TOTAL FLEET SA - 20-F - 20040629 - OPERATING_AND_FINANCIAL_REVIEW
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Discussion of Critical Accounting Policies
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated audited financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. We evaluate our estimates on an ongoing basis, including
those related to areas that require a significant level of judgment or are
otherwise subject to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, depreciation of revenue-earning vehicles,
long-lived assets, deferred income taxes, reserve for contingencies, financial
instruments and stock option plan accounting. We base our estimates on
historical experience, our observance of trends in particular areas, information
and/or valuations available from outside sources and various other assumptions
that we believe to be reasonable under the circumstances and which form the
basis for making judgments about the carrying value of assets and liabilities
that may not be readily apparent from other sources. Actual amounts could differ
significantly from amounts previously estimated. We believe that our significant
accounting policies may involve a higher degree of judgment and complexity. See
note 3 to the Localiza audited financial statements.
o Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses from the
inability or failure of our customers to make payments for daily and fleet
rental activities, sales of vehicles and franchise fees. The allowances are
based on current trends and historical collection experience and a percentage of
our accounts receivables by aging category. In determining these percentages, we
look to historical write-offs, as well as current trends in the credit quality
of our customer base.
o Revenue-earning vehicles
We must estimate what the residual values of our revenue-earning vehicles
will be at the expected time of disposal to determine monthly depreciation
rates. In determining these depreciation rates, we look at historical disposal
experience and holding periods, trends in the wholesale and retail market for
vehicles and model specific factors. Due to longer holding periods on fleet
management vehicles and the resulting increased possibility of changes in the
economic environment and market conditions, particularly as compared to car
rental vehicles, these estimates are subject to a greater degree of risk. We
continually evaluate estimated residual values. In order to reflect the higher
depreciation of the vehicles during their earlier useful lives, we adopt the
sum-of-the-years-digits method for the depreciation of vehicles, computed in a
quarterly basis. Differences between actual residual values and estimated
residual values result in a gain or loss on disposal. Vehicles held for disposal
are evaluated as a group and recorded at the lower of cost or market (less
estimated selling costs). During 2001, 2002 and 2003, we reviewed certain
projected sales prices used to compute the provision for depreciation of
revenue-earning vehicles, due to an increase in the sales price of used cars in
the Brazilian market. This resulted in changes in the estimated residual values
to be realized when the vehicle is sold. Consequently, depreciation expense
related to revenue earning vehicles for the year ended December 31, 2003
decreased approximately R$13.4 million (21.6 million in 2002 and
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R$12.0 million in 2001). Future changes in our residual values will impact our
results of operations on a prospective basis. Maintenance and repair expenses
are charged to operations when incurred.
o Long-lived assets
The carrying value of long-lived assets is reviewed whenever events or
changes in circumstances indicate that the carrying values may not be
recoverable through projected undiscounted future cash flows. Fair value is
calculated as the present value of estimated future cash flows excluding
interest. Factors we consider important which could trigger an impairment review
include the following:
o significant under-performance relative to expected, historical or
projected future operating results;
o significant changes in the manner of using the assets or the strategy
of our overall business; and
o significant negative industry or economic trends.
If the projected undiscounted future cash flows exceed the carrying value
of long-lived assets, an impairment loss is recognized to adjust the cost of the
long-lived asset to its fair value. Depending on future circumstances
surrounding our long-lived assets, impairment losses recognized may impact our
future results of operations.
o Income taxes
We account for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires the application of the
comprehensive liability method of accounting for income taxes. SFAS No. 109
requires recognition of deferred tax assets and liabilities for the estimated
future tax consequences of events attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS No.109, the effect on deferred tax assets and
liabilities of changes in tax rates is recognized in income for the period that
includes the enactment date.
We record a valuation allowance to reduce our deferred tax assets to the
amount, which, we estimate, is more likely than not to be realized. While we
have considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize deferred tax assets in the future in
excess of the net recorded amount, the resulting adjustment to deferred tax
assets would increase income in the period in which such determination was made.
Conversely, should we determine that we would not be able to realize all or part
of our net deferred tax assets in the future, an adjustment to deferred tax
assets would decrease income in the period in which such determination was made.
o Reserve for contingencies
We are a plaintiff and a defendant in a number of lawsuits, arising in the
normal course of business, in connection with tax, labor, civil and other
issues. We account for contingencies in accordance with SFAS No. 5, "Accounting
for Contingencies" and the evaluations with respect to the potential outcome of
the claims are made with the assistance of our legal and tax advisors. Such
accrued liabilities are estimated based upon historical experience and the
nature of the group of claims, relating to labor claims, and based on
information provided by internal and external legal and tax advisors.
o Financial instruments
We use derivative instruments as part of our overall strategy to protect
our U.S. dollar-denominated debt against the depreciation of the real relative
to foreign currency, through swap transactions between exchange rate variation
and fixed interest rate. Effective as of January 1, 2001, we account for our
derivatives at fair value on the balance sheet in accordance with SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities", which was issued
in June 1998 and amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging
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Activities-Deferral of the Effective Date of FASB Statement No. 133" and SFAS
No. 138, "Accounting for Derivative Instruments and Certain Hedging Activities",
and SFAS No 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". As a result of adoption of SFAS No. 133, we recognize our
derivatives on the balance sheet at fair value and adjustments to fair value are
recorded through income under the financial expenses caption. Prior to adoption
of SFAS No. 133, we recognized our derivatives on the balance sheet at contract
value and adjustments to contract value were recorded through income under the
financial expense caption. We accounted for the accounting change as a
cumulative effect of an accounting principle. The adoption of SFAS No. 133
resulted in a cumulative effect of accounting change of R$907.0 thousand, net of
applicable tax expense of R$467.0 thousand, recorded as an expense in the
consolidated statement of income for the year ended December 31, 2001. Our
derivatives and other financial instruments are not publicly traded on an
organized exchange. In the absence of quoted market miles, we must develop an
estimate of fair value using the present value of future cash flows, which may
involve significant judgments and estimates. These estimates are based on
valuation methodologies deemed appropriate in the circumstances; however, the
use of different assumptions may have a material effect on the estimated fair
value amounts recorded in the financial statements. We have determined the
estimated fair value amounts by using available market information and valuation
methodologies described above. However, considerable judgment is required in
evaluating market data to develop the estimates of fair value. Accordingly,
these estimates may not be indicative of the amounts that we could settle in a
current market exchange. The use of different market assumptions (such as
interest rate, exchange rate or other) or valuation methodologies may have a
material effect on the estimated fair value amounts.
o Stock option plan accounting
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation", we
elected to continue to account for our stock option plan using the intrinsic
value based method for variable stock plans as prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees". Under the intrinsic value method, cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. Entities choosing to
continue applying APB Opinion No. 25 on employee stock options granted on or
after January 1996 must provide pro-forma disclosures of net income, as if the
fair value method of accounting has been applied. Under this method cost is
measured at the grant date based on the fair value of the employee stock option
and is recognized ratably over the service period of the option, which is
usually the vesting period. To determine the fair value of the Localiza shares,
the stock options and consequently compensation expense, if any, we are required
to make significant judgments and estimates in the absence of quoted market
prices. These estimates are based on valuation methodologies deemed appropriate
under the circumstances, such as "Black & Scholes" model; however, the use of
different assumptions may have a material effect on the estimated fair value
amounts and in the compensation expense. For all periods presented, fair value
of the Localiza shares did not exceed the exercise (strike) prices of the
options and consequently, no compensation expense was recorded. Additionally,
the pro forma disclosures required by SFAS No. 123 have not been presented as
the effect of measuring compensation expense under SFAS No. 123 was immaterial
for all periods presented.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Under
SFAS No. 143, the liability for an asset retirement obligation is discounted and
accretion expense is recognized using the credit-adjusted risk-free interest
rate in effect when the liability was initially recognized. In addition,
disclosure requirements contained in SFAS No. 143 will provide more information
about asset retirement obligations. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 with earlier
application encouraged. Since the Company does have any legal asset retirement
obligations pursuant to the respective concession contracts, the adoption of
this standard as of January 1, 2003 did not have any impact on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections". SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", which required that all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary item
if material. SFAS No. 145 requires that gains and losses from
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extinguishment of debt be classified as extraordinary only if they meet criteria
in APB 30, thus distinguishing transactions that are part of recurring
operations from those that are unusual or infrequent, or that meet the criteria
for classification as an extraordinary item. SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases", to require that lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. In addition, SFAS No. 145 rescinds SFAS
No. 44, "Accounting for Intangible Assets of Motor Carriers", and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements", which are
not currently applicable to the Company. The provisions of SFAS No. 145 as they
relate to the rescission of SFAS No. 4 shall be applied in fiscal year 2003.
Certain provisions related to SFAS No. 13 are effective for transactions
occurring after May 15, 2002. The adoption of this statement did not have an
impact on the Company's financial statements.
In June 2002, FASB issued SFAS No. 146 "Accounting for costs associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". The principal difference
between this Statement and EITF 94-3 relates to its requirements for recognition
of a liability for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF 94-3,
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. A fundamental conclusion reached by the Board in
this Statement is that an entity's commitment to a plan, by itself, does not
create a present obligation to others that meets the definition of a liability.
This Statement also establishes that fair value is the objective for initial
measurement of the liability. This Statement improves financial reporting by
requiring that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. The accounting for similar events and circumstances will
be the same, thereby improving the comparability and representational
faithfulness of reported financial information. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. During 2003, the Company did not
have any exit or disposal activities and consequently, this statement did not
have an impact on the Company's financial statements during the year ended
December 31, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
modifies the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The Statement requires that those
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 affects an issuer's accounting for three types of freestanding
financial instruments, namely:
1. Mandatory redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets.
2. Instruments, other than outstanding shares, that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets.
These instruments include put options and forward purchase contracts.
3. Obligations that can be settled with shares, the monetary value of which
is fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares.
SFAS No. 150 does not apply to features embedded in financial instruments
that are not derivatives in their entirety. In addition to its requirements for
the classification and measurement of financial instruments within its scope,
SFAS No. 150 also requires disclosures about alternative ways of settling those
instruments and the capital structure of entities, all of whose shares are
mandatorily redeemable. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
The adoption of this statement did not have an impact on the Company's financial
statements for the year ended December 31, 2003.
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In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for interim and
annual periods ending after December 15, 2002. The initial recognition and
initial measurement requirements of FIN 45 are effective prospectively for
guarantees issued or modified after December 31, 2002. The adoption of this
statement did not have an impact on the Company's financial statements for the
year ended in December 31, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46 "Consolidation of Variable Interest Entities, an
interpretation of ARB 51" which provided a new framework for identifying
variable interest entities (VIEs) and determining when a company should include
the assets, liabilities, non-controlling interests and results of activities of
a VIE in consolidated financial statement. FIN 46 was effective immediately for
VIEs created after January 31, 2003 and to VIES in which an enterprise obtained
a variable interest after that date. For variable interests in VIES created
before February 1, 2003, FIN 46 applied to public enterprises no later than the
beginning of the first interim or annual period beginning after June 15, 2003.
On October 9, 2003 the FASB decided to defer the implementation date of FIN
46 to the fourth quarter instead of the third quarter. Pursuant to this
deferral, public companies in the United States of America had to complete their
evaluations of variable interest entities that existed prior to February 1,
2003, and the consolidation of those for which they are the primary beneficiary
for financial statements issued for the first period ending after December 15,
2003. For calendar year companies, consolidation of previously existing variable
interest entities was required in their December 31, 2003 financial statements.
This deferral did not affect the implementation date for many foreign private
issuers, which continued to be the beginning of the first annual period ending
after December 15, 2003.
In December 2003 FIN 46 was substantially revised and a new interpretation
FIN 46 (revised) was issued. The key differences between FIN 46 (revised) and
its predecessor FIN 46 include:
1. FIN 46R now scopes out many - but not all - businesses, as that term is
defined in the Interpretation. A business - assuming it is scoped out of FIN 46R
- should be consolidated with its accounting parent (if it has one) only when
required by longstanding, conventional consolidation guidance, most notably
Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51).
Under FIN 46, any business potentially could have been a VIE (and, if so,
subject to the Interpretation's unique consolidation requirements) depending on
the design of the business' capital structure and other factors. Note that an
entity whose primary activity is asset-backed financing or who acts as a
single-lessee leasing entity cannot qualify for the scope exemption in FIN 46R,
even if it would otherwise be a business. If such an entity is a VIE, it is
covered by FIN 46R's consolidation requirements.
2. FASB partially delayed FIN 46's effective date (for most public
companies until no later than the end of the first reporting period ending after
March 15, 2004. The delay notwithstanding, public companies must apply either
FIN 46 or FIN 46R to special-purpose entities (SPEs) no later than the end of
the first reporting period ending after December 15, 2003. For many foreign
private issuers the effective date continues to be the beginning of the first
annual period ending after December 15, 2003. For SPEs created by foreign
private issuers after February 1, 2003, however, the effective date is no later
than the end of the first reporting period ending after December 15, 2003.
Based on an initial assessment of the provisions and requirements of FIN
46R, the Company believes that the implementation of this statement will not
result in any impact to the Company's consolidated financial statements.
Overview
We are engaged in the business of car rental, fleet management, used car
sales and franchising.
Our revenues consist primarily of:
o Car rental: revenues generated from renting cars to customers
including revenue from loss or collision damage waivers.
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o Fleet management: revenues generated from renting vehicles to
customers including revenue from fleet management services.
o Used car sales: revenue generated from the sale of used cars including
commission on intermediation of service sales.
o Franchising: initial fees, royalties and other fees generated from our
franchisees.
Our costs and expenses consist primarily of:
o Direct operating costs: includes wages and related benefits, rent and
concessions paid to airport authorities, costs relating to the
operation net of third parties reimbursements and cost of used car
sales.
o Selling, general and administrative expenses: includes reservation,
advertising, marketing, commissions to sellers, travel agents and
other third parties and other related expenses.
o Depreciation of vehicles: depreciation expenses relating to
revenue-earning vehicles.
o Financial expense, net: includes interest income and expense, taxes on
financial revenues, net monetary variation and exchange loss and other
gains/losses.
o Non-vehicle depreciation, goodwill amortization and non-operating
result: includes depreciation of capitalized assets and amortization
of goodwill, as well as non-operating results.
o Other expenses, net: taxes, extraordinary gain - net and cumulative
effect of a change in accounting principle - net, if applicable.
Our profitability is primarily a function of the volume and pricing of
rental transactions and the utilization of cars and equipment. Significant
changes in the purchase price of cars and equipment or interest rates can also
have a significant effect on our profitability depending on our ability to
adjust pricing for these changes. Our business requires significant capital
expenditures for cars and equipment and consequently substantial liquidity to
finance such expenditures.
In the discussion that follows, total net revenues less direct operating
costs, costs of used car sales and taxes on revenues is referred to as "adjusted
gross profit". Adjusted gross profit should not be considered as an alternative
to operating income or net income or as an indicator of our performance, and may
not be comparable to other similarly titled measures of other companies.
However, we believe that adjusted gross profit is an useful indicator of our
performance for purposes of management analysis. The table below includes a
reconciliation of adjusted gross profit to operating income for the three years
ended December 31, 2003. You should read this information together with
Localiza's audited financial statements that are included elsewhere in this
annual report.
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Year Ended December 31,
----------------------------------------
2001 2002 2003
---- ---- ----
(in thousands of reais)
Net revenues:
Car rental............................................... R$ 144,253 R$ 162,595 R$ 155,291
Fleet management......................................... 120,229 118,782 120,309
Franchising.............................................. 5,056 5,111 5,456
Used car sales........................................... 150,907 190,476 250,978
------- ------- -------
Total net revenues.................................... 420,445 476,964 532,034
------- ------- -------
Direct operating costs:
Direct operating......................................... (77,059) (88,858) (91,485)
Cost of used car sales................................... (118,655) (156,270) (206,579)
Taxes on revenues........................................ (17,795) (19,578) (16,337)
------- ------- -------
Total direct operating costs.......................... (213,509) (264,706) (314,401)
------- ------- -------
Adjusted gross profit....................................... 206,936 212,258 217,633
------- ------- -------
Expenses:
Selling, general, administrative and other expenses...... (52,438) (62,482) (65,402)
Depreciation of vehicles................................. (43,995) (31,062) (37,222)
Goodwill amortization.................................... (1,499) -- --
Other depreciation and amortization...................... (2,634) (3,426) (3,841)
------- ------ -------
Total expenses........................................ (100,566) (96,970) (106,465)
------- ------ -------
Total operating expenses and costs.......................... (314,075) (361,676) (420,866)
------- ------- -------
Operating income............................................ 106,370 115,288 111,168
Financial (expenses) income, net............................ (50,464) (82,814) 40,677
Other nonoperating (expenses) income, net................... 4,475 (125) 97
Total income tax and social contribution.................... (16,493) (5,585) (46,196)
Cumulative effect of a change in accounting principles
and minority interest.................................... (907) (115) (106)
------- ------- -------
Net income.................................................. 42,981 26,649 105,640
======= ======= =======
------------------------
The table below sets forth certain data as a percentage of net revenues for
the periods indicated.
Year Ended December 31,
-----------------------------------
2001 2002 2003
---- ---- ----
(percent)
Car rental.................................................. 34.3% 34.1% 29.2%
Fleet management............................................ 28.6 24.9 22.6
Total vehicle rental..................................... 62.9 59.0 51.8
Franchising................................................. 1.2 1.1 1.0
Used car sales.............................................. 35.9 39.9 47.2
Total net revenues....................................... 100.0 100.0 100.0
Direct operating costs...................................... (50.8) (55.5) (59.1)
Adjusted gross margin....................................... 49.2 44.5 40.9
Advertising, promotion and selling expenses................. (9.6) (10.2) (9.2)
General, administrative and other expenses.................. (2.9) (2.9) (3.0)
Depreciation of vehicles.................................... (10.5) (6.5) (7.0)
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Year Ended December 31,
-----------------------------------
2001 2002 2003
---- ---- ----
(percent)
Other depreciation and amortization (Including goodwill
amortization) (1.0) (0.7) (0.7)
Operating income............................................ 25.2 24.2 21.0
Financial expense, net...................................... (12.0) (17.4) 7.6
Non-operating result........................................ 1.1 -- --
Income before taxes, minority interest, extraordinary gain
and cumulative effect of a change in accounting principle 14.3 6.8 28.6
Taxes, minority interest, extraordinary gain and cumulative
effect of a change in accounting principle.................. (4.1) (1.2) (8.7)
Net income.................................................. 10.2 5.6 19.9
Year ended December 31, 2003 Compared to Year ended December 31, 2002
o Net Revenues
Our net revenues increased by 11.5% to R$532.0 million in 2003 from R$477.0
million in 2002. This increase was primarily attributable to an increase in the
volume and prices of used cars sold.
Car rental revenues, which include replacement, leisure and corporate
short-term rental and monthly rental markets, decreased 4.5% to R$155.3 million
in 2003 from R$162.6 million in 2002. This decrease was attributable to a
reduction of 16.9% in the volume of daily rentals, offset by an increase of
14.9% in the average rates. The decrease in volume was mainly due to: (i) the
decrease in the level of economic activity in Brazil in 2003 (ii) the
renegotiations of commercial agreements increasing rates with the collateral
effect of volume decrease.
Fleet management revenues, which correspond to the corporate long-term
rental market, increased by 1.3% to R$120.3 million in 2003 from R$118.8 million
in 2002. This increase was attributable to an increase of 22.5% in average
rates, which was partially offset by a 16.3% decrease in the volume of rented
cars. The rate increase was due to: (i) the rate adjustment in the agreements,
(ii) the entrance of new customers with higher average rates and (iii) the
termination of a large customer with lower rates, resulting in a decrease in the
volume of rented cars.
Used car sales revenues increased by 31.8% to R$251.0 million in 2003 from
R$190.5 million in 2002 due to an increase of 16.0% in the volume of used cars
sold (15,468 cars in 2003 and 13,331 cars in 2002), as consequence of a
particular change in the renewal policy for car rental division for year 2003
reducing the age from 12 months to 6-8 months and to an increase of 13.8% in the
average prices. The renewal policy for 2003 was changed aiming to take advantage
market opportunities.
Franchising revenues increased by 6.8% to R$5.5 million in 2003 from R$5.1
in 2002.
o Direct Operating Costs
Direct operating costs increased by 18.8% to R$314.4 million in 2003 from
R$264.7 million in 2002. As a percentage of net revenues, direct operating costs
increased to 59.1% in 2003 from 55.5% in 2002. This increase was mainly due to
the increase in the car rental division costs compared to its revenues decrease.
Car rental direct operating costs include maintenance, casualty (accidents
and theft), car preparation expenses (title, licensing and others), car
transportation, operating personnel and location-related costs. These costs
increased by 7.0% to R$58.3 million in 2003 from R$54.5 million in 2002. As a
percentage of car rental net revenues, these costs increased to 37.6% in 2003
from 33.5% in 2002. The increase in direct costs was due to: (i) an increase in
maintenance administration costs in the amount of R$3.6 million and (ii) a
reduction of R$2.3 million in accident repair costs recoveries which are
recorded as a decrease in operating costs, reflecting mainly the fact that in,
2002, one of our largest customers terminated its contract with us, returning
most of the cars. The cars required significant
36
maintenance, fully reimbursed. These increases were partially offset by an
increase of R$1.2 million in recuperation in reimbursable costs, mainly traffic
fines, and a decrease of R$0.8 million in car transportation costs.
Fleet management direct operating costs (which are comparable to car
rental costs but do not include costs associated with locations) decreased by
3.9% to R$30.5 million in 2003 from R$31.7 million in 2002. As a percentage of
fleet management net revenues, these costs decreased to 25.3% in 2003 from 26.7%
in 2002. This was principally due to the decrease in variable costs,
specifically the increase of R$2.6 million in recoveries that was partially
offset by the decrease of R$0.7 million in reimbursable costs.
Franchising direct operating costs remained stable at approximately R$2.6
million in 2003 and 2002.
Costs of used car sales consist of the depreciated book value of cars sold
at the time of resale, net of the technical discount cost. The technical
discount cost is an amount recorded into either the car rental or fleet
management direct operating costs, as applicable, equivalent to the discount
given to the buyer when the car being sold is damaged or in need of repair. The
total residual value of cars sold by the used car sales division increased by
32.2% to R$206.6 million in 2003 from R$156.3 million in 2002 as a result of the
increase in the number of cars sold. As a percentage of used car sales revenues,
the book value of cars sold by the used car sales division remained stable at
approximately 82%.
o Adjusted Gross Profit
Adjusted gross profit increased by 2.5% to R$217.6 million in 2003
(equivalent to 40.9% of net revenues) from R$212.3 million in 2002 (equivalent
to 44.5% of net revenues). As a percentage of net revenues, adjusted gross
profits decreased principally due to the reduction in the car rental division
margin.
o Advertising, Promotion and Selling Expenses
Advertising, promotion and selling expenses, which include sales force
related expenses, reservation center costs, advertising and provision for
doubtful accounts, increased by 1.3% to R$49.4 million in 2003 from R$48.8
million in 2002, mainly due to (i) new used car sales locations in replacement
of shared-car rental locations; (ii) advertising expenses; and (iii) personnel
expenses. These increases were lower than the increase in revenues. As a
percentage of net revenues, advertising, promotion and selling expenses
decreased to 9.3% in 2003 from 10.2% in 2002.
o General, Administrative and Other Expenses
General, administrative and other expenses increased by 16,8% to R$15.9
million in 2003 from R$13.7 million in 2002. This increase was due to the
increase in compensation paid to some officers. As a percentage of net revenues,
general, administrative and other expenses remained stable at around 2.9%.
o Depreciation of Vehicles
Vehicle depreciation is calculated based on rates intended to measure the
reduction necessary to approximate a vehicle's market value (determined by
manufacturer, model and acquisition date) at the end of the estimated average
holding period of a vehicle and includes the expenses associated with selling
vehicles. In order to match the increase in maintenance costs with car
utilization and to reflect the initially higher depreciation of vehicles just
after their purchase, we depreciate our fleet using the sum-of-the-years-digits
method calculated on a quarterly basis. Depreciation expense increased by 19.8%
to R$37.2 million in 2003 from R$31.1 million in 2002. On a per car basis,
annual depreciation expense increased by 35.6% to R$2,156 in 2003 from R$1,590
in 2002. This increase is a consequence of the prices in the used cars sales
market that resulted in higher prices in 2002, reflected in lower depreciation
rates.
o Financial Expense, Net
Net financial expense decreased by 149.1% to a revenue of R$40.7 million in
2003 from a expense of R$82.8 million in 2002 principally due to:
37
(i) gain of R$46.9 million resulting in a decrease of 155.1% in the net
monetary variation and exchange gains (losses), due to the
appreciation of 18.2% of the real against the U.S. dollar in 2003,
(compared to an 52.3% of the depreciation in 2002 resulting in an
exchange loss of R$85.0 million);
(ii) an unrealized loss on derivative transactions, in particular swap
transactions from a gain of R$14.2 million in 2002 to a loss of R$7.0
million in 2003, was due to the appreciation of 18.2% of the real
against the U.S. dollar in 2003 and an increase in the CDI interest
rate (Interbank Deposit Certificate) from an average of 19.1% in 2002
to 23.3% in 2003. This effect was partially mitigated by a decrease in
the cupom rate of 3.3 p.p. to 16.7% in 2003 from 20.0% in 2002.
This rate is used to adjust the swap transactions to their present
value; and
(iii) A 107.8% increase in interest income due to the increase in the
volume of cash equivalents and the raise in the interest rate CDI
(Interbank Deposit Certificate) from an average of 19.09% in 2002 to
23.28% in 2003.
o Taxes, Minority Interest, and Cumulative Effect of a Change in Accounting
Principle
Our income tax increased by 727.1% to R$46.1 million in 2003, representing
an effective tax rate of 30.4%, from R$5.6 million in 2002, representing an
effective tax rate of 17.3%. See note 19 to the consolidated financial
statements.
o Net Income
As a result of the factors discussed above, net income increased by 296.4% to
R$105.6 million in 2003 from R$26.7 million in 2002.
Year ended December 31, 2002 Compared to Year ended December 31, 2001
o Net Revenues
Our net revenues increased by 13.4% to R$477.0 million in 2002 from R$420.4
million in 2001. This increase was primarily attributable to an increase in the
volume of used cars sold and in the average prices of car rentals.
Car rental revenues, which include replacement, leisure and corporate
short-term rental and monthly rental markets, increased 12.7% to R$162.6 million
in 2002 from R$144.3 million in 2001. This increase was attributable to a 3.7%
increase in volume and an 8.7% increase in average prices.
Average prices have increased due to: (i) the termination in 2001 of a
significant contract with lower prices in the monthly rental business; and (ii)
a price adjustment negotiated with insurance companies during 2002 in the
replacement business.
Fleet management revenues, which correspond to the corporate long-term
rental market, decreased by 1.2% to R$118.8 million in 2002 from R$120.2 million
in 2001. Although there was an increase of 2.6% in average prices, the volume
decreased 4.5% for the year 2002. This decrease in volume was mainly due to (i)
a decrease in the level of economic activity in Brazil in 2002, (ii) the entry
of new fleet management competitors with low-price strategies, which led some of
our customers to leave us, and (iii) a decrease in demand for our fleet
management services for 2002 by one of our large customers, which had
temporarily increased its usage of our fleet management services during 2001.
Used car sales revenues increased by 26.2% to R$190.5 million in 2002 from
R$150.9 million in 2001 due to an increase by 27.8% in the volume of used cars
sold to 13,331 cars in 2002 from 10,430 cars in 2001. This increase was
principally due to: (i) higher sale of cars in the car rental business during
its regular and periodic renewal of fleet and (ii) higher sale of cars from
fleet management business as a consequence of the reduction in our fleet.
Franchising revenues remained stable at R$5.1 million in 2002 and 2001.
38
o Direct Operating Costs
Direct operating costs increased by 24.0% to R$264.7 million in 2002 from
R$213.5 million in 2001. As a percentage of net revenues, direct operating costs
increased to 55.5% in 2002 from 50.8% in 2001. This increase was mainly due to
an increase in the volume of used cars sold combined with an increase in the
average cost of vehicles sold.
Car rental direct operating costs include maintenance, casualty (accidents
and theft), car preparation expenses (title, licensing and others), car
transportation, operating personnel and location-related costs. These costs
increased by 19.9% to R$54.5 million in 2002 from R$45.5 million in 2001. As a
percentage of car rental net revenues, these costs increased to 33.5% in 2002
from 31.5% in 2001. The increase in direct costs was due to an increase of R$4.7
million in fixed costs, in particular with customer service personnel costs,
driving services and fixed airport leases. In addition, expenses with
contingencies increased R$1.7 million between 2002 and 2001.
Fleet management direct operating costs (which are comparable to car rental
costs but do not include costs associated with locations) increased by 12.4% to
R$31.7 million in 2002 from R$28.2 million in 2001. As a percentage of fleet
management net revenues, these costs increased to 26.7% in 2002 from 23.5% in
2001. This was principally due to an increase in variable costs, specifically
(i) accident repair costs in the amount of R $1.4 million, and (ii) car
preparation costs, which are maintenance costs to prepare cars for sale, in the
amount of R$0.9 million. These costs increased as a result of an increase in
volume of cars sold due to a reduction in our fleet size as result of the
termination of contracts by customers who left us for new fleet management
competitors that charged lower prices and because of the reduction in the fleet
size of one of our large customers, which had temporarily increased its usage of
our fleet management services during 2001.
Franchising direct operating costs include operating personnel and
location-related costs. These costs decreased by 22.7% to R$2.6 million in 2002
from R$3.4 million in 2001. As a percentage of franchising revenues, these costs
decreased to 51.1% in 2002 from 66.8% in 2001, mainly due to a reduction of
R$0.7 million in the contingency expenses recorded in 2002, principally as a
result of the recording of a R$0.3 million gain from the settlement of a
liability under an amnesty program in 2002.
Costs of used car sales consist of the depreciated book value of cars sold
at the time of resale, net of the technical discount cost. The technical
discount cost is an amount recorded into either the car rental or fleet
management direct operating costs, as applicable, equivalent to the discount
given to the buyer when the car being sold is damaged or in need of repair. The
total residual value of cars sold by the used car sales division increased by
31.7% to R$156.3 million in 2002 from R$118.7 million in 2001. As a percentage
of used car sales revenues, the book value of cars sold by the used car sales
division was 82.0% in 2002 and 78.6% in 2001. This increase resulted from a
reduction in the average depreciation rates in 2002.
o Adjusted Gross Profit
Adjusted gross profit increased by 2.6% to R$212.3 million in 2002
(equivalent to 44.5% of net revenues) from R$206.9 million in 2001 (equivalent
to 49.2% of net revenues). As a percentage of net revenues, adjusted gross
profits decreased principally due to a decrease in the used car sales margin.
o Advertising, Promotion and Selling Expenses
Advertising, promotion and selling expenses, which include sales force
related expenses, reservation center costs, advertising and provision for
doubtful accounts, increased by 21.1% to R$48.8 million in 2002 from R$40.3
million in 2001 in line with the increase in net revenues. As a percentage of
net revenues, advertising, promotion and selling expenses increased to 10.2% in
2002 from 9.6% in 2001, mainly due to the restyling of approximately 6 car sales
locations, which included infrastructure (building and furniture) and new visual
merchandising expenses in the amount R$1.8 million.
39
o General, Administrative and Other Expenses
General, administrative and other expenses increased by 12.7% to R$13.7
million in 2002 from R$12.1 million in 2001. This increase was due to an
increase in other expenses, principally due to the recording of provisions for
tax contingencies in the amount of R$1.8 million. As a percentage of net
revenues, general, administrative and other expenses remained stable at around
2.9%.
o Depreciation of Vehicles
Vehicle depreciation is calculated based on rates intended to measure the
reduction necessary to approximate a vehicle's market value (determined by
manufacturer, model and acquisition date) at the end of the estimated average
holding period of a vehicle and includes the expenses associated with selling
vehicles. In order to match the increase in maintenance costs with car
utilization and to reflect the initially higher depreciation of vehicles just
after their purchase, we depreciate our fleet using the sum-of-the-years-digits
method calculated on a quarterly basis. Depreciation expense decreased by 29.4%
to R$31.1 million in 2002 from R$44.0 million in 2001. On a per car basis,
annual depreciation expense decreased by 31.1% to R$1,590 in 2002 from R$2,307
in 2001. This decrease is attributable to revisions made during 2002 that
reduced the average depreciation rates. These revisions were made to adjust
estimated future sales prices and the consequent depreciation rate to the
current car market trends, since car prices increased on average by 15.2% in
2002. As a consequence, the cost of used car sales increased.
o Financial Expense, Net
Net financial expense increased by 64.1% to R$82.8 million in 2002 from
R$50.5 million in 2001 principally due to the net effect of:
(i) a 190.0% increase in the net variation and exchange loss, due
to the 52.3% depreciation of the real against the U.S. dollar in
2002, resulting in an exchange loss of R$85.0 million (compared
to an 18.7% devaluation in 2001 resulting in an exchange loss of
R$29.3 million);
(ii) an unrealized gain on derivative transactions, in particular
swap operations resulting from a loss of R$26.2 million in 2001
to a gain of R$14.2 million in 2002 mainly as a result of the
2002 depreciation of the real against the U.S. dollar;
(iii) a 90.0% decrease on gains on sales of marketable securities
to R$1.6 million in 2002, from R$15.7 million in 2001 due to a
decrease in volume of securities sold; and
(iv) a 71.9% decrease on realized gain on derivative transactions
to R$1.9 million in 2002, related to swaps in Compror and Federal
Treasury bonds operations, from R$6.7 million in 2001, related to
a call option operation.
o Taxes, Minority Interest, and Cumulative Effect of a Change in Accounting
Principle
Our income tax decreased by 66.1% to R$5.6 million in 2002, representing an
effective tax rate of 17.3%, from R$16.5 million in 2001, representing an
effective tax rate of 27.3%. In addition to the tax expenses, an expense of
R$0.9 million, relating to a cumulative effect of a change in accounting
principle was recorded in 2001.
o Net Income
As a result of the factors discussed above, net income decreased by 38.0% to
R$26.7 million in 2002 from R$43.0 million in 2001.
B. Liquidity and Capital Resources
We use funds primarily for (i) the acquisition of new vehicles for our
rental fleet, (ii) payment of debt service and (iii) working capital.
40
Our primary sources of funds are cash generated from operations and from
the proceeds from the issuance of the Notes. We invested part of the proceeds
from the Notes in cash equivalents. The material terms of the Notes are
described below. For our short-term cash flow needs, we use the "Compror"
facility, which is also described below. In addition, we are able to obtain
funds from a revolving credit facility we have entered into with certain
Brazilian banks, up to a limit of R$16.3 million. Currently, we are not using
funds from this facility.
Net cash from operating activities increased to R$132.6 million in 2003
from R$83.4 million in 2002, due to an increase in accounts payable reflecting
the acquisition of approximately 4.000 cars in the end of 2003, equivalent to
R$70.3 million.
Net cash from investing activities increased by 200% to R$4.5 million from
R$1.5 million in 2002, mainly due to the fact that we did not purchase
marketable securities in 2003 as we did in 2002.
o Debt Facility - "Compror"
We use a special type of short-term financing, known as Compror. Under the
Compror facility, the banks transfer the proceeds from the financing directly to
our suppliers. We repay the banks with funds provided by our operating cash
flows. The Compror is used as an instrument of cash flow management. The Compror
was borrowed in U.S. dollars plus an annual market average positive spread of
5.5% in 2003. To avoid foreign exchange risk, this operation was automatically
changed to a local interest basis, the interbank rate, known as CDI, plus an
annual market spread of 1.7% in 2003, through a swap transaction as described in
note 18 to the Localiza audited financial statements.
As of December 31, 2002, we did not have any outstanding debt under the
Compror facility.
o The Notes
On October 1, 1997, we obtained resources of US$100 million from the 10.25%
senior notes program, which were sold at 100% of face value. The Notes are
unsecured obligations and will mature on October 1, 2005. Interest on the Notes
is payable semi-annually on April 1 and October 1. The Notes are redeemable at
our option, in whole or in part, on or after October 1, 2001. In 1998 and 1999,
we repurchased part of the Notes corresponding to the principal amount of
US$26.1 million corresponding to R$75.4 million on December 31, 2003.
We are subject to certain restrictions contained in the indenture entered
into in connection with the issuance of the Notes. These restrictive covenants
limit, except in restricted circumstances, our ability to, among other things,
declare any dividend or other similar distribution, make certain stock
repurchases, make certain payments on subordinated indebtedness or make certain
investments if, after giving effect to such actions, (i) a default or event of
default under the indenture would have occurred and be continuing, (ii) Localiza
would be unable to incur additional indebtedness under the debt incurrence ratio
test set forth in the indenture or (iii) the amount of all such payments exceeds
an aggregate threshold amount. A default or event of default includes our
failure to observe or perform any covenant. Covenants include limitations on our
ability to (i) incur certain additional indebtedness, (ii) create certain liens,
(iii) enter into certain transactions with affiliates, (iv) engage in certain
sale and leaseback transactions and (v) enter into certain merger, acquisition
or sale transactions.
Our management believes we are in compliance with all the covenants
contained in the Indenture.
o Contractual Obligations and Commercial Commitments
The table below sets forth the principal cash flows of the Notes and other
obligations by expected maturity date:
41
2007 and Repurchased
Rate Currency 2004 2005 2006 after portion Total
---- -------- ---- ---- ---- -------- ----------- -----
(in millions of reais)
Contractual Obligations:
Notes (principal)............. 10.25% US$ - 288.9 - - 75.4 213.5
Swap transactions(1).......... - US$ - 19.1 - - - 19.1
Lease commitments............. - R$ 8.7 4.8 3.2 9.2 - 25.9
-------------------------------------------------------------
Total......................... 8.7 312.8 3.2 9.2 75.4 258.5
=============================================================
(1) See note 18 to the Localiza audited financial statements.
C. Research and Development, Patents and Licenses
Not applicable.
D. Trend Information
We have four principal businesses:
o car rental,
o fleet management,
o used car sales, and
o franchising.
Fleet management is the business that is least affected by the short-term
fluctuations in the Brazilian economy due to the fact that contracts in the
fleet management business have terms of 2 to 3 years. There is, however, a
direct correlation between the fluctuations in the Brazilian market and the
economic activity of our car rental, used car sales and franchising lines of
business. Events such as inflation, increase in interest rates, and currency
devaluation can greatly impact the results of operations of these lines of
business.
We expect that vehicle rentals, and more specifically the car rental
segment, will grow in 2004, primarily due to expectations of an increased level
of economic activity due to general economic recovery in 2004, paralleled by
expectations of a moderate fall in internal interest rates.
We expect only limited growth in the fleet management segment where the
environment is marked by significant price competition with customers
continually seeking to reduce their costs.
E. Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not have any undisclosed borrowings, and we
have not entered into any derivative contracts (other than those described in
"--Qualitative and Quantitative Disclosure About Market Risk--Swap
Transactions") or synthetic leases. We are, therefore, not materially exposed to
any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
F. Tabular Disclosure of Contractual Obligations
The Company's contractual financial liabilities and their expected
maturities at December 31, 2003 are summarized in the following table:
42
Payment Due by Period
Up to 3 Between 3 Between 1 Between 3 Beyond 5
Contractual Obligations Total months and 12 months and 3 years and 5 years years
----------------------- ----- ------ ------------- ----------- ----------- --------
(in millions of reais)
Short Term and Long-Term Debt 218.9 - 5.4 213.5 - -
Obligations(1)
Capital (Finance) Lease Obligations(2) 25.9 2.2 6.5 8.0 3.9 5.3
----- --- ---- ----- --- ---
Total Contractual Obligations 244.8 2.2 11.9 221.5 3.9 5.3
----------------------------- ----- --- ---- ----- --- ---
(1) See note 14 to the Localiza audited financial statements
(2) See Note 24 to the Localiza audited financial statements
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Localiza
Localiza is a sociedade anonima, which is the corporate form most similar
to a corporation and is subject to the Brazilian Corporation Law. Localiza is
managed by its board of directors, or conselho de administracao, which currently
consists of nine members, and its executive committee, or diretoria executiva,
which currently consists of four members.
Board of Directors
As of May 31, 2004, the board of directors was composed of the individuals
named below.
Expiration
of Current
Name Age Position Member Since Term
---------------------------------------------- -------------- ----------------------- --------------- ----------
Jose Salim Mattar Junior....................... 55 chairman of the board 1995 2005
Antonio Claudio Brandao Resende................ 57 member 1995 2005
Eugenio Pacelli Mattar......................... 51 member 1995 2005
Antonio Fernando de Campos..................... 51 member 2002 2005
Aristides Luciano de Azevedo Newton............ 59 member 1995 2005
Tarcisio Pinto Ferreira........................ 69 member 1996 2005
Messias da Silva Junior........................ 64 member 1996 2005
Stefano Bonfiglio.............................. 40 member 2000 2005
Carlos Jose Garcia............................. 46 member 2000 2005
Jose Salim Mattar Junior. Mr. Mattar is the chairman of board of directors,
the president and the car rental officer of Localiza. Mr. Mattar is also the
president of Franchising, Total Fleet and Prime. He received a degree in
business administration from Fundacao Mineira de Educacao e Cultura in 1976. He
acted as manager of a Brazilian supermarket chain and of a mining company, both
located in Belo Horizonte, Brazil. In 1973, at the age of 25, he was one of
Localiza's founding partners. He is also an indirect partner of Radio Beep
Telecomunicacoes Ltda. and Radio Beep System Ltda.
