##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934ORx
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-14481 TELE LESTE CELULAR PARTICIPAÇÕES S.A. (Exact name of Registrant as specified in its charter)
 Tele Leste Cellular Holding Company
(Translation of Registrants name into English) The Federative Republic of Brazil
(Jurisdiction of incorporation or organization) Av. Silveira Martins 1036, Cabula
41150-000 Salvador, BA, Brazil
(Address of principal executive offices) 
 Securities registered or to be registered pursuant to Section 12(b) of the Act
 Title of each class:
    
    Name of each exchange on which registered:Preferred Shares, without par value
American Depositary Shares (as evidenced   
by American Depositary Receipts), each    

representing 50,000 shares of Preferred Stock
    
    New York Stock Exchange*
New York Stock Exchange
   *
    
    Not for trading purposes, but only in connection with the
registration on the New York Stock Exchange of American Depositary
Shares representing those preferred shares.   Securities registered or to be registered pursuant to Section 12(g) of the Act:
None 
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None 
 The number of outstanding shares of each class of stock of Tele Leste Celular Participações S.A., as of December 31, 2003: 166,008,004,051
313,436,994,532
    
    Shares of Common Stock
Shares of Preferred Stock
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes     x         No     o Indicate by check mark which financial statement item the registrant has elected to follow. o x




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TABLE OF CONTENTS PagePART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3. KEY INFORMATION
    
    
    1ITEM 4. INFORMATION ON THE COMPANY
    
    
    10ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    25ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    46ITEM 8. FINANCIAL INFORMATION
    
    
    47ITEM 9. THE OFFER AND LISTING
    
    
    53ITEM 10. ADDITIONAL INFORMATION
    
    
    58ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    70ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    71PART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    72ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    72ITEM 15. CONTROLS AND PROCEDURES
    
    
    72ITEM 16. [RESERVED]
    
    
    72PART IIIITEM 17. FINANCIAL STATEMENTS
    
    
    74ITEM 18. FINANCIAL STATEMENTS
    
    
    74ITEM 19. EXHIBITS
    
    
    74
 i




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INTRODUCTION All references in this annual report to:  
    
    Tele Leste Celular Participações S.A., Tele Leste
Celular, Tele Leste, we, our and us are to Tele Leste
Celular Participações S.A. and its consolidated subsidiaries (unless
the context otherwise requires), including the operations of
Telebahia Celular S.A., known as Telebahia, and Telergipe Celular
S.A., known as Telergipe;
    
    Brazilian government are to the federal government of the Federative Republic of Brazil;
    
    real, reais or R$ are to Brazilian reais, the official currency of Brazil;
    
    U.S.$, dollars or U.S. dollars are to United States dollars;
    
    ADRs are to the American Depositary Receipts evidencing our ADSs;
    
    ADSs are to our American Depositary Shares, each
representing 50,000 shares of our non-voting preferred stock;
    
    Commission are to the U.S. Securities and Exchange Commission;
    
    CVM are to the Comissão de Valores Mobiliários, the Brazilian securities commission;
    
    Brazilian Central Bank, Central Bank of Brazil or
Central Bank are to the Banco Central do Brasil, the Brazilian
central bank;
    
    General Telecommunications Law are to Lei Geral de
Telecomunicações, as amended, which regulates the telecommunications
industry in Brazil;
    
    Brazilian corporate law are to Law No. 6,404 of December,
1976, as amended;
    
    Anatel are to Agência Nacional de TelecomunicaçõesANATEL,
the Brazilian telecommunication regulatory agency;
    
    Telebrás are to Telecomunicações Brasileiras S.A. 
TELEBRAS;
    
    CDMA are to Code Division Multiple Access, an aerial
interface technology for cellular networks based on spectral
spreading of the radio signal and channel division in the code
domain;
    
    1XRTT are to 1x Radio Transmission Technology, the CDMA
2000 1X technology, which, pursuant to the ITU (International
Telecommunication Union) and in accordance with the IMT-2000 rules,
is the 3G (third generation) Technology;
    
    TDMA are to Time Division Multiple Access, a radio
interface technology for cellular networks based on spectral
spreading of the radio signal and channel division in the time
domain;
    
    AMPS are to Advanced Mobile Phone System, a radio interface
technology for cellular networks based on spectral spreading of the
radio signal and channel division in the frequency domain; ii




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
    
    SMC are to Serviço Movél Celular(Mobile Cellular Service),
a service rendered pursuant to a concession granted by Anatel to
provide mobile service in a specific frequency range;
    
    SMP are to Serviço Móvel Pessoal(Personal Cellular
Service), a service rendered pursuant to an authorization granted by
Anatel to provide mobile service in a specific frequency range;
    
    WAP are to Wireless Application Protocol, an open and
standardized protocol started in 1997, which allows access to
Internet servers through specific equipment, a WAP Gateway at the
carrier, and WAP browsers in customers handsets;
    
    SMS are to Short Message Service for cellular handsets,
which allow customers to send and receive alphanumerical messages;
    
    Customers are to number of wireless lines in service; and
    
    Net additions are to the total number of new customers
acquired in the period minus the reduction in the number of
customers. Unless otherwise specified, data relating to the Brazilian
telecommunications industry included in this annual report was obtained from
Anatel. PRESENTATION OF FINANCIAL INFORMATION Our consolidated financial statements as of December 31, 2003 and 2002 and
for the years ended December 31, 2003, 2002 and 2001, have been prepared in
accordance with the accounting practices adopted in Brazil, as prescribed by
the Brazilian Corporate Law, or Brazilian Corporate Law Method, which differs
in certain significant respects from generally accepted accounting principles
in the United States, or U.S. GAAP. Note 34 to our financial statements
appearing elsewhere in this annual report describes the principal differences
between the Brazilian Corporate Law Method and U.S. GAAP as they relate to us,
and provides a reconciliation to U.S. GAAP of net income and shareholders
equity. These consolidated financial statements have been audited by Deloitte
Touche Tohmatsu Auditores Independentes. In previous years, we presented financial information in our annual report
on Form 20-F using price-level accounting methodology prescribed by the
Brazilian Federal Accountancy Council. The Brazilian Corporate Law Method does
not permit price-level accounting for periods beginning as of 1996. We have
changed to the Brazilian Corporate Law Method in this annual report on Form
20-F because we do not primarily rely on price-level accounting in reporting to
investors and authorities in Brazil. For consistency purposes, we have
presented all our financial information in this annual report according to the
Brazilian Corporate Law Method. As a result, the financial information
included in this annual report as of and for the year ended December 31, 2002
or for previous years is different from the information we presented in our
annual report for the year ended December 31, 2002 or for previous years. FORWARD-LOOKING STATEMENTS Certain sections in this annual report, principally in Item 3D. Risk
Factors, Item 4. Information on the Company and Item 5. Operating and
Financial Review and Prospects, contains information that is forward-looking,
including, but not limited to:  
    
    statements concerning our operations and prospects;
    
    the size of the Brazilian telecommunications market; iii




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
    
    estimated demand forecasts;
    
    our ability to secure and maintain telecommunications
infrastructure licenses, rights-of-way and other regulatory
approvals;
    
    our strategic initiatives and plans for business growth;
    
    industry conditions;
    
    our funding needs and financing sources;
    
    network completion and product development schedules;
    
    expected characteristics of competing networks, products and services;
    
    quantitative and qualitative disclosures about market risks; and
    
    other statements of managements expectations, beliefs,
future plans and strategies, anticipated developments and other
matters that are not historical facts. Forward-looking statements may also be identified by words such as believe,
expect, anticipate, project, intend, should, seek, estimate,
future or similar expressions. Forward-looking information involves risks
and uncertainties that could significantly affect expected results. The risks
and uncertainties include, but are not limited to:  
    
    the short history of our operations as an independent,
private-sector entity and the introduction of competition to the
Brazilian telecommunications sector;
    
    the cost and availability of financing;
    
    uncertainties relating to political and economic conditions in Brazil;
    
    inflation, interest rate and exchange rate risks;
    
    the Brazilian governments telecommunications policy; and
    
    the adverse determination of disputes under litigation. We undertake no obligation to update publicly or revise any forward-looking
statements because of new information, future events or otherwise. In light of
these risks and uncertainties, the forward-looking information, events and
circumstances discussed in this annual report might not occur. Our actual
results and performance could differ substantially from those anticipated in
our forward-looking statements. iv




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. Selected Financial Data Our consolidated financial statements included in this annual report on
Form 20-F and the selected financial data presented for the periods described
below have been prepared in accordance with the Brazilian Corporate Law Method,
which is the same basis of accounting used in our annual financial statements
published in Brazil, audited by Deloitte Touche Tohmatsu Auditores
Independentes. For consistent presentation, we have used the Brazilian
Corporate Law Method for all periods described in this annual report on Form
20-F. See Note 2 to the consolidated financial statements. The financial information included in this annual report on Form 20-F is
different from the information we presented in our annual report on Form 20-F
for the year ended December 31, 2002 and for other previous years. See
Presentation of Financial Information for more information about it. Brazilian Corporate Law Method and U.S. GAAP Our consolidated financial statements are prepared in accordance with the
Brazilian corporate law method, which differs in certain material respects from
U.S. GAAP. See Note 34 to our consolidated financial statements for a summary
of the differences between the Brazilian Corporate Law Method and U.S. GAAP as
they relate to us and a reconciliation to U.S. GAAP of shareholders equity as
of December 31, 2003 and 2002, and net income for the years ended December 31,
2003, 2002 and 2001. Selected Financial Data The following tables present a summary of our selected financial data at the
dates and for each of the periods indicated. You should read the following
information together with our financial statements and the notes thereto
included elsewhere in this annual report and with Item 5. Operating and
Financial Review and Prospects. 1