Antonio Claudio Brandao Resende. Mr. Resende is a member of the board of
directors, an executive vice-president and the management officer of Localiza.
Mr. Resende is also a vice-president of Franchising, Total Fleet and Prime. He
graduated from Uniao de Negocios e Administracao in 1977 with a degree in
business administration. At the age of 18, he formed Leva e Traz, a delivery
company in Belo Horizonte, Brazil. In 1973, at the age of 27, he was one of
Localiza's founding partners. He is also an indirect partner of Radio Beep
Telecomunicacoes Ltda. and Radio Beep System Ltda.
Eugenio Pacelli Mattar. Mr. Mattar is a member of the board of directors,
an executive vice president and the fleet management officer of Localiza. Mr.
Mattar is also a vice-president of Franchising, Total Fleet and Prime. He
43
received a degree in civil engineering from Universidade Federal de Minas Gerais
in 1975, where he also completed extensive coursework in Economic Engineering.
Mr. Mattar has also studied general and financial administration at Fundacao Dom
Cabral. He is one of Localiza's founding partners. He is also an indirect
partner of Radio Beep Telecomunicacoes Ltda. and Radio Beep System Ltda.
Antonio Fernando de Campos. Mr. Campos is a member of Localiza's board of
directors. He joined Localiza in 1982 in order to implement the marketing and
sales department of Localiza. Mr. Campos left Localiza in 1996 to incorporate
the company Solution Comunicacao. Mr. Campos received post-graduate degree from
Fundacao Getulio Vargas, Pace University in New York City and INSEAD.
Aristides Luciano de Azevedo Newton. Mr. Newton is a member of the board of
directors of Localiza, a vice-president of Franchising and an officer of MFA. He
received a degree in business administration from Uniao de Negocios e
Administracao in 1973. He acted as manager of materials and supplies for large
construction projects in Brazil for Construtora Mendes Junior. In 1983, at the
age of 39, he founded Franchising in conjunction with Localiza.
Tarcisio Pinto Ferreira. Mr. Ferreira has been a member of the board of
directors of Localiza since 1996. He received his degree in law from
Universidade Federal de Minas Gerais in 1971. He has been the general counsel to
Localiza since its creation, and is also affiliated with the law firm of
Ferreira and Chagas.
Messias da Silva Junior. Mr. da Silva Junior has been a member of the board
of directors of Localiza since 1996. Before his retirement, he held various
positions at Localiza and its subsidiaries. He received a degree in law from
Centro Universitario de Barra Mansa/RJ. He began his professional career in 1963
as supervisor of human resources, accounting and supply administration for White
Martins Gases Industriais S.A. In 1973, he began managing the areas of human
resources, finance, logistics, control and administration for Cia. Brasileira de
Projetos Industriais. He worked for Localiza from 1982 to 1996 in a variety of
roles, including administrative officer, officer of operations and officer of
human resources and administration. From 1996 to 1998, he worked for Radio Beep
Telecomunicacoes Ltda. as an executive officer.
Stefano Bonfiglio. Mr. Bonfiglio has been a member of the board of
directors of Localiza since 2000. Mr. Bonfiglio received his baccalaureate
degree from Georgetown University and his MBA degree from The Wharton School of
the University of Pennsylvania. In 1985 Mr. Bonfiglio joined Bankers Trust
Company, where he worked in several capacities, including Structured/Acquisition
Finance, Mergers & Acquisitions and Private Equity. In 1995 he joined DLJ
Merchant Banking, the private equity arm of Donaldson, Lufkin & Jenrette, based
in New York and London. Currently Mr. Bonfiglio resides in London and is a
founding partner of Stirling Square Capital Partners, a London-based private
equity firm specialized in European buy-outs.
Carlos Jose Garcia. Mr. Garcia has been a member of the board of directors
of Localiza since 2000. Mr. Garcia received a degree in accounting from the
Catholic University of Argentina. He worked for eight years for Bank of Boston
as Head of their Corporate Finance Group. For six years, Mr. Garcia worked for
Bankers Trust Company in their mergers and acquisitions division and then later
for their Latin America private equity practice. Currently, he lives in Buenos
Aires, Argentina where he is a Managing Director in the Private Equity Division
of CSFB.
Executive Committee
As of May 31, 2004, the executive committee was composed of the individuals
named below.
Expiration
Officer of Current
Name Age Position Since Term
-------------------------------------- --------- ------------------------------------- ----------- --------------
Jose Salim Mattar Junior.............. 55 executive president 1973 2005
Antonio Claudio Brandao Resende....... 57 executive vice president and 1973 2005
management officer
Eugenio Pacelli Mattar................ 51 executive vice president and fleet 1973 2005
management officer
Flavio Brandao Resende................ 50 executive vice president and car 1973 2005
rental officer
44
Flavio Brandao Resende. Mr. Resende is an executive vice president of
Localiza. He is also a vice-president of Franchising, Total Fleet and Prime. He
graduated from Escola de Engenharia Kennedy in 1980 with a degree in civil
engineering. He is one of Localiza's founding partners and is also an indirect
partner of Radio Beep Telecomunicacoes Ltda. and Radio Beep System Ltda.
For biographies of Jose Salim Mattar Junior, Antonio Claudio Brandao
Resende and Eugenio Pacelli Mattar. See--Board of Directors.
Total Fleet
Total Fleet is a sociedade anonima. Under Brazilian law, a sociedade
anonima that is privately owned and does not have publicly issued shares, such
as Total Fleet, is not required to have a board of directors. The company is
managed by its executive committee, which consists of four members designated as
officers.
The executive committee meets at least once a year and at such times as it
may determine. It is responsible for determining general guidelines and policies
for the business and for the day-to-day management of Total Fleet. The officers'
duties include overseeing compliance with applicable law and the decisions
adopted at meetings of shareholders, directing Total Fleet's business and
activities, and preparing the annual budget and monitoring its implementation.
Under Total Fleet's by-laws, the executive committee must have from four to
eight members, as determined by a vote of the shareholders. Members are elected
for one-year terms at the annual general meeting of shareholders and can be
successively re-elected. They are subject to removal by the shareholders at any
time.
As of May 31, 2004, the executive committee of Total Fleet was composed of
the individuals named below.
Expiration
Officer of Current
Name Age Position Since Term
------------------------------------ --- -------------- ------- ----------
Jose Salim Mattar Junior............ 55 president 1997 2005
Antonio Claudio Brandao Resende..... 57 vice-president 1997 2005
Eugenio Pacelli Mattar.............. 51 vice-president 1997 2005
Flavio Brandao Resende.............. 50 vice-president 1997 2005
For biographies of Jose Salim Mattar Junior, Antonio Claudio Brandao
Resende, Eugenio Pacelli Mattar and Flavio Brandao Resende. See--Localiza--Board
of Directors and--Executive Committee.
Franchising
At a quotaholders' Meeting held on May 1, 2003, the quotaholders of
Franchising approved its transformation from a limited liability company into a
sociedade anonima. Since this date, Franchising has been a sociedade anonima
that is privately owned and does not have publicly issued shares and, therefore,
is not required to have a board of directors. The company is managed by its
executive committee, which consists of five members designated as officers.
The executive committee meets at least once a year and at such times as it
may determine. It is responsible for determining general guidelines and policies
for the business and for the day-to-day management of Franchising. The officers'
duties include overseeing compliance with applicable law and the decisions
adopted at meetings of shareholders, directing Franchising's business and
activities, and preparing the annual budget and monitoring its implementation.
45
Under Franchising's by-laws, the executive committee must have five
members, who are elected for thirteen months terms at the annual general meeting
of shareholders. Members can be successively re-elected and are subject to
removal by the shareholders at any time.
As of May 31, 2004, the executive committee of Franchising was composed of
the individuals named below.
Expiration
Officer of Current
Name Age Position Since Term
------------------------------------ --- -------------- ------- ----------
Jose Salim Mattar Junior............ 55 president 1983 2005
Antonio Claudio Brandao Resende..... 57 vice-president 1983 2005
Eugenio Pacelli Mattar.............. 51 vice-president 1983 2005
Flavio Brandao Resende.............. 50 vice-president 1983 2005
Aristides Luciano de Azevedo Newton. 59 vice-president 1983 2005
For biographies of Jose Salim Mattar Junior, Antonio Claudio Brandao
Resende, Eugenio Pacelli Mattar, Flavio Brandao Resende and Aristides Luciano de
Azevedo Newton. See --Localiza --Board of Directors and --Executive Committee.
Prime
At a quotaholders' Meeting held on May 1, 2003, the quotaholders of Prime
approved its transformation from a limited liability company into a sociedade
anonima. Since this date, Prime has been a sociedade anonima that is privately
owned and does not have publicly issued shares and, therefore, is not required
to have a board of directors. The company is managed by its executive committee,
which consists of four members designated as officers.
The executive committee meets at least once a year and at such times as it
may determine. It is responsible for determining general guidelines and policies
for the business and for the day-to-day management of Prime. The officers'
duties include overseeing compliance with applicable law and the decisions
adopted at meetings of shareholders, directing Prime's business and activities,
and preparing the annual budget and monitoring its implementation.
Under Prime's by-laws, the executive committee must have four members, who
are elected for thirteen-month terms at the annual general meeting of
shareholders. Members can be successively re-elected and are subject to removal
by the shareholders at any time.
As of May 31, 2004, the executive committee of Prime was composed of the
individuals named below.
Expiration
Officer of Current
Name Age Position Since Term
------------------------------------ --- -------------- ------- ----------
Jose Salim Mattar Junior............ 55 president 1998 2005
Antonio Claudio Brandao Resende..... 57 vice-president 1998 2005
Eugenio Pacelli Mattar.............. 51 vice-president 1998 2005
Flavio Brandao Resende.............. 50 vice-president 1998 2005
For a biography of Jose Salim Mattar Junior, Antonio Claudio Brandao
Resende, Eugenio Pacelli Mattar and Flavio Brandao Resende. See--Localiza--Board
of Directors and--Executive Committee.
MFA
MFA is managed by an executive committee, or Directorio. MFA does not
maintain a board of directors, or consejo de administracion. The executive
committee is responsible for both the day-to-day management of MFA and the
implementation of the general guidelines and policies established by Localiza
and Franchising. The executive committee consists of one to three officers, or
directores titulares, and one substitute officer, or director suplente, who are
elected by the shareholders and can be reelected at the will of the
shareholders. The mandated term for each officer is three years, which may be
extended until the day of an officer's reelection or when the term of a
replacement officer begins.
46
As of May 31, 2004, the executive committee was composed of the individuals
named below.
Expiration
Officer of Current
Name Age Position Since Term
------------------------------------- --- ------------------ ------- ----------
Leonardo Federici Guedes............. 42 president 2002 2004
Aristides Luciano de Azevedo Newton.. 59 substitute officer 1999 2004
Leonardo Federici Guedes. Mr. Federici Guedes joined the executive
committee of MFA in 2002. From 1992 to 2002, Mr. Federici Guedes served
Franchising in various position, including general manager for Argentina.
Previously, he worked for Harnischfeger do Brasil Ltda. as supervisor of
international operations. Mr. Federici Guedes received a degree in aeronautical
engineering from the Universidade Federal de Minas Gerais.
For a biography of Aristides Luciano de Azevedo Newton. See-- Localiza--
Board of Directors.
Family Relationships
Jose Salim Mattar Junior and Eugenio Pacelli Mattar are brothers. Antonio
Claudio Brandao Resende and Flavio Brandao Resende are brothers.
B. Compensation
General
For the year ended December 31, 2003, the aggregate compensation we paid to
members of our boards of directors and executive committees, as well as the
officers named above, for services in all capacities, was approximately R$6.0
million.
We have not set aside or accrued any amounts for pension, retirement or
similar benefits for our boards of directors or executive officers.
We have entered into management contracts with our senior employees. These
annual contracts contain specific objectives and goals which we and the relevant
employee agree upon, and determine the employee's eligibility for incentive
compensation. Management incentives are based primarily upon the financial
results of the specific operation managed. As of May 31, 2004, we had 219
management contracts with our employees distributed among us as follows:
o 171 with Localiza employees;
o 33 with Total Fleet employees;
o 4 with Franchising employees; and
o 11 with Prime employees.
In 2003, we paid R$6.0 million in bonuses to our employees. We pay bonuses
to employees depending on their position and their performance evaluations.
Each of our employees participates in a performance-based compensation plan
pursuant to which a portion of his or her compensation is a function of our
overall profitability. In addition, we provide a range of benefits to our
employees, including health insurance and, for some of them, food vouchers.
According to Brazilian labor legislation, employees dismissed without cause
are entitled to an additional payment equivalent to 50% of the outstanding
balance in their mandatory fund for unemployment benefits, known as FGTS, at
dismissal date.
47
Stock Option Plan
The Company sponsors a stock option plan, which grants employees and
directors the option to purchase stocks at prices annually determined. Options
were granted in five installments in the last five years, ended in 2002, and
each installment is exercisable within four years from the grant date, 25% of
the installment per year based on the terms of the grant.
The options expire on April 30, 2007. The strike price is restated annually
by the IGP-M (General Price Index-Market).
As of December 31, 2003, no options have been exercised. Had all options
being exercised the current shareholders stake would have a reduction from 100%
to 96.7%.
The following tables summarize the status of the Company's stock option
plan:
As allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", we elected to continue to measure
cost for our stock option plan using the intrinsic value based method for
variable stock plan as prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic value
method, cost is the excess, if any, of the quoted market price of the stock at
the grant date or other measurement date over the amount an employee must pay to
acquire the stock. Entities choosing to continue applying APB Opinion No. 25 on
employee stock options granted on or after January 1996 must provide pro forma
disclosures of net income, as if the fair value method of accounting had been
applied. Under this method cost is measured at the grant date based on the fair
value of the employee stock option and is recognized ratably over the service
period of the option, which is usually the vesting period. For all periods
presented, fair value of our shares did not exceed the exercise prices of the
options and consequently, no compensation expense was recorded. Additionally,
the pro forma disclosures required by SFAS No. 123 have not been presented as
the effect of measuring compensation expense under SFAS No. 123 was immaterial
for all periods presented.
C. Board Practices
Localiza is managed by its board of directors, or conselho de
administracao, and its executive committee, or diretoria executiva.
Board of Directors
Localiza's board of directors meets whenever a simple majority of the
members of the board of directors (or the chairman of the board of directors in
absence of a determination by the board of directors) determines so from time to
time, but at least every three months, and is responsible for determining
general guidelines and policies for Localiza's business, appointing, supervising
and monitoring the activities of the executive officers, appointing independent
auditors and implementing and supervising internal audits.
Under Localiza's by-laws, the board of directors must have nine members.
Board members are elected for terms of one year at the annual general meeting of
shareholders and can be successively re-elected. They are subject to removal by
the shareholders at any time. As per Brazilian law, members of the board of
directors must own at
48
least one share of Localiza. Neither Localiza nor any of its subsidiaries
maintains any services contracts with any members of the board of directors
providing for benefits upon termination of their functions as board members.
Executive Committee
Localiza's executive committee is responsible for Localiza's day-to-day
management and implementation of the general guidelines and policies established
by the board of directors. The executive committee's duties include overseeing
compliance with applicable law and with the decisions adopted at meetings of
shareholders, directors and executive officers, managing Localiza's business and
activities, preparing the annual budget and monitoring its implementation after
approval by the board of directors.
Under Localiza's by-laws, the board of directors appoints four executive
officers to form the executive committee. Members of the executive committee
must be residents of Brazil, are appointed to terms of one year and can be
successively re-appointed. They are subject to removal at any time by the board
of directors.
Fiscal Council
Under Brazilian corporate law and our by-laws, we are not required to, and
currently do not, maintain a permanent fiscal council. We would, however, be
required to establish a fiscal council upon the request of shareholders who hold
2% of the common shares or 1% of the preferred shares, pursuant CVM Instruction
324 of January 19, 2000 that altered the percentages referred to in Article 161,
Paragraph 2 of Law 6,404/76, based on its prerogative established in Article 291
of Law 6,404/76. The primary responsibility of the fiscal council, which, if
established, would act independently from our management and external auditors,
would be to review our consolidated financial statements and report on them to
our shareholders.
Audit Committee
Under the Brazilian Corporation Law and its by-laws, Localiza is not
required to maintain and does not currently maintain a permanent audit
committee. Our board of directors approves our financial statements, the
performance of our auditors, either for audit or permissible non-audit services,
and related fees, fulfilling the function of an audit committee.
D. Employees
The table below shows the number of employees for the three years ended
December 31, 2003, distributed among our divisions as follows:
At December 31,
-------------------------
2001 2002 2003
----- ----- -----
Division:
Car rental....................................... 790 851 1,061
Fleet management................................. 83 95 97
Used car sales................................... 92 126 188
Franchising...................................... 26 24 26
Administrative................................... 77 80 78
----- ----- -----
Total........................................ 1,068 1,176 1,450
===== ===== =====
We hire independent contractors to perform certain non-core activities,
such as fleet maintenance, fueling, car washing, cleaning, security and
chauffeuring.
All of our employees are represented by unions, including the Federacao do
Comercio, the Sindicato dos Agentes Autonomos no Comercio, and the Confederacao
dos Trabalhadores no Comercio. We have never experienced a labor strike and we
believe that our relationships with our employees and with the unions are good.
49
E. Share Ownership
Each member of Localiza's board of directors owns at least one of
Localiza's shares, as required by the Brazilian Corporation Law. Some members of
Localiza's board of directors own more shares in Localiza through their
participation in holding companies. See Item 7. Major Shareholders and Related
Party Transactions.
Aristides Luciano de Azevedo Newton, who is a vice-president of Franchising
and a substitute officer of MFA, holds a 7.5% interest in Franchising and,
indirectly, a 7.5% interest in MFA.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Localiza
The table below sets forth information regarding Localiza's ownership by
each person who we know to be the beneficial owner of more than 5% of Localiza's
common shares and by directors and officers as a group as of May 31, 2004.
Percentage
Number of of Common
Common Shares Shares
------------- ----------
Jose Salim Mattar Junior............................. 3,071,997 20.00%
Antonio Claudio Brandao Resende...................... 3,071,997 20.00
Flavio Brandao Resende............................... 2,047,998 13.33
Eugenio Pacelli Mattar............................... 2,047,999 13.33
DLJ Funds............................................ 5,120,000 33.34
Directors and executive officers as a group.......... 9 0.00
---------- ------
Total........................................... 15,360,000 100.00%
========== ======
Shareholders' Agreement
Localiza's shareholders are parties to an agreement entered into on March
10, 1997 which includes, among other provisions:
o a provision which permits affiliates of Localiza's founders (Jose
Salim Mattar Junior, Eugenio Pacelli Mattar, Antonio Claudio Brandao
Resende and Flavio Brandao Resende) to appoint seven members of the
board of directors and affiliates of CSFB to appoint two members of
the board of directors, subject to adjustment based on changes in the
respective ownership percentages of these shareholders;
o a provision which grants CSFB the right to veto certain significant
actions provided that CSFB continues to hold at least a minimum
percentage of our equity;
o a provision which restricts the ability of Localiza's founders and of
CSFB to transfer their respective common shares;
o reciprocal rights to participate in certain transfers of common shares
by Localiza's founders and CSFB;
o a provision which requires that from March 10, 2001, Localiza, at the
option of CSFB, take all actions necessary to facilitate a public
offering of the shares held by CSFB, subject to certain other
conditions;
o a provision which requires that Localiza establish an American
Depositary Receipt program;
o a provision which requires that Localiza's founders participate,
subject to certain conditions, at the option of CSFB, in a sale of all
of Localiza's outstanding common shares; and
50
o a provision which grants Localiza's founders and CSFB the right to
convert their respective common shares into preferred shares.
Subsidiary Guarantors
The table below sets forth information regarding beneficial ownership of
each subsidiary guarantor.
Percentage Owned By
----------------------------------
Directors
of
Localiza Franchising Localiza
-------- ----------- --------
Total Fleet................................. 100.0% -- --
Franchising................................. 92.5% -- 7.5%
Prime....................................... 100.0% -- --
MFA......................................... -- 99.996% --
B. Related Party Transactions
In 1999, Localiza sold its subsidiary, Alterosa Estacionamentos Ltda.
("Alterosa"), to Locapar Participacoes e Administracao Ltda. ("Locapar"), a
company owned by our controlling shareholders, and recorded an accounts
receivable from Locapar. Alterosa's assets were principally comprised of land in
the city of Sao Paulo. Given that Localiza and Locapar are under common control,
no gain was recorded on the sale. During 2000, this land returned to Localiza as
consideration for the receivable originating from the sale of Alterosa. The land
was recorded as "other current asset - properties available for sale" until
January 2001, when it was sold to third parties for R$6.0 million, resulting in
a gain of R$4.6 million, recorded as other non-operating income.
Total Fleet, Franchising and Prime use the administrative and advertising
structure of Localiza. Localiza and Total Fleet use the intermediation services
of purchase and sale of vehicles and accessories rendered by Prime and pay Prime
a fee for these services. Localiza provides car rental services to Total Fleet
whenever Total Fleet needs a car replacement. Total Fleet also uses the location
and structure of Localiza to sell, through Prime, its used cars to the market
and reimburses Localiza for these services. In 2002, Localiza sold 320 vehicles
in the amount of R$3.8 million to Total Fleet. These transactions were carried
out at an arm's length basis and consistent with the prevailing market
conditions.
C. Interests of Experts and Counsel
Not Applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
For our consolidated audited financial statements, and notes thereto, see
Item 18. Financial Statements.
Dividends and Distributions
In accordance with the Brazilian Corporation Law, Localiza's by-laws
require that its shareholders be paid a minimum annual dividend of 25% of
adjusted net profits. However, upon the vote of 100% of the shareholders present
at a general meeting, such shareholders can declare a lower dividend or decide
not to declare dividends. In addition, upon the recommendation of the board of
directors that the payment of a dividend in respect of any period would be
inadvisable due to our financial situation, the payment of the minimum dividend
in respect of such period is not mandatory. In such case, the adjusted net
profits which were not distributed for this reason are to be recorded as a
special reserve and, if not absorbed by losses in subsequent fiscal years, are
to be paid as soon as our financial situation permits it.
51
Legal Proceedings
We are party to certain legal proceedings arising in the normal course of
business, including civil, administrative, tax, social security and labor
proceedings. We believe that these actions, if decided adversely to us, would
not have a material adverse effect on our business, financial condition or
results of operations. Reserves have been established in connection with certain
of these matters. There are no material legal or administrative proceedings
pending against us with respect to any environmental matters.
We are party to several labor claims related principally to the payment of
overtime and related social security charges. Our management, based on the
opinion of legal counsel, believes that the recorded accrual for these claims is
sufficient to cover possible losses. See note 17 to the Localiza audited
financial statements.
B. Significant Changes
None.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Not applicable.
B. Plan of Distribution
Not applicable.
C. Markets
The Notes currently trade in the over-the-counter market. The Notes are not
listed on any securities exchange, nor are they quoted through any automated
quotation system. There can be no assurance that an active market for the Notes
will develop or as to the liquidity of any such market. There are currently
US$73.9 million of Notes held by non-affiliates of Localiza.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Localiza
Localiza is registered with the Board of Trade of the State of Minas Gerais
under the number 3130001144-5. Pursuant to article 3 of Localiza's by-laws,
Localiza's corporate purpose is the rental of cars, fleets of cars and their
52
disposal at the end of their useful economic life and the exploitation and
licensing of trademarks and franchises in Brazil and elsewhere.
There are no provisions in Localiza's by-laws with respect to:
o a director's power to vote on proposals in which the director is
materially interested,
o a director's power, in the absence of an independent quorum, to vote
compensation for him or herself or for any other member of the board
of directors,
o borrowing powers exercisable by the directors,
o age limits for retirement of directors,
o anti-takeover mechanisms or other procedures designed to delay, defer
or prevent changes in our control, except for the preemptive rights
mentioned below,
o redemption of shares,
o sinking funds, or
o liability to further capital calls by the company.
Each of the nine members of the board of directors is required to own at
least one of Localiza's shares.
Under Brazilian Corporation Law, Localiza is not required to disclose
information on share ownership, and Localiza's by-laws do not have a provision
on the disclosure of share ownership.
Voting Rights
Each common share entitles its holder to one vote at shareholders'
meetings.
Shareholders' Meetings
Under the Brazilian Corporation Law, at a general meeting of shareholders,
convened and held in accordance with such law and Localiza's by-laws, the
shareholders are entitled to decide all matters relating to Localiza's
objectives and to approve any resolution that they deem necessary for Localiza's
protection and growth. Annual shareholders' meetings must be held until April 30
of each year. In addition, special shareholders' meetings may be held as often
as deemed necessary. General meetings are called by the chairman of Localiza's
board of directors, as prescribed by the Brazilian Corporation Law, and are
chaired by a shareholder elected by a majority of votes of those present at the
meeting. The chairperson appoints the secretary of the meeting. Localiza's
shareholders may be represented at the general meeting by an attorney-in-fact,
who must be a shareholder, one of Localiza's general officers or directors, or a
lawyer. Directors' compensation is determined by shareholders at a shareholder
meeting.
Common Shares and Preferred Shares
As of May 31, 2004, Localiza has 15,360,000 common registered shares, no
par value per share.
The issuance of preferred shares is limited by the Brazilian Corporation
Law to 50% of the total capital of the company. Currently, Localiza does not
have preferred shares. Pursuant to Localiza's by-laws, any future preferred
shares would not be convertible into common shares and would not have voting
rights. Pursuant to Localiza's by-laws, holders of future preferred shares would
be entitled to (a) a minimum annual non-cumulative preferential dividend equal
to R$0.01 per share, (b) priority in the reimbursement of the corporate capital,
in case of liquidation, and (c) right to participate in capital increases
derived from capitalization of profits or reserves in the same conditions as
holders of common shares. Preferred shares would acquire voting rights, however,
if Localiza does not pay the minimum preferential dividend for three consecutive
years. In this case, voting rights for preferred shares would continue until the
payment of non-cumulative dividends is made.
53
There are no restrictions under Brazilian law or Localiza's by-laws
limiting the rights of non-residents or non-Brazilian shareholders to hold or
exercise voting rights on Localiza's shares.
Preemptive Rights
Localiza's by-laws do not have provisions regarding shareholders'
preemptive rights. Under Brazilian Corporation Law, however, each of Localiza's
shareholders has a general preemptive right to subscribe for shares of the same
class in any capital increase, in an amount sufficient to keep the same
proportional participation of each shareholder in Localiza's total capital.
Localiza shall observe a minimum period of 30 days following the publication of
the capital increase notice, for the exercise of the preemptive right by its
shareholders.
Total Fleet
Total Fleet is a sociedade anonima registered with the Board of Trade of
the State of Minas Gerais under the number 3130001301-4. Pursuant to article 3
of Total Fleet's by-laws, Total Fleet's corporate purpose is the rental and/or
management of fleets of cars. Total Fleet is managed by an executive committee
composed of a minimum of four members and a maximum of eight members.
There are no provisions in Total Fleet's by-laws with respect to:
o an executive officer's power to vote on a proposal, arrangement or
contract in which the executive officer is materially interested,
o an executive officer's power, in the absence of an independent quorum,
to vote compensation for him or herself or for any other member of the
executive committee,
o borrowing powers exercisable by the executive officers,
o the number of shares required for an executive officer's
qualification,
o age limits for retirement of executive officers,
o anti-takeover mechanism or other procedures designed to delay, defer
or prevent changes in Total Fleet's control, except for the preemptive
rights mentioned below,
o redemption of shares,
o sinking funds, or
o liability to further capital calls by the company.
Under Brazilian law, Total Fleet is not required to disclose information on
share ownership, and Total Fleet's by-laws do not have a provision on the
disclosure of share ownership.
Voting Rights
Each common share entitles its holder to one vote at a shareholders'
meeting.
There are no restrictions under Brazilian law or Total Fleet's by-laws
limiting the rights of non-residents or non-Brazilian shareholders to hold or
exercise voting rights on Total Fleet's shares.
Shareholders' Meetings
Under the Brazilian Corporation Law, at a general meeting of shareholders,
convened and held in accordance with such law and Total Fleet's by-laws, the
shareholders are entitled to decide all matters relating to Total Fleet's
objectives and to approve any resolution that they deem necessary for Total
Fleet's protection and growth. Annual shareholders' meetings must be held until
April 30 of each year. In addition, special shareholders' meetings may be
54
held as often as deemed necessary. General meetings are called by Total Fleet's
executive committee, as prescribed by the Brazilian Corporation Law, and are
presided over by a shareholder elected by a majority of votes of those present
at the meeting. The chairperson appoints the secretary of the meeting. Total
Fleet's shareholders may be represented at the general meeting by an
attorney-in-fact, who must be a shareholder, one of the general officers, or a
lawyer. Compensation for executive officers is determined by the shareholders at
a shareholders' meeting.
Common Shares and Preferred Shares
As of May 31, 2004, Total Fleet has 109,630,000 registered common shares,
no par value per share, and is a wholly owned subsidiary of Localiza.
Total Fleet does not have any preferred shares.
Preemptive Rights
Total Fleet's by-laws do not have provisions regarding shareholders'
preemptive rights. Under Brazilian Corporation Law, however, each of Total
Fleet's shareholders has a general preemptive right to subscribe for shares of
the same class in any capital increase, in an amount sufficient to keep the same
proportional participation of each shareholder in Total Fleet's total capital.
Total Fleet shall observe a minimum period of 30 days following the publication
of the capital increase notice for the exercise of the preemptive right by its
shareholders.
Franchising
Franchising is a sociedade anonima registered with the Board of Trade of
the State of Minas Gerais, under the number 3130001797-4. Pursuant to article 3
of Franchising's by-laws, Franchising's corporate purpose is to manage the
franchising business of Localiza. Franchising is managed by an executive
committee composed of five officers.
There are no provisions in Franchising's by-laws with respect to:
o an executive officer's power to vote on a proposal, arrangement or
contract in which the executive officer is materially interested,
o an executive officer's power, in the absence of an independent quorum,
to vote compensation for him or herself or for any other member of the
executive committee,
o borrowing powers exercisable by the executive officers,
o the number of shares required for an executive officer's
qualification,
o age limits for retirement of executive officers,
o anti-takeover mechanism or other procedures designed to delay, defer
or prevent changes in Franchising's control, except for the legal
preemptive rights of shareholders in capital increases,
o redemption of shares,
o sinking funds, or
o liability to further capital calls by the company.
Under Brazilian law, Franchising is not required to disclose information of
share ownership, and Franchising does not have a provision on the disclosure of
share ownership.
Voting Rights
Each common share entitles the holder thereof to one vote at a
shareholders' meeting.
55
There are no restrictions under Brazilian law or Franchising's by-laws
limiting the rights of non-residents or non-Brazilian shareholders to hold or
exercise voting rights of Franchising's shares.
Shareholders' Meetings
Under the Brazilian Corporation Law, at a general meeting of shareholders,
convened and held in accordance with such law and Franchising's by-laws, the
shareholders are entitled to decide all matters relating to Franchising's
objectives and to approve any resolution that they deem necessary for
Franchising's protection and growth. Annual shareholders' meetings must be held
until April 30 of each year. In addition, special shareholders' meetings may be
held as often as deemed necessary. General meetings are called by Franchising's
executive committee, as prescribed by the Brazilian Corporation Law, and are
presided over by a shareholder elected by a majority of votes of those present
at the meeting. The chairperson appoints the secretary of the meeting.
Franchising's shareholders may be represented at the general meeting by an
attorney-in-fact, who must be a shareholder, one of the general officers, or a
lawyer. Compensation for executive officers is determined by the shareholders at
a shareholders' meeting.
Common Shares and Preferred Shares
As of May 31, 2004, Franchising has 116,254 registered common shares, no
par value per share.
Franchising does not have any preferred shares.
Preemptive Rights
Franchising's by-laws do not have provisions regarding shareholders'
preemptive rights. Under Brazilian Corporation Law, however, each of
Franchising's shareholders has a general preemptive right to subscribe for
shares of the same class in any capital increase, in an amount sufficient to
keep the same proportional participation of each shareholder in Franchising's
total capital. Franchising shall observe a minimum period of 30 days following
the publication of the capital increase notice for the exercise of the
preemptive right by its shareholders.
Prime
Prime is a sociedade anonima, registered with the Board of Trade of the
State of Minas Gerais under the number 3130001805-9. Pursuant to article 3 of
Prime's by-laws, Prime's corporate purpose is to deal with the intermediation of
used car sales and related services. Prime is managed by an executive committee
composed of four officers.
There are no provisions in Prime's by-laws with respect to:
o an executive officer's power to vote on a proposal, arrangement or
contract in which the executive officer is materially interested,
o an executive officer's power, in the absence of an independent quorum,
to vote compensation for him or herself or for any other member of the
executive committee,
o borrowing powers exercisable by the executive officers,
o the number of shares required for an executive officer's
qualification,
o age limits for retirement of executive officers,
o anti-takeover mechanism or other procedures designed to delay, defer
or prevent changes in Prime's control, except for the legal preemptive
rights of shareholders in capital increases,
o redemption of shares,
o sinking funds, or
56
o liability to further capital calls by the company.
Under Brazilian law, Prime is not required to disclose information of share
ownership, and Prime does not have a provision on the disclosure of share
ownership.
Voting Rights
Each common share entitles the holder thereof to one vote at a
shareholders' meeting.
There are no restrictions under Brazilian law or Prime's by-laws limiting
the rights of non-residents or non-Brazilian shareholders to hold or exercise
voting rights of Prime's shares.
Shareholders' Meetings
Under the Brazilian Corporation Law, at a general meeting of shareholders,
convened and held in accordance with such law and Prime's by-laws, the
shareholders are entitled to decide all matters relating to Prime's objectives
and to approve any resolution that they deem necessary for Prime's protection
and growth. Annual shareholders' meetings must be held until April 30 of each
year. In addition, special shareholders' meetings may be held as often as deemed
necessary. General meetings are called by Prime's executive committee, as
prescribed by the Brazilian Corporation Law, and are presided over by a
shareholder elected by a majority of votes of those present at the meeting. The
chairperson appoints the secretary of the meeting. Prime's shareholders may be
represented at the general meeting by an attorney-in-fact, who must be a
shareholder, one of the general officers, or a lawyer. Compensation for
executive officers is determined by the shareholders at a shareholders' meeting.
Common Shares and Preferred Shares
As of May 31, 2004, Prime has 15,000 registered common shares, no par value
per share and is a wholly-owned subsidiary of Localiza.
Prime does not have any preferred shares.
Preemptive Rights
Prime's by-laws do not have provisions regarding shareholders' preemptive
rights. Under Brazilian Corporation Law, however, each of Prime's shareholders
has a general preemptive right to subscribe for shares of the same class in any
capital increase, in an amount sufficient to keep the same proportional
participation of each shareholder in Prime's total capital. Prime shall observe
a minimum period of 30 days following the publication of the capital increase
notice for the exercise of the preemptive right by its shareholders.
MFA
MFA is registered with the Argentine public register of commerce under
number 9043, Book III File A of Sociedades por Acciones. Subsequently, amended
on September 30, 1999, under number 3602, Book 10 of Sociedades por Acciones, on
October 4, 2000, under number 18285, Book 13 of Sociedades por Acciones, and on
December 17, 2002, under number 3588, Book 20 of Sociedades por Acciones.
Pursuant to article 3 of MFA's by-laws, its corporate purpose is:
o to sub-license to third parties the right to use Localiza's brand
name, or any other brand name that may replace or supplement it in the
future, for the purpose of operating the business of renting cars,
along with related services,
o to manage the sub-license system of Localiza's brand name, or any
other brand name that may replace or supplement it in the future,
related with the car rental activities or supplementary services,
o to manage Localiza's brand name, or any other brand name that may
replace or supplement it in the future, through the collection of
royalties, commissions, fees, tariffs, funds or any other type of
compensation, as well as the sale of printed materials an other
related activities,
57
o to transfer technology and know-how through training programs and to
supply manuals and other materials in connection with the
sub-licensing of Localiza brand name, or any other brand name that may
replace or supplement it in the future, and
o to carry out activities related to the above-mentioned corporate
purposes.
There are no provisions in MFA's by-laws with respect to:
o an officer's power to vote on a proposal, arrangement or contract in
which the officer is materially interested,
o an officer's power, in the absence of an independent quorum, to vote
compensation for him or herself or for any other officer,
o borrowing powers exercisable by the officers,
o the number of shares required for an officer's qualification,
o age limits for retirements of officers,
o anti-takeover mechanism or other procedures designed to delay, defer
or prevent changes in MFA's control,
o redemption of shares,
o sinking funds, or
o liability to further capital calls by the company.
Voting Rights
Each common share entitles the holder thereof to one vote at the
shareholders' meetings.
Shareholders' Meetings
MFA is required to hold a general shareholders' meeting in each fiscal year
to consider the matters outlined in Article 234 of Argentina's Business
Companies Law, including:
o approval of MFA's audited financial statements and general performance
of the officers in the preceding fiscal year,
o election, removal and compensation of officers, and
o allocation of profits.
Matters which may be considered at shareholders' general meetings include
consideration of the responsibilities of the officers, as well as capital
increases and the issuance of negotiable debentures. In addition, special
shareholders' meetings may be called at any time to consider matters beyond the
scope of the general meeting, including amendments to the by-laws, issuances of
certain securities that permit profit sharing, anticipated dissolution, merger
and transformation from one type of company into another. Shareholders' meetings
may be convened by the executive committee.
Shareholders' meetings are called by publication at least ten days before
the date of the meeting, in the Official Gazette of the Republic of Argentina
for five days, and in a widely circulated newspaper in Argentina. In order to
attend a meeting, shareholders must communicate their attendance at least three
business days before the date of the meeting. Nevertheless, said publications
may be omitted if the attendance of all the shareholders is confirmed with
certainty and the shareholders take unanimous decisions.
58
Common Shares and Preferred Shares
As of May 31, 2004, MFA has 25,000 common shares, par value ARP1.00 per
share. Currently, MFA does not have any preferred shares.
There are no restrictions under Argentine law or MFA's by-laws limiting the
rights of non-residents or non-Argentine shareholders to hold or exercise voting
rights on MFA's shares, provided that said shareholder has comply with the
requirements stated under Argentina's Business Companies Law.
Preemptive Rights
MFA's by-laws do not have provisions regarding shareholders' preemptive
rights. MFA's shares may be freely transferred to third parties.
As stated under section 214 of Argentine Business Association Law, MFA's
common shares may be freely transferred to third parties. In addition, there are
no limitations to the transfer of shares or preemptive rights in the By-Laws.
Nevertheless, Section 194 of Argentine Business Association Law, states
that if MFA issues new shares, then existing shareholders will have the
preemptive right to acquire new shares, in proportion to the their holdings of
existing shares. In said case, MFA will offer the new shares to its shareholders
through publications for three days in an official bulletin and in some cases an
additional publication in an important newspaper is also required. The
shareholders must exercise their preferential right to purchase the shares
offered within 30 days from the last publication day.
C. Material Contracts
None.
D. Exchange Controls
There are no restrictions on ownership of the Notes by individuals or legal
entities domiciled outside Brazil.
Brazilian law provides that whenever there is a serious imbalance in
Brazil's balance of payments or reasons to foresee a serious imbalance, the
Brazilian government may impose temporary restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil. The last
occurrence of restrictions on the remittance of foreign capital was in 1989
when, for approximately six months until early 1990, the Brazilian government
froze all dividend and capital repatriations that were owed to foreign equity
investors and held by the Central Bank of Brazil in order to conserve Brazil's
foreign currency reserves. These amounts were subsequently released in
accordance with Brazilian government directives. There can be no assurance that
similar measures will not be taken by the Brazilian government in the future.
The Brazilian government currently restricts the ability of Brazilian and
foreign persons or entities to convert Brazilian currency into U.S. dollars or
other currencies other than in connection with certain authorized transactions.
The issuance of the Notes has been authorized by, and is currently
electronically registered with, the Central Bank of Brazil. The Central Bank of
Brazil had issued a certificate of registration, which was later replaced by the
electronic registration currently in place, authorizing each of the scheduled
payments of principal at maturity and interest on the Notes. However, consent
from the Central Bank of Brazil will be needed for (i) the payment of principal
of, and premium, if any, and interest on the Notes upon acceleration of the
Notes following an event of default, (ii) payments in respect of the Notes upon
certain optional redemption events or upon a repurchase of the Notes by us or
our affiliates under certain circumstances or in the event of certain changes in
Brazilian law relating to tax withholding, and (iii) overdue payments, in the
event that any payment in connection with the Notes is not paid in full by 120
days after the date that such payment becomes due and payable. There can be no
assurance that we will obtain the necessary consents from the Central Bank of
Brazil for the remittance abroad of the foregoing payments.