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais, except dividend amounts)Income Statement Data:Brazilian Corporate Law MethodNet operating revenue
    
    
    441,267
    
    
    
    431,395
    
    
    
    386,132
    
    
    
    332,586
    
    
    
    323,036Cost of services and goods
    
    
    (256,259
    )
    
    
    (241,362
    )
    
    
    (202,342
    )
    
    
    (186,927
    )
    
    
    (239,952
    )Gross profit
    
    
    185,008
    
    
    
    190,033
    
    
    
    183,790
    
    
    
    145,659
    
    
    
    83,084Operating expensesSelling expense
    
    
    (145,010
    )
    
    
    (116,404
    )
    
    
    (97,766
    )
    
    
    (92,013
    )
    
    
    (118,011
    )General and administrative expense
    
    
    (52,345
    )
    
    
    (49,616
    )
    
    
    (55,405
    )
    
    
    (44,997
    )
    
    
    (32,384
    )Other net operating income (expense)
    
    
    (122
    )
    
    
    4,968
    
    
    
    2,559
    
    
    
    13,407
    
    
    
    (3,456
    )Operating income (loss) before financial expense
    
    
    (12,469
    )
    
    
    28,981
    
    
    
    33,178
    
    
    
    22,056
    
    
    
    (70,767
    )Financial expense, net
    
    
    (30,286
    )
    
    
    (32,811
    )
    
    
    (24,111
    )
    
    
    (37,933
    )
    
    
    (64,589
    )Operating income (loss)
    
    
    (42,755
    )
    
    
    (3,830
    )
    
    
    9,067
    
    
    
    (15,877
    )
    
    
    (135,356
    )Net non-operating expenses
    
    
    (661
    )
    
    
    (1,601
    )
    
    
    (560
    )
    
    
    (1,416
    )
    
    
    (380
    )Income (loss) before minority interests and taxes
    
    
    (43,416
    )
    
    
    (5,431
    )
    
    
    8,507
    
    
    
    (17,293
    )
    
    
    (135,736
    )Income and social contribution taxes
    
    
    754
    
    
    
    324
    
    
    
    (2,487
    )
    
    
    5,963
    
    
    
    41,244Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,872
    
    
    
    12,841Net income (loss)
    
    
    (42,662
    )
    
    
    (5,107
    )
    
    
    6,020
    
    
    
    (9,458
    )
    
    
    (81,651
    )Net income (loss) per thousand shares
    
    
    (0.09
    )
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    (0.24
    )Dividends per thousand preferred sharesR$
    
    
    
    
    
    
    
    
    
    
    0.04
    
    
    
    
    
    
    
    Dividends per thousand common sharesR$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends per thousand preferred sharesUS$
    
    
    
    
    
    
    
    
    
    
    0.59
    
    
    
    
    
    
    
    Dividends per thousand common sharesUS$
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    U.S. GAAPNet operating revenue
    
    
    559,905
    
    
    
    527,443
    
    
    
    468,409
    
    
    
    226,060
    
    
    
    233,224Operating income (loss)
    
    
    (25,992
    )
    
    
    17,674
    
    
    
    23,587
    
    
    
    26,515
    
    
    
    (94,798
    )Net income (loss)
    
    
    (6,476
    )
    
    
    (56,012
    )
    
    
    14,102
    
    
    
    (5,905
    )
    
    
    (95,691
    )Net income per thousand shares:Common sharesbasic
    
    
    (0.01
    )
    
    
    (0.12
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.29
    )Common
sharesdiluted (1)
    
    
    (0.01
    )
    
    
    (0.12
    )
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.29
    )Weighted average number of Common Shares
Basic (thousands)
    
    
    166,007,792
    
    
    
    166,008,044
    
    
    
    166,008,044
    
    
    
    146,939,973
    
    
    
    124,369,031Weighted average number of Common Shares
Diluted (thousands)
    
    
    166,007,792
    
    
    
    166,008,044
    
    
    
    253,574,241
    
    
    
    146,939,973
    
    
    
    124,369,031Preferred sharesbasic
    
    
    (0.01
    )
    
    
    (0.12
    )
    
    
    0.04
    
    
    
    (0.01
    )
    
    
    (0.29
    )Preferred sharesdiluted
    
    
    (0.01
    )
    
    
    (0.12
    )
    
    
    0.04
    
    
    
    (0.01
    )
    
    
    (0.29
    )Weighted average number of preferred shares -
basic and diluted (thousands)
    
    
    313,386,092
    
    
    
    313,436,995
    
    
    
    313,436,995
    
    
    
    251,047,912
    
    
    
    210,029,997
 (1) Basic net income (loss) per share for the year ended December 31, 1999,
because the company did not have any potentially diluted shares outstanding.
As a result of a corporate restructuring completed in November, 2000, the
company was obligated to issue shares to the controlling shareholder for the
amount of the tax benefit on the amortization of the intangible related to
concession that was transferred in the merger. The numbers of issuable shares,
which are determined on the basis of estimates using the Companys share price
at the date of the balance sheet, are considered dilutive and are included on
the basis of purposes of calculating dilutive earnings per share for the year
ended December 31, 2000, 2002 and 2003. The potentially dilutive shares,
consisting solely of the estimate of issuable shares mentioned above, have been
excluded from the computation for 2000, 2002 and 2003 as their effect would
have been anti-dilutive. Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais, except when indicated)Cash Flow Data:Net cash provided by (used in) operating activities
    
    
    126,238
    
    
    
    204,781
    
    
    
    151,591
    
    
    
    51,168
    
    
    
    (37,673
    )Net cash used in investing activities
    
    
    (65,926
    )
    
    
    (76,296
    )
    
    
    (115,896
    )
    
    
    (133,870
    )
    
    
    (161,832
    )Net cash provided by (used in) financing activities
    
    
    (82,144
    )
    
    
    (76,201
    )
    
    
    (122,762
    )
    
    
    180,860
    
    
    
    200,911
 2




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais, except when indicated)Cash Flow
Data:Increase (decrease) in cash and cash equivalents
    
    
    (21,832
    )
    
    
    52,284
    
    
    
    (87,067
    )
    
    
    98,158
    
    
    
    1,406Cash and cash equivalents at beginning of year
    
    
    81,259
    
    
    
    28,975
    
    
    
    116,042
    
    
    
    17,884
    
    
    
    16,478Cash and cash equivalents at end of year
    
    
    59,427
    
    
    
    81,259
    
    
    
    28,975
    
    
    
    116,042
    
    
    
    17,884
 December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais)Balance Sheet Data:Brazilian Corporate Law MethodProperty, plant and equipment, net
    
    
    392,473
    
    
    
    464,546
    
    
    
    496,899
    
    
    
    472,766
    
    
    
    417,617Total assets
    
    
    831,657
    
    
    
    956,737
    
    
    
    860,655
    
    
    
    914,457
    
    
    
    664,061Loans and financing  current portion
    
    
    68,582
    
    
    
    99,665
    
    
    
    54,331
    
    
    
    124,670
    
    
    
    198,255Loans and financing  non current portion
    
    
    153,655
    
    
    
    269,891
    
    
    
    231,922
    
    
    
    226,164
    
    
    
    169,493Capital stock
    
    
    305,396
    
    
    
    305,396
    
    
    
    305,396
    
    
    
    305,396
    
    
    
    135,494Shareholders equity
    
    
    401,250
    
    
    
    443,011
    
    
    
    445,519
    
    
    
    451,926
    
    
    
    167,138Number of shares as adjusted to reflect changes in
capital
    
    
    479,445,039
    
    
    
    479,445,039
    
    
    
    479,445,039
    
    
    
    479,445,039
    
    
    
    334,399,028U.S. GAAPProperty, plant and equipment, net
    
    
    365,542
    
    
    
    439,885
    
    
    
    494,593
    
    
    
    481,554
    
    
    
    436,611Total assets
    
    
    876,690
    
    
    
    947,743
    
    
    
    929,366
    
    
    
    972,480
    
    
    
    684,168Loans and financing  current portion
    
    
    68,582
    
    
    
    99,665
    
    
    
    54,331
    
    
    
    124,670
    
    
    
    198,255Loans and financing  non current portion
    
    
    153,655
    
    
    
    269,891
    
    
    
    231,922
    
    
    
    226,164
    
    
    
    169,493Capital stock
    
    
    305,396
    
    
    
    305,396
    
    
    
    305,396
    
    
    
    305,396
    
    
    
    135,494Shareholders equity
    
    
    430,789
    
    
    
    437,031
    
    
    
    502,839
    
    
    
    488,737
    
    
    