59
There can be no assurance that the Brazilian government will not in the
future (i) restrict, by limiting access to foreign currency or otherwise, the
ability of Brazilian entities, such as Localiza, to repay foreign currency
denominated indebtedness, such as the Notes, or (ii) require that any payments
on indebtedness be made in Brazilian reais. The likelihood of the imposition of
restrictions by the Brazilian government may be affected by, among other
factors, the extent of Brazil's foreign currency reserves, the availability of
foreign currency in the foreign exchange markets on the date a payment is due,
the size of Brazil's debt service burden relative to the economy as a whole,
Brazil's policy towards the IMF and political constraints to which Brazil may be
subject. See Item 3. Key Information--Exchange Rates.
E. Taxation
Not applicable.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Statements contained in this annual report as to the contents of any
contract or other document referred to are not necessarily complete, and each of
these statements is qualified in all respects by reference to the full text of
such contract or other document filed as an exhibit hereto. A copy of the
complete annual report including the exhibits and schedules filed herewith may
be inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 233 Broadway, New York,
New York 10279, and copies of all or any part of the annual report may be
obtained from such offices upon payment of the fees prescribed by the SEC.
We are subject to the information and periodic reporting requirements of
the Securities Exchange Act of 1934, and in accordance therewith, will file
periodic reports and other information with the SEC. These periodic reports and
other information will be available for inspection and copying at the public
reference facilities of the SEC regional offices referred to above. As a foreign
private issuer, we are exempt from certain provisions of the Exchange Act
prescribing the furnishing and content of proxy statements and periodic reports
and from Section 16 of the Exchange Act relating to the short-swing profits
reporting and liability.
We will provide without charge to each person to whom this report is
delivered, upon written or oral request, copies of all reports we are required
to file with the SEC under the Exchange Act, including our annual reports in
English, containing a brief description of our operations and our annual
consolidated audited financial statements which will be prepared in accordance
with U.S. GAAP, and a copy of any or all of the documents incorporated by
reference into this annual report (other than exhibits, unless such exhibits are
specifically incorporated by reference in such documents). Written request for
such copies should be directed to Localiza Rent a Car S.A., Av. Bernardo
Monteiro, 1563 Funcionarios 30150-902- Belo Horizonte, Minas Gerais, Brazil,
Attention: Financial Department. Telephone requests may be directed to
55-31-3247-7040.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt portfolio is principally composed by the Notes, which were issued
as long-term US dollar denominated obligations and were incurred primarily in
connection with capital expenditures and repayments of
60
short-term loans. As a consequence, we should be exposed to the foreign currency
exchange risk, once our revenues and operating expenses are principally real
denominated. In view of this currency mismatch between revenues and debt, we
have swapped the principal and interest market risk of the Notes for the
domestic interest risk - CDI (Interbank Deposit Certificate) through swap
transactions, seeking to protect us from its exposure to dollar denominated
liabilities.
As of December 31, 2003, our US dollar-denominated debt, in the amount of
R$227.2 million (including interest payable of R$5.4 million and R$8.3 million
of "Compror" transactions), was protected against currency devaluation by swap
transactions.
Swap Transactions
As of December 31, 2003, R$227.2 million of our debt was denominated in US
dollars, while all our revenues were denominated in reais. We contracted swap
transactions aiming at protecting our U.S. dollar denominated liabilities, which
were outstanding during the year ended December 31, 2003, against the
devaluation of real. The swap's terms are as follows:
Unrealized
US$ rate Unrealized gain/(loss)
Notional at loss as of as of
Date of amount - contract December December
contract Due date US$ date Company pays Company receives 31, 2002 31, 2003
-------- -------- --- ---- ------------ ---------------- ---------- -----------
(In thousands of reais)
Short term:
Exchange rate
From From 2,811 2.9420 100% CDI + variation + - 25
12/15/03 01/29/04 1.72% p.a. coupon of 5.50%
p.a.
Long term:
Exchange rate
From From variation +
09/05/01 to 09/29/05 66,300 2.5642 to 100% CDI coupon (from (12,031) (18,950)
10/16/01 2.7400 9.30% to 9.80%
p.a.)
Exchange rate
From 09/29/05 5,400 2.8839 variation +
10/21/03 coupon of 5.10%
p.a. 100% CDI - (122)
------- -------
(12,031) (19,047)
Current liabilities - Loans and financing - 25
------- -------
Noncurrent liabilities - Unrealized loss on derivatives (12,031) (19,072)
======= =======
As of December 31, 2003, the notional amount of swap contracted plus
accrued coupon was US$75.4 million.
The unrealized loss has been determined based on the fair value of these
swap transactions which was estimated based on discounting future contracted
cash flow considering market rates, terms and conditions at each balance sheet
date.
Permitted Investment in Notes
In October 1997, we issued the Notes, which have a fixed interest rate of
10.25% and which will mature on October 1, 2005. In 1998 and 1999, we
repurchased part of the Notes corresponding to the principal amount of US$26.1
million equivalent to R$75.4 million in December 31, 2003.
Market Risk Sensitive Instruments
The table below presents information related to market risk sensitive
instruments:
61
Fair Expected Maturity Dates
Value At -----------------------
December Repurchased
Rate Currency 31, 2003 2004 2005 Portion Total
---- -------- -------- ---- ---- ------- -----
(In millions of reais)
Notes (principal).... 10.25% US$ 207.1 - 288.9 75.4 213.5
Swap transactions.... (1) US$ 19.1 - 19.1 - 19.1
---- ----- ----- -----
- 308.0 75.4 232.6
==== ===== ===== =====
(1) See note 18 of Localiza audited financial statements
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Our president and chief executive officer, Jose Salim Mattar Junior and our
principal financial officer, Roberto Antonio Mendes, have evaluated, together
with management, the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of December 31, 2003, the end of the period covered by this
report. Based on this evaluation, our chief executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective at the reasonable assurance level for the purpose of collecting,
analyzing and disclosing the information that we are required to disclose in the
reports we file under the Securities Exchange Act of 1934, within the time
periods specified in the SEC's rules and forms.
There have been no significant changes in our internal controls over financial
reporting or other factors during the annual period covered by this Form 20-F
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
In light of the new regulatory framework introduced by the Sarbanes-Oxley
Act of 2002, on April 30, 2003 we established a disclosure committee consisting
of Antonio Claudio Brandao Resende (a member of our board of directors and an
executive vice president), Eugenio Pacelli Mattar (a member of our board of
directors, an executive vice president and our fleet management officer),
Aristides Luciano de Azevedo Newton (a member of our board of directors, an
executive vice president of Franchising and an officer of MFA), Marco Antonio
Guimaraes (our car resale officer), Eugenia Rafael (our car rental officer),
Tarcisio Pinto Ferreira (our general counsel) and Claudia Leao (our controller).
The committee is generally responsible for considering the materiality of
information and determining our disclosure obligations on a timely basis. The
committee also allocates reviewing responsibilities to the appropriate officers
within Localiza or any of its subsidiaries. The committee, together with our
chief executive officer and chief financial officer, has the responsibility for
the evaluation of the effectiveness of our disclosure and control procedures and
may generally take all action deemed necessary or desirable to ensure compliance
with such procedures.
62
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Under Brazilian corporate law, we are not required to, and currently do not
maintain, a permanent audit committee. Consequently, we do not currently have a
financial expert performing audit functions.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics which covers all of our employees,
including our principal executive officer, principal financial officer and
controller and other directors and officers. The objective of this code is: (i)
to reduce the subjectivity of personal interpretations of ethical principles;
(ii) to be a formal and institutional benchmark for the professional conduct of
our employees, including the ethical handling of actual or apparent conflicts of
interests, becoming a standard for the internal and external relationship of
Localiza with its stakeholders, namely: shareholders, customers, employees,
suppliers, service providers, labor unions, competitors, society, government and
the communities in which it operates; and (iii) to ensure that the daily
concerns with efficiency, competitiveness and profitability do not override
ethical behavior.
Our code of ethics complies with the provisions of the Sarbanes-Oxley Act
of 2002. A copy of our code of ethics is filed as an exhibit to this document.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For the fiscal years ending December 31, 2003 and 2002, Deloitte Touche
Tohmatsu Auditores Independentes acted as independent auditor for Localiza and
Subsidiaries for the fiscal years ended December 31, 2003 and 2002, Deloitte &
Co. S.R.L. acted as independent auditor for MFA. In 2002, the aggregate of Audit
Services Fees billed by Deloitte Touche Tohmatsu Auditores Independentes to
Localiza and Subsidiaries and by Deloitte & Co. S.R.L. to MFA amounted to R$
182.9. In 2003, the aggregate of Audit Service Fees billed by Deloitte Touche
Tohmatsu Auditores Independentes to Localiza and Subsidiaries and by Deloitte &
Co. S.R.L. to MFA amounted to R$ 246.0. No other fees were billed to us by our
principal accountants for services provided in connection with fiscal years 2002
and 2003.
"Audit Services Fees" consist of fees billed for professional services
rendered in connection with the audit of the Company's consolidated and
individual annual financial statements and annual regulatory filings thereon.
Pre-Approval Policies
Under the Brazilian Corporation Law and its by-laws, Localiza is not
required to maintain and does not currently maintain a permanent audit
committee. Our board of directors approves our financial statements, the
performance by our auditors of audit and permissible non-audit services, and
associated fees, fulfilling the function of an audit committee.
Our board of directors requires management to obtain the board's approval
before engaging independent auditors to provide any audit or permitted non-audit
services to us or our subsidiaries. Pursuant to this policy, our board of
directors pre-approves all audit and non-audit services provided by Deloitte
Touche Tohmatsu, our principal auditor.
63
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Page
Consolidated Financial Statements of Localiza Rent a Car S.A.:...............F-2
Report of Deloitte Touche Tohmatsu Auditores Independentes dated
April 2, 2004 for the fiscal year ending December 31, 2003....F-3
Consolidated Balance Sheets at December 31, 2002 and 2003............F-4
Consolidated Statements of Income and other comprehensive income
(loss) for the Years Ended December 31, 2001, 2002 and 2003...F-6
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2001, 2002 and 2003..................F-7
Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2002 and 2003.......................................F-8
Notes to the Consolidated Financial Statements......................F-10
Consolidated Financial Statements of Localiza Franchising S.A.:.............F-54
Report of Deloitte Touche Tohmatsu Auditores Independentes dated
April 2, 2004 for the fiscal year ending December 31, 2003...F-55
Consolidated Balance Sheets at December 31, 2002 and 2003...........F-56
Consolidated Statements of Income for the Years Ended December 31,
2001, 2002 and 2003..........................................F-58
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2001, 2002 and 2003.................F-59
Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2002 and 2003......................................F-60
Notes to the Consolidated Financial Statements......................F-62
Financial Statements of Localiza Master Franchisee Argentina S.A.:..........F-80
Report of Deloitte & Co. S.R.L. dated March 12, 2004 for the
fiscal year ending December 31, 2003.........................F-81
Report of Independent Public Accountants for the Years Ended
December 31, 2000 and 2001 (Pistrelli, Dyas y Associados, a
former member of Andersen S/C)(1)............................F-82
Balance Sheets at December 31, 2002 and 2003........................F-83
Statements of Income for the Years Ended December 31, 2001, 2002
and 2003.....................................................F-84
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2001, 2002 and 2003.............................F-85
Statements of Cash Flows for the Years Ended December 31, 2001,
2002 and 2003................................................F-86
Notes to the Financial Statements...................................F-88
--------------------------
(1) Copy of a report issued by Pistrelli, Dyas y Associados, a former member of
Andersen S/C on March 11, 2002.
ITEM 19. EXHIBITS
1.1 Charter and bylaws of Localiza Rent a Car S.A. (English translation)
64
1.2 Charter and bylaws of Total Fleet S.A. (English translation)1
1.3 Charter and bylaws of Localiza Franchising S.A. (English translation)
1.4 Charter and bylaws of Prime Prestadora de Servicos S.A. (English
translation)
1.5 Charter and bylaws of Localiza Master Franchisee Argentina S.A. (English
translation)2
8.1 List of significant subsidiaries
10.1 Consent of Deloitte Touche Tohmatsu Auditores Independentes as of December
31, 2002 and 2003 and for the three years in the period ended December 31,
2003 (Localiza)
10.2 Consent of Deloitte Touche Tohmatsu Auditores Independentes as of December
31, 2002 and 2003 and for the three years in the period ended December 31,
2003 (Franchising)
10.3 Consent of Deloitte & Co. S.R.L. as of December 31, 2002 and 2003 and for
the two years in the period ended December 31, 2003 (MFA)
10.4 Letter from MFA regarding certain representations given by Andersen 3
10.5 Notice issued by MFA regarding consent of Andersen
11.1 Code of Ethics of Localiza Rent a Car S.A. and Subsidiaries
12.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Localiza)
12.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Total Fleet)
12.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Franchising)
12.4 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Prime)
12.5 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(MFA)
13.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Localiza)
13.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Total Fleet)
13.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Franchising)
13.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Prime)
13.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(MFA)
1 Incorporated by reference to our Annual Report in Form 20-F for fiscal year
ended December 31, 2001 (File No. 333-8128) filed with the SEC on June 28,
2002.
2 Incorporated by reference to our Annual Report in Form 20-F for fiscal year
ended December 31, 2002 (File No. 333-8128) filed with the SEC on June 30,
2003.
3 Copy of a letter filed with the SEC on June 28,2002.
65
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrants certify that they meet all of the requirements for
filing on Form 20-F and have duly caused this annual report or amendment thereto
to be signed on their behalf by the undersigned, thereunto duly authorized.
LOCALIZA RENT A CAR S.A.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: President
By: /s/ Antonio Claudio Brandao Resende
-----------------------------------------
Name: Antonio Claudio Brandao Resende
Title: Vice President
TOTAL FLEET S.A.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: President
By: /s/ Antonio Claudio Brandao Resende
-----------------------------------------
Name: Antonio Claudio Brandao Resende
Title: Vice President
LOCALIZA FRANCHISING S.A.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: President
By: /s/ Antonio Claudio Brandao Resende
-----------------------------------------
Name: Antonio Claudio Brandao Resende
Title: Vice President
PRIME PRESTADORA DE SERVICOS S.A.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: President
By: /s/ Antonio Claudio Brandao Resende
-----------------------------------------
Name: Antonio Claudio Brandao Resende
Title: Vice President
66
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
By: /s/ Leonardo Federici Guedes
-----------------------------------------
Name: Leonardo Federici Guedes
Title: President
By: /s/ Aristides Luciano de Azevedo Newton
-----------------------------------------
Name: Aristides Luciano de Azevedo Newton
Title: Substitute Officer
Dated: June 29, 2004
67
Index to consolidated financial statements
Page
Consolidated Financial Statements of Localiza Rent a Car S.A.:...............F-2
Report of Deloitte Touche Tohmatsu Auditores Independentes dated
June 2, 2004 for the fiscal year ending December 31, 2003.....F-3
Consolidated Balance Sheets at December 31, 2002 and 2003............F-4
Consolidated Statements of Income for the Years Ended December 31,
2001, 2002 and 2003...........................................F-6
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2001, 2002 and 2003..................F-7
Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2002 and 2003.......................................F-8
Notes to the Consolidated Financial Statements......................F-10
Consolidated Financial Statements of Localiza Franchising S.A.:.............F-54
Report of Deloitte Touche Tohmatsu Auditores Independentes dated
June 2, 2004 for the fiscal year ending December 31, 2003....F-55
Consolidated Balance Sheets at December 31, 2002 and 2003...........F-56
Consolidated Statements of Income for the Years Ended December 31,
2001, 2002 and 2003..........................................F-58
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2001, 2002 and 2003.................F-59
Consolidated Statements of Cash Flows for the Years Ended December
31, 2001, 2002 and 2003......................................F-60
Notes to the Consolidated Financial Statements......................F-62
Financial Statements of Localiza Master Franchisee Argentina S.A.:..........F-80
Report of Deloitte & Co. S.R.L. dated March 12, 2004 for the
fiscal year ending December 31, 2003.........................F-81
Report of Independent Public Accountants for the Years Ended
December 31, 2000 and 2001 (Pistrelli, Dyas y Associados, a
former member of Andersen S/C)(1)............................F-82
Balance Sheets at December 31, 2002 and 2003........................F-83
Statements of Income for the Years Ended December 31, 2000, 2001
and 2002.....................................................F-84
Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 2000, 2001 and 2002.............................F-85
Statements of Cash Flows for the Years Ended December 31, 2000,
2001 and 2002................................................F-86
Notes to the Financial Statements...................................F-88
--------------------------
(1) Copy of a report issued by Pistrelli, Dyas y Associados, a former member of
Andersen S/C on March 11, 2002.
Localiza Rent a Car S.A. and Subsidiaries
Financial Statements Together with Report of Independent Registered Public
Accounting Firm
Expressed in Brazilian reais
As of December 31, 2002 and 2003 and for the three
years in the period ended December 31, 2003
Deloitte Touche Tohmatsu Auditores Independentes
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Localiza Rent a Car S.A.
Belo Horizonte - MG
1. We have audited the accompanying consolidated balance sheets of Localiza
Rent a Car S.A., (the "Company"), a Brazilian corporation, as of December
31, 2002 and 2003 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, 2003, all
expressed in Brazilian reais. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
2. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversights Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
3. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Localiza Rent a Car S.A. as of December 31, 2002 and 2003, and
the results of its operations and cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
4. Our audits also comprehended the translation of Brazilian reais amounts
into U.S. dollar amounts as of and for the year ended December 31, 2003
and, in our opinion, such translation has been made in conformity with the
basis stated in Note 2 (d). Such U.S. dollar amounts are presented solely
for the convenience of readers in the United States of America.
April 2, 2004
/s/ Deloitte Touche Tohmatsu
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
A S S E T S December 31,
---------------- --------------------------------------------
2002 2003 2003
------------- ------------- ------------
R$ R$ US$
------------- ------------- ------------
CURRENT ASSETS:
Cash and cash equivalents 71,391 159,264 55,124
Available for sale marketable securities 11,078 - -
Accounts receivable, net 51,074 46,899 16,233
Revenue-earning vehicles, net 263,404 278,409 96,362
Deferred income tax and social contribution 1,585 2,909 1,007
Other 5,922 8,974 3,106
------------- ------------- ------------
404,454 496,455 171,832
------------- ------------- ------------
NONCURRENT ASSETS:
Revenue-earning vehicles, net 87,034 110,452 38,229
Escrow deposits 18,975 19,235 6,657
Deferred income tax and social contribution 33,477 12,486 4,322
Other 2,805 490 170
------------- ------------- ------------
142,291 142,663 49,378
------------- ------------- ------------
PROPERTY AND EQUIPMENT, NET 15,126 18,581 6,431
------------- ------------- ------------
GOODWILL 4,704 4,704 1,628
------------- ------------- ------------
TOTAL ASSETS 566,575 662,403 229,269
============= ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY December 31,
------------------------------------ ------------ ----------- ----------
2002 2003 2003
------------ ----------- ----------
R$ R$ US$
------------ ----------- ----------
CURRENT LIABILITIES:
Loans and financing - 8,309 2,876
Interest payable on long-term debt 6,616 5,410 1,872
Accounts payable 18,818 81,670 28,267
Payroll and related charges 10,067 11,562 4,002
Income tax and social contribution 460 954 330
Taxes, other than on income 3,550 4,576 1,584
Deferred income tax and social contribution 7,302 6,356 2,200
Advances from customers 3,878 4,847 1,678
Other 615 1,118 387
------------ ----------- ----------
51,306 124,802 43,196
------------ ----------- ----------
NONCURRENT LIABILITIES:
Long-term debt 261,111 213,512 73,900
Unrealized loss on derivatives (Note 18) 12,031 19,072 6,601
Reserve for contingencies 35,847 45,727 15,827
Deferred income tax and social contribution 9,983 14,440 4,998
Other 1,583 1,617 560
------------ ----------- ----------
320,555 294,368 101,886
------------ ----------- ----------
MINORITY INTEREST 92 17 6
------------ ----------- ----------
SHAREHOLDERS' EQUITY:
Capital stock 135,723 153,693 53,196
Accumulated earnings 59,374 89,523 30,985
Accumulated other comprehensive loss (475) - -
------------ ----------- ----------
194,622 243,216 84,181
------------ ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 566,575 662,403 229,269
============ =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS) FOR THE
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003 (Stated in thousands of Brazilian
reais and U.S. dollars)
Year ended December 31,
-------------------------------------------------------
2001 2002 2003 2003
----------- ------------ ------------ ------------
R$ R$ R$ US$
----------- ------------ ------------ ------------
NET REVENUES:
Car rental 144,253 162,595 155,291 53,749
Fleet management 120,229 118,782 120,309 41,641
Franchising 5,056 5,111 5,456 1,888
Used car sales 150,907 190,476 250,978 86,868
----------- ------------ ------------ ------------
Total net revenues 420,445 476,964 532,034 184,146
----------- ------------ ------------ ------------
EXPENSES AND COSTS:
Direct operating (77,059) (88,858) (91,485) (31.665)
Cost of used car sales (118,655) (156,270) (206,579) (71,500)
Taxes on revenues (17,795) (19,578) (16,337) (5,655)
Selling, general, administrative and other (52,438) (62,482) (65,402) (22,637)
Depreciation of vehicles (43,995) (31,062) (37,222) (12,883)
Goodwill amortization (1,499) - - -
Other depreciation and amortization (2,634) (3,426) (3,841) (1,329)
----------- ------------ ------------ ------------
Total operating expenses and costs (314,075) (361,676) (420,866) (145,669)
----------- ------------ ------------ ------------
Operating income 106,370 115,288 111,168 38,477
----------- ------------ ------------ ------------
FINANCIAL (EXPENSES) INCOME, NET (50,464) (82,814) 40,677 14,079
OTHER NONOPERATING (EXPENSES) INCOME, NET 4,475 (125) 97 34
----------- ------------ ------------ ------------
Income before taxes and minority interest 60,381 32,349 151,942 52,590
----------- ------------ ------------ ------------
INCOME TAX AND SOCIAL CONTRIBUTION:
Current (14,107) (19,190) (23,256) (8,049)
Deferred (2,386) 13,605 (22,940) (7,940)
----------- ------------ ------------ ------------
(16,493) (5,585) (46,196) (15,989)
----------- ------------ ------------ ------------
Income before minority interest 43,888 26,764 105,746 36,601
MINORITY INTEREST - (115) (106) (37)
----------- ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle 43,888 26,649 105,640 36,564
Cumulative effect of a change in accounting
principle, net of taxes of R$467 (Note 3 i) (907) - - -
----------- ------------ ------------ ------------
Net income 42,981 26,649 105,640 36,564
=========== ============ ============ ============
OTHER COMPREHENSIVE INCOME (LOSS):
Total change in market value of marketable securities 15,753 269 501 173
Reclassification adjustment of realized (gains) losses (15,737) (1,566) 219 76
----------- ------------ ------------ ------------
Unrealized/realized gains (losses) on marketable
securities 16 (1,297) 720 249
Deferred income tax and social contribution
on unrealized gains (losses) (5) 436 (245) (85)
----------- ------------ ------------ ------------
Other comprehensive income (loss) 11 (861) 475 164
----------- ------------ ------------ ------------
Comprehensive income 42,992 25,788 106,115 36,728
=========== ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Brazilian reais)
Accumulated
other
Capital Accumulated comprehensive
stock earnings income (loss) Total
---------- ----------- ------------- ----------
BALANCES AT DECEMBER 31, 2000 117,523 46,156 375 164,054
Cash dividends (Note 20 b) - (15,000) - (15,000)
Interest on capital (Note 20 c) - (6,353) - (6,353)
Capital increase (Note 20 c) 5,400 - - 5,400
Net income - 42,981 - 42,981
Other comprehensive income - - 11 11
---------- ----------- ------------- ----------
BALANCES AT DECEMBER 31, 2001 122,923 67,784 386 191,093
Cash dividends (Note 20 b) - (20,000) - (20,000)
Interest on capital (Note 20 c) - (15,059) - (15,059)
Capital increase (Note 20 c) 12,800 - - 12,800
Net income - 26,649 - 26,649
Other comprehensive loss - - (861) (861)
---------- ----------- ------------- ----------
BALANCES AT DECEMBER 31, 2002 135,723 59,374 (475) 194,622
Cash dividends (Note 20 b) - (54,350) - (54,350)
Interest on capital (Note 20 c) - (21,141) - (21,141)
Capital increase (Note 20 c) 17,970 - - 17,970
Net income - 105,640 - 105,640
Other comprehensive income - - 475 475
---------- ----------- ------------- ----------
BALANCES AT DECEMBER 31, 2003 153,693 89,523 - 243,216
=========== ============= =============== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
1/2
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
Year ended December 31,
-------------------------------------------------------------
2001 2002 2003 2003
-------------- ----------- ---------- -----------
R$ R$ R$ US$
-------------- ----------- ---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 42,981 26,649 105,640 36,564
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization (including goodwill) 48,128 34,488 41,063 14,212
Vehicles written-off as a result of theft 2,493 2,041 1,540 533
Deferred income taxes 2,386 (13,605) 22,940 7,940
Provision for doubtful accounts 1,102 1,436 (128) (44)
Reversal of compulsory loans, net 383 - - -
Gain on sale of land (4,639) - - -
Provision for contingencies 8,099 13,682 15,537 5,378
Realized gains (losses) on sale of marketable
securities (15,737) (1,566) 219 76
Realized gains on derivatives (6,722) (1,891) - -
Exchange variation, net 29,328 85,044 (46,896) (16,231)
Unrealized (gain) loss on derivatives 26,235 (14,204) 7,016 2,428
Other 282 307 (454) (158)
(Increase) decrease in operating assets:
Accounts receivable (19,741) (3,043) 5,946 2,058
Revenue-earning vehicles-
New acquisitions (247,527) (215,604) (288,361) (99,806)
Cost of used car sales 121,381 164,846 211,176 73,092
Escrow deposits (2,356) (1,355) (260) (90)
Accrued interest income on marketable securities (1,465) 1,978 (759) (263)
Compulsory loans 1,597 - - -
Other 9,985 8,083 (2,440) (845)
Increase (decrease) in operating liabilities:
Accounts payable 5,834 (5,500) 62,852 21,754
Payroll and related charges 1,238 1,382 1,495 518
Income tax and social contribution (1,362) 246 494 171
Taxes, other than on income (2,066) 2,154 1,026 355
Advances from customers 2,617 789 969 335
Reserve for contingencies (2,224) (4,872) (5,657) (1,958)
Loans and debt - accrued interest expense, net (51) 2,086 (660) (228)
Other (514) (220) 322 111
-------------- ----------- ---------- -----------
Net cash provided by (used in) operating activities (335) 83,351 132,620 45,902
-------------- ----------- ---------- -----------
F-8
2/2
Year ended December 31,
-------------------------------------------------------------
2001 2002 2003 2003
-------------- ----------- ---------- -----------
R$ R$ R$ US$
-------------- ----------- ---------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of marketable securities (16,733) (5,717) - -
Proceeds from sales of marketable securities 61,365 13,210 11,798 4,083
Additions to property and equipment, net (7,246) (6,018) (7,296) (2,525)
Acquisitions of former franchisees (1,329) - - -
-------------- ----------- ---------- -----------
Net cash provided by investing activities 36,057 1,475 4,502 1,558
-------------- ----------- ---------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Short-term loans:
Proceeds 113,837 39,186 57,454 19,886
Repayments (120,057) (66,381) (49,182) (17,023)
Transaction with related parties:
Capital increase 5,400 12,800 17,970 6,220
Cash dividends (15,000) (20,000) (54,350) (18,812)
Interest on capital (6,353) (15,059) (21,141) (7,317)
-------------- ----------- ---------- -----------
Net cash used in financing activities (22,173) (49,454) (49,249) (17,046)
-------------- ----------- ---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,549 35,372 87,873 30,414
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 22,470 36,019 71,391 24,710
-------------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR 36,019 71,391 159,264 55,124
============== =========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 27,542 22,514 24,435 8,457
Income tax and social contribution 16,816 15,993 24,083 8,336
-------------- ----------- ---------- -----------
44,358 38,507 48,518 16,793
============== =========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2002 AND 2003
(Amounts expressed in thousands of Brazilian reais and U.S. dollars, unless
otherwise indicated)
1. THE COMPANY AND ITS OPERATIONS
Localiza Rent a Car S.A. (the "Company" or "Localiza") is a Brazilian
closely-held corporation organized under the laws of the Federative
Republic of Brazil and based in Belo Horizonte, State of Minas Gerais. The
Company is controlled by four of its senior executives ("Founders") and
eleven Donaldson, Lufkin & Jenrette ("DLJ") funds, which have been managed
by Credit Suisse First Boston ("CSFB") since August 2000.
On March 26, 1997, DLJ entities acquired 33.33% of the common stock of the
Company.
On June 30, 1998, Localiza merged its holdings PAR-LIZA Ltda. and LIZA-PAR
S.A. (the DLJ affiliates). See Note 1 (a).
As part of the Senior Notes program (Note 14), the Company has registered
with Securities and Exchange Commission ("SEC") in the United States of
America, on March 10, 1998.
The Company operates in four complementary businesses: car rental, fleet
management, used car sales and franchising.
As of December 31, 2003, the Localiza network, including Brazilian and
international franchisees, comprises 309 - unaudited (320 - unaudited in
2002) locations: 245 (unaudited) locations in Brazil and 64 (unaudited)
locations in 7 countries in Latin America. Localiza operates directly 71
(unaudited) locations in Brazil and the remaining locations in Brazil are
operated by franchisees under contract with Localiza Franchising S.A.
("Franchising"), a subsidiary of the Company. The locations in other Latin
America countries were operated by franchisees under contracts with Master
Franchisee Argentina S.A. ("MFA"), a subsidiary of the Franchising.
Franchising charges initial fees to franchisees as well as monthly royalty
fees and additional fees to reimburse advertising expenses incurred to
promote Localiza's brand name and businesses.
As of December 31, 2003, in accordance with management controls, the fleet
comprises approximately 29,000 - unaudited vehicles (29,366 - uanudited in
2002), of which the Company owned approximately 22,355 (22,845 in 2002),
including 9,765 (10,427 in 2002) vehicles from the fleet management
segment, approximately 5,700- unaudited (5,405 - unaudited in 2002) are
owned by Brazilian franchisees and the remaining are owned by international
franchisees. Localiza usually renews its car rental fleet after 12 months.
A significant portion of the company-owned fleet is sold to final consumers
through 15 used car sales locations in 15 major Brazilian cities.
F-10
Total Fleet S.A. ("Total Fleet"), a wholly-owned subsidiary of the Company
operates the fleet management business. The lease period for new cars
varies from 12 to 48 months with an average of 36 months. The contracts can
be canceled with a 30-day advance notice and payment of charges equivalent
to 15% to 35% of the contracts' remaining payments, depending on terms and
renewal covenants.
The management fleet services, which include maintenance, insurance,
replacement among others, are contracted in accordance with clients'
definitions.
Total Fleet provides national maintenance and technical assistance to the
customers through contracted service providers.
(a) Change of subsidiaries into closely-held corporations
As of May 1, 2003, the subsidiaries Prime Prestadora de Servicos S/C Ltda.
and Localiza Franchising Ltda. were changed into closely-held corporations
and were renamed to Prime Prestadora de Servicos S.A. ("Prime") and
Localiza Franchising S.A. ("Franchising"). The Franchising's participation
of 0.01% in Prime was sold to Localiza by book value, which now holds 100%
of the Company.
(b) Increases and decreases in subsidiaries' capital stock
On July 7, 2003, the Company increased capital in Prime in the amount of
R$800.
On May 1, 2003, the Company reduced capital in Franchising in the amount of
R$925, keeping the minority shareholders' proportion.
On July 31, 2002, MFA had its capital reduced by ARP172 thousand
("Argentine pesos") to resettle the proportion between capital and
accumulated deficits in compliance with the Article No. 205 of the
Argentine Law No. 19.550.
(c) Franchising spin-off
On March 31, 2004, Franchising was spun-off and generated a new company
named Localiza Franchising Brasil S.A., currently responsible for the
Brazilian franchising operations. Localiza Franchising just maintained
recorded in its books the investment in MFA. The spun-off was made based on
the book value.
(d) Acquisition and merger of franchisees
In the second semester of 2000, Localiza began to operate directly in areas
that were formerly operated by franchisees in the State of Santa Catarina
and the cities of Uberlandia and Uberaba in the State of Minas Gerais. In
June 2001, Localiza began to operate in the area formerly operated by its
franchisees in the cities of Londrina and Maringa in the State of Parana.
This process involved the acquisition and subsequent merger of spun-off
companies of former franchisees Auto Locadora Coelho Ltda. (Auto Locadora
Locar - "Locar"), which
F-11
operates in the State of Santa Catarina; Monza Autolocadora Ltda. (Auto
Locadora Locare - "Locare"), which operates in the cities of Uberlandia and
Uberaba within the State of Minas Gerais and Locadora Marajo Ltda.
(Londrina Locadora Ltda. - "Londrina"), which operates in the cities of
Londrina and Maringa within the State of Parana.
The acquisition of Locar for R$4,000 resulted in the recognition of
goodwill in the amount of R$2,800. The remaining purchase price was
allocated to cash equivalents and other current assets.
Goodwill generated in the acquisition of Locare for R$5,476 amounted to
R$1,585. In addition, the market value of vehicle fleet exceeded the book
value by R$1,813, which was allocated to the cost of the fleet purchased
and has been depreciated according to the remaining useful life of such
fleet. The remaining purchase price was allocated to cash equivalents and
other current assets.
The acquisition of Londrina for R$1,875 resulted in the recognition of
goodwill in the amount of R$1,329. The remaining purchase price was
allocated to accounts receivables.
2. BASIS FOR PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
(a) Accounting records
The Company's accounting records are maintained in Brazilian reais (R$),
based on the criteria enacted by Brazilian Corporate Law, which provided a
simplified mechanism of accounting for the effects of inflation up to
December 31, 1995. The financial statements prepared based on such
accounting records and the Corporate Law criteria (Corporate Law Method
financial statements) are the basis for determining income taxes and
shareholders' rights, such as the computation of dividends.
The accounting records of MFA are maintained in Argentine Pesos (ARP) and
translated to Brazilian reais at the exchange rate at the end of each
balance sheet date, except for December 31, 2001, when the exchange rate
used represented the first free-floating rate for which transactions could
be settled after December 31, 2001. Such exchange rate was calculated by
converting Pesos to U.S. dollars at a rate of $1.70 to US$1.00 and then to
Brazilian reais at a rate of R$2.3204 to US$1.00. For all periods presented
the effects of translation were immaterial.
(b) Price-level adjusted financial statements
All financial information for periods ended after June 30, 1997 are
presented at amounts price-level adjusted as of June 30, 1997, with any
subsequent transactions included in nominal Brazilian reais. Effective July
1, 1997, the Company ceased adjusting its financial statements to recognize
certain effects of changes in the purchasing power of Brazilian currency
due to inflation, as Brazil ceased to be considered a highly inflationary
economy as of such date.
F-12
(c) Presentation of consolidated financial statements
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which differ
in certain aspects from the accounting principles applied by the Company
and its subsidiaries in their financial statements prepared in accordance
with accounting principles generally accepted in Brazil and Argentina or
for other statutory purposes in Brazil and Argentina.
(d) Convenience translation of balances from Brazilian reais to U.S.
dollars
The accompanying consolidated financial statements in Brazilian reais were
translated into U.S. dollars at the rate of R$2.8892 to US$1.00, the
selling Commercial Market exchange rate reported by the Central Bank of
Brazil, for December 31, 2003. Such translation was made solely for the
convenience of the readers and should not be construed as a representation
that the Brazilian reais amounts could have been converted into U.S.
dollars at this or any other rate.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America,
based on the following accounting policies:
(a) Consolidation - The consolidated financial statements include the
accounts of Localiza and its subsidiaries Total Fleet, Prime,
Franchising and MFA. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and cash equivalents - Stated at cost or invested amount plus
accrued interest up to the balance sheet dates.
(c) Allowance for doubtful accounts - Provided in an amount considered
sufficient to cover eventual losses on accounts receivable,
considering past experience, the current financial situation of the
Company's customers and the status of past-due receivables.
(d) Marketable securities - Available for sale marketable securities are
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of shareholders' equity.
Realized gains on sales of marketable securities are recorded in
earnings as financial income.
(e) Revenue-earning vehicles - Comprised of car rental and fleet
management vehicles, stated at acquisition cost, less accumulated
depreciation. Depreciation is computed based on annual rates that are
intended to measure the reduction necessary to approximate a vehicle's
market value (determined by manufacturer, model and acquisition date)
at the end of the estimated average holding period of the vehicle and
also includes the selling costs of the vehicle. The average annual
rates of depreciation applied for 2001, 2002 and 2003 were 12.3%, 7.8%
and 8.8%, respectively. The Company and its subsidiary Total Fleet, in
order to reflect the higher depreciation of the
F-13
vehicles during their earlier useful lives, adopted the
sum-of-the-years-digits method, computed on a quarterly basis for all
periods presented.
The Company periodically evaluates the carrying value of its
long-lived assets for impairment. The carrying value of a long-lived
asset is considered impaired by the Company when the anticipated
undiscounted cash flow from such asset is separately identifiable and
less than its carrying value. In that event, a loss would be
recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is
determined primarily using discounted anticipated cash flows. No
impairment losses have been recorded for any of the periods presented.
(f) Property and equipment - Stated at price-level adjusted acquisition
cost for periods prior to June 30, 1997. Depreciation is calculated
using the straight-line method at the annual rate of 20% for
computers, 4% for buildings and 10% for other items. Leasehold
improvements are amortized over the lower of the estimated useful life
of the related asset or the term of the rental contracts.
(g) Auto liability claims, property damage and theft - The Company and its
subsidiary Total Fleet accrues for possible bodily injury and death
claims based on legal counsel's opinion of the eventual outcome of
claims existing at period end. The Company does not contract insurance
for the risks involving vehicle collision damage and theft; losses are
recorded as incurred. Historically, losses have not been significant
to the operations. Management does not expect material losses in the
future, based on industry experience in Brazil.
(h) Income tax and social contribution - The Company accounts for income
taxes under the provisions of SFAS No. 109, "Accounting for Income
Taxes", which requires the application of the comprehensive liability
method of accounting for income taxes. SFAS No. 109 requires
recognition of deferred tax assets and liabilities for the estimated
future tax consequences of events attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss and
tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect
on deferred tax assets and liabilities of changes in tax rates is
recognized in income for the period that includes the enactment date.
Deferred tax assets are reduced through the recognition of a valuation
allowance, as appropriate, if, based on the weight of available
evidence, it is more likely than not that the deferred tax asset will
not be realized.
(i) Derivative instruments - As of January 1, 2001, the Company
adopted SFAS No.133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No.133), which was issued in June 1998 and
amended by SFAS No.137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement
No.133" and SFAS No.138, "Accounting for Derivative Instruments and
Certain Hedging Activities", and SFAS No.149, "Amendment of Statement
No.133 on Derivative Instruments and Hedging Activities. As a result
of adoption of SFAS No.133, the
F-14
Company recognizes its derivatives on the balance sheet at fair value
and adjustments to fair value are recorded through income under the
financial expenses caption. Prior to adoption of SFAS No.133, the
Company recognized its derivatives on the balance sheet at contract
value and adjustments to contract value were recorded through income
under the financial expense caption. The Company accounted for the
accounting change as a cumulative effect of a change in an accounting
principle. The adoption of SFAS No.133 resulted in a cumulative
effect of accounting change of R$907, net of applicable income tax
and social contribution expense of R$467, which was recorded as an
expense in the consolidated statement of income for the year ended
December 31, 2001.
(j) Assets and liabilities denominated in foreign currencies or subject to
monetary restatement - Assets and liabilities denominated in foreign
currencies are adjusted based on the exchange rate reported by the
Central Bank of Brazil at each balance sheet date. Those denominated
in Brazilian reais, and contractually or legally subject to
indexation, are restated at the balance sheet dates by using the
related index. Exchange gains and losses and monetary variation gains
and losses are recorded in the profit and loss account.
(k) Revenues and expenses - Revenues from vehicle rentals are recognized
as earned on a daily basis under the related rental contracts with
customers. Revenues from fleet rentals principally result from
operating leases with fixed monthly payments and are recognized as
earned on a monthly basis over the term of the lease. Revenues from
used car sales are recorded upon delivery of the used cars. Revenues
from franchise fees are generally based on a percentage of franchisee
rental revenue and are recognized as earned on a monthly basis.
Initial franchise fees are recognized upon substantial completion of
all material services and conditions of the franchise sale, which
coincides with the date of sale and commencement of operations by the
franchisee. Franchising expenses include reservations, information
systems and other services to franchisees. Expenses are recorded as
incurred.
(l) Advertising costs - Advertising costs are expensed when incurred. No
advertising costs have been deferred at the balance sheet dates
herein. Advertising costs amounted to R$7,737, R$9,648 and R$9,263 for
the years ended December 31, 2001, 2002 and 2003, respectively.