    171,416
 Exchange Rates There are two principal legal foreign exchange markets in Brazil:  
    
    the commercial rate exchange market; and
    
    the floating rate exchange market Most trade and financial foreign-exchange transactions are carried out on
the commercial rate exchange market. These transactions include the purchase
or sale of shares or payment of dividends or interest with respect to shares.
Foreign currencies may only be purchased through a Brazilian bank authorized to
operate in these markets. In both markets, rates are freely negotiated but may
be influenced by Central Bank intervention. In 1999, the Central Bank placed
the commercial exchange rate and the floating rate exchange market under
identical operational limits, which led to a convergence in the pricing and
liquidity of both markets. Since February 1, 1999, the floating market rate
has been the same as the commercial market rate, and the system relying on the
foreign exchange rate band has been eliminated. However, there is no guarantee
that these rates will continue to be the same in the future. Despite the
convergence in pricing and liquidity of both markets, each market continues to
be regulated separately. Since 1999, the Central Bank has allowed the real/U.S. dollar exchange
rate to float freely, and during that period, the real/U.S. dollar exchange
rate has fluctuated considerably. In the past, the Central Bank has intervened
occasionally to control unstable movements in foreign exchange rates. We
cannot predict whether the Central Bank or the Brazilian government will
continue to let the realfloat freely or will intervene in the exchange rate
market 3




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through a currency band system or otherwise. The realmay depreciate or
appreciate substantially in the future. For more information on these risks,
see Risk FactorsRisks relating to Brazil. The following tables set forth the commercial selling rate, expressed in
reaisper U.S. dollar (R$/U.S.$), for the periods indicated. Exchange Rate of R$ per U.S.$Low
    
    High
    
    Average(1)
    
    Year-EndYear ended December 31,1999
    
    
    1.2078
    
    
    
    2.1647
    
    
    
    1.8150
    
    
    
    1.78902000
    
    
    1.7234
    
    
    
    1.9847
    
    
    
    1.8295
    
    
    
    1.95542001
    
    
    1.9357
    
    
    
    2.8007
    
    
    
    2.3522
    
    
    
    2.32042002
    
    
    2.2709
    
    
    
    3.9552
    
    
    
    2.9309
    
    
    
    3.53332003
    
    
    2.8219
    
    
    
    3.6623
    
    
    
    3.0715
    
    
    
    2.8892
   Source:
    
    Central Bank of Brazil, PTAX. PTAX is the average of the exchange
rates negotiated in the commercial rate market on a given day.(1) Represents the average of the exchange rates (PTAX) on the last day of each
month during the relevant period. Exchange Rate of R$ per U.S.$Low
    
    HighMonth EndedDecember 31, 2003
    
    
    2.8883
    
    
    
    2.9434January 31, 2004
    
    
    2.8022
    
    
    
    2.9409February 29, 2004
    
    
    2.9042
    
    
    
    2.9878March 31, 2004
    
    
    2.8752
    
    
    
    2.9410April 30, 2004
    
    
    2.8743
    
    
    
    2.9522May 31, 2004
    
    
    2.9569
    
    
    
    3.2051June 25, 2004
    
    
    3.1030
    
    
    
    3.1651
   Source:
    
    Central Bank of Brazil, PTAX. PTAX is the average of the exchange
rates negotiated in the commercial rate market on a given day. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors This section is intended to be a summary of more detailed discussions
contained elsewhere in this annual report. The risks described below are not
the only ones we face. Our business, results of operations or financial
condition could be harmed if any of these risks materializes and, as a result,
the trading price of the ADSs could decline. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions have a direct impact on our business, operations and the
market price of our preferred shares and our ADSs. In the past, the Brazilian government has intervened in the Brazilian
economy and occasionally made drastic changes in policy. The Brazilian
governments actions to control inflation and affect other policies have often
involved wage and price controls, currency devaluations, capital controls, and
limits on imports, among other 4




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things. Our business, financial condition, results of operations and the
market price of our preferred shares and ADSs may be adversely affected by
changes in government policies, as well as general economic factors, including:  
    
    currency fluctuations;
    
    inflation;
    
    price instability;
    
    energy policy;
    
    interest rates;
    
    tax policy; and
    
    other political, diplomatic, social and economic developments in or affecting Brazil. Inflation and certain government measures to curb inflation may have
adverse effects on the Brazilian economy, the Brazilian securities market
and/or our business and operations. Brazil has historically experienced extremely high rates of inflation.
Inflation and certain of the Brazilian governments measures taken in the
attempt to curb inflation have had significant negative effects on the
Brazilian economy. Since 1994, Brazils inflation rate has been substantially
lower than in previous periods. However, inflationary pressures persist, and
actions taken in an effort to curb inflation, coupled with public speculation
about possible future governmental actions, have contributed to economic
uncertainty in Brazil and heightened volatility in the Brazilian securities
market. In 2003, the general price index, or the IGP-DI (the #ndice Geral de
Preços  Disponibilidade Interna), an inflation index developed by the Fundação
Getúlio Vargas, a private Brazilian economic organization, reflected inflation
of 7.7%, compared to 26.4% in 2002 and 10.4% in 2001. If Brazil experiences
significant inflation, we may be unable to increase service rates to our
customers in amounts that are sufficient to cover our increasing operating
costs, and our business may be adversely affected. Fluctuations in the value of the real against the value of the U.S. dollar
may adversely affect our ability to pay U.S. dollar-denominated or U.S.
dollar-linked obligations and could lower the market value of our preferred
shares and ADSs. The Brazilian currency has historically experienced frequent devaluations.
The realdevalued against the U.S. dollar by 18.7% in 2001. During 2002, the
realcontinued to undergo significant devaluation due in part to the political
uncertainty in connection with the elections and the global economic slowdown.
In 2002, the realdevalued against the U.S. dollar by 52.3%. In 2003, the
internal economy showed inflation stabilization and the dissipation about
uncertainty in the Governmental economic team, which promoted an appreciation
of the realby 18.2%. However, there is no guarantee that this trend will
continue or that the exchange rate will remain at current levels. Devaluations
of the realwould reduce the U.S. dollar value of distributions and dividends
on preferred shares and the ADSs and may also reduce the market value of the
preferred shares and the ADSs. See Selected Financial DataExchange Rates
for more information on exchange rates. As of December 31, 2003, we had R$222.2 million in total debt, all of
which was denominated in U.S. dollars. As of December 31, 2003, we had
currency derivatives in place to cover 100% of our U.S. dollar-denominated debt
and U.S. dollar-linked obligations. Also, significant costs relating to our
network infrastructure are payable or linked to payment by us in U.S. dollars.
At the same time, while we may derive income from derivative transactions
denominated in foreign currencies, all of our operating revenues are generated
in reais. To 5




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the extent that the value of the realdecreases relative to the U.S.
dollar, our debt becomes more expensive to service and it becomes more costly
for us to import the technology and the goods that are necessary to operate our
business. Deterioration in economic and market conditions in other countries,
especially emerging market countries, may adversely affect the Brazilian
economy and our business. The market for securities issued by Brazilian companies is influenced by
economic and market conditions in Brazil and, to varying degrees, market
conditions in other Latin American and emerging market countries. Although
economic conditions are different in each country, the reaction of investors to
developments in one country may cause the capital markets in other countries to
fluctuate. Developments or conditions in other emerging market countries have
at times significantly affected the availability of credit in the Brazilian
economy and resulted in considerable outflows of funds and declines in the
amount of foreign currency invested in Brazil. Adverse developments in other emerging market countries could lead to a
reduction in both demand and the market price for our preferred shares and
ADSs. Risks Relating to the Brazilian Telecommunications Industry and Us Extensive government regulation of the telecommunications industry may
limit our flexibility in responding to market conditions, competition and
changes in our cost structure. Our business is subject to extensive government regulation, including any
changes that may occur during the period of our authorization to provide
telecommunication services. Anatel, which is the main telecommunications
industry regulator in Brazil, regulates, among other things:  
    
    industry policies and regulations;
    
    licensing;
    
    tariffs;
    
    competition;
    
    telecommunications resource allocation;
    
    service standards;
    
    technical standards;
    
    interconnection and settlement arrangements; and
    
    universal service obligations. This extensive regulation and the conditions imposed by our authorization
to provide telecommunication services may limit our flexibility in responding
to market conditions, competition and changes in our cost structure. 6