(m) Use of estimates - The preparation of consolidated financial
statements in accordance with accounting principles generally accepted
in the United States of America requires that the Company's management
make estimates and use assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and
liabilities as of the dates of the consolidated financial statements
and the reported amounts of revenues, costs and expenses during the
reporting periods. Significant estimates are used when accounting for
allowance for doubtful accounts, fair value of marketable securities,
depreciation of revenue-earning vehicles, goodwill, income taxes,
including recognition of valuation allowances, contingencies and stock
option plan, among others. Although these estimates are based on
management's knowledge of current events and actions that may be
undertaken in the future, actual results may differ from the estimates
included in these consolidated financial statements.
F-15
(n) Interest on capital - Interests paid to shareholders', calculated in
accordance with Law No. 9.249/95, were recorded in the Company's
books in the income statement under financial expenses, as determined
by tax legislation. For presentation in the consolidated financial
statements, interests paid were presented as a charge to retained
earnings.
(o) Constant currency presentation - In addition to the accounting
practices described above, the following practices were adopted in the
preparation of constant currency financial statements:
i. Index - Through December 31, 1995, the financial statements were
price-level adjusted based on the variation of UFIR (Inflation
index for tax purposes). From January 1, 1996, through June 30,
1997, the financial statements were price-level adjusted based on
the variation of the IGP-M (General Price Index of the Market).
ii. Nonmonetary assets and liabilities - Property and equipment,
shareholders' equity and other nonmonetary assets and liabilities
accounts were restated from the date the original transactions
occurred to June 30, 1997. Income tax and social contribution
effects were accrued in respect of the increase in shareholders'
equity due to the recognition of the effects of inflation.
As of December 31, 2002 and 2003, cash equivalents are highly liquid
investments that are readily convertible to known amounts of cash without
any penalty or loss of market rate interest. All of these investments are
remunerated based on the Interbank Deposit Certificate (CDI).
5. MARKETABLE SECURITIES
As of December 31, 2003, the Company does not have investments in
marketable securities.
As of December 31, 2002, marketable securities represented Brazilian
Central Bank Notes (NBC-E's). The Notes were U.S. dollar denominated and
accrued average interest of 6.87%. Based on management's investment
strategy, marketable securities were classified as "available-for-sale"
securities, as defined by Statement of Accounting Standards No. 115,
F-16
"Accounting for Certain Investments in Debt and Equity Securities". As of
December 31, 2002, the securities were marked to market, with unrealized
loss of R$720, classified as Other Comprehensive Income or Loss.
The NBC-E Notes had contractual maturities in April 17 and July 17, 2003.
The Company determined the cost of the NBC-E sold based on specific
identification and recorded a gain of R$501.
6. ACCOUNTS RECEIVABLE, NET
December 31,
-------------------------------------
2002 2003 2003
---------- --------- ---------
R$ R$ US$
---------- --------- ---------
Car rental and fleet management 46,082 39,731 13,751
Used car sales 10,948 11,221 3,884
Franchising 1,385 1,517 525
---------- --------- ---------
58,415 52,469 18,160
Allowance for doubtful accounts (5,591) (5,463) (1,891)
---------- --------- ---------
52,824 47,006 16,269
Noncurrent assets (1,750) (107) (36)
---------- --------- ---------
Current assets 51,074 46,899 16,233
========== ========= =========
The long-term receivable amount is recorded as other noncurrent assets.
7. REVENUE-EARNING VEHICLES, NET
Represented by vehicles used in car rental and fleet management operations
and vehicles to be sold as follows:
Operating vehicles are classified as current assets when the respective
replacement and sale are expected to occur within 12 months, and as
noncurrent assets, when the vehicles are expected to be replaced and sold
after this 12-month period.
Management periodically reviews estimate residual values for adequacy based
on the changes of the projected sales price and estimated holding period of
the vehicles. During 2001, 2002 and 2003, the projected sales prices of the
Company's vehicles were reviewed, resulting in changes in management's
estimate of the residual values of the vehicles. The impact of the change
in estimate of residual values on depreciation expense for revenue earning
vehicles in 2003 was a decrease of approximately R$13,400 (R$21,600 in 2002
and R$12,000 in 2001). Maintenance and repair expenses are charged to
operations when incurred.
8. OTHER
December 31,
------------------------------------
2002 2003 2003
---------- -------- --------
R$ R$ US$
---------- -------- --------
Prepaid expenses:
Senior Notes 661 661 229
Other 164 84 29
Recoverable taxes:
Income tax withheld on cash investments 2,186 1,632 565
Prepaid income tax and social contribution 2,612 5,215 1,805
Other 74 776 269
Other 225 606 209
---------- -------- --------
5,922 8,974 3,106
========== ======== ========
9. ESCROW DEPOSITS
December 31,
------------------------------------
2002 2003 2003
---------- -------- --------
R$ R$ US$
---------- -------- --------
PIS (tax on revenues) 90 90 31
PIS/COFINS (taxes on other revenues) 6,020 1,066 369
Finsocial (tax on revenues) 2,515 2,429 841
ISS (tax on revenues) 2,192 4,116 1,425
Income tax and social contribution 2,606 2,877 996
SESC/SENAC 770 792 274
SEST/SENAT 1,819 2,115 732
SAT 1,282 1,282 444
Labor litigation 1,199 1,351 468
Social security contribution litigation - 2,464 852
Other 482 653 225
---------- -------- --------
18,975 19,235 6,657
========== ======== ========
F-18
These deposits were primarily made in connection with pending litigation.
Related reserves for contingencies have been recognized (Note 17), where
applicable.
10. TRANSACTIONS WITH RELATED PARTIES
In 1999, Localiza sold its subsidiary Alterosa Estacionamentos Ltda.
("Alterosa") to Locapar Participacoes e Administracao Ltda. ("Locapar"), a
Localiza's affiliate company, recording a receivable from Locapar.
Alterosa's assets were principally comprised of a land in the city of Sao
Paulo. Since Localiza and Locapar were under common control, no gain was
recorded on the sale. During 2000, this land returned to Localiza as a
payment to the receivable originated in the sale of Alterosa. The land was
recorded as other current asset - properties available for sale until
January 2001, when it was sold to third parties for R$6,095, resulting in a
gain of R$4,639, recorded as other nonoperating income.
As required by SFAS No. 142, following are additional disclosures related
to other intangible assets recorded by the Company that are subject to
amortization:
The amortization period for the Company's software was 5 years for the
years ended December 31, 2001, 2002 and 2003. Aggregate amortization
expense for the above intangible asset amounted to R$382, R$434 and R$449
for the years ended December 31, 2001, 2002 and 2003, respectively.
The estimated aggregate amortization expense for the next five years is as
follows:
The following summary presents the Company's unaudited pro-forma
consolidated results of operations as if the acquisition of Londrina and
Maringa operations had been completed at the beginning of the year of
acquisition. The pro-forma information is presented for comparative
purposes only and does not purport to be indicative of what would have
occurred had the acquisition actually been made at such date, nor is it
necessarily indicative of future operating results:
Year ended
December 31, 2001
-----------------
(unaudited)
-----------------
Net revenue 422,752
Income before cumulative effect of a change in
accounting principle 43,919
Net income 43,012
F-20
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") no 142, "Goodwill and Other Intangible Assets". In
connection with the adoption of this standard, the Company has not
amortized goodwill during 2002 and 2003. Prior to the adoption, the
goodwill was amortized over a five-year period, on a straight-line basis.
The results of operations for 2001 reflect the amortization of goodwill,
while the results of operations for 2002 and 2003 do not reflect such
amortization (in 2002 and 2003 the goodwill amortization would have been
approximately R$1,140). In connection with the adoption of SFAS no 142, the
Company assessed goodwill for impairment as of January 1, 2002. The
goodwill associated with the above acquisitions is allocated to the
Company's car rental segment, which represents a reporting unit. The
Company reviewed the carrying value of its car rental segment by comparing
such amounts to its fair value and determined that the carrying amount of
the reporting segment did not exceed its respective fair value. Fair value
was determined by management based on valuation methodology, which
considered the multiples of projected EBITDA (Earnings before interest, tax
depreciation and amortization) of the segment. Accordingly, the adoption of
SFAS no 142 did not have an impact on the Company's financial position or
results of operations. SFAS no 142 requires that the Company assess
goodwill for impairment annually, or more frequently if circumstances
indicate impairment may have occurred. During 2002 and 2003, the Company
assessed the goodwill for impairment and conclude that there is no
impairment losses.
13. LOANS AND FINANCING
As of December 31, 2003, the Company had "Compror" loans indexed to the
U.S. dollar, plus an average spread of 5.50% p.a., in the principal amount
of US$2,811, obtained from Brazilian financial institutions, without
collateral and maturing in January 2004. As of December 31, 2003, this
balance amounted to R$8,309, which included accrued interest and the gain
in the "swap" operation of the R$25, see Note 18 (a). During January 2004,
this balance was fully paid.
As of December 31, 2002, the Company and its subsidiaries did not have any
outstanding loans and financing.
On October 1, 1997, Localiza issued Senior Notes for US$100 million at face
value under its 10.25% Senior Notes program. The Notes are unsecured
obligations of the Company and
F-21
will mature on October 1, 2005. Interest on the Notes is payable
semi-annually on April 1 and October 1. The Notes are redeemable at the
option of the Company, in whole or in part on or after October 1, 2001.
Debt issuance costs incurred with the Senior Notes program, including fees
and commissions, amounting to R$5,004, are capitalized as debt issuance
costs and are being amortized over the term of the debt as an adjustment to
financial expense.
As of December 31, 2003, the remaining debt issuance costs to be amortized
amount to R$802 (R$1,330 in 2002), with R$661 classified as current asset.
The Company and its subsidiaries are subject to certain restrictions
contained in the Senior Notes program. These restrictive covenants will
limit, except in certain circumstances, the ability of the Company and its
subsidiaries to, among other things, declare any dividend or other similar
distribution, make certain stock repurchases, make certain payments on
subordinated indebtedness or make certain investments if, after giving
effect to such actions, (i) a default or event of default under the Senior
Notes indenture would have occurred and be continuing, (ii) the Company and
its subsidiaries would be unable to incur additional indebtedness under the
debt incurrence ratio test set forth in the indenture or (iii) the amount
of all such payments exceeds an aggregate threshold amount. A default or
event of default includes the failure of the Company or its subsidiaries to
observe or perform any covenant, whose covenants include limitations on the
ability of the Company and its subsidiaries to: (i) incur certain
additional indebtedness, (ii) create certain liens, (iii) enter into
certain transactions with affiliates, (iv) engage in certain sale and
leaseback transactions and (v) enter into certain merger, acquisition or
sale transactions. Management believes that the Company is in compliance
with all covenants described above.
15. ACCOUNTS PAYABLE
As of December 31, 2003, the balance of R$81,670 (R$18,818 in 2002) is
comprised of R$70,285 (R$10,695 in 2002) related to amounts payable to car
suppliers, with no interest. The remaining balance principally refers to
other suppliers for maintenance services, spare parts, leases and others.
16. PAYROLL AND RELATED CHARGES
December 31,
--------------------------------
2002 2003 2003
--------- -------- --------
R$ R$ US$
--------- -------- --------
Management compensation 2,469 2,314 801
Accrued vacation 2,610 3,310 1,146
Reserve for employees' bonuses 3,913 4,613 1,597
INSS (social security contribution) 672 933 323
FGTS (reserve for mandatory fund for
The Company pays bonuses over profits to employees on a six-month basis,
based on position and performance.
17. RESERVE FOR CONTINGENCIES
(a) Reserves
December 31,
-------------------------------------
2002 2003 2003
--------- --------- ---------
R$ R$ US$
--------- --------- ---------
PIS (tax on revenues) 90 90 31
PIS/COFINS (taxes on other revenues) 7,395 5,575 1,930
Finsocial (tax on revenues) 2,674 2,816 975
ISS (tax on revenues) 11,047 18,750 6,490
Income tax and social contribution 518 518 179
Fiscal litigation 2,308 2,049 709
SESC/SENAC 698 1,026 355
SEST/SENAT 4,348 5,341 1,849
SAT 1,261 1,282 444
Labor litigation 2,582 2,858 989
Social security contribution litigation - 1,649 571
Bodily injury and death claims 2,496 3,306 1,144
Other 430 467 161
--------- --------- ---------
35,847 45,727 15,827
========= ========= =========
The Company and its subsidiaries are claimants in several lawsuits and
defendants in several others. It has recognized the above reserves
considering the opinion of its external legal and tax counsel which
consider that the likelihood of an unfavorable outcome related to these
cases is probable.
o PIS (tax on revenues) - The Company's subsidiaries have pending
litigations contesting this tax. As of December 31, 2003 and 2002, the
amount of the provision is R$90, totally deposited in an escrow
account.
In December 2002, the subsidiaries petitioned for the conversion of
escrow deposits, which assured suspension of the payments to the
Federal Government, although they maintained the lawsuits. This
conversion to the Government has not been granted in court.
o PIS/COFINS (taxes on other revenues) - The Company and its
subsidiaries have pending litigation contesting these taxes in the
total amount of R$5,575 (R$7,395 in 2002), of which R$1,066 (R$6,020
in 2002) are deposited in an escrow account.
F-23
In December 2002, the Company and its subsidiaries petitioned for the
conversion of the escrow deposits, which assured suspension of the
payments to the Federal Government, although they maintained the
lawsuits and resumed the monthly payments. The COFINS conversion to
the Government has been granted in court. However, the PIS conversion
has not yet been granted.
o Finsocial (tax on revenues) - In prior years, the Company paid this
tax at a rate of 0.5% in accordance with the original law.
Subsequently, the rate was gradually increased to 2%. The Company is
contesting this rate increase. The reserve amounted to R$2,816
(R$2,674 in 2002), of which R$2,429 (R$2,515 in 2002) are deposited in
an escrow account.
In July 1999, the Company took advantage of a tax amnesty program,
pursuant to the Law No. 9.779/99, petitioning for the conversion of
the escrow deposit. If the conversion is granted in court, part of
the provisioned amount will be reversed.
o ISS (tax on revenues) - The Company and its subsidiary Total Fleet
have been contesting the charge of this tax on their rental revenues
for the period from July 2001 to July 2003. In July, 2003 the
Brazilian government issued Law No. 116/03, which recognized rental
revenues as non-taxable activities as from August 2003. As of
December 31, 2003, the reserve amounted to R$18,750 (R$11,047 in
2002), of which R$4,116 (R$2,192 in 2002) are deposited in an escrow
account.
o Income tax and social contribution - As a result of tax inspections in
prior years, the Company and Franchising were assessed by the tax
authorities, mainly due to the allegation that certain expenses were
inappropriately treated as deductible and they were not considered
necessary to the Company's operations for tax purposes.
The Company and Franchising based their defenses on prior decisions of
the Supreme Court and legislation in force. These reserves amount to
R$518 as of December 31, 2003 and 2002, while the amount of R$2,877
(R$2,606 in 2002) is deposited in an escrow account. The settlement of
the Franchising contingency was guaranteed by a bank guarantee in the
amount of R$931.
In September 2002, the Company and Franchising took advantage of a tax
amnesty program, pursuant to Executive Order no 66/02, reducing part
of the debts related to these tax assessments in the amount of R$665.
o SESC/SENAC - The Company, Franchising and Prime have pending
litigations contesting these payroll-related taxes. These reserves
amount to R$1,026 (R$698 in 2002) as of December 31, 2003, of which
R$792 (R$770 in 2002) are deposited in an escrow account.
In December 2002, Prime petitioned for the conversion of the escrow
deposits, which assured suspension of the payments to the Federal
Government, although it maintained the lawsuit and resumed the monthly
payments. This conversion to the Government has not been granted in
court.
o SEST/SENAT - The Company and Total Fleet have pending litigation
contesting these payroll-related taxes. These reserves amount to
R$5,341 (R$4,348 in 2002) as of
F-24
December 31, 2003, of which R$2,115 (R$1,819 in 2002) are deposited in
an escrow account.
o SAT - The Company and its subsidiaries have pending litigation
contesting these payroll-related taxes. These reserves amount to
R$1,282 (R$1,261 in 2002) as of December 31, 2003, totally deposited
in an escrow account (R$1,282 in 2002).
In December 2002, the Company and its subsidiaries petitioned for the
conversion of the escrow deposits, which assured suspension of the
payments to the Federal Government, although they maintained the
lawsuits and resumed the monthly payments. This conversion to the
Government has not been granted in court.
o Labor litigation - The Company is party to several labor claims
related principally to the payment of overtime and related social
charges. Management, after considering the opinion of its legal
counsel, believes that the recorded accrual for these claims is
sufficient to cover probable losses. In December 31, 2003, these
reserves amounted to R$2,858 (R$2,582 in 2002) of which R$1,351
(R$1,199 in 2002) are deposited in an escrow account. The total amount
of these claims is R$7,815.
o Bodily injury and death claims - The Company and its subsidiaries are
party to several claims related to bodily injury and death, caused by
vehicles. Management, after considering the opinion of its external
legal counsel, believes that the recorded accrual for these claims in
the amount of R$3,306 as of December 31, 2003 (R$2,496 in 2002) is
sufficient to cover probable losses. Of this amount, R$62 (R$56 in
2002) are deposited in an escrow account.
o Fiscal and social security litigations - The Company and its
subsidiaries are party in some fiscal and social security lawsuits.
Management, based on the opinion of its external legal counsel,
recorded a provision of R$3,698 (R$2,308 in 2002) and believes that it
is sufficient to cover probable losses of which R$2,464 are deposit in
a escrow account.
Accruals for the aforementioned contingencies are determined based on an
analysis of the pending claims, as well as on the potential risks involved.
(b) Other contingencies
In addition to the above mentioned reserves, the Company and its
subsidiaries are defendants in other tax lawsuits, considered a remote loss
by legal counsel. Such lawsuits have their settlements guaranteed by bank
guarantees, as per judicial procedures request, in the amount approximately
of R$3,000.
The Company's management, based on the opinion of its external legal and
tax counsel, does not expect that the resolution of these matters will have
a material adverse effect on the Company's financial position or results of
operations and believes that no additional reserves for contingencies are
required.
F-25
18. FINANCIAL INSTRUMENTS
(a) Swap operations
As of December 31, 2003, R$ 227,231 (R$267,727 in 2002) of the Company's
debt and loans were denominated in U.S. dollars, while all of the Company's
revenues were denominated in Brazilian reais. The Company contracted "Swap"
operations, aiming to protect itself from exchange fluctuations on U.S.
dollar denominated liabilities, as follows:
Unrealized
Unrealized gain/(loss)
Notional loss as of as of
Date of amount - US$ rate at December 31, December 31,
contract Due date US$ contract date Company pays Company receives' 2002 2003
--------------- ---------- --------- --------------- ----------------- ----------------------- ------------ --------------
Short term:
Exchange rate
From 12/15/03 From 100% CDI + variation + coupon of
01/29/04 2,811 2.9420 1.72% p.a. 5.50% p.a. - 25
Long term:
From Exchange rate
From 09/05/01 2.5642 variation + coupon
to 10/16/01 to 2.7400 (from 9.30% to 9.80%
09/29/05 66,300 100% CDI p.a.) (12,031) (18,950)
Exchange rate
From variation + coupon
10/21/03 09/29/05 5,400 2.8839 of 5.10% p.a. 100% CDI - (122)
----------- -----------
(12,031) (19,047)
Current liabilities - Loans and financing - 25
----------- -----------
Noncurrent liabilities - Unrealized loss on derivatives (12,031) (19,072)
=========== ===========
The unrealized gains/losses have been determined based on the fair values
of these swap contracts which were estimated based on discounting future
contracted cash flows considering market rates, terms and conditions at
each balance sheet date. The Company's objectives were to protect its loans
and financing in foreign currency against foreign currency devaluation
during the year through "Swap" between foreign currency and fixed interest
rate. These agreements were contracted with major financial institutions in
Brazil. The current portion of the unrealized gain is recorded as loans and
financing as of December 31, 2003.
(b) Other financial instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107
"Disclosure about Fair Value of Financial Instruments". The Company used
available market information and valuation methodologies to estimate fair
value amounts. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein may not be indicative of the amounts that the
Company could settle in a current market exchange. The use of different
market assumptions or valuation methodologies may have a material effect
on the estimated fair value amounts.
F-26
The carrying values of cash and cash equivalents, receivables, accounts
payable and short-term loans approximate fair values due to the short-term
maturities of these instruments. The carrying amounts, face value and
estimated fair values of the Company's other financial instruments are as
follows:
December 31, 2002 December 31, 2003
------------------------------------- ---------------------------------------
Book Face Fair Book Face Fair
value value value value value value
--------- --------- --------- -------- ----------------- ---------
R$ R$
------------------------------------- ---------------------------------------
Marketable securities:
Cost plus foreign exchange variation 11,078 11,941 11,078 - - -
Debt:
Senior Notes- principal 261,111 261,111 182,778 213,512 213,512 207,107
Derivative contracts (12,031) - (12,031) (19,072) - (19,072)
The methods and assumptions used to estimate the fair values of the
marketable securities and debt were based on market quotations from
financial institutions and securities dealers as of the balance sheet
dates.
(c) Net foreign currency position
The Company's net foreign currency position in U.S. dollars is as follows:
The exchange rates as of December 31, 2002 and 2003 were R$3.5333 and
R$2.8892 per US$1.00, respectively.
19. INCOME TAX AND SOCIAL CONTRIBUTION
(a) Deferred income tax and social contribution
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities are as follows:
F-27
December 31,
----------------------------------
2002 2003 2003
--------- --------- --------
R$ R$ US$
--------- --------- --------
Deferred tax assets:
Allowance for doubtful accounts 676 884 306
Reserve for contingencies 9,970 12,581 4,354
Tax effect on difference in accounting for derivative
between U.S. GAAP and Brazilian GAAP 19,009 - -
Tax benefit resulting from merger of holding companies
(Note 1a) 596 - -
Tax loss carryforwards 3,753 2,785 964
Other 1,146 1,082 375
--------- --------- --------
35,150 17,332 5,999
Valuation allowance (88) (1,937) (670)
--------- --------- --------
35,062 15,395 5,329
Current portion (1,585) (2,909) (1,007)
--------- --------- --------
Long-term portion 33,477 12,486 4,322
========== ========== =========
Deferred tax liabilities:
Goodwill amortization 387 778 269
Tax effect on difference in accounting for derivatives
between U.S. GAAP and Brazilian GAAP - 5,830 2,018
Extraordinary gain on debt extinguishment 6,786 4,307 1,491
Depreciation 10,112 9,881 3,420
--------- --------- --------
17,285 20,796 7,198
Current portion (7,302) (6,356) (2,200)
--------- --------- --------
Long-term portion 9,983 14,440 4,998
========= ========= ========
The Company's management believes, based on projections of future taxable
income and the fact that tax loss carryforwards in Brazil may be used
indefinitely, it is more likely than not that the deferred income tax
assets will be realized, except for Localiza and the subsidiary Prime, for
which a valuation allowance of R$1,726 in 2003 (R$88 in 2002) was
established, mainly referent to social contribution tax.
From 2004 on, after the Franchising spun-off, the company's management
believes, based on projections of future taxable income, that the
realization of the deferred taxes previously recorded by Franchising are
not more likely than not and a valuation allowance have been recorded, in
the amount of R$211.
(b) Income tax and social contribution
Income tax and social contribution at nominal rates are reconciled to the
amount reported as income tax expense in these financial statements, as
follows:
Year ended December 31,
-----------------------------------------------
2001 2002 2003 2003
---------- --------- --------- --------
R$ R$ R$ US$
---------- --------- --------- --------
Income before taxes 60,381 32,349 151,942 52,590
Nominal rate 34% 34% 34% 34%
---------- --------- --------- --------
Income taxes at nominal rate (20,530) (10,999) (51,660) (17,880)
Interest on capital 2,160 5,120 7,188 2,488
Reversal (increase) of valuation allowance 2,392 (20) (1,849) (640)
Other (515) 314 125 43
---------- --------- --------- --------
(16,493) (5,585) (46,196) (15,989)
========== ========= ========= ========
F-28
The tax rates for the periods are:
Income tax 15%
Additional income tax (for the taxable income exceeding
R$240 per year) 10%
Social contribution 9%
Under the Brazilian income tax law, the Company and its subsidiaries are
treated as separate taxable entities and are not entitled to file
consolidated tax returns.
20. SHAREHOLDERS' EQUITY
(a) Capital stock
As of December 31, 2003, capital stock as per the statutory records was
represented by R$146,970 (R$129,000 in 2002) corresponding to 15,360,000
issued and outstanding nominative common shares, with no par value. Capital
can be increased by 810,000 nominative preferred shares through
deliberation of the Board of Directors. The composition of outstanding
capital stock and shareholders are as follows:
Common
Shareholders Shares %
------------------------------------------- -------------- ----------
Founders 10,239,994 66.66
DLJMB Overseas Partners II, C.V. 3,225,217 21.00
DLJ First ESC L.P. 614,400 4.00
DLJMB Funding II, Inc. 572,622 3.73
DLJ Diversified Partners, L.P. 188,561 1.23
DLJ Offshore Partners II, L.P. 158,599 1.03
DLJMB Overseas Partners II-A, C.V. 128,443 0.84
UK Investment Plan 1997 Partners 85,333 0.56
DLJ Diversified Partners-A, L.P. 70,025 0.46
DLJ Millennium Partners, L.P. 52,148 0.33
DLJ EAB Partners, L.P. 14,481 0.09
DLJ Millennium Partners-A, L.P. 10,171 0.07
Board members 6 0.00
-------------- ----------
15,360,000 100.00
============== ==========
(b) Dividends
In accordance with Brazilian Corporate Law, the Company's bylaws require
that the Company's shareholders be paid a minimum annual dividend of 25% of
adjusted net profit. However, upon the vote of 100% of the shareholders
present at the general shareholders'
F-29
meeting, such shareholders may declare a lower dividend or decide not to
declare them. In addition, upon the recommendation of the Board of
Directors that the payment of a dividend in respect of any period would be
incompatible with the financial circumstances of the Company, the payment
of the minimum dividend in respect of such period is not mandatory. In such
case, the adjusted net profit, which was not distributed for such reason,
is recorded as a special reserve and, if not absorbed by losses in
subsequent fiscal years, is paid as soon as the financial situation of the
Company permits.
Brazilian legislation permits dividend payments limited to the accumulated
earnings in the statutory financial statements prepared in accordance with
Brazilian Corporate Law.
For the years ended in December 31, 2001, 2002 and 2003, the Company's net
income in accordance with Brazilian Corporate Law was R$30,697, R$46,807
and R$63,223, respectively, and the accumulated earnings available for
payment of dividends were R$39,568, R$48,976 and R$74,647, respectively.
The appropriation of the Company's net income was determined in the annual
shareholders' meetings, resulting in a decision to pay dividends of
R$15,000 in 2001, R$20,000 in 2002 and R$54,350 in 2003. The appropriation
of the Company's net income for 2003 will be determined at the annual
shareholders' meeting in 2004.
According to Brazilian law, the foreign capital must be registered with the
Brazilian Central Bank to allow the dividends remittance and repatriation
of capital for foreign shareholders.
(c) Interest on capital
The interest on capital paid in 2001, 2002 and 2003, amounting to R$6,353,
R$15,059 and R$21,141, respectively, were approved by the Extraordinary
General Shareholders' meetings held on June 30, 2001, December 31, 2002 and
December 30, 2003. As also approved by the meetings mentioned above, the
shareholders decided to contribute to capital the amount related to
interest on capital, net of the corresponding income tax withheld.
The interest on capital was paid pursuant to Article No. 9 of Law No.
9.249, of December 26, 1995, and amendments introduced by Article No. 78
of Law No. 9.430, of December 27, 1996. Interest was calculated based on
shareholders' equity, is limited to the variation of the Long-Term
Interest Rate ("TJLP"), and is deductible for income tax purposes.
21. STOCK OPTION PLAN
The Company sponsors a stock option plan, which grants employees and
directors the option to purchase stocks at prices annually determined.
Options were granted in five installments in the last five years, ended in
2002, and each installment is exercisable within four years from the grant
date, 25% of the installment per year based on the terms of the grant.
The maturity date to exercise the options have been is April 30, 2007. The
strike price is restated annually by the IGPM (General Price Index-Market).
Until December 31, 2003, no options have been exercised. Had all options
being exercised the current shareholders stake would have a reduction from
100% to 96.7%.
F-30
The following table summarizes the status of the Company's stock option
plan:
As allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", the Company elected to continue
to measure cost for its stock option plan using the intrinsic value based
method for variable stock plan as prescribed by Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees".
Under the intrinsic value method, cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. Entities
choosing to continue applying APB Opinion No. 25 on employee stock options
granted on or after January 1996 must provide pro forma disclosures of net
income, as if the fair value method of accounting had been applied. Under
this method, cost is measured at the grant date based on the fair value of
the employee stock option and is recognized ratably over the service
period of the option, which is usually the vesting period. For all periods
presented, fair value of the Company's shares did not exceed the exercise
prices of the options and consequently, no compensation expense was
recorded. Additionally, the pro forma disclosures required by SFAS No. 123
have not been presented, as the effect of measuring compensation expense
under SFAS No. 123 was immaterial for all periods presented.
22. SELLING, GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
Year ended December 31,
---------- ----------- ---------- ---------
2001 2002 2003 2003
---------- ----------- ---------- ---------
R$ R$ R$ US$
---------- ----------- ---------- ---------
Interest income 17,637 17,069 35,473 12,278
Interest expense (30,431) (28,770) (29,741) (10,294)
Taxes on financial revenues (2,010) (1,305) (1,672) (579)
Reversal of compulsory loan, net (383) - - -
Net monetary variation and exchange gains (losses) (29,328) (85,044) 46,896 16,232
Realized gains (losses) on sale of marketable securities 15,737 1,566 (219) (76)
Unrealized gains (losses) on derivatives (26,235) 14,204 (7,016) (2,428)
Realized gains on derivatives 6,722 1,891 - -
Other (2,173) (2,425) (3,044) (1,054)
---------- ----------- ---------- ---------
(50,464) (82,814) 40,677 14,079
=========== ============ =========== ==========
The unrealized gains (losses) on derivatives for the years ended December
31, 2001, 2002 and 2003 are determined based on the settlement value of the
corresponding contracts, on an accrual basis.
24. LEASE COMMITMENTS
As of December 31, 2003, of the 71 car rental locations and the 15 used car
sales locations, 4 were located on premises owned by the Company and the
others were located on rented premises (under one to twenty year renewable
leases), including 31 locations in airports (under one to fifteen year
renewable concessions), and the head office building. The amounts payable
under the remaining lease terms are as follows:
Years Airport
concessions Other
----------------- --------------- -----------
2004 4,262 4,459
2005 1,674 3,114
2006 1,335 1,879
2007 1,078 1,160
2008 654 972
2009 and after - 5,348
--------------- -----------
9,003 16,932
=============== ===========
The Company has a 20-year-term lease contract for its Porto Alegre used car
sales location, signed in 2002, in the monthly amount of R$24.
F-32
Rental expense during the years ended December 31, 2001, 2002 and 2003
amount to R$7,526, R$9,254 and R$10,343, respectively.
The guaranteed minimum lease payments to be received by the subsidiary
Total Fleet from the operating leases of cars by the fleet management
business are distributed as follow:
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires companies to
disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance.
The Company has identified four reportable operating segments: car rental,
fleet management, franchising and used car sales. The accounting policies
of the operating segments are the same as those described in the summary of
significant accounting policies. Segment amounts disclosed are after
intercompany elimination entries made in consolidation. The contribution of
these segments, as well as "corporate and other" for each of the three
years ended December 31, 2003 are summarized below:
Enterprise wide geographic disclosures have not been presented as all
significant operations and customers of Localiza and its subsidiaries are
located in Brazil.
26. RECENTLY ISSUED ACCOUNTING STANDARDS
During June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS No. 141),
"Business Combinations". SFAS No. 141 addresses financial accounting and
reporting for business combinations. All business combinations in the scope
of SFAS No. 141 are to be accounted for using one method, the purchase
method. In addition, SFAS No. 141 requires that intangible assets be
recognized as assets apart from goodwill if they meet two criteria: the
contractual-legal criterion or the separability criterion. To assist in
identifying acquired intangible assets, SFAS No. 141 also provides a list
of intangible assets that meet either of those criteria. In addition to the
disclosure requirements prescribed in Opinion 16, SFAS No. 141 requires
disclosure of the primary reasons for a business combination and the
allocation of the purchase price paid to the assets acquired and
liabilities assumed by major balance sheet caption. SFAS No. 141 also
requires that when the amounts of goodwill and intangible assets acquired
are significant to the purchase price paid, disclosure of other information
about those assets is required, such as the amount of goodwill by
reportable segment and the amount of the purchase price assigned to each
major intangible asset class. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. SFAS No. 141 also
applies to all business combinations accounted for using the purchase
method
F-34
for which the date of acquisition is July 1, 2001, or later. The adoption
of SFAS No. 141 on January 1, 2002 did not have any impact on the Company's
financial statements.
During June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. SFAS No. 142 amends SFAS No.
121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived
Assets to Be Disposed Of", to exclude from its scope goodwill and
intangible assets that are not amortized. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. The provisions of SFAS No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. The adoption
of SFAS No.142 on January 1, 2002 did not have any impact on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
Under SFAS No. 143, the liability for an asset retirement obligation is
discounted and accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability was initially
recognized. In addition, disclosure requirements contained in SFAS No. 143
will provide more information about asset retirement obligations. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002 with earlier application encouraged. Since the Company
does have any legal asset retirement obligations pursuant to the respective
concession contracts, the adoption of this standard as of January 1, 2003
did not have any impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The new standard will be
effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early application encouraged. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", although it retains
the fundamental provisions of SFAS No. 121. SFAS No. 144 also expands the
scope of discontinued operations presentation to a component of an entity
and eliminates the exception to consolidation for a temporarily controlled
subsidiary. The adoption of SFAS No. 144 had no impact on the Company's
financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," which required that all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary
item if material. SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary only if they meet
criteria in APB 30, thus distinguishing transactions that are part of
recurring operations from those that are unusual or infrequent, or that
meet the criteria for classification as an extraordinary item. SFAS No. 145
amends SFAS No. 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted
F-35
for in the same manner as sale-leaseback transactions. In addition, SFAS
No. 145 rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," which are not currently applicable to the
Company. The provisions of SFAS No. 145 as they relate to the rescission of
SFAS No. 4 shall be applied in fiscal year 2003. Certain provisions related
to SFAS No. 13 are effective for transactions occurring after May 15, 2002.
The adoption of this statement did not have an impact on the Company's
financial statements.
In June 2002, FASB issued SFAS No. 146 "Accounting for costs associated
with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between this Statement and EITF
94-3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. This Statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an
exit plan. A fundamental conclusion reached by the Board in this Statement
is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. This Statement improves financial reporting
by requiring that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. The accounting for similar events and
circumstances will be the same, thereby improving the comparability and
representational faithfulness of reported financial information. The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application
encouraged. During 2003, the Company did not have any exit or disposal
activities and consequently, this statement did not have an impact on the
Company's financial statements during the year ended December 31, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 modifies the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The Statement
requires that those instruments be classified as liabilities in statements
of financial position. SFAS No. 150 affects an issuer's accounting for
three types of freestanding financial instruments, namely:
1. Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
2. Instruments, other than outstanding shares, that do or may
require the issuer to buy back some of its shares in exchange for
cash or other assets. These instruments include put options and
forward purchase contracts.
3. Obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the
issuers' shares.
F-36
SFAS No. 150 does not apply to features embedded in financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The adoption
of this statement did not have an impact on the Company's financial
statements for the year ended December 31, 2003.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective
for interim and annual periods ending after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002.
The adoption of this statement did not have an impact on the Company's
financial statements for the year ended in December 31, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46 "Consolidation of Variable Interest Entities, an
interpretation of ARB 51" which provided a new framework for identifying
variable interest entities (VIEs) and determining when a company should
include the assets, liabilities, non-controlling interests and results of
activities of a VIE in consolidated financial statement. FIN 46 was
effective immediately for VIEs created after January 31, 2003 and to VIES
in which an enterprise obtained a variable interest after that date. For
variable interests in VIES created before February 1, 2003, FIN 46 applied
to public enterprises no later than the beginning of the first interim or
annual period beginning after June 15, 2003.
On October 9, 2003 the FASB decided to defer the implementation date of FIN
46 to the fourth quarter instead of the third quarter. Pursuant to this
deferral, public companies in the United States of America had to complete
their evaluations of variable interest entities that existed prior to
February 1, 2003, and the consolidation of those for which they are the
primary beneficiary for financial statements issued for the first period
ending after December 15, 2003. For calendar year companies, consolidation
of previously existing variable interest entities was required in their
December 31, 2003 financial statements. This deferral did not affect the
implementation date for many foreign private issuers, which continued to be
the beginning of the first annual period ending after December 15, 2003.
In December 2003 FIN 46 was substantially revised and a new interpretation
FIN 46 (revised) was issued. The key differences between FIN 46 (revised)
and its predecessor FIN 46 include:
F-37
1. FIN 46R now scopes out many - but not all - businesses, as that
term is defined in the Interpretation. A business - assuming it
is scoped out of FIN 46R - should be consolidated with its
accounting parent (if it has one) only when required by
longstanding, conventional consolidation guidance, most notably
Accounting Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51). Under FIN 46, any business potentially could
have been a VIE (and, if so, subject to the Interpretation's
unique consolidation requirements) depending on the design of the
business' capital structure and other factors. Note that an
entity whose primary activity is asset-backed financing or who
acts as a single-lessee leasing entity cannot qualify for the
scope exemption in FIN 46R, even if it would otherwise be a
business. If such an entity is a VIE, it is covered by FIN 46R's
consolidation requirements.
2. FASB partially delayed FIN 46's effective date (for most public
companies until no later than the end of the first reporting
period ending after March 15, 2004. The delay notwithstanding,
public companies must apply either FIN 46 or FIN 46R to
special-purpose entities (SPEs) no later than the end of the
first reporting period ending after December 15, 2003. For many
foreign private issuers the effective date continues to be the
beginning of the first annual period ending after December 15,
2003. For SPEs created by foreign private issuers after February
1, 2003, however, the effective date is no later than the end of
the first reporting period ending after December 15, 2003.
Based on an initial assessment of the provisions and requirements of FIN
46R, the Company believes that the implementation of this statement will
not result in any impact to the Company's consolidated financial
statements.
27. VALUATION AND QUALIFYING ACCOUNTS
Following are disclosures regarding the Company's valuation and qualifying
accounts:
Year ended December 31,
-----------------------------------------------------
Description 2001 2002 2003 2003
--------- --------- ---------- ----------
R$ R$ R$ US$
--------- --------- ---------- ----------
Reserve for contingencies:
--------------------------
Balances as of beginning of the year 21,162 27,037 35,847 12,407
Charges to costs and expenses 8,099 13,682 15,537 5,378
Deductions (2,224) (4,872) (5,657) (1,958)
--------- --------- ---------- ----------
Balances as of end of the year 27,037 35,847 45,727 15,827
========= ========= ========== ==========
Allowance for doubtful accounts:
--------------------------------
Balances as of beginning of the year 3,053 4,155 5,591 1,935
Charges to expenses, net of reversions 1,102 1,436 (128) (44)
--------- --------- ---------- ----------
Balances as of end of the year 4,155 5,591 5,463 1,891
========= ========= ========== ==========
F-38
Depreciation:
-------------
Balances as of beginning of the year 65,440 64,388 50,239 17,389
Vehicles acquisitions 43,995 31,062 37,222 12,882
Vehicles written-off as a result of sale (44,669) (44,969) (31,259) (10,819)
Vehicles written-off as a result of theft (378) (242) (89) (31)
--------- --------- ---------- ----------
Balances as of end of the year 64,388 50,239 56,113 19,421
========= ========= ========== ==========
F-39
28. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS
Localiza's US$100 million 10.25% Senior Notes are jointly and severally,
irrevocably and fully and unconditionally guaranteed on a senior basis by all of
Localiza's direct and indirect subsidiaries. Presented below is condensed
consolidating financial information for: i) Localiza on a parent company only
basis; ii) the Wholly Owned Guarantor Subsidiaries (Total Fleet S.A. and Prime
Prestadora de Servicos S.A.); iii) the Majority-Owned Guarantor Subsidiaries
(Localiza Franchising S.A. and Localiza Master Franchisee Argentina S.A.); iv)
Eliminations; and v) Consolidated Localiza S.A. and subsidiaries.
The equity method of accounting has been used by Localiza with respect to
investments in its subsidiaries.
Separate financial statements have been presented for Localiza Franchising S.A.
and Localiza Master Franchisee Argentina S.A. as of December 31, 2003 and 2002
and for each of the three years in the period ended December 31, 2003.
F-40
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
CONSOLIDATED BALANCE SHEET - AS OF DECEMBER 31, 2003
(Stated in thousands of Brazilian reais)
A S S E T S Guarantor Subsidiaries
---------------- ----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 106,800 51,890 574 -- 159,264
Accounts receivable, net 34,531 11,141 1,327 (100) 46,899
Revenue-earning vehicles, net 201,643 76,766 -- -- 278,409
Deferred income tax and social contribution 1,790 1,112 7 -- 2,909
Other 8,753 1,098 462 (1,339) 8,974
-------- -------- -------- -------- --------
353,517 142,007 2,370 (1,439) 496,455
-------- -------- -------- -------- --------
NONCURRENT ASSETS:
Revenue-earning vehicles, net -- 110,452 -- -- 110,452
Escrow deposits 17,890 1,107 238 -- 19,235
Deferred income tax and social contribution 11,254 1,171 61 -- 12,486
Other 270 -- 270 (50) 490
-------- -------- -------- -------- --------
29,414 112,730 569 (50) 142,663
-------- -------- -------- -------- --------
INVESTMENTS 210,840 -- -- (210,840) --
-------- -------- -------- -------- --------
PROPERTY AND EQUIPMENT, NET 18,068 415 98 -- 18,581
-------- -------- -------- -------- --------
GOODWILL 4,704 -- -- -- 4,704
-------- -------- -------- -------- --------
TOTAL ASSETS 616,543 255,152 3,037 (212,329) 662,403
======== ======== ======== ======== ========
F-41
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
CONSOLIDATED BALANCE SHEET - AS OF DECEMBER 31, 2003
(Stated in thousands of Brazilian reais)
LIABILITIES AND SHAREHOLDERS' EQUITY
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CURRENT LIABILITIES:
Loans and financing 8,309 -- -- -- 8,309
Interest payable on long-term debt 5,410 -- -- -- 5,410
Accounts payable 54,783 26,719 268 (100) 81,670
Payroll and related charges 8,849 2,068 645 -- 11,562
Income tax and social contribution -- 559 395 -- 954
Taxes, other than on income 4,021 528 27 -- 4,576
Deferred income tax and social contribution 3,455 2,901 -- -- 6,356
Advances from customers 3,923 924 -- -- 4,847
Other 829 1,064 614 (1,389) 1,118
-------- -------- -------- -------- --------
89,579 34,763 1,949 (1,489) 124,802
-------- -------- -------- -------- --------
NONCURRENT LIABILITIES:
Long-term debt 213,512 -- -- -- 213,512
Unrealized loss on derivatives 19,072 -- -- -- 19,072
Reserve for contingencies 39,653 5,225 849 -- 45,727
Deferred income tax and social contribution 10,265 4,175 -- -- 14,440
Other 1,246 356 15 -- 1,617
-------- -------- -------- -------- --------
283,748 9,756 864 -- 294,368
-------- -------- -------- -------- --------
MINORITY INTEREST -- -- -- 17 17
-------- -------- -------- -------- --------
SHAREHOLDERS' EQUITY:
Capital stock 153,693 121,964 200 (122,164) 153,693
Accumulated earnings 89,523 88,669 24 (88,693) 89,523
-------- -------- -------- -------- --------
243,216 210,633 224 (210,857) 243,216
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
616,543 255,152 3,037 (212,329) 662,403
======== ======== ======== ======== ========
F-42
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR ENDED DECEMBER 31, 2003
(Stated in thousands of Brazilian reais)
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
NET REVENUES:
Car rental 156,862 -- -- (1,571) 155,291
Fleet management -- 120,683 -- (374) 120,309
Franchising -- -- 5,456 -- 5,456
Used car sales 187,491 63,990 -- (503) 250,978
-------- -------- -------- -------- --------
Total net revenues 344,353 184,673 5,456 (2,448) 532,034
-------- -------- -------- -------- --------
EXPENSES AND COSTS:
Direct operating (59,888) (30,646) (2,718) 1,767 (91,485)
Cost of used car sales (157,041) (49,538) -- -- (206,579)
Taxes on revenues (10,101) (6,015) (221) -- (16,337)
Selling, general, administrative and other (44,664) (21,244) (175) 681 (65,402)
Depreciation of vehicles (14,225) (22,997) -- -- (37,222)
Other depreciation and amortization (3,670) (114) (57) -- (3,841)
-------- -------- -------- -------- --------
Total operating expenses and costs (289,589) (130,554) (3,171) 2,448 (420,866)
-------- -------- -------- -------- --------
Equity 40,632 -- -- (40,632) --
-------- -------- -------- -------- --------
Operating income 95,396 54,119 2,285 (40,632) 111,168
-------- -------- -------- -------- --------
FINANCIAL EXPENSES, NET 35,702 4,896 79 -- 40,677
OTHER NONOPERATING (EXPENSES) INCOME, NET 73 52 (28) -- 97
-------- -------- -------- -------- --------
Income before taxes and minority interest 131,171 59,067 2,336 (40,632) 151,942
-------- -------- -------- -------- --------
INCOME TAX AND SOCIAL CONTRIBUTION:
Current (2,109) (20,361) (786) -- (23,256)
Deferred (23,422) 625 (143) -- (22,940)
-------- -------- -------- -------- --------
(25,531) (19,736) (929) -- (46,196)
-------- -------- -------- -------- --------
Income before minority interest 105,640 39,331 1,407 (40,632) 105,746
MINORITY INTEREST -- -- -- (106) (106)
-------- -------- -------- -------- --------
Net income 105,640 39,331 1,407 (40,738) 105,640
======== ======== ======== ======== ========
OTHER COMPREHENSIVE INCOME (LOSS):
Total change in market value of marketable
securities 501 -- -- -- 501
Reclassification adjustment of realized gains 219 -- -- -- 219
-------- -------- -------- -------- --------
Unrealized gains (losses) on marketable
securities 720 -- -- -- 720
Deferred income tax and social contribution
on unrealized gains (losses) (245) -- -- -- (245)
-------- -------- -------- -------- --------
Other comprehensive income (loss) 475 -- -- -- 475
-------- -------- -------- -------- --------
Comprehensive income 106,115 -- -- -- 106,115
======== ======== ======== ======== ========
F-43
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES GUARANTORS
1/2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
(Stated in thousands of Brazilian reais)
Guarantor
Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 105,640 39,331 1,407 (40,738) 105,640
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization (including
goodwill) 17,895 23,111 57 -- 41,063
Vehicles written-off as a result of theft 1,093 447 -- -- 1,540
Deferred taxes on income 23,422 (625) 143 -- 22,940
Provision for doubtful accounts (1,328) 1,190 10 -- (128)
Provision for contingencies 13,442 1,952 143 -- 15,537
Realized gains (losses) on sale of
marketable securities 219 -- -- -- 219
Exchange variation, net (46,896) -- -- -- (46,896)
Unrealized (gain) loss on derivatives 7,016 -- -- -- 7,016
Equity (40,632) -- -- 40,632 --
Other (421) 113 (252) 106 (454)
(Increase) decrease in operating assets:
Accounts receivable 4,045 2,364 (132) (331) 5,946
Revenue-earning vehicles-
New acquisitions (186,799) (101,562) -- -- (288,361)
Cost of used car sales 159,717 51,459 -- -- 211,176
Escrow deposits (483) 234 (11) -- (260)
Accrued interest income on marketable securities (759) -- -- -- (759)
Other (1,731) 416 (95) (1,030) (2,440)
Increase (decrease) in operating liabilities:
Accounts payable 43,201 19,403 (83) 331 62,852
Payroll and related charges 1,290 95 110 -- 1,495
Income tax and social contribution -- 317 177 -- 494
Taxes, other than on income 1,005 16 5 -- 1,026
Advances from customers 630 339 -- -- 969
Reserve for contingencies (5,088) (537) (32) -- (5,657)
Loans and debt - accrued interest expense, net (660) -- -- -- (660)
Other (199) (104) 551 74 322
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 93,619 37,959 1,998 (956) 132,620
-------- -------- -------- -------- --------
F-44
2/2
Guarantor
Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities 11,798 -- -- -- 11,798
Additions to property and equipment, net (7,157) (77) (62) -- (7,296)
-------- -------- -------- -------- --------
Net cash provided by investing activities 4,641 (77) (62) -- 4,502
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans:
Proceeds 45,820 11,634 -- -- 57,454
Repayments (37,548) (11,634) -- -- (49,182)
Transaction with related parties:
Capital increase 17,970 -- -- -- 17,970
Cash dividends (54,350) -- -- -- (54,350)
Interest on capital (21,141) -- -- -- (21,141)
Other 6,822 (4,461) (3,317) 956 --
-------- -------- -------- -------- --------
Net cash used in financing activities (42,427) (4,461) (3,317) 956 (49,249)
-------- -------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 55,833 33,421 (1,381) -- 87,873
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR
50,967 18,469 1,955 -- 71,391
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR 106,800 51,890 574 -- 159,264
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 24,381 54 -- -- 24,435
Income tax and social contribution 3,170 20,311 602 -- 24,083
-------- -------- -------- -------- --------
27,551 20,365 602 -- 48,518
======== ======== ======== ======== ========
F-45
LOCALIZA RENT A CAR S.A. AND SUBSIDIARIES GUARANTORS
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002
(Stated in thousands of Brazilian reais)
A S S E T S Guarantor Subsidiaries
---------------- ----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 50,967 18,469 1,955 -- 71,391
Available for sale marketable securities 11,078 -- -- -- 11,078
Accounts receivable, net 37,248 12,945 1,312 (431) 51,074
Revenue-earning vehicles, net 189,879 73,525 -- -- 263,404
Deferred income tax and social contribution 1,329 256 -- -- 1,585
Other 12,377 1,514 206 (8,175) 5,922
-------- -------- -------- -------- --------
302,878 106,709 3,473 (8,606) 404,454
-------- -------- -------- -------- --------
NONCURRENT ASSETS:
Revenue-earning vehicles, net -- 87,034 -- -- 87,034
Escrow deposits 17,407 1,341 227 -- 18,975
Deferred income tax and social contribution 32,297 976 204 -- 33,477
Other 1,086 1,750 166 (197) 2,805
-------- -------- -------- -------- --------
50,790 91,101 597 (197) 142,291
-------- -------- -------- -------- --------
INVESTMENTS 171,171 -- -- (171,171) --
-------- -------- -------- -------- --------
PROPERTY AND EQUIPMENT, NET 14,581 452 93 -- 15,126
-------- -------- -------- -------- --------
GOODWILL 4,704 -- -- -- 4,704
-------- -------- -------- -------- --------
TOTAL ASSETS 544,124 198,262 4,163 (179,974) 566,575
======== ======== ======== ======== ========
F-46
FINANCIAL INFORMATION FOR SUBSIDIARIES GUAARANTORS
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002
(Stated in thousands of Brazilian reais)
LIABILITIES AND SHAREHOLDERS' EQUITY
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CURRENT LIABILITIES:
Interest payable on long-term debt 6,616 -- -- -- 6,616
Accounts payable 11,582 7,316 351 (431) 18,818
Payroll and related charges 7,559 1,973 535 -- 10,067
Income tax and social contribution -- 242 218 -- 460
Taxes, other than on income 3,016 512 22 -- 3,550
Deferred income tax and social contribution 4,257 3,045 -- -- 7,302
Advances from customers 3,293 585 -- -- 3,878
Other 1,028 6,929 1,074 (8,416) 615
-------- -------- -------- -------- --------
37,351 20,602 2,200 (8,847) 51,306
-------- -------- -------- -------- --------
NONCURRENT LIABILITIES:
Long-term debt 261,111 -- -- -- 261,111
Unrealized loss on derivatives 12,031 -- -- -- 12,031
Reserve for contingencies 31,299 3,810 738 -- 35,847
Deferred income tax and social contribution 6,378 3,605 -- -- 9,983
Other 1,332 243 8 -- 1,583
-------- -------- -------- -------- --------
312,151 7,658 746 -- 320,555
-------- -------- -------- -------- --------
MINORITY INTEREST -- -- -- 92 92
-------- -------- -------- -------- --------
SHAREHOLDERS' EQUITY:
Capital stock 135,723 121,164 1,200 (122,364) 135,723
Accumulated earnings 59,374 48,838 17 (48,855) 59,374
Accumulated other comprehensive
income (loss) (475) -- -- -- (475)
-------- -------- -------- -------- --------
194,622 170,002 1,217 (171,219) 194,622
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
544,124 198,262 4,163 (179,974) 566,575
======== ======== ======== ======== ========
F-47
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR ENDED DECEMBER 31, 2002
(Stated in thousands of Brazilian reais)
Guarantor
Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
NET REVENUES:
Car rental 164,001 -- -- (1,406) 162,595
Fleet management -- 118,969 -- (187) 118,782
Franchising -- -- 5,111 -- 5,111
Used car sales 129,935 68,668 -- (8,127) 190,476
-------- -------- -------- -------- --------
Total net revenues 293,936 187,637 5,111 (9,720) 476,964
-------- -------- -------- -------- --------
EXPENSES AND COSTS:
Direct operating (55,916) (31,860) (2,648) 1,566 (88,858)
Cost of used car sales (108,744) (50,814) -- 3,288 (156,270)
Taxes on revenues (13,482) (5,920) (176) -- (19,578)
Selling, general, administrative and other (45,345) (21,757) (246) 4,866 (62,482)
Depreciation of vehicles (15,110) (15,952) -- -- (31,062)
Other depreciation and amortization (3,278) (93) (55) -- (3,426)
-------- -------- -------- -------- --------
Total operating expenses and costs (241,875) (126,396) (3,125) 9,720 (361,676)
-------- -------- -------- -------- --------
Equity 46,025 -- -- (46,025) --
-------- -------- -------- -------- --------
Operating income 98,086 61,241 1,986 (46,025) 115,288
-------- -------- -------- -------- --------
FINANCIAL EXPENSES, NET (88,901) 5,864 223 -- (82,814)
OTHER NONOPERATING (EXPENSES) INCOME, NET (118) 1 (8) -- (125)
-------- -------- -------- -------- --------
Income before taxes and minority interest 9,067 67,106 2,201 (46,025) 32,349
-------- -------- -------- -------- --------
INCOME TAX AND SOCIAL CONTRIBUTION:
Current (18) (18,576) (596) -- (19,190)
Deferred 17,600 (3,906) (89) -- 13,605
-------- -------- -------- -------- --------
17,582 (22,482) (685) -- (5,585)
-------- -------- -------- -------- --------
Income before minority interest 26,649 44,624 1,516 (46,025) 26,764
MINORITY INTEREST -- -- -- (115) (115)
-------- -------- -------- -------- --------
Net income 26,649 44,624 1,516 (46,140) 26,649
======== ======== ======== ======== ========
OTHER COMPREHENSIVE INCOME (LOSS):
Total change in market value of marketable
securities 269 -- -- -- 269
Reclassification adjustment of realized gains (1,566) -- -- -- (1,566)
-------- -------- -------- -------- --------
Unrealized gains (losses) on marketable
securities (1,297) -- -- -- (1,297)
Deferred income tax and social contribution
on unrealized gains (losses) 436 -- -- -- 436
-------- -------- -------- -------- --------
Other comprehensive income (loss) (861) -- -- -- (861)
-------- -------- -------- -------- --------
Comprehensive income 25,788 -- -- -- 25,788
======== ======== ======== ======== ========
F-48
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
1/2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
(Stated in thousands of Brazilian reais)
Guarantor
Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 26,649 44,624 1,516 (46,140) 26,649
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization (including
goodwill) 18,388 16,045 55 -- 34,488
Vehicles written-off as a result of theft 1,181 860 -- -- 2,041
Deferred taxes on income (17,600) 3,906 89 -- (13,605)
Provision for doubtful accounts 1,155 285 (4) -- 1,436
Provision for contingencies 11,328 2,282 72 -- 13,682
Realized gains (losses) on sale of
marketable securities (1,566) -- -- -- (1,566)
Realized gains on derivatives (1,891) -- -- -- (1,891)
Exchange variation, net 85,044 -- -- -- 85,044
Unrealized (gain) loss on derivatives (14,204) -- -- -- (14,204)
Equity (46,025) -- -- 46,025 --
Other 268 37 -- 2 307
(Increase) decrease in operating assets:
Accounts receivable (5,850) 2,786 (56) 77 (3,043)
Revenue-earning vehicles-
New acquisitions (147,685) (67,919) -- -- (215,604)
Cost of used car sales 110,883 53,963 -- -- 164,846
Escrow deposits (745) (517) (93) -- (1,355)
Accrued interest income on marketable securities 1,978 -- -- -- 1,978
Other 58,914 2,396 (190) (53,037) 8,083
Increase (decrease) in operating liabilities:
Accounts payable (6,917) 1,412 85 (80) (5,500)
Payroll and related charges 1,085 133 164 -- 1,382
Income tax and social contribution (199) 238 207 -- 246
Taxes, other than on income 2,076 95 (17) -- 2,154
Advances from customers 343 446 -- -- 789
Reserve for contingencies (4,250) (37) (585) -- (4,872)
Loans and debt - accrued interest expense, net 2,086 -- -- -- 2,086
Other 132 (1,545) (176) 1,369 (220)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 74,578 59,490 1,067 (51,784) 83,351
-------- -------- -------- -------- --------
F-49
2/2
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (5,717) -- -- -- (5,717)
Proceeds from sales of marketable securities 13,210 -- -- -- 13,210
Additions to property and equipment, net (5,852) (158) (8) -- (6,018)
-------- -------- -------- -------- --------
Net cash provided by investing activities 1,641 (158) (8) -- 1,475
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans:
Proceeds 32,853 6,333 -- -- 39,186
Repayments (55,317) (11,078) -- 14 (66,381)
Transaction with related parties:
Capital increase 12,800 -- -- -- 12,800
Cash dividends (20,000) (44,239) (582) 44,821 (20,000)
Interest on capital (15,059) -- -- -- (15,059)
Other (6,585) (500) 136 6,949
-------- -------- -------- -------- --------
Net cash used in financing activities (51,308) (49,484) (446) 51,784 (49,454)
-------- -------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,911 9,848 613 -- 35,372
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 26,056 8,621 1,342 -- 36,019
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR 50,967 18,469 1,955 -- 71,391
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 22,387 127 -- -- 22,514
Income tax and social contribution -- 15,664 329 -- 15,993
-------- -------- -------- -------- --------
22,387 15,791 329 -- 38,507
======== ======== ======== ======== ========
F-50
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR ENDED DECEMBER 31, 2001
(Stated in thousands of Brazilian reais)
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
NET REVENUES:
Car rental 145,448 -- -- (1,195) 144,253
Fleet management -- 120,463 -- (234) 120,229
Franchising -- -- 5,056 -- 5,056
Used car sales 97,476 57,247 -- (3,816) 150,907
-------- -------- -------- -------- --------
Total net revenues 242,924 177,710 5,056 (5,245) 420,445
-------- -------- -------- -------- --------
EXPENSES AND COSTS:
Direct operating (46,646) (28,463) (3,424) 1,474 (77,059)
Cost of used car sales (79,490) (39,165) -- -- (118,655)
Taxes on revenues (11,880) (5,743) (172) -- (17,795)
Selling, general, administrative and other (37,041) (18,750) (418) 3,771 (52,438)
Depreciation of vehicles (17,114) (26,881) -- -- (43,995)
Goodwill amortization (1,010) -- (489) -- (1,499)
Other depreciation and amortization (2,416) (128) (90) -- (2,634)
-------- -------- -------- -------- --------
Total operating expenses and costs (195,597) (119,130) (4,593) 5,245 (314,075)
-------- -------- -------- -------- --------
Equity 43,388 -- -- (43,388) --
-------- -------- -------- -------- --------
Operating income 90,715 58,580 463 (43,388) 106,370
-------- -------- -------- -------- --------
FINANCIAL EXPENSES, NET (50,590) 198 (72) -- (50,464)
OTHER NONOPERATING (EXPENSES) INCOME, NET 4,494 1 (20) -- 4,475
-------- -------- -------- -------- --------
Income before taxes and minority interest 44,619 58,779 371 (43,388) 60,381
-------- -------- -------- -------- --------
INCOME TAX AND SOCIAL CONTRIBUTION:
Current (604) (13,166) (337) -- (14,107)
Deferred (127) (2,226) (33) -- (2,386)
-------- -------- -------- -------- --------
(731) (15,392) (370) -- (16,493)
-------- -------- -------- -------- --------
Income before minority interest 43,888 43,387 1 (43,388) 43,888
Cumulative effect of a change in accounting
principle, net of taxes of R$467 (907) -- -- -- (907)
-------- -------- -------- -------- --------
Net income 42,981 43,387 1 (43,388) 42,981
======== ======== ======== ======== ========
OTHER COMPREHENSIVE INCOME (LOSS):
Total change in market value of marketable
securities 15,753 -- -- -- 15,753
Reclassification adjustment of realized gains (15,737) -- -- -- (15,737)
-------- -------- -------- -------- --------
Unrealized gains (losses) on marketable
securities 16 -- -- -- 16
Deferred income tax and social contribution
on unrealized gains (losses) (5) -- -- -- (5)
-------- -------- -------- -------- --------
Other comprehensive income (loss) 11 -- -- -- 11
-------- -------- -------- -------- --------
Comprehensive income 42,992 -- -- -- 42,992
======== ======== ======== ======== ========
F-51
FINANCIAL INFORMATION FOR SUBSIDIARIES GUARANTORS
1/2
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(Stated in thousands of Brazilian reais)
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 42,981 43,387 1 (43,388) 42,981
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization (including
goodwill) 20,540 27,009 224 355 48,128
Vehicles written-off as a result of theft 1,129 1,364 -- -- 2,493
Deferred taxes on income 127 2,226 33 -- 2,386
Provision for doubtful accounts 680 385 37 -- 1,102
Reversal of compulsory loans, net 383 -- -- -- 383
Gain on sale of land -- -- -- (4,639) (4,639)
Provision for contingencies 6,411 982 706 -- 8,099
Realized gains (losses) on sale of
marketable securities (15,737) -- -- -- (15,737)
Realized gains on derivatives (6,722) -- -- -- (6,722)
Exchange variation, net 29,299 29 -- -- 29,328
Unrealized (gain) loss on derivatives 26,146 -- -- 89 26,235
Equity (43,388) -- -- 43,388 --
Other 438 (88) 287 (355) 282
(Increase) decrease in operating assets:
Accounts receivable (15,206) (4,375) 373 (533) (19,741)
Revenue-earning vehicles-
New acquisitions (151,186) (96,341) -- -- (247,527)
Cost of used car sales 81,293 40,088 -- -- 121,381
Escrow deposits (2,005) (322) (29) -- (2,356)
Compulsory loans 1,597 -- -- -- 1,597
Accrued interest income on marketable securities (1,465) -- -- -- (1,465)
Other 31,992 (3,681) 46 (18,372) 9,985
Increase (decrease) in operating liabilities:
Accounts payable 7,814 (2,618) 102 536 5,834
Payroll and related charges 1,022 268 (52) -- 1,238
Income tax and social contribution 198 (1,385) (175) -- (1,362)
Taxes, other than on income (1,978) (24) (64) -- (2,066)
Advances from customers 2,948 (740) (159) 568 2,617
Reserve for contingencies (1,806) (25) (393) -- (2,224)
Loans and debt - accrued interest expense, net (51) -- -- -- (51)
Other 316 (237) (76) (517) (514)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 15,770 5,902 861 (22,868) (335)
-------- -------- -------- -------- --------
F-52
2/2
Guarantor Subsidiaries
----------------------
Parent Wholly- Majority-
Company Owned Owned Eliminations Consolidated
-------- -------- --------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (16,733) -- -- -- (16,733)
Proceeds from sales of marketable securities 61,365 -- -- -- 61,365
Additions to property and equipment, net (6,986) (258) (2) -- (7,246)
Acquisitions of former franchisees (1,329) -- -- -- (1,329)
Other (10,980) -- -- 10,980 --
-------- -------- -------- -------- --------
Net cash provided by investing activities 25,337 (258) (2) 10,980 36,057
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term loans:
Proceeds 72,434 41,403 -- -- 113,837
Repayments (79,197) (40,860) -- -- (120,057)
Transaction with related parties:
Capital increase 5,400 10,980 -- (10,980) 5,400
Cash dividends (15,000) (10,000) (46) 10,046 (15,000)
Interest on capital (6,353) (12,800) -- 12,800 (6,353)
Other (1,848) 1,920 (94) 22 --
-------- -------- -------- -------- --------
Net cash used in financing activities (24,564) (9,357) (140) 11,888 (22,173)
-------- -------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,543 (3,713) 719 -- 13,549
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 9,513 12,334 623 -- 22,470
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
YEAR 26,056 8,621 1,342 -- 36,019
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest 26,827 715 -- -- 27,542
Income tax and social contribution -- 16,410 406 -- 16,816
-------- -------- -------- -------- --------
26,827 17,125 406 -- 44,358
======== ======== ======== ======== ========
F-53
Localiza Franchising S.A. and Subsidiary
Financial Statements Together with Report of Independent Registered
Public Accounting Firm
Expressed in Brazilian reais
As of December 31, 2002 and 2003 and for the
three years in the period ended December 31, 2003
Deloitte Touche Tohmatsu Auditores Independentes
Report of Independent Registered Public Accounting Firm
To the Shareholders of
Localiza Franchising S.A.
Belo Horizonte - MG
1. We have audited the accompanying consolidated balance sheets of Localiza
Franchising S.A., (the "Company"), a Brazilian corporation and subsidiary
of Localiza Rent a Car S.A., as of December 31, 2002 and 2003 and the
related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2003, all expressed in Brazilian reais. 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.
2. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
3. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Localiza Franchising S.A. as of December 31, 2002 and 2003, and
the results of its operations and cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
4. Our audits also comprehended the translation of Brazilian reais amounts
into U.S. dollar amounts as of and for the year ended December 31, 2003,
and, in our opinion, such translation has been made in conformity with the
basis stated in Note 2 (d). Such U.S. dollar amounts are presented solely
for the convenience of readers in the United States of America.
April 2, 2004
/s/ Deloitte Touche Tohmatsu
LOCALIZA FRANCHISING S.A. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
A S S E T S December 31,
----------- -------------------------
2002 2003 2003
----- ----- -----
R$ R$ US$
----- ----- -----
CURRENT ASSETS:
Cash and cash equivalents 1,955 574 199
Accounts receivable, net 1,312 1,327 459
CEPIN (Note 10) 54 -- --
Recoverable taxes 43 340 118
Other 109 129 44
----- ----- -----
3,473 2,370 820
----- ----- -----
NONCURRENT ASSETS:
Accounts receivable, net -- 107 37
Escrow deposits 227 238 82
Receivable from related party 94 -- --
Deferred income tax and social contribution 204 61 21
Recoverable taxes 72 163 57
----- ----- -----
597 569 197
----- ----- -----
OFFICE EQUIPMENT, NET 93 98 34
----- ----- -----
TOTAL ASSETS 4,163 3,037 1,051
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
F-56
LOCALIZA FRANCHISING S.A. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY December 31,
------------------------------------ -------------------------
2002 2003 2003
----- ----- -----
R$ R$ US$
----- ----- -----
CURRENT LIABILITIES:
Accounts payable 351 268 93
Payroll and related charges 535 645 223
Income tax and social contribution 218 395 137
Taxes, other than on income 22 27 9
CEPIN (Note 10) -- 403 140
Payable to related parties 210 52 18
Dividends payable 853 -- --
Other 11 159 55
----- ----- -----
2,200 1,949 675
----- ----- -----
NONCURRENT LIABILITIES:
Reserve for contingencies 738 849 294
Other 8 15 5
----- ----- -----
746 864 299
----- ----- -----
SHAREHOLDERS' EQUITY:
Capital stock 1,200 200 69
Accumulated earnings 17 24 8
----- ----- -----
1,217 224 77
----- ----- -----
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 4,163 3,037 1,051
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
F-57
LOCALIZA FRANCHISING S.A. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
NET REVENUES:
Royalties and advertising fees 4,430 4,585 4,812 1,666
Initial franchise fees 522 481 587 203
Other services 104 45 57 20
------ ------ ------ ------
Total net revenues 5,056 5,111 5,456 1,889
------ ------ ------ ------
EXPENSES AND COSTS:
Direct operating (3,424) (2,935) (3,020) (1,045)
Taxes on revenues (172) (176) (221) (76)
Selling, general, administrative and other (418) (246) (175) (61)
Depreciation and amortization (90) (55) (57) (20)
Gain on settlement of liability under amnesty
program (Note 11) -- 287 -- --
Gain on social security contribution litigation
(Note 6) -- -- 302 104
Impairment of goodwill (Note 1 b) (355) -- -- --
Goodwill amortization (134) -- -- --
------ ------ ------ ------
Total operating expenses and costs (4,593) (3,125) (3,171) (1,098)
------ ------ ------ ------
Operating income 463 1,986 2,285 791
------ ------ ------ ------
FINANCIAL (EXPENSES) INCOME, NET (72) 223 79 27
OTHER NONOPERATING EXPENSES, NET (20) (8) (28) (9)
------ ------ ------ ------
Income before taxes 371 2,201 2,336 809
INCOME TAX AND SOCIAL CONTRIBUTION:
Current (337) (596) (786) (273)
Deferred (33) (89) (143) (49)
------ ------ ------ ------
(370) (685) (929) (322)
------ ------ ------ ------
Net income 1 1,516 1,407 487
====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-58
LOCALIZA FRANCHISING S.A. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Brazilian reais)
Accumulated
Capital earnings
stock (deficit) Total
---------- ----------- ---------
BALANCES AT DECEMBER 31, 2000 1,200 71 1,271
Cash dividends (Note 13) -- (30) (30)
Interest on capital (Note 13) -- (106) (106)
Net income -- 1 1
----- ----- -----
BALANCES AT DECEMBER 31, 2001 1,200 (64) 1,136
Cash dividends (Note 13) -- (1,435) (1,435)
Net income -- 1,516 1,516
----- ----- -----
BALANCES AT DECEMBER 31, 2002 1,200 17 1,217
Capital reduction (Note 1 a) (1,000) -- (1,000)
Cash dividends (Note 13) -- (1,400) (1,400)
Net income -- 1,407 1,407
----- ----- -----
BALANCES AT DECEMBER 31, 2003 200 24 224
===== ===== =====
The accompanying notes are an integral part of the consolidated financial
statements.
F-59
1/2
LOCALIZA FRANCHISING S.A. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Brazilian reais and U.S. dollars)
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 1 1,516 1,407 487
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (including
goodwill) 224 55 57 20
Impairment of goodwill 355 -- -- --
Deferred taxes on income 33 89 143 49
Provision for doubtful accounts 37 (4) 10 4
Provision for contingencies 706 72 143 49
Gain on settlement of liability under
amnesty program -- (287) -- --
Gain on social security litigation -- -- (259) (90)
Other (68) -- 7 3
(Increase) decrease in operating assets:
Accounts receivable 373 (56) (132) (45)
Escrow deposits (29) (93) (11) (4)
Recoverable taxes -- -- (129) (45)
Other 46 (190) 34 12
Increase (decrease) in operating liabilities:
Accounts payable 102 85 (83) (29)
Payroll and related charges (52) 164 110 38
Income tax and social contribution (175) 207 177 61
Taxes, other than on income (64) (17) 5 2
CEPIN (159) (112) 403 140
Reserve for contingencies (393) (298) (32) (11)
Other accounts payable (76) (64) 148 51
------ ------ ------ ------
Net cash provided by operating activities 861 1,067 1,998 692
------ ------ ------ ------
F-60
2/2
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to office equipment, net (2) (8) (62) (22)
------ ------ ------ ------
Net cash used in investing activities (2) (8) (62) (22)
------ ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transactions with related parties:
Proceeds 98 182 94 33
Repayments (192) (46) (158) (55)
Capital reduction in cash -- -- (1,000) (346)
Dividends and interest on capital (46) (582) (2,253) (780)
------ ------ ------ ------
Net cash used in financing activities (140) (446) (3,317) (1,148)
------ ------ ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 719 613 (1,381) (478)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 623 1,342 1,955 677
------ ------ ------ ------
CASH AND CASH EQUIVALENTS AT
END OF YEAR 1,342 1,955 574 199
====== ====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income tax and social contribution 406 329 602 208
====== ====== ====== ======
Supplemental information of non-cash
financing activities:
Dividends and interest on capital payable 90 853 -- --
====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
F-61
LOCALIZA FRANCHISING S.A. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2002 AND 2003
(Amounts expressed in thousands of Brazilian reais and U.S. dollars, unless
otherwise indicated)
1. THE COMPANY AND ITS OPERATIONS
Localiza Franchising S.A. (the "Company" or "Franchising") (formerly
Localiza Franchising Ltda.) is a Brazilian closely held corporation and a
subsidiary of Localiza Rent a Car S.A. ("Localiza"). Its main activity is
to manage the Localiza franchising business, referring to car rental and
related services.
In 2002, Franchising was a Brazilian limited liability Company. On May 1,
2004, Franchising was changed to a closely held corporation. Its capital is
shared between Localiza (92.5%) and Aristides Luciano Azevedo Newton
(7.5%).
As of December 31, 2003, franchisees comprise 238 unaudited locations (250
- unaudited - in 2002). The Company selects franchisees in order to serve
smaller markets, while major urban areas in Brazil are served by the 71
(unaudited) (70 - unaudited - in 2002) Localiza owned locations. The
Brazilian franchise locations are operated by a total of 78 (unaudited)
(84 - unaudited - in 2002) franchisees.
In 2003 and 2002, the Localiza network has 64 (unaudited) franchise
locations outside Brazil, in 7 (6 in 2002) countries as follows: Bolivia,
Ecuador, Mexico, Paraguay, Chile, Uruguay and Argentina, where the
Company's franchisees have 34 (unaudited) (32 - unaudited - in 2002)
locations.
The international franchise locations are operated by 3 (unaudited) (4 -
unaudited - in 2002) master franchisees and 32 (unaudited) (30 - unaudited
- in 2002) franchisees, the largest of which owns 5 locations (unaudited)
(6 - unaudited - in 2002).
The Company grants exclusive rights to its franchisees for defined
geographic areas pursuant to renewable contracts, which terms range from
five to ten years. These contracts may be cancelled by either party upon 90
days written notice. Brazilian franchisees generally pay the Company an
initial fee plus royalties and an advertising fee based on gross revenues.
Non-Brazilian franchisees pay royalties at varying rates, depending upon
local market conditions. For the years ended December 31, 2001, 2002 and
2003 aggregate net royalties from Brazilian franchisees amount to R$3,737,
R$3,917 and R$4,099 or 84%, 85% and 85%, respectively, of total franchise
royalties. Aggregate net royalties from non-Brazilian franchisees amount to
R$693, R$668 and R$713 or 16%, 15% and 15%, respectively, of total
franchise royalties. Revenue in Argentina represents 14.6%, 9.2% and 6.6%
of the total consolidated revenues in 2001, 2002 and 2003 respectively.
The Company oversees the quality of its franchise operations: (i) through
rigorous qualifying procedures for accepting new franchisees; (ii) by
providing training, comprehensive education and procedural manuals; and
(iii) through periodic onsite inspections.
F-62
The franchisee is responsible for the purchase, maintenance and sale of its
fleet.
(a) Capital reduction
As of May 1, 2003, the Company made a capital distribution amounting to
R$1,000 totally paid in cash.
(b) Investment in subsidiary and affiliate
On August 17, 1999, the Company acquired the remaining 60% of MFA -
Localiza Master Franchisee Argentina S.A. ("MFA"), located in Argentina,
for R$337. The subsidiary had negative net worth of R$330 that approximated
its book value on the acquisition date. Goodwill arising from that
acquisition, amounting to R$667, was being amortized over a 5-year period,
from the acquisition date to 2001, when, as a result of the economic crisis
in Argentina, an impairment charge was recorded to write-off the remaining
balance of the goodwill.
To fund the operations of MFA, Franchising made capital contributions
amounting to R$91 and R$192 during the years ended December 31, 2000 and
2001, respectively. These capital contributions were made in compliance
with the Argentine law, section 205 of the Business Associations Law that
requires the maintenance of a specified proportion between accumulated
losses and capital stock.
On July 31, 2002, MFA had its capital reduced in the amount of ARP172
thousand (Argentine pesos), reestablishing the proportion required
mentioned before.
MFA is responsible for the commercialization of the "Localiza" trademark in
Argentina through the sales of franchises and the collection of royalties.
On May 1, 2003, Franchising sold its participation of 0.01% in Prime
Prestadora de Servicos S.A. to Localiza for book value.
(c) Franchising spin-off
On March 31, 2004, Franchising spun-off and generated a new company named
Localiza Franchising Brasil S.A., currently responsible for the Brazilian
franchising operations. Localiza Franchising just maintained recorded in
its books the investment in MFA. The spun-off was maid based on the book
value.
(d) Guarantee in Senior Notes Program
The Company and MFA are guarantors of Localiza's Senior Notes program,
which are unsecured obligations of Localiza, in the amount of US$100
million, maturing on October 1, 2005. As a consequence, the Company is
subject to certain restrictions contained in the Senior Notes program.
These restrictive covenants will limit, except in certain circumstances,
the ability of Localiza and subsidiaries to, among other things, declare
any dividend or other similar distribution, make certain stock repurchases,
make certain payments on subordinated indebtedness or make certain
investments if, after giving effect to such actions, (i) a default or event
of default under the Senior Notes indenture would have
F-63
occurred and be continuing, (ii) Localiza and subsidiaries would be unable
to incur additional indebtedness under the debt incurrence ratio test set
forth in the indenture or (iii) the amount of all such payments exceeds an
aggregate threshold amount. A default or event of default includes the
failure of Localiza or its subsidiaries to observe or perform any covenant,
whose covenants include limitations on the ability of the Localiza and
subsidiaries to (i) incur certain additional indebtedness, (ii) create
certain liens, (iii) enter into certain transactions with affiliates, (iv)
engage in certain sale and leaseback transactions and (v) enter into
certain merger, acquisition or sale transactions.
As of the date of these consolidated financial statements, Management
believes that the Company is in compliance with all of the covenants
described above.
2. BASIS FOR PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS
(a) Accounting records
The Company's accounting records are maintained in Brazilian reais
(R$), based on the criteria enacted by Brazilian Corporate Law. The
consolidated financial statements prepared based on such accounting
records and the Corporate Law criteria (Corporate Law Method financial
statements) are the basis for determining income taxes and
shareholders' rights, such as dividends.
MFA's accounting records are maintained in Argentine Pesos (ARP) and
translated to Brazilian reais at the exchange rate at the end of each
balance sheet date, except for December 31, 2001, when the exchange
rate used represented the first free-floating rate for which
transactions could be settled after December 31, 2001. Such exchange
rate was calculated by converting Pesos to U.S. dollars at a rate of
$1.70 to US$1.00 and then to Brazilian reais at a rate of R$2.3204 to
US$1.00. For all periods presented the effects of translation are
immaterial.
All financial information for periods ended after June 30, 1997 are
presented at amounts price-level adjusted as of June 30, 1997, with
any subsequent transactions included in nominal Brazilian reais.
Effective July 1, 1997, the Company ceased restating its financial
statements to recognize certain effects of changes in the purchasing
power of Brazilian currency due to inflation, as Brazil ceased to be
considered a highly inflationary economy as of such date.
(c) Presentation of the consolidated financial statements
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America, which differ in certain aspects from the accounting
principles applied by the Company and its subsidiary in their
consolidated financial statements prepared in accordance with
accounting principles generally accepted in Brazil and
F-64
Argentina or for other statutory purposes in Brazil and Argentina.
(d) Convenience translation of balances from Brazilian reais to U.S.
dollars
The accompanying consolidated financial statements in Brazilian reais
were translated into U.S. dollars at the rate of R$2.8892 to US$1.00,
the selling Commercial Market exchange rate reported by the Central
Bank of Brazil, for December 31, 2003. Such translation was made
solely for the convenience of the readers and should not be construed
as a representation that the Brazilian reais amounts could have been
converted into U.S. dollars at this or any other rate.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America,
based on the following accounting policies:
(a) Consolidation - The consolidated financial statements include the
accounts of Franchising and MFA. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Cash and cash equivalents - Stated at cost or invested amount plus
accrued interest up to the balance sheet dates.
(c) Allowance for doubtful accounts - Provided in an amount considered
sufficient to cover eventual losses on accounts receivable,
considering past experience, the current financial situation of the
Company's customers and the status of past-due receivables.
(d) Office equipment - Stated at price-level adjusted acquisition cost for
periods prior to June 30, 1997. Depreciation is calculated using the
straight-line method at the annual rate of 20% for computers, 10% for
other items.
(e) Goodwill - Corresponded to the excess of the purchase price over the
book value of the remaining equity share in MFA on the acquisition
date. It was being amortized over a 5-year period until December 31,
2001, when, as a result of the economic crisis in Argentina, an
impairment charge was recorded to write-off the remaining balance.
(f) Income tax and social contribution - The Company accounts for income
taxes under the provisions of SFAS No. 109, "Accounting for
Income Taxes", which requires the application of the comprehensive
liability method of accounting for income taxes. SFAS No. 109
requires recognition of deferred tax assets and liabilities for the
estimated future tax consequences of events attributable to
differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under
F-65
SFAS No. 109, the effect on deferred tax assets and liabilities
of changes in tax rates is recognized in income for the period that
includes the enactment date.
Deferred tax assets are reduced through the recognition of a valuation
allowance, as appropriate, if, based on the weight of available
evidence, it is more likely than not that the deferred tax asset will
not be realized.