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Our results may be affected in the medium or long term as a result of the
new SMP rules. In 2002, Anatel changed the SMP regime (first enacted in December 2000),
thus encouraging companies operating under the SMC system to migrate to the SMP
system. Under the SMP regime, we no longer receive payment from our customers
for outbound long distance traffic, but we receive payment for the use of our
network, in accordance with the network usage remuneration plan. In 2003, this
change had little impact on us, but we cannot assure that in the next years the
interconnection fees that we will receive from long distance operators will
compensate us for the revenues that we would have received from our customers
for outbound long distance traffic. Until June 30, 2004, SMP service providers may opt to establish a price
cap or freely negotiate their interconnection charges. After that date, free
negotiation will be the rule, subject to Anatel regulations to be issued in
regarding to the traffic capacity and interconnection infrastructure that must
be made available to requesting parties. In addition, under the SMP regime, an SMP cellular operator will pay for
the use of another SMP cellular operators network in the same registration
area only if the traffic carried from the first operator to the second exceeds
55% of the total traffic exchanged between them. In that case, only those calls
that have surpassed the 55% level will be subject to payment for network usage.
This rule is valid until June 30, 2005, after which no payments will be due for
network usage between SMP networks, regardless of the amount of traffic. As a
result, if the traffic we terminate for other SMP cellular operators exceeds
the traffic they terminate for our company, our revenues and results of
operations may be adversely affected. The new rules may negatively affect our revenues and results of
operations. If the inflation adjustment index now applied to our tariffs is changed,
the new index may not be adequate. The Brazilian government is considering replacing the IGP-DI, the monetary
adjustment index currently used in connection with the tariffs applied in the
telecommunications industry, with another index, which has not yet been
identified. We cannot assure you that a new index, if any, would adequately
reflect the effect of inflation on our tariffs. We face substantial competition that may reduce our market share and harm
our financial performance. There is substantial competition in the telecommunications industry. We
not only compete with companies that provide wireless services and trunking,
but also with companies that provide fixed-line telecommunications and Internet
access services, due to the trend towards the convergence and substitution of
mobile services for these other services. We expect competition to intensify as a result of the entrance of new
competitors and the rapid development of new technologies, products and
services. Our ability to compete successfully will depend on our marketing
techniques, as well as on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by our competitors. To the extent
that we do not keep pace with technological advances, or fail to timely respond
to changes in competitive factors in our industry, we could lose a portion of
our market share or experience a decline in our revenue. Competition from
other mobile communications service providers in the region in which we operate
may also affect our financial results by causing, among other things, the rate
of our customer growth to decline and bring about decreases in tariff rates and
increases in selling expenses. This could have a material adverse effect on
our results of operations. 7




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There has been consolidation in the Brazilian telecommunications market,
and we believe this trend may continue. Consolidations may result in increased
competitive pressures within our market. We may be unable to adequately
respond to pricing pressures resulting from consolidation, which would
adversely affect our business, financial condition and results of operations. Our results of operations would be affected by a high rate of customer
turnover or a decrease in our customer growth. A high rate of customer turnover and/or a decrease in our customer growth
could adversely affect our results of operations as well as our competitive
position. The rate of customer turnover may be the result of several factors,
including limited network coverage and lack of sufficient reliability of our
services, as well as increased competition in the region in which we operate
and the economic conditions in Brazil. The industry in which we conduct our business is subject to rapid
technological changes and these changes could have a material adverse effect on
our ability to provide competitive services. The telecommunications industry is subject to rapid and significant
technological changes. Our success depends, in part, on our ability to
anticipate and adapt in a timely manner to technological changes. We expect
that new products and technologies will emerge and that existing products and
technologies will be further developed. The advent of new products and technologies could have a variety of
consequences for us. These new products and technologies may reduce the price
of our services by providing lower-cost alternatives, or they may be superior
to, and render obsolete, the products and services we offer and the
technologies we use, requiring investment in new technology. The cost of
upgrading our products and technology in order to continue to compete
effectively could be significant, and our ability to fund this upgrading may
depend on our ability to obtain additional financing. Our controlling shareholders have a great deal of influence over our
business. PT Móveis SGPS, S.A. and Telefónica Móviles, S.A., our principal
shareholders, currently own, directly and indirectly, approximately 55.25% of
our common shares and 24.32% of our total capital. PT Móveis SGPS, S.A. is
100% controlled by Portugal Telecom, SGPS, S.A. See Item 7. Major
Shareholders and Related Party TransactionsMajor Shareholders. Due to their
share ownership, our principal shareholders have the power to control us and
our subsidiaries, including the power to elect our directors and officers and
determine the outcome of any action requiring shareholder approval, including
transactions with related parties, corporate reorganizations and the timing and
payment of our dividends. In addition, as Portugal Telecom and Telefónica
Móviles share their participation in us equally, any disagreement or dispute
between them may have an impact on the decision-making capabilities of our
management. The wireless industry, including us, may be harmed by reports suggesting
that radio frequency emissions cause health problems and interfere with medical
devices. Media and other reports have suggested that radio frequency emissions from
wireless handsets and base stations may cause health problems. If consumers
harbor health-related concerns, they may be discouraged from using wireless
handsets. These concerns could have an adverse effect on the wireless
communications industry and, possibly, expose wireless providers, including us,
to litigation. We cannot assure you that further medical research and studies
will refute a link between the radio frequency emissions of wireless handsets
and base stations and these 8