From 2004 on, after the spun-off, the company's management believes,
based on projections of future taxable income, that it is more likely
than not that the deferred income tax assets will be realized, for
which a valuation allowance of R$211 in 2003 was established.
(g) Assets and liabilities denominated in foreign currencies or subject to
monetary restatement - Assets and liabilities denominated in foreign
currencies are adjusted based on the exchange rate reported by the
Central Bank of Brazil at each balance sheet date. Those denominated
in Brazilian reais, and contractually or legally subject to
indexation, are restated at the balance sheet dates by using the
related index. Exchange gains and losses and monetary variation gains
and losses are recorded in the income statement.
(h) Revenues and expenses - Revenues from franchise fees are generally
based on a percentage of franchisee rental revenue and are recognized
as earned on a monthly basis. Initial franchise fees are recognized
upon substantial completion of all material services and conditions of
the franchise sale, which coincides with the date of sale and
commencement of operations by the franchisee. Expenses include the
provision of sales and marketing, reservations, information systems
and other services to franchisees. Expenses are recorded as incurred.
(i) Advertising costs - Advertising costs are expensed when incurred. No
advertising costs have been deferred at the balance sheet dates
herein. The Company has not incurred advertising costs in the three
years ended December 31, 2003.
(j) Use of estimates - The preparation of consolidated financial
statements in accordance with accounting principles generally accepted
in the United States of America requires that the Company's management
make estimates and use assumptions that affect the reported amounts of
assets, liabilities and disclosures of contingent assets and
liabilities as of the dates of the consolidated financial statements
and the reported amounts of revenues, costs and expenses during the
reporting periods. Significant estimates are used when accounting for
allowance for doubtful accounts, income taxes, including recognition
of valuation allowances, contingencies and goodwill, among others.
Although these estimates are based on management's knowledge of
current events and actions that may be undertaken in the future,
actual results may differ from the estimates included in these
consolidated financial statements.
(k) Interest on capital - Interest paid to shareholders, calculated in
accordance with Law No. 9.249/95, is recorded in the Company's
books in the income statement under financial expenses, as determined
by tax legislation. For presentation in the consolidated financial
statements, interest paid on capital is presented as a charge to
retained earnings.
(l) Constant currency presentation - In addition to the accounting
practices described above, the following practices were adopted in the
preparation of constant currency consolidated
F-66
financial statements:
i. Index - Through December 31, 1995, the consolidated financial
statements were price-level adjusted based on the variation of
UFIR (Inflation index for tax purposes). From January 1, 1996
through June 30, 1997, the consolidated financial statements were
price-level adjusted based on the variation of the IGP-M (General
Price Index of the Market).
ii. Nonmonetary assets and liabilities - Office equipment,
shareholders' equity and other nonmonetary assets and liabilities
accounts were restated from the date the original transactions
occurred to June 30, 1997. Income tax and social contribution
effects were accrued in respect of the increase in shareholders'
equity due to the recognition of the effects of inflation.
As of December 31, 2002 and 2003, all cash and cash equivalents are
denominated in Brazilian reais. The cash equivalents are highly liquid
investments that are readily convertible to known amounts of cash without
any penalty or loss of market rate interest. All of these investments are
remunerated based on the Interbank Deposit Certificate (CDI).
On February 13, 2003, the Company obtained a favorable judicial decision in
a claim related to INSS (social security contributions) litigation, which
assured additional tax assets in the amount of R$302. The amount can be
offset within the legal limits established in the Law. The Company has
already offset R$43 through 2003.
7. ESCROW DEPOSITS
December 31,
----------------------------------
2002 2003 2003
------ ------ ------
R$ R$ US$
------ ------ ------
PIS (tax on revenues) 51 51 18
PIS/COFINS (tax on other revenues) 39 7 2
SESC/SENAC 78 94 33
SAT 39 39 13
Other 20 47 16
------ ------ ------
227 238 82
====== ====== ======
These deposits are primarily made in connection with pending litigation.
Related reserves for contingencies have been recognized (Note 11), where
applicable.
The Company pays bi-annual bonuses to employees based on profit,
considering position and performance.
10. CEPIN (Assets and Liabilities)
The CEPIN fund represents amounts collected from the franchisees at a rate
up to 2.5% of monthly gross revenues, pursuant to the respective business
franchise contracts. This amount is used for general publicity,
advertising, and promotions that benefit the Localiza car rental system. In
2002, the CEPIN funds were used for on-going initiatives and to finance the
development of a new operational system for franchisees. The costs of this
project exceeded the available CEPIN funds and consequently, costs,
amounting to R$54 were paid by Franchising. This amount was in 2002
recorded as other current assets and it was reimbursed through CEPIN
collections in 2003. As of December 31, 2003 the CEPIN balance amounts to
R$403, and it is recorded as a liability. The CEPIN transactions do not
effect the Company's statement of operations.
11. RESERVE FOR CONTINGENCIES
(a) Reserves
December 31,
----------------------------------
2002 2003 2003
------ ------ ------
R$ R$ US$
------ ------ ------
PIS (tax on revenues) 51 51 18
PIS/COFINS (taxes on other revenues) 39 7 2
Fiscal 108 128 44
SESC/SENAC 270 328 114
SAT 39 39 13
Civil litigation 222 253 88
Other 9 43 15
------ ------ ------
738 849 294
====== ====== ======
F-69
The Company and its subsidiary are claimants in several lawsuits and
defendants in several others. It has recognized the above reserves
considering the opinion of its external legal and tax counsel which
consider that the likelihood of an unfavorable outcome related to these
cases is probable.
o PIS (tax on revenues) - The Company has pending litigation contesting
this tax. As of December 31, 2002 and 2003 the amount of the provision
is R$51, entirely deposited in an escrow account.
In December 2002, Franchising petitioned for the conversion of the
escrow deposit, which assured suspension of the payments to the
Federal Government, although it maintained the lawsuit. This
conversion to the Government has not been granted in court.
o PIS/COFINS (taxes on other revenues) - The Company has pending
litigations contesting these taxes in the total amount of R$7 (R$39 in
2002), entirely deposited in an escrow account.
In December 2002, Franchising petitioned for the conversion of the
escrow deposit, which assured suspension of the payments to the
Federal Government, although it maintained the lawsuit and resumed the
monthly payments. The COFINS conversion to the Government has been
granted in court. However, the PIS conversion has not been granted
yet.
o Fiscal - As a result of tax inspections in prior years, the Company
was assessed by the tax authorities, mainly due to the allegation of
authorities that certain expenses were inappropriately treated as
deductible and were not considered necessary to Company's operation
for tax purposes. The settlement of this contingency was guaranteed by
a bank guarantee in the amount of R$931.
The Company based its defense on prior decisions of the Supreme Court
and legislation in force.
In September 2002, the Company took advantage of a tax amnesty
program, pursuant to Executive Order No. 66/02, and settled this
liability, corresponding to R$1,039, paying R$585 and reversing the
provision of R$287. As of December 31, 2003, the total amount under
dispute is R$2,908, and a reserve of R$128 (R$108 in 2002) is
recorded.
o SESC/SENAC - The Company has pending litigation contesting these
payroll-related taxes. These reserves amount to R$328 as of December
31, 2003 (R$270 in 2002), of which R$94 (R$78 in 2002) are deposited
in an escrow account.
o SAT - The Company has pending litigation contesting this
payroll-related tax. This reserve amounts to R$39 as of December 31,
2003 and 2002, entirely deposited in an escrow account.
In December 2002, Franchising petitioned for the conversion of the
escrow deposit, which assured suspension of the payments to the
Federal Government, although it maintained the lawsuit and resumed the
monthly payments. This conversion to the Government has not been
granted in court.
F-70
o Civil litigation - The reserve refers mainly to a lawsuit proposed by
a former franchisee against the Company claiming the right to be
reimbursed for losses incurred in the ordinary course of business.
Management, based on the opinion of its external legal counsel,
believes that the recorded accrual of R$253 in 2003 (R$222 in 2002),
is sufficient to cover probable losses.
Accruals for the aforementioned contingencies are determined based on
an analysis of the pending claims, as well as on the potential risks
involved.
(b) Other contingencies
o Bodily injury and death claim - The Company was party to a claim
related to bodily injury and death, caused by franchisees' vehicle. In
2001, the Company settled with the claimants, for the amount of R$400.
As part of the related franchise agreement, the Company was reimbursed
by the franchisee in monthly installments until February 2003, when
the franchisee agreement was cancelled and the residual amount was
liquidated through the settlement of payable and receivable amounts
with the franchisee.
In addition to the above mentioned reserves, the Company is a
defendant in other tax lawsuits, considered a remote loss by legal
counsel. Such lawsuits have their settlements guaranteed by bank
guarantees, as per judicial procedures request, in the amount of
R$2,018.
The Company's management, based on the opinion of its external legal
and tax counsel, does not expect that the resolution of these matters
will have a material adverse effect on the Company's financial
position or results of operations and believes that no additional
reserves for contingencies are required to be recorded.
12. INCOME TAX AND SOCIAL CONTRIBUTION
(a) Deferred income tax and social contribution
Temporary differences that give rise to deferred tax assets are as follows:
The current portion of deferred tax assets is recorded as other current
assets as of December 31, 2002 and 2003. For December 31, 2003, the total
amount of deferred tax assets refers to MFA. From 2004 on, after the
spun-off, the Company's management believes, based on projections of future
taxable income, that the realization of the deferred taxes previously
recorded by the Company are not more likely than not to be realized and a
valuation allowance has been recorded in the amount of R$211.
(b) Income tax and social contribution
Income tax and social contribution at nominal rates are reconciled to the
amount reported as income tax expense in the consolidated financial
statements, as follows:
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
Income before taxes 371 2,201 2,336 809
Nominal rate 34% 34% 34% 34%
------ ------ ------ ------
Income taxes at nominal rate (126) (748) (794) (275)
Equity in subsidiary (67) 15 (29) (10)
Goodwill amortization (136) -- -- --
Interest on capital 36 -- -- --
Non deductible reserve for
contingencies (97) 4 -- --
Valuation reserve -- -- (211) (73)
Other 20 44 105 36
------ ------ ------ ------
Income tax-profit and loss (370) (685) (929) (322)
====== ====== ====== ======
The tax rates for the periods are:
Income tax 15%
Additional income tax (for the taxable income exceeding R$240
per year) 10%
Social contribution 9%
13. SHAREHOLDERS' EQUITY
(a) Capital stock
As of December 31, 2002 capital stock as per the statutory records was
represented by R$1,116 corresponding to 1,115,540 issued outstanding
quotas, with par value of R$1.00 each. The quotas could not be sold,
pledged or transferred to third parties without the approval of all
quotaholders.
As of December 31, 2003, capital stock as per the statutory records was
represented by
F-72
R$116 corresponding to 116,254 issued outstanding nominative common shares,
without par value.
The number of outstanding shares on December 31, 2003 is as follows:
Shares %
--------- --------
Localiza Rent a Car S.A. 107,535 92.5%
Aristides Luciano Azevedo Newton 8,719 7.5%
--------- --------
116,254 100.0%
========= ========
(b) Dividends
In accordance with Brazilian Corporate Law, the Company's bylaws require
that the Company's shareholders be paid a minimum annual dividend of 25% of
adjusted net profit. However, upon the vote of 100% of the shareholders
present at the general shareholders' meeting, such shareholders may declare
a lower dividend or decide not to declare dividends. In such case, the
adjusted net profit, which was not distributed for such reason, is recorded
as a special reserve and, if not absorbed by losses in subsequent fiscal
years, is paid as soon as the financial situation of the Company permits.
Brazilian legislation permits dividend payments limited to the accumulated
earnings in the statutory consolidated financial statements prepared in
accordance with Brazilian Corporate Law.
For the years ended December 31, 2001, 2002 and 2003, the Company's net
income, determined in accordance with Brazilian Corporate Law was R$148,
R$1,516 and R$1,407 respectively, and the accumulated earnings available
for distribution of profits were R$50, R$1,536 and R$1,508 respectively.
The appropriation of the Company's net income was determined in
quotaholders' meetings in 2001 and 2002, and by an shareholders' meeting in
2003, resulting in a decision to pay distribution of profits of R$30 in
2001, declared during the year, R$1,435 in 2002, of which R$853 was paid in
2003. For 2003, dividends of R$1,400 were declared and paid.
(c) Interest on capital
The interest on capital paid in 2001, amounting to R$106, was approved by
the quotaholders. Interest on capital, net of income tax withheld,
amounting to R$90, was recorded as payable to related parties. Such amount
was paid in 2002. The interest on capital was paid pursuant to Article
No. 9 of Law No. 9,249, of December 26, 1995, and amendments
introduced by Article No. 78 of Law No. 9,430, of December 27,
1996. Interest was calculated based on quotaholders' equity, is limited to
the variation of the Long-Term Interest Rate ("TJLP"), and is deductible
for income tax purposes.
F-73
14. SELLING, GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
Payroll and related charges (16) -- (25) (9)
External services (120) (118) (73) (25)
Provision for bad debts (37) 4 (10) (3)
Write-off of uncollectible receivables (92) (100) (7) (2)
Tax contingencies (92) (2) (16) (6)
Bank fees (21) (15) (12) (4)
Credit card fees (32) (2) (6) (2)
Other (8) (13) (26) (10)
------ ------ ------ ------
(418) (246) (175) (61)
====== ====== ====== ======
15. FINANCIAL (EXPENSES) INCOME, NET
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
Interest income 185 314 318 110
Interest expense (30) (37) (170) (59)
Taxes on financial revenues (11) (13) (14) (5)
Net monetary variation and exchange gains
(losses) (177) 24 (3) (1)
Other (39) (65) (52) (18)
------ ------ ------ ------
(72) 223 79 27
====== ====== ====== ======
16. TRANSACTIONS WITH RELATED PARTIES:
The main balances and transactions with related parties are as follows:
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
Accounts receivable - Current assets:
Localiza Rent a Car S.A. 167 -- -- --
====== ====== ====== ======
Accounts receivable - Noncurrent assets:
Minority shareholder 93 94 -- --
====== ====== ====== ======
Accounts payable and dividends - current
liabilities:
Minority shareholder 6 64 -- --
Localiza Rent a Car S.A. 246 999 52 18
Total Fleet S.A. 3 -- -- --
------ ------ ------ ------
F-74
Year ended December 31,
------------------------------------------
2001 2002 2003 2003
------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
255 1,063 52 18
====== ====== ====== ======
Direct costs:
Total Fleet S.A. -- -- 37 13
====== ====== ====== ======
Other revenues:
Total Fleet S.A. 49 38 -- --
====== ====== ====== ======
Reimbursement of direct operating costs:
Localiza Rent a Car S.A. (494) (526) (650) (225)
====== ====== ====== ======
Financial interest expenses:
Localiza Rent a Car S.A. 3 -- -- --
====== ====== ====== ======
Total Fleet S.A. is a wholly-owned subsidiary of Localiza and is engaged in
the fleet management business.
Management believes that such transactions were completed at arm's length
and consistent with market conditions.
17. FINANCIAL INSTRUMENTS
The Company's financial instruments are recorded in balance sheet accounts,
as of December 31, 2002 and 2003, at amounts that approximate their fair
values on those dates. The management of these instruments is made through
operational strategies, seeking liquidity, returns and safety. The control
policy consists of continually checking contracted rates versus the market.
The Company did not have derivatives during all periods presented.
18. RECENTLY ISSUED ACCOUNTING STANDARDS
During June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 (SFAS No. 141),
"Business Combinations". SFAS No. 141 addresses financial accounting and
reporting for business combinations. All business combinations in the scope
of SFAS No. 141 are to be accounted for using one method, the purchase
method. In addition, SFAS No. 141 requires that intangible assets be
recognized as assets apart from goodwill if they meet two criteria: the
contractual-legal criterion or the separability criterion. To assist in
identifying acquired intangible assets, SFAS No. 141 also provides a list
of intangible assets that meet either of those criteria. In addition to the
disclosure requirements prescribed in Opinion 16, SFAS No. 141 requires
disclosure of the primary reasons for a business combination and the
allocation of the purchase price paid to the assets acquired and
liabilities assumed by major balance sheet caption. SFAS No. 141 also
requires that when the amounts of goodwill and intangible assets
F-75
acquired are significant to the purchase price paid, disclosure of other
information about those assets is required, such as the amount of goodwill
by reportable segment and the amount of the purchase price assigned to each
major intangible asset class. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001. SFAS No. 141 also
applies to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later. The
adoption of SFAS No. 141 on January 1, 2002 did not have any impact on the
Company's financial statements.
During June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. SFAS No. 142 amends SFAS No.
121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived
Assets to Be Disposed Of", to exclude from its scope goodwill and
intangible assets that are not amortized. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should be
accounted for in financial statements upon their acquisition. This
Statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. The provisions of SFAS No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. The adoption
of SFAS No.142 on January 1, 2002 did not have any impact on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made.
Under SFAS No. 143, the liability for an asset retirement obligation is
discounted and accretion expense is recognized using the credit-adjusted
risk-free interest rate in effect when the liability was initially
recognized. In addition, disclosure requirements contained in SFAS No. 143
will provide more information about asset retirement obligations. SFAS No.
143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002 with earlier application encouraged. Since the Company
does have any legal asset retirement obligations pursuant to the respective
concession contracts, the adoption of this standard as of January 1, 2003
did not have any impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The new standard will be
effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early application encouraged. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", although it retains
the fundamental provisions of SFAS No. 121. SFAS No. 144 also
expands the scope of discontinued operations presentation to a component of
an entity and eliminates the exception to consolidation for a temporarily
controlled subsidiary. The adoption of SFAS No. 144 had no impact on
the Company's financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," which required that all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary
item if material. SFAS No. 145 requires that gains and losses from
F-76
extinguishment of debt be classified as extraordinary only if they meet
criteria in APB 30, thus distinguishing transactions that are part of
recurring operations from those that are unusual or infrequent, or that
meet the criteria for classification as an extraordinary item. SFAS No. 145
amends SFAS No. 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. In addition, SFAS No. 145 rescinds SFAS No. 44, "Accounting
for Intangible Assets of Motor Carriers," and SFAS No. 64, "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements," which are not currently
applicable to the Company. The provisions of SFAS No. 145 as they relate to
the rescission of SFAS No. 4 shall be applied in fiscal year 2003. Certain
provisions related to SFAS No. 13 are effective for transactions occurring
after May 15, 2002. The adoption of this statement did not have an impact
on the Company's financial statements.
In June 2002, FASB issued SFAS No. 146 "Accounting for costs associated
with Exit or Disposal Activities". This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between this Statement and EITF
94-3 relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. This Statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an
exit plan. A fundamental conclusion reached by the Board in this Statement
is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. This Statement improves financial reporting
by requiring that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. The accounting for similar events and
circumstances will be the same, thereby improving the comparability and
representational faithfulness of reported financial information. The
provisions of this Statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early application
encouraged. During 2003, the Company did not have any exit or disposal
activities and consequently, this statement did not have an impact on the
Company's financial statements during the year ended December 31, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 modifies the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The Statement
requires that those instruments be classified as liabilities in statements
of financial position. SFAS No. 150 affects an issuer's accounting for
three types of freestanding financial instruments, namely:
1. Mandatory redeemable shares, which the issuing company is
obligated to buy back in exchange for cash or other assets.
2. Instruments, other than outstanding shares, that do or may
require the issuer to buy back some of its shares in exchange for
cash or other assets. These instruments include put options and
forward purchase contracts.
F-77
3. Obligations that can be settled with shares, the monetary value
of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the
issuers' shares.
SFAS No. 150 does not apply to features embedded in financial instruments
that are not derivatives in their entirety. In addition to its requirements
for the classification and measurement of financial instruments within its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling those instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. It is to be implemented by reporting the
cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still
existing at the beginning of the interim period of adoption. The adoption
of this statement did not have an impact on the Company's financial
statements for the year ended December 31, 2003.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective
for interim and annual periods ending after December 15, 2002. The initial
recognition and initial measurement requirements of FIN 45 are effective
prospectively for guarantees issued or modified after December 31, 2002.
The adoption of this statement did not have an impact on the Company's
financial statements for the year ended December 31, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation 46 "Consolidation of Variable Interest Entities, an
interpretation of ARB 51" which provided a new framework for identifying
variable interest entities (VIEs) and determining when a company should
include the assets, liabilities, non-controlling interests and results of
activities of a VIE in consolidated financial statement. FIN 46 was
effective immediately for VIEs created after January 31, 2003 and to VIES
in which an enterprise obtained a variable interest after that date. For
variable interests in VIES created before February 1, 2003, FIN 46 applied
to public enterprises no later than the beginning of the first interim or
annual period beginning after June 15, 2003.
On October 9, 2003 the FASB decided to defer the implementation date of FIN
46 to the fourth quarter instead of the third quarter. Pursuant to this
deferral, public companies in the United States of America had to complete
their evaluations of variable interest entities that existed prior to
February 1, 2003, and the consolidation of those for which they are the
primary beneficiary for financial statements issued for the first period
ending after December 15, 2003. For calendar year companies, consolidation
of previously existing variable interest entities was required in their
December 31, 2003 financial statements. This deferral did not affect the
implementation date for many foreign private issuers, which continued to be
the beginning of the first annual period ending after December 15, 2003.
F-78
In December 2003 FIN 46 was substantially revised and a new interpretation
FIN 46 (revised) was issued. The key differences between FIN 46 (revised)
and its predecessor FIN 46 include:
1. FIN 46R now scopes out many - but not all - businesses, as that
term is defined in the Interpretation. A business - assuming it
is scoped out of FIN 46R - should be consolidated with its
accounting parent (if it has one) only when required by
longstanding, conventional consolidation guidance, most notably
Accounting Research Bulletin No. 51, Consolidated Financial
Statements (ARB 51). Under FIN 46, any business potentially could
have been a VIE (and, if so, subject to the Interpretation's
unique consolidation requirements) depending on the design of the
business' capital structure and other factors. Note that an
entity whose primary activity is asset-backed financing or who
acts as a single-lessee leasing entity cannot qualify for the
scope exemption in FIN 46R, even if it would otherwise be a
business. If such an entity is a VIE, it is covered by FIN 46R's
consolidation requirements.
2. FASB partially delayed FIN 46's effective date (for most public
companies until no later than the end of the first reporting
period ending after March 15, 2004. The delay notwithstanding,
public companies must apply either FIN 46 or FIN 46R to
special-purpose entities (SPEs) no later than the end of the
first reporting period ending after December 15, 2003. For many
foreign private issuers the effective date continues to be the
beginning of the first annual period ending after December 15,
2003. For SPEs created by foreign private issuers after February
1, 2003, however, the effective date is no later than the end of
the first reporting period ending after December 15, 2003.
Based on an initial assessment of the provisions and requirements of FIN
46R, the Company believes that the implementation of this statement will
not result in any impact to the Company's consolidated financial
statements.
19. VALUATION AND QUALIFYING ACCOUNTS
Following are disclosures regarding the Company's valuation and qualifying
accounts:
Year ended December 31,
------------------------------------------
Description 2001 2002 2003 2003
---------------------------------------------- ------ ------ ------ ------
R$ R$ R$ US$
------ ------ ------ ------
Reserve for contingencies:
--------------------------
Balances as of beginning of the year 938 1,251 738 255
Charges to costs and expenses 706 72 143 50
Deductions (393) (585) (32) (11)
------ ------ ------ ------
Balances as of end of the year 1,251 738 849 294
====== ====== ====== ======
Allowance for doubtful accounts:
--------------------------------
Balances as of beginning of the year 40 77 73 26
Charges to expenses, net of reversions 37 (4) 10 3
------ ------ ------ ------
Balances as of end of the year 77 73 83 29
====== ====== ====== ======
F-79
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
Financial Statements Together with Report
of Independent Registered Public Accounting Firm
Stated in thousands of Argentine pesos
December 31, 2002 and 2003
and for the three years for the period ended December 31, 2003
Report of Independent Registered Public Accounting Firm
To the Shareholders of
Localiza Master Franchisee Argentina S.A.:
We have audited the balance sheets of Localiza Master Franchisee Argentina S.A.
(an Argentine Corporation and a subsidiary of Localiza Franchising S.A.) as of
December 31, 2003 and 2002, and the related statements of income, changes in
shareholders' equity and cash flows for the years then ended (all expressed in
thousands of Argentine pesos). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
such financial statements based on our audits. The financial statements of the
Company as of December 31, 2001 and for the year in the period ended December
31, 2001, were audited by other auditors whose report, dated March 11, 2002
expressed an unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards in Argentina and in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion the financial statements expressed in thousands of Argentine
pesos referred to in the first paragraph present fairly, in all material
respects, the financial position of Localiza Master Franchisee Argentina S.A.
as of December 31, 2003 and 2002, and the results of its operations and cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Our audits also comprehended the translation of the Argentine peso amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2 (c). The translation of the
financial statement amounts into U.S. dollars have been made solely for the
convenience of readers in the United States of America. Accordingly, it should
not be construed that the financial statements in U.S. dollars present the
financial position, results of operations, changes in shareholders' equity and
cash flows in accordance with accounting principles generally accepted in the
United States of America.
Buenos Aires, Argentina
March 12, 2004
/s/ Deloitte Touche Tohmatsu
(This is a copy of a previously issued report.
This report has not been reissued).
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Shareholders of
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.:
We have audited the balance sheets of LOCALIZA MASTER FRANCHISEE ARGENTINA
S.A. (an Argentine Corporation and a subsidiary of Localiza System Ltda.) as of
December 31, 2001, and 2000, and the related statements of income, changes in
shareholders' equity and cash flows for the years ended in December 31, 2001 and
2000 and for the one-month period ended December 31, 1999, stated in thousands
of Argentine pesos. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on such
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in note 12 to the accompanying financial statements, in the
last few months, a deep change has been implemented in the economic model of the
country as well as in the Convertibility Law that was in place since March 1991
(whereby the Argentine peso was pegged at parity with the US dollar). The main
consequences of the set of measures adopted by the Argentine Federal Government,
which are detailed in the above mentioned note, have been (a) the devaluation of
the Argentine peso with respect to the US dollar and de-dollarization of certain
assets and liabilities in foreign currency held in the country; (b) the
implementation of restrictions on the withdrawal of funds deposited with
financial institutions; (c) the restriction on transfers abroad on account of
financial loan service and dividend distributions without prior authorization
from the Central Bank; and (d) the increase in domestic prices. The future
development of the economic crisis may require further measures from the
Argentine Federal Government. The accompanying financial statements should be
read taking into account the issues mentioned above.
In our opinion the financial statements referred to in paragraph 1. present
fairly, in all material respects, the financial position of LOCALIZA MASTER
FRANCHISEE ARGENTINA S.A. as of December 31, 2001, and 2000, and the results of
its operations and its cash flows for the years ended December 31, 2001 and 2000
and for the one-month period ended December 31, 1999, in conformity with
generally accepted accounting principles in the United States of America.
Additionally, in our opinion, the figures of the balance sheet as of
December 31, 2001 and the statements of income and cash flows for the year then
ended, converted to US dollars and included in the column "2001 US$", have been
computed in accordance with the methodology described in Note 2. (d).
Buenos Aires, Argentina, PISTRELLI, DIAZ Y ASOCIADOS
March 11, 2002
/s/ Karen Grigorian
KAREN GRIGORIAN
Partner
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2003
(in thousands of Argentine pesos - ARP - and U.S. dollars - US$)
December 31,
----------------------
2002 2003 2003
------ ------ ------
ARP ARP US$
------ ------ ------
Current Assets:
Cash 4 38 13
Accounts receivable 273 337 115
Other 42 145 49
----- ----- -----
Total current assets 319 520 177
----- ----- -----
Noncurrent Assets:
Accounts receivable 15 5
Other 75 170 58
Deferred income tax 62 21
Office equipment, net 13 7 3
----- ----- -----
Total non-current assets 88 254 87
----- ----- -----
Total assets 407 774 264
===== ===== =====
Current Liabilities:
Accounts payable 77 134 46
Accrued payroll and payroll taxes 17 25 8
Accrued taxes, other than on income 7 8 3
Due to related party 152 215 73
Other 42 172 58
----- ----- -----
Total current liabilities 295 554 188
----- ----- -----
Noncurrent Liabilities:
Accrued contingencies 28 40 14
Other 1 . .
----- ----- -----
Total non-current liabilities 29 40 14
----- ----- -----
Shareholders' Equity:
Capital stock 25 25 9
Additional paid-in capital 448 448 153
(Accumulated deficit) Retained earnings (390) (293) (100)
----- ----- -----
Total shareholders' equity 83 180 62
----- ----- -----
Total liabilities and shareholders' equity 407 774 264
===== ===== =====
See notes to financial statements.
LEONARDO FEDERICI GUEDES
Chairman
F-83
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Argentine pesos - ARP and U.S. dollars - US$)
Year ended December, 31
--------------------------------------------
2001 2002 2003 2003
-------- -------- -------- --------
ARP ARP ARP US$
-------- -------- -------- --------
NET REVENUES:
Royalties and advertising fees 668 772 762 260
Initial franchise fees 72 94 220 75
---- ---- ---- ----
Total revenues 740 866 982 335
COSTS AND EXPENSES:
Operating (706) (588) (779) (266)
Selling, general and administrative (143) (222) (158) (54)
Depreciation (15) (14) (10) (3)
---- ---- ---- ----
Total costs and expenses (864) (824) (947) (323)
---- ---- ---- ----
Operating income (loss) (124) 42 35 12
FINANCIAL EXPENSES, NET (10) 9 - -
---- ---- ---- ----
Net income (loss) for the year before income tax (134) 51 35 12
Income tax benefit - - 62 21
---- ---- ---- ----
Net income (loss) for the year (134) 51 97 33
==== ==== ==== ====
See notes to financial statements.
LEONARDO FEDERICI GUEDES
Chairman
F-84
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Argentine pesos)
(Accumulated
Capital Additional deficit)
Stock paid-in capital Retained earnings Total
------- --------------- ----------------- -----
BALANCE AS OF DECEMBER 31, 2000 197 135 (307) 25
Irrevocable capital contribution - 141 - 141
Net loss for the year - - (134) (134)
---- ---- ---- ----
BALANCE AS OF DECEMBER 31, 2001 197 276 (441) 32
Reduction of capital stock (172) 172 - -
Net income for the year - - 51 51
---- ---- ---- ----
BALANCE AS OF DECEMBER 31, 2002 25 448 (390) 83
Net income for the year 97 97
==== ==== ==== ====
BALANCE AS OF DECEMBER 31, 2003 25 448 (293) 180
==== ==== ==== ====
See notes to financial statements.
LEONARDO FEDERICI GUEDES
Chairman
F-85
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Argentine pesos - ARP and U.S. dollars - US$)
Year ended December, 31
--------------------------------------------
2001 2002 2003 2003
-------- -------- -------- --------
ARP ARP ARP US$
-------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year (134) 51 97 33
Adjustments to reconcile net income (loss) to
net cash provided by (used
in) operating activities:
Income tax (62) (21)
Depreciation 15 14 10 3
Provision for contingencies 17 11 12 4
----- ----- ----- ----
(102) 76 57 19
Changes in assets and liabilities:
Accounts receivable (1) (93) (79) (27)
Other assets 7 (64) (198) (68)
Accounts payable 30 (28) 57 19
Accrued payroll and payroll taxes (7) (9) 8 3
Accrued taxes (36) (13) 1 -
Other liabilities (2) 14 129 45
----- ----- ----- ----
(9) (193) (144) (49)
Net cash used in operating activities (111) (117) (25) (9)
===== ===== ===== ====
LEONARDO FEDERICI GUEDES
Chairman
F-86
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(Stated in thousands of Argentine pesos - ARP and U.S. dollars - US$)
Year ended December, 31
--------------------------------------------
2001 2002 2003 2003
-------- -------- -------- --------
ARP ARP ARP US$
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to office equipment (6) - (4) (1)
Net cash used in investing activities (6) - (4) (1)
---- ---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Transactions with related parties:
Increase in (repayment of) intercompany debt (38) 120 63 22
Irrevocable capital contribution 141 - - -
---- ---- ---- ----
Net cash provided by financing activities 103 120 63 22
---- ---- ---- ----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14) 3 34 12
---- ---- ---- ----
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15 1 4 1
---- ---- ---- ----
CASH AND CASH EQUIVALENTS AT END OF YEAR
1 4 38 13
==== ==== ==== =====
Supplemental disclosures of cash flow information-
Cash paid during the year for Income taxes 1 - - -
See notes to financial statements.
LEONARDO FEDERICI GUEDES
Chairman
F-87
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2002 AND 2003
(Amounts expressed in thousands of Argentine pesos - ARP and U.S. dollars -
US$, unless otherwise indicated)
1. THE COMPANY AND ITS OPERATIONS:
Localiza Master Franchisee Argentina S.A. ("the Company") is a
corporation ("sociedad anonima") organized under the laws of the Republic
of Argentina and domiciled in the city of Buenos Aires; its main
shareholder is Localiza Franchising S.A. (Formerly Localiza Franchising
Ltda.), a company domiciled in Belo Horizonte, Brazil. The Company,
engaged in the commercial use of licenses and trademarks, started its
operations during the year 1992.
The Company grants exclusive rights to its franchisees for defined
geographic areas pursuant to renewable contracts. Franchisees generally
pay the Company an initial fixed fee when the contract is signed, plus a
monthly flat fee consisting of royalties and an advertising fee, based on
gross revenues generated by the franchisees.
On August 30, 1999, Localiza Franchising S.A., acquired a 60% interest in
the Company from EDS Inversora S.A. As a consequence of this transaction
Localiza Franchising S.A. increased its ownership in the Company to
99.99%.
By virtue of the Master Franchise Agreement signed between the Company (as
"franchisee") and Localiza Franchising S.A. (as "franchisor"), the Company
must pay Localiza Franchising S.A. 1.5% of the car rental earned by the
Company's franchisees. However, this payment was waived as from September
1999. This Master Franchisee Agreement has a 10-year term, starting March
1994.
2. BASIS FOR PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS:
a) Accounting records
The Company's accounting records are maintained in Argentine pesos
(U$S1=$ 2.93 as of December 31, 2003) based on the criteria
prescribed by the Argentine Corporate Law. These records serve as a
basis for the distribution of results/dividends.
b) Presentation of the financial statements
These financial statements have been prepared to be filed with the
Securities and Exchange Commission of the United States of America
(the "SEC"). They have been prepared in accordance with generally
accepted accounting principles in the United States of America, which
differ in certain respects from the accounting principles applied by
the Company in its financial statements prepared in accordance with
generally accepted accounting principles in Argentina or for other
statutory purposes in Argentina.
F-88
Shareholders' equity and net income included in these financial
statements differ from those included in the statutory accounting
records as a result of adjustments made to reflect the requirements
of generally accepted accounting principles in the United States of
America.
c) Translation of balances from Argentine pesos to U.S. dollars
The financial statements are stated in Argentine pesos, the currency
of the country in which the company is incorporated and operates. The
translations of Argentine peso amounts into U.S. dollar amounts are
included solely for the convenience of readers in the United States
of America and have been made at the rate of Argentine pesos 2.93 to
$1 U.S., the approximate free rate of exchange at December 31, 2003.
Accordingly, it should not be construed that the financial statements
in U.S. dollars present the financial position, results of
operations, changes in shareholders' equity and cash flows in
accordance with accounting principles generally accepted in the
United States of America. Such translations should not be construed
as representations that the Argentine peso amounts could be converted
into U.S. dollars at the above or any other rate.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES:
The financial statements expressed in Argentine pesos were prepared in
conformity with accounting principles generally accepted in the United
States of America, based on the following accounting policies:
a) Allowance for doubtful accounts: Provided in an amount considered
sufficient to cover eventual losses on accounts receivable,
considering past experience, the current financial situation of the
Company's customers and the status of past-due receivables.
b) Office equipment: Valued at historical cost, are net of related
accumulated depreciation, using the straight-line method over the
estimated useful lives of the related assets.
Estimated useful lives are as follows:
Furniture and fixtures 5 years
Software and equipment 3 to 5 years
Facilities 5 years
The Company's estimated undiscounted future cash flows are
sufficient to recover the carrying value of fixed assets at period
end.
c) Income and social contribution taxes - The Company calculates income
taxes at the current rate of 35% based on the taxable income for the
year. Deferred taxes arising from temporary differences are
recognized using the criteria set forth in Statement of Financial
Accounting Standard No. 109, "Accounting for income taxes".
The tax on minimum presumed income (TOMPI) is complementary to income
tax because while the latter is levied on the year's taxable income,
the tax on minimum presumed income is a minimum levy on the potential
income from certain productive assets at a 1% tax rate; the tax
obligation of the Company is equal to the higher of the two taxes.
However, if the tax on minimum presumed income exceeds income tax in
one tax year, such excess may be computed as a tax credit against any
excess of income tax over the tax on minimum presumed income that
might arise in any of the ten subsequent years.
F-89
In the year ended December 31, 2000, and as a result of the enactment
of Law No. 25,360 that extended the term over which the Company may
compute minimum presumed income tax as payment on account of income
tax to ten years, the Company has reversed in 2001 the valuation
reserve against the minimum presumed income tax, which had been
charged to income during the prior year. In addition, the Company has
recorded minimum presumed income tax, which has been included in the
Other noncurrent receivables account as minimum presumed income tax.
As of December 31, 2002, a full valuation allowance was recorded
against the tax deferred assets (including the tax loss
carryforward), as management believed that realization of these
benefits was not probable.
During fiscal year 2003, the valuation allowance was reversed, as the
Company considers that, according to management projections, it is
more likely than not that the deferred tax assets will be realized.
The calculated tax loss carryforward will be available to offset
future taxable income until 2005 and 2006. In each fiscal year in
which the tax loss carryforward is realized, the income tax benefit
will be realized provided that income tax (after offsetting) equals
or exceeds TOMPI, but will be reduced for any amount in which TOMPI
may exceed income tax.
d) Assets and liabilities denominated in foreign currencies - Foreign
exchange gains and losses are included in the determination of net
income/loss for the relevant periods.
e) Use of estimates -- In preparing its financial statements, management
is required to make certain assumptions and estimates with respect to
the recording of assets, liabilities and transactions. Actual results
in the future may differ from the estimates included in these
financial statements.
f) Franchise revenues -- Initial franchise fees are recognized
immediately, as the Company does not have any continuing obligation
related to these amounts after the initial set up of the franchisee
is complete. Royalties and advertising fees based on percentages of
franchisees rental revenues are recognized as earned.
December 31,
----------------------------
2002 2003 2003
-------- -------- --------
ARP ARP US$
-------- -------- --------
Non-current:
Royalties and advertising fees 15 5
---- ----
15 5
==== ====
6. OTHER ASSETS:
Current:
Director fees advances 30 113 39
Other 12 32 10
---- ---- ----
42 145 49
==== ==== ====
Non-current:
Fiscal credits 71 166 57
---- ---- ----
Other 4 4 1
---- ---- ----
75 170 58
==== ==== ====
7. OFFICE EQUIPMENT, NET:
Furniture and fixtures 56 60 21
Software and equipment 8 8 3
Facilities 3 3 1
Accumulated depreciation (54) (64) (22)
---- ---- ----
13 7 3
==== ==== ====
8. INCOME TAX:
The income tax consists of the following:
December 31,
----------------------------
2002 2003 2003
-------- -------- --------
ARP ARP US$
-------- -------- --------
Current
Deferred - 62 21
---- ---- ----
Provision for income tax - 62 21
---- ---- ----
The provision for income tax differs from the amount computed by applying
the statutory tax rate to net (loss) income before provision for income
tax. The sources and tax effects of the differences are as follows:
December 31,
----------------------------
2002 2003 2003
-------- -------- --------
ARP ARP US$
-------- -------- --------
Income before taxes 51 35 12
Nominal rate 35% 35% 35%
---- ---- ----
Income tax benefit at nominal rate 18 12 4
Difference, net (in 2002 - adjustment for
inflation) 27 (1)
---- ---- ----
Income tax - current 45 11 4
Tax loss carryforward used (45) (11) (4)
Temporary differences, net 62 21
---- ---- ----
Income tax - total - 62 21
---- ---- ----
F-91
Temporary differences, which give rise to deferred tax assets are as
follows:
(1) Tax loss carryforward expires after five years. The expiration dates
as of December 31, 2003 are as follows:
Year of
expiration ARP US$
---------- ------- -------
2005 23 8
2006 30 10
-- --
53 18
== ==
The Company had established a valuation allowance against the net deferred
tax asset position at December 31, 2002, as management believed that
realization of these benefits were not probable at that time.
During fiscal year 2003, the valuation allowance was reversed, as the
Company considers that, according to management projections, it is more
likely than not that the deferred tax assets will be realized.
9. CAPITAL STOCK:
After giving effect to the reduction of Capital stock approved by the
Shareholders' meeting held October 2, 2002, as of December 31 2003,
capital stock consisted of 25,000 shares, at a par value of ARP 1.00.
Capital is held as follows:
Shares outstanding at December 31,
---------------------------------
2002 2003
-------- --------
Localiza Franchising S.A. 24,999 24,999
Aristides Luciano Azevedo Newton 1 1
-------- --------
25,000 25,000
-------- --------
12. IMPACT OF ARGENTINA'S RECENT ECONOMIC REFORMS ON THE COMPANY'S
OPERATIONS
Beginning in 1991, the Argentine government maintained the value of its
currency such that one Argentine peso equaled one U.S. dollar. During
2001, Argentina suffered a severe economic and monetary crisis. In early
January 2002, as Argentina's ongoing political and financial crisis
deepened, the country defaulted on its massive foreign debt and the
Argentine government abandoned the decade-old fixed peso-dollar exchange
rate and permitted the peso to float freely against the U.S. dollar. The
peso free market opened on January 11, 2002 and the peso traded at 0.606
U.S. dollars per peso (1.65 pesos to the U.S. dollar). After a
significant devaluation in 2002, the peso ended 2002 and 2003 with a
value of 0.297 U.S. dollars per peso and 0.341 U.S. dollars per peso,
respectively.
The devaluation of the peso affected and will generally affect the
Company's consolidated financial statements by generating foreign
exchange gains or losses on monetary assets and liabilities denominated
in foreign currencies, and will generally result in a decrease, in U.S.
dollar terms, in the Company's revenues, costs and expenses. The
devaluation may have adverse, unknown and unforeseeable effects on the
Company.
Numerous uncertainties exist surrounding the ultimate resolution of
Argentina's economic and political instability and actual results could
differ from those estimates and assumptions utilized. The Argentine
economic and political situation continues to evolve and the Argentine
Government may enact future regulations or policies, or change its
interpretation of current regulations and policies, whose ultimate effect
on the Company's financial position and the related impact on the
Company's future operations, if any, cannot be predicted with certainty
at this time.
13. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
Balances and revenues (expenses) on transactions completed with Localiza
Franchising S.A. are as follows:
Localiza Franchising S.A.
As of December 31,
----------------------------
2001 2002 2003
-------- -------- --------
Payables 32 152 215
Income (expense):
Other charges (10) - -
Interest paid 1 - -
Expense reimbursement 27 - -
F-93
During 2001, the Company's shareholder has transferred to Localiza MFA,
effective January 1st 2001, the rights and obligations derived from
franchise agreements signed with franchisees from Paraguay, Uruguay,
Bolivia, Mexico, Peru and Aruba. Accordingly, Royalties and advertising
fees include approximately 100 for franchise fees from these franchisees.
14. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001 the Financial Accounting Standards Board (FASB) issued SFAS
No 141, "Business Combinations". SFAS No 141 is effective for all
business combinations initiated after June 30, 2001 and to all business
combination accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. SFAS No. 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The adoption of SFAS No. 141 had no impact on the
Company.
In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Early application of SFAS No. 142 is permitted for
entities with fiscal years beginning after March 15, 2001, provided that
the first interim financial statements have not previously been issued.
With the adoption of SFAS No. 142, goodwill is no longer subject to
amortization over estimated useful life, but rather it will be subject to
at least an annual assessment for impairment by applying a
fair-value-based test. Additionally, negative goodwill is recognized as
an extraordinary gain at the time of the business combination. The
adoption of SFAS No. 142 had no impact on the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which is effective for years beginning
after June 15, 2002, which will be the Company's fiscal year 2003. SFAS
No. 143 addresses legal obligations associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development or normal operation of a long-lived asset. The standard
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the related asset and
depreciated over the life of the asset. The liability is accreted each
period through charges to operating expense. If the obligation is settled
for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The adoption of SFAS No. 143 on
January 1, 2003 had no impact on the Company.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the
impairment or Disposal of Long-Lived Assets". The new standard will be
effective for financial statements issued for fiscal years beginning after
December 15, 2001 with early application encouraged. SFAS No. 144
addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of an
supersedes SFAS No. 121, "Accounting for the impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". However, this
Statement retains the fundamental provision of SFAS No. 121 for (a)
recognition and measurement of the impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed of
by sale. SFAS No. 144 also supersedes the accounting and reporting
provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequent Occurring Events
and Transactions" for segments of a business to be disposed of to expand
discontinued operations presentation to a component of an entity. Finally,
SFAS No. 144 amends Accounting Research Bulletin (ARB) No. 51,
"Consolidated Financial Statements", to eliminate the exception to
consolidation for a temporarily controlled subsidiary. The adoption of
SFAS No. 144 had no impact on the Company.
F-94
In April 2002, the FASB issued Statements of Accounting Standards No. 145,
"Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical
Corrections as of "April 2002" ("SFAS 145"). SFAS 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers," and SFAS 64,
"Extinguishments of Debt made to satisfy Sinking-Fund requirements." As a
result, gains and losses from extinguishment of debt will no longer be
classified as extraordinary items unless they meet the criteria of unusual
or infrequent as described in Accounting Principles Boards Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." In addition, SFAS 145 amends SFAS 13,
"Accounting for Leases," to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. SFAS 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. SFAS 145 is effective for fiscal years beginning after
May 15, 2002. The adoption of SFAS No. 145 had no impact on the Company.
In June 2002, the FASB issued Statement of Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues
Task Force 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)" ("EITF 94-3"). SFAS 146
eliminates the definition and requirements for recognition of exit costs
in EITF 94-3. SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF
94-3 was recognized at the date of an entity's commitment to an exit plan.
SFAS 146 also concluded that an entity's commitment to a plan, by itself,
does not create a present obligation to others that meets the definition
of a liability. SFAS 146 also establishes that fair value is the objective
for initial measurement of the liability. During 2003, the Company did not
have any exit or disposal activities and consequently, this statement did
not have an impact on the Company's financial statements during the year
ended December 31, 2003.
In November 2002, the FASB issued Interpretation Number 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation
requires certain disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
that it has issued. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45
are effective for interim and annual periods after December 15, 2002. The
initial recognition and initial measurement requirements of FIN 45 are
effective prospectively for guarantees issued or modified after December
31, 2002. The adoption of this statement did not have an impact on the
Company's financial statements for the year ended December 31, 2003.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities
("FIN No. 46"). FIN No. 46 addresses consolidation by business enterprises
of variable interest entities that possess certain characteristics. The
interpretation requires that if a business enterprise has a controlling
financial interest in a variable interest entity, the assets, liabilities
and results of operations of the variable interest entity must be included
in the consolidated financial statements with those of the business
enterprise. This interpretation applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities
in which an enterprise obtains an interest after that date. In December
2003, the FASB issued FASB Interpretation No. 46R, Consolidation of
Variable Interest Entities--an interpretation of ARB 51 (revised December
2003) ("FIN No. 46R"), which includes significant amendments to previously
issued FIN No. 46. Among other provisions, FIN No. 46R includes revised
transition dates for public entities. The Company is now required to adopt
the provisions of FIN No. 46R no later than the end of the first reporting
period that ends after March 15, 2004. The adoption of this statement did
not have an impact on the Company's financial statements for the year
ended December 31, 2003.
F-95
In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, was issued effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, with the exception of an indefinite
deferral relating to application to limited life entities. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). The adoption
of SFAS No. 150 did not result in the reclassification of any financial
instruments in the Company's financial statements.
LEONARDO FEDERICI GUEDES
Chairman
F-96
EXHIBIT INDEX
1.1 Charter and bylaws of Localiza Rent a Car S.A. (English translation)
1.2 Charter and bylaws of Total Fleet S.A. (English translation)1
1.3 Charter and bylaws of Localiza Franchising S.A. (English translation)
1.4 Charter and bylaws of Prime Prestadora de Servicos S.A. (English
translation)
1.5 Charter and bylaws of Localiza Master Franchisee Argentina S.A. (English
translation)2
8.1 List of significant subsidiaries
10.1 Consent of Deloitte Touche Tohmatsu Auditores Independentes as of December
31, 2002 and 2003 and for the three years in the period ended December 31,
2003 (Localiza)
10.2 Consent of Deloitte Touche Tohmatsu Auditores Independentes as of December
31, 2002 and 2003 and for the three years in the period ended December 31,
2003 (Franchising)
10.3 Consent of Deloitte & Co. S.R.L. as of December 31, 2002 and 2003 and for
the two years in the period ended December 31, 2003 (MFA)
10.4 Letter from MFA regarding certain representations given by Andersen3
10.5 Notice issued by MFA regarding consent of Andersen
11.1 Code of Ethics of Localiza Rent a Car S.A. and Subsidiaries
12.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Localiza)
12.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Total Fleet)
12.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Franchising)
12.4 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(Prime)
12.5 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2003
(MFA)
13.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Localiza)
13.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Total Fleet)
13.3 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Franchising)
13.4 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(Prime)
13.5 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2003
(MFA)
1 Incorporated by reference to our Annual Report in Form 20-F for fiscal year
ended December 31, 2001 (File No. 333-8128) filed with the SEC on June 28,
2002.
2 Incorporated by reference to our Annual Report in Form 20-F for fiscal year
ended December 31, 2002 (File No. 333-8128) filed with the SEC on June 30,
2003.
3 Copy of a letter filed with the SEC on June 28,2002.
EXHIBIT 1.1
LOCALIZA RENT A CAR S.A.
BYLAWS
CHAPTER I. - NAME, HEADQUARTERS, PURPOSE AND DURATION
Article 1. - LOCALIZA RENT A CAR S.A. is a joint-stock company (sociedade
anonima), and it shall be governed by these By-laws and by the applicable laws
and regulations.
Article 2. - The Company is headquartered and domiciled at Avenida Bernardo
Monteiro, No. 1563, in the City of Belo Horizonte, State of Minas Gerais. It
may open, transfer or close branches, agencies, offices, and any other
establishments upon resolution of the Executive Committee.
Article 3. - The purpose of the Company is:
(i) the rental of cars and of fleets of cars and the sale thereof after
the end of their useful life;
(ii) the exploitation and licensing of trademarks and franchises in Brazil
and overseas
Article 4. - The Company shall have an indeterminate term of duration.
Chapter II. - Capital and shares
Article 5. - The capital shares of the Company is one hundred and forty six
million, nine hundred and seventy thousand reais (R$146.970.000,00) divided
into fifteen million, three hundred and sixty thousand (15,360,000) common
registered shares, with no par value.
First Paragraph - Pursuant to the terms of this article and without any
alterations in the rights and restrictions that are inherent to such shares,
all the Company's shares may be transformed, through deliberation of the Board
of Directors, into book-entry shares and remain deposited in the account of the
financial institution designated by the Board of Directors under the name of
its holders, without the issuance of certificates, in accordance to articles 34
and 35 of Law No. 6,404 of December 15, 1976, with remuneration dealt with
-2-
in paragraph 3 of article 35 of the above-mentioned law being charged from the
shareholders.
Second Paragraph - The Company may, through an authorization of the Board of
Directors, redeem its own shares for the purpose of cancellation or to deposit
in the treasury department for later sale, in accordance with the applicable
laws and regulations.
Article 6. - The Company is hereby authorized to increase its capital stock,
regardless of a statutory reform, up to an additional eight hundred and ten
thousand (810,000) registered preferred shares.
First Paragraph - The Board of Directors shall be in charge of the
deliberations on the issuance of shares within the limits of the authorized
capital. The issue price will be fixed by the Board of Directors without
unjustified spread of the participation ratio of the former shareholders, even
if they have the preemptive right of subscription, taking into consideration,
alternatively or jointly: (a) the profitability perspectives of the Company;
(b) the equity value of the shares; (c) the shares quotation in the shares
market or in the organized over-the-counter market, whereas, according to
market conditions, a premium shall be allowed.
Second Paragraph - The issuance of shares, debentures or participation
certificates convertible into shares and in subscription bonuses that are sold
either in the shares market or through a public offering, or the exchanging for
shares in public offerings dealing with acquisitions of control, may be carried
out in disregard for the preemptive rights, at the discretion of the Board of
Directors, which can concede to the shareholders priority in the subscription
of the shares of either or both types.
Third Paragraph - The issuance of shares shall not be bound by any ratio
between classes and types.
Forth Paragraph - The issuance of preferred shares is subject to the limits of
the law.
Fifth Paragraph - Within the limits of the authorized capital and in accordance
with a plan approved at a General Meeting, the Company may grant stock options
to its managers, employees or individuals who render services to the Company,
or to managers, employees or individuals who render services to companies
controlled by the Company, except for the preemptive right of shareholders to
grant and exercise the stock options, whereas the Board
-3-
of Directors must elect the Stock Option Plan Administration Committee, who
shall create Annual Stock Options Programs.
Article 7. - The shares are indivisible with regard to the Company and each
common share shall entitle its owner one vote in the deliberations of the
General Meetings.
Article 8. - Preferred shares benefit from the following advantages: (a)
priority in receipt of a minimum non-cumulative annual dividend of one cent of
real (R$0.01) per share: (b) priority in capital reimbursement, in case of the
Company's liquidation, up to the portion of capital represented by such shares;
and (c) participation, in equaled conditions to the common shares, in capital
increases deriving from the capitalization of profits or reserves.
First Paragraph - Preferred shares are not convertible into common shares and
have no voting right. The right to vote shall only be granted if the Company
does not pay the statutory minimum dividend within three consecutive terms and
such right shall remain in force until the payment of the non-cumulative
dividends.
Second Paragraph - Through a General Meeting's deliberation, the Company may
create other classes of preferred shares in addition to the already existing
ones.
Chapter III. - MANAGEMENT OF THE COMPANY
Article 9. - The Company shall be managed by a Board of Directors and by an
Executive Committee.
Chapter IV. - BOARD OF DIRECTORS
Article 10. - The Board of Directors shall be composed of nine (9) members, all
of whom must be shareholders and residents in Brazil, elected on an annual
basis within the Ordinary General Meeting with possibility of reelection. The
same General Meeting shall appoint, from among those elected, one to hold the
position of Chairman.
First Paragraph - The members of the Board of Directors shall be vested in
office upon the signature of the investiture form drawn up in the "Book of
Minutes of the Board of Directors' Meetings", and shall remain in office until
their successors take office.
Second Paragraph - The General Meeting shall set the global remuneration of the
members of the Board of Directors, who shall allocate such amount among its
members
-4-
during a meeting.
Article 11. - The Board of Directors have the primordial function of
establishing the fundamental guidelines and the general orientation of the
policies and businesses of the Company, as well as verifying and following up
on its performance, especially:
(a) previously addressing any proposal to amend these By-laws, except if
required by law, before such proposal is submitted to the General Meeting;
(b) previously addressing any proposal to amend the Company's purpose or to
involve the Company into a new area of business, before such proposal is
submitted to the General Meeting;
(c) previously addressing any proposal on the incorporation or merger of the
Company or of its subsidiaries, before such proposal is submitted to the
General Meeting;
(d) previously addressing any acquisition or disposal by the Company (or
related acquisitions or sales) of assets, businesses, operations or equity
securities that shall involve amounts in excess of two million reais (R$
2,000,000.00), at the time of the acquisition or disposal, except: (i) for cars
bought or sold within the normal course of the Company's business; and (ii) for
the operation of financial investment moves for purposes of cash management
within the normal course of the business;
(e) previously addressing any presentation to the General Meeting, of any
proposal for liquidation, winding-up, voluntary bankruptcy, composition or
similar event, or of any request for liquidation, wind-up, voluntary bankruptcy
or similar occurrence, with regard to the Company and/or to its subsidiaries;
(f) approving, within the authorized capital and the legal powers of the Board
of Directors, or previously addressing the presentation to the General Meeting
of proposals of issuance, voluntary redemption or repurchase of any security
issued by the Company or by its subsidiaries (including shares, options,
convertible or exchangeable bills, or warrants), or the practice of any act
that may affect the capital structure of the Company or its subsidiaries;
(g) previously addressing the acceptance or issuance of guarantee, by the
Company or by its subsidiaries with regard to any indebtedness if, with the
acceptance or issuance of guarantee with regard to such indebtedness, the
consolidated indebtedness of the Company
-5-
or its subsidiaries is higher than twice the tangible net worth of the Company
or its subsidiaries at the time of the latest quarterly balance of the Company
or subsidiaries;
(h) previously addressing the presentation to the General Meeting, of any
proposal with regard to the declaration, payment or retention of a dividend
higher than twenty five percent (25%) of the adjusted net profit defined in
article 189 and subsequent articles, of Law No. 6404/76;
(i) previously addressing the presentation, to the General Meeting, of a
distribution proposal, as bonus or dividend, of any class of securities of the
Company or its subsidiaries, except for the provisions set forth in the item
(h) above;
(j) previously approving the annual business plan, the annual budget and the
long term strategic plan of the Company and of its subsidiaries;
(k) previously addressing the execution or amendment of any contract (or
related contracts) signed by the Company or by its subsidiaries, involving
payments by or to the Company or its subsidiaries, during the term of the
contract or amendment, of any amount in excess of two million reais (R$
2,000,000.00), on the date of signature of the contract or amendment, except
for contracts executed during the normal course of the businesses relating to
(i) car rental (ii) franchising; or (iii) indebtedness and cash management;
(l) choosing or dismissing the public accountants of the Company;
(m) previously approving any operation between the Company or its subsidiaries
and any shareholder, its affiliates or associates, except for:
(i) operations between the Company and its affiliated affiliates for purposes
of cash management; and
(ii) operations on an arm's length basis and with proper compensation with
Radio Beep Telecomunicacoes Ltda. up to the amount, on the date of the
operation, of two million reais (R$ 2,000,000.00) per year;
(n) previously addressing the constitution and acquisition of new subsidiaries
or associations (including acquisition of other subsidiaries, as well as the
disposal of the subsidiaries of the Company); and
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(o) previously addressing the presentation to the General Meeting, of a
proposal for remuneration, benefits and other incentives for the members of the
Board of Directors or for the Executive Committee, and approving any changes in
the existing remuneration, benefits and other incentives of members of the
Board of Directors or the Executive Committee except for the normal course of
business, in a consistent way to previous practices and in accordance with the
remuneration, benefits or other incentives in force for Brazilian companies
whose organization and size are similar to those of the Company.
First Paragraph - For the purposes of items (g) and (k) above, indebtedness
means: (A) (i) liabilities resulting from loans in cash; (ii) liabilities
resulting from bonds, debentures, promissory notes or similar instruments;
liabilities resulting from the deferred payment of the acquisition price of
goods or services, except for accounts payable for the normal course of
business; (iii) liabilities related to financial leasing; (iv) liabilities
resulting from imminent debts within agreements for tax installment payment or
similar; (v) all third party indebtedness guaranteed by a lien over any asset
of the Company or its subsidiaries; and (vi) all third party indebtedness
guaranteed by the Company or its subsidiaries; except for (B) (i) cash, cash
deposited in current account and financial investments; and (ii) regarding to
the Company and its subsidiaries, loans between the Company and its
subsidiaries.
Second Paragraph - The amounts assigned in items (d), (k) and (m) of the
heading of Article 11 above will be reviewed and adjusted annually, at an
Extraordinary General Meeting.
Article 12. - The Board of Directors shall meet ordinarily every three (3)
months and extraordinarily whenever necessary, at the Company's headquarters or
at any other location. The Minutes from such meetings shall be drawn up in the
proper book.
First Paragraph - Meetings shall be called by the Chairman of the Board or by
the simple majority of the members of the Board upon written notice sent at
least ten (10) business days in advance, stating the location, date and time of
the meeting as well as a summary of the agenda. The Resolutions taken in the
Board of Directors' meetings shall be limited to the matters included in the
notice sent to the members of the Board ten (10) working days in advance.
Second Paragraph - For the valid instatement and deliberation of the General
Meetings of the Board of Directors it is necessary that such meeting be
attended by the majority of its members in office, or, in case of the
deliberations related to the matters dealt with in items (a) through (o) of
article 11 above, the totality of the members in office shall be present,
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with any member being considered to be present if he/she is represented by
his/her an alternate or legally appointed representative or if he/she has sent
a vote by telex, telegram, facsimile or in any other written form.
Third Paragraph - The deliberations by the Board of Directors shall always be
made by the majority of the attendants, with the Chairman of the Board or
his/her alternate or representative being in charge of the casting vote.
CHAPTER V. -EXECUTIVE COMMITEE
Article 13. - The Executive Committee shall be composed by five (5) Officers,
who do not need to be shareholders, all Brazilian residents, elected by the
Board of Directors. Among the Officers, one shall be appointed Chief Executive
Officer, three shall be appointed Vice-Chief Executive Officers, and the fifth
shall be appointed Officer in charge of Finances and Relationship with
Investors.
First Paragraph - Officers shall remain in office for one (1)-year terms, with
the possibility of reelection. At the end of the term of office, the members of
the Executive Committee remain in their positions until the new elected
officers take office.
Second Paragraph - The Officers shall be vested in their positions upon
signature of the term of office to be drawn up in the proper book, following
the legal prescriptions.
Article 14. - The Executive Committee shall meet whenever necessary but at
least once every six (6) months, under the chairmanship of the Chief Executive
Officer or, in his/her absence, of any of the Vice Chief Executive Officer
indicated by the Chief Executive Officer.
First Paragraph - The Executive Committee meetings shall always be called by
the Chief Executive Officer or by the majority of the members of the Executive
Committee. In order to achieve instatement quorum and make valid resolutions,
the majority of the Officers must be present.
Second Paragraph - The deliberations of Executive Committee shall be drawn up
in the proper book, and shall be approved by the majority of votes, and the
Chairman of the meeting shall have the casting vote in the case of a tie.
Article 15. - In the event of absence or temporary impairment of any Officer,
he/she shall
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appoint, subject to the prior approval of the Chief Executive Officer, among
the remaining Officers, an alternate Officer to serve office during his/her
absence or impairment. The alternate shall carry out all his/her duties and
have the same powers, rights and obligations as the substituted Officer.
First Paragraph - The alternate shall vote, at the Executive Committee
meetings, for himself and for the Officer he/she is representing.
Second Paragraph - In case of death, impairment or withdrawal of any Officer,
the Board of Directors may appoint an alternate, stating his/her mandate, which
shall not exceed the term of office of the substituted Officer.
Third Paragraph - In the event of temporary absence or impairment of the Chief
Executive Officer, he/she shall appoint one of the Vice Chief Executive
Officers as an alternate to carry out all duties and have the same powers,
rights and obligations of the Chief Executive Officer.
Article 16. - The Executive Committee shall manage the corporate business in
general and shall perform all of the necessary or appropriate acts, except for
those that, in accordance with the law or these By-laws, are attributed to the
authority of the General Meeting or to the Board of Directors. Their powers
include, among others the powers (a) to ensure the compliance with the law and
these By-laws; (b) to ensure the compliance of the deliberations made by the
General Meetings, by the Board of Directors' meetings, and at their own
meetings; (c) to control, manage, and superintend the corporate businesses; and
(d) to issue and approve instructions and in-house regulations deemed useful or
necessary.
First Paragraph - The Chief Executive Officer shall:
(a) perform an overall supervision and the strategic planning of the Company's
businesses;
(b) coordinate and orient the activities of the other officers within their
respective areas of competence;
(c) perform executive decision-making functions;
(d) appoint any of the officers to perform special activities and tasks, in
addition to those that he/she ordinarily performs; and
-9-
(e) call, install and preside over the Executive Committee' meetings.
Second Paragraph - The Vice Chief Executive Officer, in charge of the
administrative office shall:
(a) replace the Chief Executive Officer in his absence or incapacity whenever
recommended by the Chief Executive Officer;
(b) assist the Chief Executive Officer in the supervision, coordination,
management and administration of the activities and of the businesses of the
Company as well as with all the tasks to which he/she is assigned; and
(c) coordinate, manage, direct and supervise the activities in the areas of
human resources, telecommunication systems, legal assistance, corporate
communication and fleet acquisition.
Third Paragraph - The Vice Chief Executive Officer, in charge of fleet rental
shall:
(a) replace the Chief Executive Officer in his absence or impediment whenever
recommended by the Chief Executive Officer;
(b) assist the Chief Executive Officer with the supervision, coordination,
management and administration of activities and businesses of the Company and
as well as with all the tasks to which he is assigned;
(c) coordinate, manage, direct and supervise the operations related to car
fleet rental, including the activities of sales and marketing related to this
market segment; and
(d) coordinate, manage, direct and supervise operations related to the
deactivation of fleets.
Fourth Paragraph - The Vice Chief Executive Officer, in charge of car rental
shall:
(a) replace the Chief Executive Officer in his absence or impediment whenever
recommended by the Chief Executive Officer;
(b) assist the Chief Executive Officer with the supervision, coordination,
management
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and administration of activities and businesses of the Company and as well as
with all the tasks to which he is assigned; and
(c) coordinate, manage, direct and supervise operations related to car rental,
including the areas of sales and marketing related to this market segment.
Fifth Paragraph - The Officer in charge of Finances and Relationship with
Investor is responsible for:
(a) coordinating, managing, directing and supervising the development of the
relationship with the capital market;
(b) representing the Company before shareholders, investors, market analysts,
the Securities Commission, the Stock Exchanges, the Central Bank of Brazil and
all other bodies related to activities carried out within the capital markets,
in Brazil and abroad; and
(c) coordinating, managing, directing and supervising the accounting and
finance areas of the Company.
Sixth Paragraph - The responsibility to represent the Company in or out of a
court of law, actively or passively, before third parties, any public
department or federal authority, state or local authority as well as before
special agencies, mixed-capital companies, and quasi-public organizations is
held by each Officer.
Article 17. - The deeds of any nature, bills of exchange, checks, money orders,
contracts and any other documents that implies any liability or obligation for
the Company must be signed either by (a) the Chief Executive Officer jointly
with any other Officer; (b) one Vice Chief Executive Officer, jointly with any
other Officer; (c) by two (2) Vice Chief Executive Officers jointly; (d) by the
Chief Executive Officer jointly with an alternate vested with special and
express powers; (e) by one Chief Executive Officer jointly with one alternate
vested with special and express powers; or (f) by two (2) alternates jointly,
vested with special and express powers.
Sole Paragraph - The Executive Committee shall appoint, during a meeting, any
officer or authorize the appointment of a third party as an alternate to
individually perform any act of within the authority of the Executive Committee
or of a sole Officer, without prejudice to any identical power or duty granted
by these By-laws to the Executive Committee itself or to a sole Officer.
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Article 18. - Powers of attorney under the Company's name shall always be
granted by the Chief Executive Officer together with any of the Vice Chief
Executive Officers jointly, or by two (2) Vice Chief Executive Officers
jointly, and must state the powers granted and, except for the ones that grant
ad-judicia powers, powers of attorney shall be granted for a limited term of
thirteen (13) months.
Article 19. - Acts of any Company Officer, employee, or alternate, that
involves the Company in any liability related to the businesses or operations
outside the scope of corporate purpose, such as sureties, guarantees,
endorsements or any other guarantee on behalf of third parties, are hereby
expressly forbidden and shall be deemed to be null and void, and without any
effect towards the Company, except when expressly authorized by the Executive
Committee in meeting, in compliance with the due limits established by the
Board of Directors.
CHAPTER VI. - GENERAL SHAREHOLDERS' MEETINGS
Article 20. - The General Meetings shall be either ordinary or extraordinary.
Ordinary General meetings shall be held within four (4) months after the end of
the fiscal year, and General Extraordinary meetings shall be held as often as
necessary.
Article 21. - The General meetings shall be called by the Chairman of the Board
of Directors, in accordance with and within the terms provided by law, and
shall be presided by a shareholder chosen by the majority of votes of the
attendants. The Chairman of the meeting shall appoint the secretary of the
meeting.
Sole Paragraph - Shareholders may be represented at the General Meetings by an
attorney, shareholder, manager of the Company or lawyer, duly authorized by the
powers of attorney.
CHAPTER VII. - AUDIT COMMITTEE
Article 22. - The Company's Audit Committee shall only be instated upon request
of the shareholders, pursuant to law.
Sole Paragraph - The members of the Audit Committee shall remain in office
until the first General Meeting of the Company that follows the meeting during
which they had been appointed.
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Article 23. - The Audit Committee, when in operation, shall be composed of five
(5) sitting members, and the same number of alternates, all resident in Brazil,
alien to the Company's management. The operation of the Audit Committee and the
compensation, authority, duties and liabilities of its members shall comply
with prevailing legislation.
CHAPTER VIII. - FISCAL YEAR, PROFITS AND DIVIDENDS
Article 24. - The Company's fiscal year shall begin on January 1st and end on
December 31st every year. At the end of each fiscal year, the financial
statements shall be recorded in accordance with applicable laws.
Article 25. - The Company's net profits ascertained during each fiscal year,
after the legal deductions, shall have the destination decided by the General
Meeting, after hearing the Audit Committee, if one is in operation.
First Paragraph - Shareholders are entitled to receive annual dividend of at
least twenty-five percent (25%) of the net profit of the year, increased or
reduced by the following amounts: (a) the legal reserve; (b) contingency
reserves and reversion of these same reserves formed in previous years; and (c)
realizable profits transferred to the respective reserve and profits previously
recorded in this reserve and realized during the year.
Second Paragraph - The Company may pay or credit interests on net equity,
calculated with basis on the net worth accounts, always in compliance with the
interest rates and the limits established in the applicable laws. The amounts
paid to the shareholders as interests on net equity shall be deducted from the
minimum obligatory dividend. As decided by the General Meeting, the amount of
the interests may be credited and paid to the shareholders and later
incorporated to the Company's capital instead of being distributed and paid.
Article 26. - By resolution of the Board of Directors, the Company may draw up
semi-annual and interim balance sheets and pay dividends from profits
ascertained on these balance sheets or accrued profits, pursuant to law.
CHAPTER IX. - LIQUIDATION
Article 27. - The Company shall be liquidated when required by law; a general
meeting shall determine the manner of liquidation and appoint the liquidator
and the Audit Committee that shall officiate during the period of liquidation.
CHAPTER X. - FINAL PROVISIONS
Article 28. - In the event of any omission or doubt with regard to these
By-laws, the legal provisions in force shall prevail.
I hereby declare that the above text is a true copy of the original, recorded
in the appropriate book.
CHAPTER I. - NAME, HEADQUARTERS, PURPOSE AND DURATION
Article 1. - Localiza Franchising S.A. is a joint stock Company (sociedade
anonima), and it shall be governed by these By-laws and by the applicable laws
and regulations.
Article 2. - The Company has its headquarters at Avenida Bernardo Monteiro,
No. 1563, 4th floor, in the City of Belo Horizonte, State of Minas Gerais. It
may open, transfer or close branches, agencies, offices, and any other
establishments upon resolution of the Executive Committee.
Sole Paragraph - The Company has a branch in the City of Buenos Aires, Republic
of Argentina.
Article 3. - The purpose of the Company is the management of the franchise of
Localiza Rent a Car S.A.
Article 4. - The Company shall have an indeterminate term of duration
CHAPTER II. - CAPITAL AND SHARES
Article 5. - The corporate capital of the Company is one hundred and sixteen
thousand, two hundred and fifty four Reais (R$ 116.254,00), fully paid-up in
Brazilian currency, represented by one hundred and sixteen thousand, two
hundred and fifty four (116,254) common registered shares, with no par value.
Sole Paragraph - In the proportion of the shares already held previously, the
shareholders shall have preemptive rights for the subscription and purchase of
shares of the Company's capital.
Article 6. - The ownership of the shares shall be proven by the register of the
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shareholders' name in the Company's Share Register Book.
Article 7. - The shares are indivisible with regard to the Company and each
common share shall confer to its owner one vote in the deliberations of the
General Meetings.
CHAPTER III. - MANAGEMENT
Article 8. - The Company shall be managed by an Executive Committee.
Article 9. - The Executive Committee shall be composed of five (5) Officers,
who do not need to be shareholders, all Brazilian residents, elected by the
Ordinary General Meeting. Among the Officers, one shall be appointed Chief
Executive Officer and the remaining shall be appointed Vice-Chief Executive
Officers by the General Meeting.
First Paragraph - Officers shall remain in office for thirteen (13)
month-terms, with the possibility of reelection. The Officers shall be vested
in their positions upon signature of the term of office to be drawn in the
Executive Committee' Book for Minutes of the Meetings, and shall remain in
office until their successors take office.
Second Paragraph - The General Meeting shall determine the amount of the global
remuneration of the members of the Executive Committee and shall allocate such
remuneration among its members.
Article 10. - The Executive Committee shall meet, ordinarily, once a year and,
extraordinarily, whenever necessary, at the headquarters of the Company or at
any other location. The meetings shall be chaired by the President. Minutes of
the meetings shall be drawn up and filed at the headquarters of the Company.
First Paragraph - The meetings shall always be called by the Chief Executive
Officer or by the majority of the Vice Chief Executive Officers, upon written
notice sent at least five (5) business days in advance. If all members are
present, the prior written notice may be waived.
-3-
Second Paragraph. - The quorum for the meetings of the Executive Committee is
the majority of its members in office.
Third Paragraph - Each officer shall have one vote at the meetings and the
decisions shall always be taken by the majority of votes, the Chief Executive
Officer having the casting vote in case of a tie.
Article 11. - In the event of absence or temporary impairment of any Officer,
he/she shall appoint, subject to the prior approval of the Chief Executive
Officer, among the remaining Officers, an alternate Officer to serve office
during his/her absence or impairment. The alternate shall carry out all his/her
duties and have the same powers, rights and obligations as the substituted
Officer.
First Paragraph - The alternate shall vote for himself and for the Officer
he/she is representing.
Second Paragraph - In case of death, impairment or withdrawal of any Officer,
the General Meeting shall appoint an alternate, stating his/her mandate, which
shall not exceed the term of office of the substituted Officer.
Third Paragraph - In the event of temporary absence or impairment of the Chief
Executive Officer, he/she shall appoint one of the Vice Chief Executive
Officers as an alternate to carry out all duties and have the same powers,
rights and obligations of the Chief Executive Officer.
Article 12. - The Executive Committee shall manage the corporate business in
general and shall perform all of the necessary or appropriate acts, except for
those that, in accordance with the law or these By-laws, are attributed to the
authority of the General Meeting.
(a) The powers of the Executive Committee shall include, among others, the
powers to ensure the compliance with the law and these By-laws;
(b) to ensure the compliance of the deliberations made by the General Meetings,
and at their own meetings;
-4-
(c) to control, manage, and superintend the corporate businesses; and
(d) to issue and approve instructions and in-house regulations deemed useful or
necessary.
(e) to approve the acquisition or sale by the Company (or related acquisitions
or sales) of assets, business, operations or equity securities involving
amounts in excess of one million Reais (R$ 1,000,000.00) on the date of
acquisition or sale, except financial transactions for cash management purposes
within the normal course of business;
(f) to deliberate on the assumption or granting of guarantees for any
indebtedness, by the Company or its subsidiaries, should this assumption or
granting of guarantee for such indebtedness reach a value of one million Reais
(R$ 1,000,000.00).
(g) to grant guarantees, sureties, endorsement or any guarantees to the
controlling shareholder and/or other companies, directly or indirectly
controlled by the Company or by the controlling shareholder.
First Paragraph - The Chief Executive Officer shall:
(a) perform an overall supervision and strategic planning of the Company's
businesses;
(b) coordinate and orient the activities of the other officers within their
respective areas of competence;
(c) perform executive decision-making functions;
(d) appoint any of the officers to perform special activities and tasks, in
addition to those that he/she ordinarily performs; and
(e) call, install and preside over the Executive Committee' meetings.
Second Paragraph - Each of the Vice Chief Executive Officers shall:
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(a) replace the Chief Executive Officer in his absence or incapacity whenever
recommended by the Chief Executive Officer;
(b) assist the Chief Executive Officer in the supervision, coordination,
management and administration of the activities and businesses of the Company
as well as with all the tasks to which he/she is assigned; and.
Third Paragraph - For the purposes determined in item (f) of the abovementioned
caput of Article 12, indebtedness shall mean: (A) (i) commitments derived from
loans in cash; (ii) commitments evidenced by bonus, debentures, promissory
notes or similar instruments; (iii) commitments regarding the deferred payment
of the acquisition price of goods and services, except accounts payable derived
from the normal course of business; (iv) commitments related to financial
leasing; (v) commitments related to amounts remaining due in agreements
scheduling the payment of taxes and similar agreements; (vi) all indebtedness
from third parties insured by an encumbrance over any asset of the Company
and/or its subsidiaries; and (vii) all indebtedness from third parties
guaranteed by the Company and/or its subsidiaries; less (B) (i) cash, cash
deposited in bank account and financial investments; and (ii) regarding the
Company and its subsidiaries, loans between the Company and its subsidiaries
and its controlling company.
Fourth Paragraph - The responsibility to represent the Company in or out of a
court of law, actively or passively, before third parties, any public
department or federal authority, state or local authority as well as before
special agencies, mixed-capital companies, and quasi-public organizations is
held by each Officer, in compliance with Article 13 below.
Article 13. - The deeds of any nature, bills of exchange, checks, money orders,
contracts and any other documents that implies any liability or obligation for
the Company must be signed by: (a) two (2) officers; (b) by an officer jointly
with an attorney-in-fact, provided that the latter vested with special and
express powers; or (c) by two (2) attorneys-in-fact, jointly, provided that
they are vested with special and express powers.
Sole Paragraph - The Executive Committee may, by deliberation of the majority
at
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a meeting, appoint any officer or authorize the appointment of a third party
as an alternate to individually perform any act within the authority of the
Executive Committee or of a sole Officer, without prejudice to any identical
power or duty granted by these By-laws to the Executive Committee itself or to
a sole Officer.
Article 14. - Power-of-attorneys under the Company's name shall always be
granted by two (2) Officers together, and must state the powers granted and,
except for the ones that grant ad-judicia powers, powers of attorney shall be
granted for a limited term of thirteen (13) months.
Article 15. - Acts of any Company Officer, employee, or alternate, that
involves the Company in any liability related to businesses or operations
outside the scope of corporate purpose, such as sureties, guarantees,
endorsements or any other guarantee on behalf of third parties are hereby
expressly forbidden and shall be deemed to be null and void, and without any
effect towards the Company, excepted in the case of guarantees, sureties,
endorsements or any guarantees given to the controlling shareholder and/or all
other companies which are directly or indirectly controlled by the Company or
by the controlling shareholder, when the same are previously and expressly
authorized by the Executive Committee, in the form of Articles 10,11 and 12
above.
CHAPTER IV. - GENERAL SHAREHOLDERS' MEETINGS
Article 16. - The General Meetings shall be either ordinary or extraordinary.
Ordinary General meetings shall be held within four (4) months after the end of
the fiscal year, in order to deliberate on the matters related to Article 132
of Law 6404, and the Extraordinary Meetings and General Extraordinary meetings
shall be held as often as necessary.
Article 17. - The General Meetings shall be called by the Executive Committee,
in accordance with and within the terms provided by law, and shall be presided
by a shareholder chosen by the majority of votes of the attendants. The
Chairman of the meeting shall appoint the secretary of the meeting.
Sole Paragraph - The Shareholder may be represented at the General Meeting by
an attorney-in-fact, duly constituted by an instrument of power of attorney
granted
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no more than 12 (twelve) months before the date of the meeting, which shall be
a shareholder or administrator of the Company or a lawyer. The proof of
representation shall be filed at the headquarters of the Company until the
moment of the opening of the works of the meeting.
Article 18. - The purpose of the meetings is to establish the fundamental
guidelines and the general guidance of the Company's policies and business, as
well as to verify and accompany their execution with special powers, besides
the attributions set forth in the law:
(a) to deliberate about any amendment to these By-laws;
(b) to deliberate on any amendment to the Company's objectives or the
involvement of the Company in a new business field;
(c) to elect and to dismiss the members of the Executive Committee and of the
Audit Committee, when installed;
(d) to deliberate about the constitution, acquisition and sale of subsidiaries
or associations;
(e) to deliberate on the incorporation, merger, transformation or spin-off of
the Company or of its subsidiaries;
(f) to deliberate about the winding-up, dissolution, bankruptcy, "concordata"
or similar event involving the Company and any of its subsidiaries, including
without limitation the request for winding-up, dissolution, bankruptcy,
"concordata" or similar event;
(g) to approve the issuance, voluntary redemption or repurchase of any security
issued by the Company or its subsidiaries (including shares, options,
convertible or exchangeable securities or warrants), by the Company or by any
of its subsidiaries, or the practice of any act which may affect the capital
structure of the Company or its subsidiaries;
(h) to approve the declaration, payment or retention of dividends which are
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greater than twenty five per cent (25%) of the adjusted net profit, as defined
in Article 189 and following of Law No. 6404/76;
(i) to approve the distribution, as a bonus or dividend, referring to any class
of securities of the Company and its subsidiaries, exempted the dispositions of
Item (h) above-mentioned;
(j) to approve the annual business plan, the annual budget and the long term
strategic planning of the Company and its subsidiaries;
(k) to determine the global remuneration of the Executive Committee and its
distribution among its members, through the determination of the compensation,
benefits and other incentives of the executive officers of the Company, as well
as to approve any change in the compensation, benefits and other incentive
existing plans for the officers;
(l) to deliberate about the execution of any contract or its attachments (or
related contracts) by the Company or its subsidiaries, involving payments by or
to the Company or any of its subsidiaries, during the term of the contract or
the attachments, with a value greater than the equivalent in Reais to one
million Reais (R$ 1,000,000.00) on the date of the execution of the contract or
attachment, except in: (i) operations between the Company and its controlling
shareholder Localiza Rent A Car S.A., for cash administration purposes; (ii)
contracts executed in the normal course of business regarding cash indebtedness
and administration;
(m) to chose and to dismiss the public accountants of the Company;
(n) to approve any operation between the Company or its subsidiaries and any
shareholders, its affiliated or associated companies, except operations on an
arm's length basis, and with an adequate compensatory payment;
(o) to elect and to destitute liquidators, in the case of winding-up and
liquidation of the Company.
Article 19. - The deliberations of the General Meeting shall be recorded in
Minutes of the Meetings drawn in the proper book of the Company and shall be
taken by the
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majority of votes, with each common share representing one vote.
CHAPTER V. - AUDIT COMMITTEE
Article 20. - The Company's Audit Committee shall only be instated upon request
of the shareholders, pursuant to law.
Sole Paragraph - The members of the Audit Committee shall remain in office
until the first General Meeting of the Company that follows the meeting during
which they had been appointed.
Article 21. - The Audit Committee, when in operation, shall be composed of five
(5) sitting members, and the same number of alternates, all resident in Brazil,
alien to the Company's management. The operation of the Audit Committee and the
compensation, authority, duties and liabilities of its members shall comply
with prevailing legislation.
CHAPTER VI. - FISCAL YEAR, PROFITS AND DIVIDENDS
Article 22. - The Company's fiscal year shall begin on January 1st and end on
December 31st every year. At the end of each fiscal year, the financial
statements shall be recorded in accordance with applicable laws.
Article 23. - The Company's net profits ascertained during each fiscal year,
after the legal deductions, shall have the destination decided by the General
Meeting, after hearing the Audit Committee, if one is in operation.
First Paragraph - Shareholders are entitled to receive annual dividends of at
least twenty-five percent (25%) of the net profit of the year, increased or
reduced by the following amounts: (a) the legal reserve; (b) contingency
reserves and reversion of these same reserves formed in previous years; and (c)
realizable profits transferred to the respective reserve and profits previously
recorded in this reserve and realized during the year.
Second Paragraph - The Company may pay or credit interest on net equity,
calculated with basis on the net worth accounts, always in compliance with the
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interest rates and the limits established in the applicable laws. The amounts
paid to the shareholders as interests on net equity shall be deducted from the
minimum obligatory dividend. As decided by the General Meeting, the amount of
the interests may be credited and paid to the shareholders and later
incorporated to the Company's capital instead of being distributed and paid.
Article 24. - By deliberation of the Executive Committee the Company may draw
up semi-annual and interim balance sheets and pay dividends in compliance with
Article 204 and its paragraphs of Law 6404/76.
CHAPTER VII. - LIQUIDATION
Article 25. - The Company shall be liquidated when required by law; a general
meeting shall determine the manner of liquidation and appoint the liquidator
and the Audit Committee that shall officiate during the period of liquidation.
CHAPTER VIII. - FINAL PROVISIONS
Article 26. - In the event of any omission or doubt with regard to these
By-laws, the legal provisions in force shall prevail.
By-laws attached to the Minutes of the Shareholders Meeting held on July 4,
2003, at 10 a.m., currently being registered with the Commercial Registry of the
State of Minas Gerais - JUCEMG.
I hereby declare that the above text is a true copy of the original, recorded
in the appropriate book.
CHAPTER I. - NAME, HEADQUARTERS, PURPOSE AND DURATION
Article 1. - Prime-Prestadora de Servicos S.A. is a joint stock Company
(sociedade anonima), and it shall be governed by these By-laws and by the
applicable laws and regulations.
Sole Paragraph - The Company is a wholly owned subsidiary of Localiza Rent a
Car S.A. ("Localiza")
Article 2. - The Company has its headquarters at Avenida Bernardo Monteiro
1563 (part), Funcionarios, in the City of Belo Horizonte, CEP 30150-902, State
of Minas Gerais. It may open, transfer or close branches, agencies, offices,
and any other establishments upon resolution of the Executive Committee.
Article 3. - The purpose of the Company is the intermediation of the purchase
and/or sale of vehicles and accessories, and the rendering of services that are
ancillary to such intermediations.
Article 4. - The Company shall have an indeterminate term of duration.
CHAPTER II. - CAPITAL AND SHARES
Article 5. - The corporate capital of the Company is nine hundred and fifty
thousand Reais (R$950.000,00), fully paid-up in Brazilian currency, divided
into fifteen thousand (15,000) common registered shares, with no par value.
Sole Paragraph - In the proportion of the shares already held previously, the
shareholders shall have preemptive rights for the subscription and purchase of
shares of the Company's capital.
Article 6. - The ownership of the shares shall be proven by the register of
the
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Shareholders' name in the Company's Share Register Book.
Article 7. - The shares are indivisible with regard to the Company and each
common share shall confer to its owner one vote in the deliberations of the
General Meetings.
CHAPTER III. - MANAGEMENT
Article 8. - The Company shall be managed by an Executive Committee.
Article 9. - The Executive Committee shall be composed of four (4) Officers,
who do not need to be shareholders, all Brazilian residents, elected by the
Ordinary General Meeting. Among the Officers, one shall be appointed Chief
Executive Officer and the remaining shall be appointed Vice-Chief Executive
Officers by the General Meeting.
First Paragraph - Officers shall remain in office for thirteen (13)
month-terms, with the possibility of reelection. The Officers shall be vested
in their positions upon signature of the term of office to be drawn in the
Executive Committee' Book for Minutes of the Meetings, and shall remain in
office until their successors take office.
Second Paragraph - The General Meeting shall determine the amount of the global
remuneration of the members of the Executive Committee and shall allocate such
remuneration among its members.
Article 10. - The Executive Committee shall meet, ordinarily, once a year and,
extraordinarily, whenever necessary, at the headquarters of the Company or at
any other location. The meetings shall be chaired by the President. Minutes of
the meetings shall be drawn up and filed at the headquarters of the Company.
First Paragraph - The meetings shall always be called by the Chief Executive
Officer or by the majority of the Vice Chief Executive Officers, upon written
notice sent at least five (5) business days in advance. If all members are
present, the prior written notice may be waived.
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Second Paragraph - The quorum for the meetings of the Executive Committee is
the majority of its members in office.
Third Paragraph - Each officer shall have one vote at the meetings and the
decisions shall always be taken by the majority of votes, the Chief Executive
Officer having the casting vote in case of a tie.
Article 11. - In the event of absence or temporary impairment of any Officer,
he/she shall appoint, subject to the prior approval of the Chief Executive
Officer, among the remaining Officers, an alternate Officer to serve office
during his/her absence or impairment. The alternate shall carry out all his/her
duties and have the same powers, rights and obligations as the substituted
Officer.
First Paragraph - The alternate shall vote for himself and for the Officer
he/she is representing.
Second Paragraph - In case of death, impairment or withdrawal of any Officer,
the General Meeting shall appoint an alternate, stating his/her mandate, which
shall not exceed the term of office of the substituted Officer..
Third Paragraph - In the event of temporary absence or impairment of the Chief
Executive Officer, he/she shall appoint one of the Vice Chief Executive
Officers as an alternate to carry out all duties and have the same powers,
rights and obligations of the Chief Executive Officer.
Article 12. - The Executive Committee shall manage the corporate business in
general and shall perform all of the necessary or appropriate acts, except for
those that, in accordance with the law or these By-laws, are attributed to the
authority of the General Meeting.
(a) The powers of the Executive Committee shall include, among others, the
powers (a) to ensure the compliance with the law and these By-laws;
(b) to ensure the compliance of the deliberations made by the General Meetings,
and at their own meetings;
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(c) to control, manage, and superintend the corporate businesses; and
(d) to issue and approve instructions and in-house regulations deemed useful or
necessary.
(e) to approve the acquisition or sale by the Company (or related acquisitions
or sales) of assets, business, operations or equity securities involving
amounts in excess of one million Reais (R$ 1,000,000.00) on the date of
acquisition or sale, except financial transactions for cash management purposes
within the normal course of business;
(f) to deliberate on the assumption or granting of guarantees for any
indebtedness, by the Company or its subsidiaries, should this assumption or
granting of guarantee for such indebtedness reach a value of one million Reais
(R$ 1,000,000.00).
(g) to grant guarantees, sureties, endorsement or any guarantees to the
controlling shareholder and/or other companies, directly or indirectly
controlled by the Company or by the controlling shareholder.
First Paragraph - The Chief Executive Officer shall:
(a) perform an overall supervision and strategic planning of the Company's
businesses;
(b) coordinate and orient the activities of the other officers within their
respective areas of competence;
(c) perform executive decision-making functions;
(d) appoint any of the officers to perform special activities and tasks, in
addition to those that he/she ordinarily performs; and
(e) call, install and preside over the Executive Committee' meetings.
Second Paragraph - Each of the Vice Chief Executive Officers shall:
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(a) replace the Chief Executive Officer in his absence or incapacity whenever
recommended by the Chief Executive Officer;
(b) assist the Chief Executive Officer in the supervision, coordination,
management and administration of the activities and businesses of the Company
as well as with all the tasks to which he/she is assigned; and
Third Paragraph - For the purposes determined in item (f) of the abovementioned
caput of Article 12, indebtedness shall mean: (A) (i) commitments derived from
loans in cash; (ii) commitments evidenced by bonus, debentures, promissory
notes or similar instruments; (iii) commitments regarding the deferred payment
of the acquisition price of goods and services, except accounts payable derived
from the normal course of business; (iv) commitments related to financial
leasing; (v) commitments related to amounts remaining due in agreements
scheduling the payment of taxes and similar agreements; (vi) all indebtedness
from third parties insured by an encumbrance over any asset of the Company
and/or its subsidiaries; and (vii) all indebtedness from third parties
guaranteed by the Company and/or its subsidiaries; except for (B) (i) cash,
cash deposited in bank account and financial investments; and (ii) regarding
the Company and its subsidiaries, loans between the Company and its
subsidiaries and its controlling company.
Fourth Paragraph - The responsibility to represent the Company in or out of a
court of law, actively or passively, before third parties, any public
department or federal authority, state or local authority as well as before
special agencies, mixed-capital companies, and quasi-public organizations is
held by each Officer, in compliance with Article 13 below.
Article 13. - The deeds of any nature, bills of exchange, checks, money orders,
contracts and any other documents that implies any liability or obligation for
the Company must be signed by: (a) two (2) officers; (b) by an officer jointly
with an attorney-in-fact, provided that the latter vested with special and
express powers; or (c) by two (2) attorneys-in-fact, jointly, provided that
they are vested with special and express powers.
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Sole Paragraph - The Executive Committee may, by deliberation of the majority
at a meeting, appoint any officer or authorize the appointment of a third party
as an alternate to individually perform any act within the authority of the
Executive Committee or of a sole Officer, without prejudice to any identical
power or duty granted by these By-laws to the Executive Committee itself or to
a sole Officer.
Article 14. - Power-of-attorneys under the Company's name shall always be
granted by two (2) Officers together, and must state the powers granted and,
except for the ones that grant ad-judicia powers, powers of attorney shall be
granted for a limited term of thirteen (13) months.
Article 15. - Acts of any Company Officer, employee, or alternate, that
involves the Company in any liability related to businesses or operations
outside the scope of corporate purpose, such as sureties, guarantees,
endorsements or any other guarantee on behalf of third parties are hereby
expressly forbidden and shall be deemed to be null and void, and without any
effect towards the Company, excepted in the case of guarantees, sureties,
endorsements or any guarantees given to the controlling shareholder and/or all
other companies which are directly or indirectly controlled by the Company or
by the controlling shareholder, when the same are previously and expressly
authorized by the Executive Committee, in the form of Articles 10,11 and 12
above.
CHAPTER IV. - GENERAL SHAREHOLDERS' MEETINGS
Article 16. - The General Meetings shall be either ordinary or extraordinary.
Ordinary General meetings shall be held within four (4) months after the end of
the fiscal year, in order to deliberate on the matters related to Article 132
of Law 6404, and the Extraordinary Meetings and General Extraordinary meetings
shall be held as often as necessary.
Article 17. - The General Meetings shall be called by the Executive Committee,
in accordance with and within the terms provided by law, and shall be presided
by a shareholder chosen by the majority of votes of the attendants. The
Chairman of the meeting shall appoint the secretary of the meeting.
Sole Paragraph - The Shareholder may be represented at the General Meeting by
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an attorney-in-fact, duly constituted by an instrument of power of attorney
granted no more than 12 (twelve) months before the date of the meeting, which
shall be a shareholder or administrator of the Company or a lawyer. The proof
of representation shall be filed at the headquarters of the Company until the
moment of the opening of the works of the meeting.
Article 18. - The purpose of the meetings is to establish the fundamental
guidelines and the general guidance of the Company's policies and business, as
well as to verify and accompany their execution with special powers, besides
the attributions set forth in the law:
(a) to deliberate about any amendment to these By-laws;
(b) to deliberate on any amendment to the Company's objectives or the
involvement of the Company in a new business field;
(c) to elect and to dismiss the members of the Executive Committee and of the
Audit Committee, when installed;
(d) to deliberate about the constitution, acquisition and sale of subsidiaries
or associations;
(e) to deliberate on the incorporation, merger, transformation or spin-off of
the Company or of its subsidiaries;
(f) to deliberate about the winding-up, dissolution, bankruptcy, "concordata"
or similar event involving the Company and any of its subsidiaries, including
without limitation the request for winding-up, dissolution, bankruptcy,
"concordata" or similar event;
(g) to approve the issuance, voluntary redemption or repurchase of any security
issued by the Company or its subsidiaries (including shares, options,
convertible or exchangeable securities or warrants), by the Company or by any
of its subsidiaries, or the practice of any act which may affect the capital
structure of the Company or its subsidiaries;
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(h) to approve the declaration, payment or retention of dividends which are
greater than twenty five per cent (25%) of the adjusted net profit, as defined
in Article 189 and following of Law No. 6404/76;
(i) to approve the distribution, as a bonus or dividend, referring to any class
of securities of the Company and its subsidiaries, exempted the dispositions of
Item (h) above-mentioned;
(j) to approve the annual business plan, the annual budget and the long term
strategic planning of the Company and its subsidiaries;
(k) to determine the global remuneration of the Executive Committee and its
distribution among its members, through the determination of the compensation,
benefits and other incentives of the executive officers of the Company, as well
as to approve any change in the compensation, benefits and other incentive
existing plans for the officers;
(l) to deliberate about the execution of any contract or its attachments (or
related contracts) by the Company or its subsidiaries, involving payments by or
to the Company or any of its subsidiaries, during the term of the contract or
the attachments, with a value greater than the equivalent in Reais to one
million Reais (R$ 1,000,000.00) on the date of the execution of the contract or
attachment, except in: (i) operations between the Company and its controlling
shareholder Localiza Rent A Car S.A., for cash administration purposes; (ii)
contracts executed in the normal course of business regarding cash indebtedness
and administration;
(m) to chose and to dismiss the public accountants of the Company;
(n) to approve any operation between the Company or its subsidiaries and any
shareholders, its affiliated or associated companies, except operations on an
arm's length basis, and with an adequate compensatory payment;
(o) to elect and to destitute liquidators, in the case of winding-up and
liquidation of the Company.
Article 19. - The deliberations of the General Meeting shall be recorded in
Minutes
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of the Meetings drawn in the proper book of the Company and shall be taken by
the majority of votes, with each common share representing one vote.
CHAPTER V. - AUDIT COMMITTEE
Article 20. - The Company's Audit Committee shall only be instated upon request
of the shareholders, pursuant to law.
Sole Paragraph - The members of the Audit Committee shall remain in office
until the first General Meeting of the Company that follows the meeting during
which they had been appointed.
Article 21. - The Audit Committee, when in operation, shall be composed of five
(5) sitting members, and the same number of alternates, all resident in Brazil,
alien to the Company's management. The operation of the Audit Committee and the
compensation, authority, duties and liabilities of its members shall comply
with prevailing legislation.
CHAPTER VI. - FISCAL YEAR, PROFITS AND DIVIDENDS
Article 22. - The Company's fiscal year shall begin on January 1st and end on
December 31st every year. At the end of each fiscal year, the financial
statements shall be recorded in accordance with applicable laws.
Article 23. - The Company's net profits ascertained during each fiscal year,
after the legal deductions, shall have the destination decided by the General
Meeting, after hearing the Audit Committee, if one is in operation.
First Paragraph - Shareholders are entitled to receive annual dividends of at
least twenty-five percent (25%) of the net profit of the year, increased or
reduced by the following amounts: (a) the legal reserve; (b) contingency
reserves and reversion of these same reserves formed in previous years; and (c)
realizable profits transferred to the respective reserve and profits previously
recorded in this reserve and realized during the year.
Second Paragraph - The Company may pay or credit interest on net equity,
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calculated with basis on the net worth accounts, always in compliance with the
interest rates and the limits established in the applicable laws. The amounts
paid to the shareholders as interests on net equity shall be deducted from the
minimum obligatory dividend. As decided by the General Meeting, the amount of
the interests may be credited and paid to the shareholders and later
incorporated to the Company's capital instead of being distributed and paid.
Article 24. - By deliberation of the Executive Committee the Company may draw
up semi-annual and interim balance sheets and pay dividends in compliance with
Article 204 and its paragraphs of Law 6404/76.
CHAPTER VII. - LIQUIDATION
Article 25. - The Company shall be liquidated when required by law; a general
meeting shall determine the manner of liquidation and appoint the liquidator
and the Audit Committee that shall officiate during the period of liquidation.
CHAPTER VIII. - FINAL PROVISIONS
Article 26. - In the event of any omission or doubt with regard to these
By-laws, the legal provisions in force shall prevail.
By-laws attached to the Minutes of the Shareholders Meeting held on July 7,
2003, at 12 p.m., currently being registered with the Commercial Registry of the
State of Minas Gerais - JUCEMG.
I hereby declare that the above text is a true copy of the original, recorded
in the appropriate book.
Companies Jurisdiction of Organization Name
Total Fleet S.A. Brazil Total Fleet
Localiza Franchising S.A. Brazil Franchising
Prime Prestadora de Servicos Brazil Prime
S.A.
Localiza Master Franchisee Argentina MFA
Argentina S.A.
Exhibit 10.1
Consent of Independent Registered Public Accounting Firm
We consent to the use, in this Annual Report of Localiza Rent a Car S.A. on Form
20-F filed on June 29, 2004 (File No. 333-8128), which is incorporated by
reference in the Registration Statement on Form F-3 filed on August 24, 2001
(Registration No. 333-13852), of our report dated April 2, 2004
Consent of Independent Registered Public Accounting Firm
We consent to the use, in this Annual Report of Localiza Franchising S.A. on
Form 20-F filed on June 29, 2004 (File No. 333-8128-01), which is incorporated
by reference in the Registration Statement on Form F-3 filed on August 24, 2001
(Registration No. 333-13852-01), of our report dated April 2, 2004.
Consent of Independent Registered Public Accounting Firm
We consent to the use, in this Annual Report of Localiza Master Franchisee
Argentina S.A. Form 20-F filed on June 29, 2004 (File No. 333-8128-04), which is
incorporated by reference in the Registration Statement on Form F-3 filed on
August 24, 2001 (Registration No. 333-13852-04), of our report dated March 12,
2004.
Buenos Aires, Argentina
June 29, 2004
/s/ Deloitte & Co. S.R.L.
Exhibit 10.5
NOTICE REGARDING CONSENT OF ANDERSEN
Localiza Master Franchisee Argentina S.A. ("MFA") dismissed Pistrelli, Dyaz
y Associados ("Pistrelli"), a former member firm of Andersen S/C, as its
independent auditors on July 1, 2002. The Company has been unable to obtain
Pistrelli's written consent to the inclusion of Pistrelli's report of
independent public accountants on the financial position at December 31,2001 and
the results of operations and cash flows of MFA for the two years ended December
31, 2001. Under these circumstances, Rule 437(a) under the Securities Act
permits the Company to file this Annual Report on Form 20-F without Pistrelli's
written consent. Because Pistrelli has not consented to, the inclusion of its
report is this Annual Report on Form 20-F, which is incorporated by reference in
the Registration Statements, you may have no effective remedy against Pistrelli
under Section 11 of the Securities Act for any untrue statements of a malarial
fact contained in the financial statements audited by Pistrelli, or my omissions
to state a material fact required to be stated therein. In addition, the ability
of Pistrelli to, satisfy any claims (including claims arising from its provision
of auditing and other services to MFA) may be limited as a practical matter due
to the recent events regarding Andersen and Pistrelli, as its former member
firm.
Buenos Aires, June 29, 2004
/s/ Leonardo Federici
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
EXHIBIT 11.1
Ethics Code
LOCALIZA RENT A CAR S.A.
LOCALIZA FRANCHISING S.A.
TOTAL FLEET S.A.
PRIME PRESTADORA DE SERVICOS S.A.
LOCALIZA MASTER FRANCHISEE ARGENTINA S.A.
LOCALIZA FRANCHISING BRASIL S.A.
Introduction
Localiza Rent a Car S.A., Localiza Franchising S.A., Total Fleet S.A., Prime
Prestadora de Servicos S.A., Localiza Master Franchisee Argentina S.A., Localiza
Franchising Brasil S.A. are herein collectively referred to as Localiza.
Localiza is a company which is open to the processes of change now transforming
our society. The speed of these developments has led to a range of consequences
in every field and affected all our habits and customs, so that ethical
behavior is both a personal and professional aspiration and one required of all
organizations.
In this environment of rapid change, where we frequently experience concerns
and conflict of interests, we prepared our Ethics Code in order to set
consistent standards as benchmarks that are adapted to the business culture of
the organization itself, customer-focused, and based on appreciation of the
value of the individual.
This Code recognizes our organization as socially responsible and part of
society in every country and location where it is active. It aims to produce an
appropriate response to the demands of a fast moving and complex globalized
market.
We are determined to maintain our competitive edge and our prospects for the
future, and an exemplary approach to ethics is one of the cornerstones of this
process.
We are therefore making this Ethics Code applicable to everyone within the
organization. The point is not to set final rules that will cover any situation
that may arise, but to pose consistent standards of ethics that can guide our
organizational and personal behavior on the road toward our business and
personal integrity.
It is up to each and every one of us to ensure that the standards described
here translate into a homogeneous culture, leading to fair treatment, equity
and probity in all Localiza's relations with its customers, employees,
suppliers, partners, competitors and the community in general.
This Ethics Code does not end here. It must be periodically reviewed in order
to adapt to any modifications in our organization, in the market or in society
as a whole.
Should you have doubts in relation to any attitude, behavior, situation or
sensitive issue that is only partially covered in the Code or omitted, seek
assistance from your immediate superior, or other departments in the company
that you believe to be informed on the issue.
If you would like to obtain copies of this Ethics Code, call our Marketing
Communications department in Belo Horizonte, Brazil, tel. (55.31) 3247.7879,
fax (55.31) 3247.7678.
1
The organization's reputation
Our reputation has been, and will always be one of the decisive factors for our
success and perpetuity.
It also reflects the quality of our products and services, the excellence of
our human resources and our personal, professional and business ethics.
So we aim to continue and enhance our position as an honest and serious company
that strives for excellence, that is guided by high ethical standards,
providing confidence to our customers, employees and to the community in
general.
2
Workplace environment
We wish to provide all our employees with the best workplace environment,
sharing the social concerns of society in general and practicing the principles
of no discrimination on the basis of nationality, race, religion, gender or
age.
All our employees have the duty of striving to introduce and maintain a clean,
healthy, organized, safe and productive workplace environment.
Therefore, we shall not admit any expression of prejudice, nor actions, or
remarks or any kind of conduct that may create an environment that involves
constraint or intimidation or that is in any way offensive or deleterious.
We shall appreciate the personal and professional development of our employees,
as well as the commitment to higher levels of performance and bonus reward
policies that prioritize productivity and profit sharing for them.
Providing guidance for any employee making mistakes in the course of their
duties constitutes a value for the company. Penalties will only be applicable
in cases of serious violations or when there is recidivism in relation to
faults, even after previous guidance has been provided.
3
Personal conduct
We would like you to take pride in working with us and to be capable of
transmitting this feeling to others.
The company will do all it can to help you show pride in working here in any
environment or in any occasion. It is our belief that every single one of us
has an important role to play in building and sustaining the reputation of this
company.
We should pay attention to our personal and professional conduct and the kind
of concept that we convey to people with regards to our integrity.
Let us recall that it is up to them to decide whether we are trustworthy. This
means that we should always act honestly and impartially, consciously and in a
transparent manner, and should always be committed to the company respecting
its culture and values.
You have the duty to do not overlook if you become aware of the occurrence of
any illegal actions or actions undertaken by any collaborator that may damage
our integrity.
The company will give all employees the benefit of the doubt, in other words,
all employees are assumed innocent and the company will be on their side unless
there is conclusive proof of guilt.
Any disclosure of inside information to certain customers in relation to
products and services before making the news available to all our customers in
general should be avoided. This will only be permitted in particular cases
after authorization, when:
o the customer is working in partnership to develop or to test these new
products or services;
o there is a need for partial disclosure to provide planning guidelines to
customers.
4
Conflict of interest
With each passing day, our professional and personal lives are increasingly
intertwined. Therefore, we must be alert to avoid the conflicts of interest
that may arise if you are engaged in an activity or promoting affairs of your
own personal interest that may be contrary to the interests of the company.
The following items amount to undesirable actions in this respect:
o holding, directly or indirectly, through spouse, children or 1st degree
relatives, shares and/or interests in any institution that may derive
advantage in so far as it is involved in business relations with the
company or is competing with it;
o rendering services of any kind to other organizations, directly or
indirectly remunerated, that conflict with our interests, except in cases
where there is prior authorization;
o gaining privileged financial advantages, direct or indirectly, in relation
to institutions that maintain business relations with us;
o accepting, directly or indirectly, money or objects of value from any
person or entity that has been or may be interested in having business
relations with the company;
o providing competitors or third parties any reserved information in
relation to customers, pricing policies, or marketing, economic and
financial plans;
o unduly passing to third parties benefits offered exclusively to employees;
o not reporting the existence of a spouse or 1st degree relation or person
in a close relationship, working or occupying positions of influence in
the company, or who may influence decisions that affect its affairs, or
working in a competitor company, or vendor of products and / or services,
or working in partnership with us. This fact should be notified to your
immediate superior and registered in your statement of commitment;
o making improper use of the organization's confidential information or
competing with the company in a disloyal manner after leaving its
employment;
o gaining or prompting third parties to make gains of a personal character
to close business deals;
o using company resources (know-how, facilities, equipment, supplies,
information and others) for personal advantage or that of third parties
5
without authorization;
o using company premises to conduct trade union, political-party and / or
religious activities not guaranteed by constitutional precepts or union
agreements.
Participation in charitable, philanthropic, civic, religious, political, social
or cultural organizations does not constitute conflict of interest when these
activities do not require dedication during working time.
An employee carrying out any of the above activities must clearly show that
this is an activity of a private character must and never make use of the name
of the company.
o We will not hire former-employees of competitors that have left those
entities less than two years previously and in these cases superiors must
be consulted. Similarly, we expect that our former employees will not work
for competitors until two years after leaving the company.
6
Care for company property
o Our property consists of tangible goods (cars, equipment, facilities
and materials) and intangible goods (information, brand and know-how).
o You have a duty of care in relation to the custody and conservation of
this property, and to protect it against robbery, theft or improper
use.
o Company property should be used only for your company business
activity, and must not be used for private purposes or those of third
parties, except for authorized cases.
o Employees may not acquire goods from the company with privileged
conditions for the commercial aim of reselling them.
Brand
The brand is one of the company's greatest assets. It should be used correctly,
since it is the most visible company symbol for the market. The brand is not
just the design, but also the colors, sound, signs, plaques, uniforms and all
symbols recalling the company's image. Their representation should be conserved
in the sense of correct use and should always be kept in appropriate
conditions. The brand may be used and publicized only for documents,
promotional items, facilities and media vehicles in accordance with the
standards set by the department responsible. Whenever you see the brand being
used inappropriately or without the proper maintenance, inform the competent
department.
Do not allow jokes to be played using the brand.
The company expects all employees to attempt to uphold the reputation of the
brand, its products, services, and know-how, and to strengthen it with actions
transmitting its integrity, whether in carrying out their work or in our
external relations. In all cases of doubt as to the proper use or conservation
of the brand, contact our communications department.
Know-how and information
Know-how is the knowledge of the company's activity and should not be disclosed
or transferred to a third party without previous authorization. Our know-how
consists of information, intellectual property and knowledge of the technical,
commercial and administrative management of the company applied to our
business, such as producing price lists, franchising agreements, techniques for
maximization of fleet use, procedure manuals, management practices and
everything related to our performance.
7
In general, access, use, distribution and publicizing of information should be
democratized in the organization. The criteria for secrecy and confidentiality
will only be used in special cases.
Our customer database is a valuable company asset and as such will be treated
with due care.
Part of our employees' commitment is to guard the confidentiality of information
to which they have access.
Forwarding information to the press is the responsibility of the officers and
the company's communications department. On certain occasions, designated
employees may provide information after prior guidance.
Irregularities in obtaining, using and disclosing information or in the use of
the brand and/or company goods must be notified to your immediate superior.
Data relating to current and former employees are confidential and will only be
provided after prior notification and authorization, except for cases
stipulated under law. Information required for the full development of everyday
tasks must be provided honestly and accurately. Agility and speed in delivering
information is part of our commitment.
Providing deliberately incomplete or dishonest information or making false or
deceptive statements constitute unacceptable practice.
The use of confidential inside company information is not allowed for one's own
advantage or that of third parties.
8
Relations with customers
Our relationships with customers should be governed in such a way that we can
attend to their needs, ensure their well-being and contribute to their success.
Furthermore it is important to:
o establish a relationship of mutual trust with customers;
o render services of the highest quality;
o conduct our business affairs fairly;
o only promise to do what the company is capable of doing, involving all
aspects of our relation, including scheduled tours, reservations,
discounts and negotiated prices, delivery deadlines for cars, coverage of
risk and other commitments of all kinds, except for cases outside our
control, which should be renegotiated with customers;
o keep the loyalty with the customers;
o provide timely and agile customer service;
o give back any valuables or objects of their property left behind by
customers or third parties in company cars or on company's premises;
o not to use the competition as a selling point in a disloyal or unethical
manner;
o show great consideration in serving customers;
o handle customer information confidentially and carefully;
o use advertising based on true facts in relation to our products and
services.
9
Relations with suppliers and partners
Institutions working together with us and committed to our organization are to
be treated as partners since they publicize our brand, guide us and support us
in financing our activity and support us in developing and marketing our
products. With them, we will establish differentiated and enduring relations
based on mutual respect and trust.
When negotiating with our partners, suppliers and financial institutions,
regardless of exclusivity, size and whether they are customers or not, we
recommend:
o making true statements, complete and not misleading ones, always
attempting to use clear and honest communications;
o being impartial and fair;
o respecting and fulfilling agreements;
o creating only expectations that can be met;
o negotiating the best deal for all those involved.
Furthermore, you should note that:
o even if a transaction is fair for the parties involved, it is not
acceptable for anybody involved in the process to obtain benefits or
personal advantages/benefits as a result of this transaction;
o it is crucial that all interested parties are sure they were fairly
treated throughout the process;
o we should avoid behavior that may be misinterpreted or that may suggest
questionable conduct;
o only amend signed agreements after notifying and obtaining authorization
from partners, suppliers and financial institutions;
o in relations with partners, suppliers and financial institutions you may
receive gifts or promotional discounts as long as they are derived from
promotion processes or bonus awards for individuals and are in general
use;
o partners may have differentiated treatment, but the same criteria should
be applied to those in the same category.
10
Gift and courtesy items
Receiving gift and courtesy items
The company recommends that neither yourself nor any member of your family
should ask for or accept amounts in money, gifts or favors from suppliers,
partners or customers when such items may be seen as associated with our
business relation with the supplier, customer or partner concerned, or that may
in the future be seen in this light.
Any insinuation in relation to personal needs that might be met by the
supplier, partner or customer through money, gifts or favors constitutes
unacceptable conduct. You may only accept gifts that have no commercial value,
are part of the marketing strategy of the customer, partner or supplier, or are
widely distributed and commonly offered to all those in commercial relations
with the partner, customer or supplier.
Whenever you receive a gift or benefit worth over US$ 100, you should notify
your immediate superior. You will only be able to accept invitations to lunch,
dinner or social, cultural and sporting events, if this is recognized as
current practice in commercial relations with the supplier, partner or
customer. In such cases, keep your superior informed.
Giving presents
Similarly, our employees shall only offer customers, suppliers and partners
gifts developed as part of our marketing strategy, produced on a large scale,
without commercial value, not involving encouragement to abuse or addiction,
that do not provoke moral damage to health or ecologically, and shall only
offer lunches, dinners or tickets for shows and events within reasonable limits
as covered by our usual business practices.
11
Relations with competitors
We shall maintain loyal relations with competitors, observing that:
o these companies may have more than one kind of relation with us - they may
be suppliers, customers, competitors or partners at different times. It is
important to understand the different kinds of relations and maintain the
appropriate approach for each type of relation;
o these relations require special care, in the sense of being ethical with
the company itself, and we should avoid discussing pricing policy, terms
and conditions, information, plans about products, marketing, our own
marketing studies and surveys or plans for the future. You should avoid
being involved in any possible activity of this kind;
o obtaining information in relation to competitors is not uncommon. This is
normal commercial activity and is not unethical as long as information is
obtained in an acceptable manner.
12
Respect for the law and government regulations
o We operate in competitive markets and we comply with the laws and
government regulations in each country where we are active. In cases where
we do not agree with the current law, we will seek legal assistance and
legal means of defending our position.
o The company follows the principles of the open market and free
competition, respecting the culture and interests of all communities where
it is working.
o The company attempts to abstain from any political-party involvement.
Occasionally, contributions to candidates or parties may only be made when
allowed by law, without involving the company brand.
o We expect all employees to be conscientious citizens and comply with the
laws of their country of residence.
13
Notifying irregularities
Our culture, values and attitude are constantly being widely disclosed thus
facilitating employees' knowledge of the basis of our ethical conduct and
ability to detect the possible existence of unethical attitudes.
It is crucial that all and any ethical problem be notified immediately.
The company has specific mechanisms for you to notify these facts. You should
seek your immediate superior, or senior managers, officers or even the
presidency if applicable, depending on your trust or your convenience.
You can also use the "Banco de Ideias", whether or not you state your own
identity.
Be constantly careful in this respect, since you are personally responsible for
maintaining our ethical standards.
All notifications of irregularities will be confidential and there will be no
harm or retaliation against the person making them.
14
Doubts and other considerations
We all are subject to coming across a situation in which the ethical aspect is
not clearly shown. These situations involve what are known as ethical dilemmas.
This usually occurs when there are two or more acceptable opinions or
conflicting legitimate interests, and we cannot say that one solution is the
only correct option.
In these cases and in situations not covered by the Ethics Code, we cannot
simply accept the existence of gray zones. On the contrary, we should
thoroughly investigate all the aspects involved, identify and appraise each of
the different points of view or conflicting interests, with the aim of finding
solutions in which the best ethical alternatives prevail.
If you think you may be in one of these situations and have any doubt as to the
solution to be applied, seek the assistance of your immediate superior or
another person in the company whom you see as having competences related with
the problem in question.
Remember that in our internal and external relations confidence is a crucial
condition for our integrity and therefore your care and attention in preventing
and correcting conflict situations is important.
15
Quality of Public Disclosures
The company has a responsibility to communicate effectively with investors so
that they are provided with full and accurate information, in all material
respects, about the company's financial condition and results of operations.
Our reports and documents filed with or submitted to the United States
Securities and Exchange Commission and our other public communications shall
include full, fair, accurate, timely and understandable disclosure.
16
Waivers and Amendments
Any waivers (including any implicit waivers) of the provisions in this Ethics
Code for executive officers or directors may only be granted by the Board of
Directors and will be disclosed to the company's public noteholders in the
company's annual report on Form 20-F. Any waivers of this Ethics Code for other
employees may only be granted by the CEO. Amendments to this Ethics Code must
be approved by the Board of Directors and will also be disclosed in the
company's annual report on Form 20-F.
17
Statement of Commitment
I have received a copy of the "Ethics Code." Having carefully read and
understood this code, I agree with the guidelines established herein. I am
aware that my responsibility and conduct must at all times be governed by the
highest personal and professional ethical standards emanating from this Code.
I am aware that non-compliance with the Code may lead to disciplinary actions
or even to my being dismissed.
In the case of any questions arising during the course of my duties, I shall
seek my immediate superior to discuss them. I am signing this "Statement of
Commitment" as an integral part of my signed employment agreement.
18
EXHIBIT 12.1.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jose Salim Mattar Junior, certify that:
1. I have reviewed this annual report on Form 20-F of Localiza Rent A Car
S.A. (the "Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
EXHIBIT 12.1.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Antonio Mendes, certify that:
1. I have reviewed this annual report on Form 20-F of Localiza Rent a Car
S.A. (the "Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Roberto Antonio Mendes
--------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
EXHIBIT 12.2.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jose Salim Mattar Junior, certify that:
1. I have reviewed this annual report on Form 20-F of Total Fleet S.A. (the
"Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
EXHIBIT 12.2.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Antonio Mendes, certify that:
1. I have reviewed this annual report on Form 20-F of Total Fleet S.A. (the
"Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are reasonably
likely to adversely affect Registrant's ability to record, process, summarize
and report financial data; 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 over
financial reporting.
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
EXHIBIT 12.3.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jose Salim Mattar Junior, certify that:
1. I have reviewed this annual report on Form 20-F of Localiza Franchising
S.A. (the "Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
EXHIBIT 12.3.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Antonio Mendes, certify that:
1. I have reviewed this annual report on Form 20-F of Localiza Franchising
S.A. (the "Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
EXHIBIT 12.4.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jose Salim Mattar Junior, certify that:
1. I have reviewed this annual report on Form 20-F of Prime Prestadora de
Servicos S.A. (the "Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
EXHIBIT 12.4.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Antonio Mendes, certify that:
1. I have reviewed this annual report on Form 20-F of Prime Prestadora de
Servicos S.A. (the "Registrant");
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-15(e) and 15d-15(e)) for the Registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons fulfilling the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
EXHIBIT 12.5
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Leonardo Federici Guedes, certify that:
1. I have reviewed this annual report on Form 20-F of Localiza Master
Franchisee Argentina S.A. (the "Registrant");
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. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the Registrant and I have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervisions,
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) paragraph omitted pursuant to SEC Release Nos. 33-8238 and
34-47986;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
5. I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons fulfilling the
equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect Registrant's ability to record,
process, summarize and report financial data; 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 over financial reporting.
By: /s/ Leonardo Federici Guedes
-----------------------------------------
Name: Leonardo Federici Guedes
Title:Chief Executive Officer and
Principal Financial Officer
Date: June 29, 2004
7
Exhibit 13.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the
Annual Report on December 31, 2003 for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
Jose Salim Mattar Junior, the Chief Executive Officer, and Roberto Antonio
Mendes, the Principal Financial Officer of Localiza Rent A Car S.A., each
certifies that, to the best of their respective knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Localiza
Rent A Car S.A.
Belo Horizonte, June 29, 2004
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
Exhibit 13.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the
Annual Report on December 31, 2003 for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
Jose Salim Mattar Junior, the Chief Executive Officer, and Roberto Antonio
Mendes, the Principal Financial Officer of Total Fleet S.A., each certifies
that, to the best of their respective knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Total Fleet
S.A.
Belo Horizonte, June 29, 2004
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
Exhibit 13.3
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the
Annual Report on December 31, 2003 for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
Jose Salim Mattar Junior, the Chief Executive Officer, and Roberto Antonio
Mendes, the Principal Financial Officer of Localiza Franchising S.A., each
certifies that, to the best of their respective knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Localiza
Franchising S.A.
Belo Horizonte, June 29, 2004
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
Exhibit 13.4
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the
Annual Report on December 31, 2003 for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
Jose Salim Mattar Junior, the Chief Executive Officer, and Roberto Antonio
Mendes, the Principal Financial Officer of Prime Prestadora de Servicos S.A,
each certifies that, to the best of their respective knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Prime
Prestadora de Servicos S.A
Belo Horizonte, June 29, 2004
By: /s/ Jose Salim Mattar Junior
-----------------------------------------
Name: Jose Salim Mattar Junior
Title: Chief Executive Officer-President
Date: June 29, 2004
By: /s/ Roberto Antonio Mendes
-----------------------------------------
Name: Roberto Antonio Mendes
Title: Principal Financial Officer
Date: June 29, 2004
Exhibit 13.5
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The certification set forth below is being submitted in connection with the
Annual Report on December 31, 2003 for the purpose of complying with Rule
13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States
Code.
Federici Guedes, the Chief Executive Officer and Principal Financial Officer of
Localiza Master Franchisee Argentina S.A., certifies that, to the best of his
respective knowledge:
1. the Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Localiza
Master Franchisee Argentina S.A
Belo Horizonte, June 29, 2004
By: /s/ Federici Guedes
-----------------------------------------
Name: Federici Guedes
Title: Chief Executive Officer and
Principal Financial Officer
Date: June 29, 2004
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