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health concerns. Government authorities could increase regulation of
wireless handsets and base stations as a result of these health concerns or
wireless companies, including us, could be held liable for costs or damages
associated with these concerns, which could have an adverse effect on our
business. The expansion of our network may be affected by these perceived risks
if we experience problems in finding new sites to expand our network, which in
turn may delay the expansion and may affect the quality of our services. Risks Relating to Our Preferred Shares and Our ADSs Our preferred shares and our ADSs generally do not have voting rights. In accordance with Brazilian corporate law and our by-laws, holders of our
preferred shares, and therefore of our ADSs, are not entitled to vote at
meetings of our shareholders, except in limited circumstances. See Item 10.
Additional InformationMemorandum and Articles of Association. Our bylaws state that holders of preferred shares will have full voting
rights if we do not pay minimum dividends for three consecutive fiscal years,
and the preferred shareholders will retain those voting rights until the
minimum dividends are paid. Because we did not pay minimum dividends for the
years ended December 31, 2002 and 2003 and do not anticipate being able to pay
dividends for the year ended December 31, 2004, we expect that holders of our
preferred shares will be able to exercise voting rights after the 2005 general
shareholders meeting and until we pay the minimum dividends for 2004 or any
subsequent year, on a share for share basis with our common shares. This might
have a significant impact, since our controlling shareholders would cease to
have the majority of our voting stock. You might be unable to exercise preemptive rights with respect to our
preferred shares unless there is a current registration statement in effect
that covers those rights or unless an exemption from registration applies. You will not be able to exercise the preemptive rights relating to our
preferred shares underlying your ADSs unless a registration statement under the
U.S. Securities Act of 1933, as amended, or the Securities Act, is effective
with respect to those rights, or unless an exemption from the registration
requirements of the Securities Act is available. We are not obligated to file
a registration statement. Unless we file a registration statement or an
exemption from registration applies, you may receive only the net proceeds from
the sale of your preemptive rights by the depositary, or, if the preemptive
rights cannot be sold, they will lapse and you will not receive any value for
them. For more information on the exercise of your rights, see Item 10.
Additional Information. An exchange of ADSs for preferred shares risks loss of certain foreign
currency remittance and Brazilian tax advantages. The ADSs benefit from the certificate of foreign capital registration,
which permits The Bank of New York, as depositary, to convert dividends and
other distributions with respect to preferred shares into foreign currency, and
to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for
preferred shares will then be entitled to rely on the depositarys certificate
of foreign capital registration for five business days from the date of
exchange. Thereafter, they will not be able to remit non-Brazilian currency
abroad unless they obtain their own certificate of foreign capital
registration, or unless they qualify under Resolution 2,689 of the Central Bank
of Brazil, dated January 26, 2000, known as Resolution 2,689, which entitles
certain investors to buy and sell shares on Brazilian stock exchanges without
obtaining separate certificates of registration. If holders of ADSs do not qualify under Resolution 2,689, they will
generally be subject to less favorable tax treatment on distributions with
respect to our preferred shares. There can be no assurance that the
depositarys certificate of registration or any certificate of foreign capital
registration obtained by holders of ADSs will not be 9




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affected by future legislative or regulatory changes, or that additional
Brazilian law restrictions applicable to their investment in the ADSs may not
be imposed in the future. The relative volatility and illiquidity of the Brazilian securities
markets may adversely affect holders of ADSs. Investments in securities, such as the preferred shares or the ADSs, of
issuers from emerging market countries, including Brazil, involves a higher
degree of risk than investing in securities of issuers from more developed
countries. The Brazilian securities market is substantially smaller, less liquid,
more concentrated and more volatile than major securities markets in the United
States. There is also significantly greater concentration in the Brazilian
securities market than in major securities markets in the United States. These
features may substantially limit the ability to sell the preferred shares
underlying the ADSs at a price and time at which holders wish to do so. 
 ITEM 4. INFORMATION ON THE COMPANY A. Our History and Development General We are incorporated under the laws of the Federative Republic of Brazil
under the name Tele Leste Celular Participações S.A., known as Tele Leste. We
have the legal status of a sociedade por ações, or a stock corporation,
operating under the Brazilian corporate law. Our principal executive offices
are located at Av. Silveira Martins 1036, Cabula, 41150-000 Salvador, Bahia,
Brazil. Our telephone number is +55 71 387-7620, our facsimile number is +55
71 387 7602 and our website is www.vivo.com.br. The information on our website
is not part of this annual report. Our agent for service of process in the
United States is CT Corporation System, located at 111 Eighth Avenue, New York,
NY 10011. We are a leading provider of cellular telecommunications services in
Brazil through our subsidiaries Telebahia Celular and Telergipe Celular,
according to market share data published by Anatel. Below you will find a chart showing the major companies in our ownership
structure as of December 31, 2003. 10




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(FLOW CHART) Telebrás and the Privatization Tele Leste was created as a result of a restructuring of Telebrás in July
1998. Before 1972, there were more than 900 telecommunications companies
operating throughout Brazil. Between 1972 and 1975, Telebrás and its operating
subsidiaries, known as the Predecessor Companies, and collectively known as the
Telebrás System, were created, acquiring almost all of the telecommunication
companies in Brazil, and creating a near monopoly over the provision of public
telecommunications services in Brazil. In 1995, the federal government began a comprehensive reform of Brazils
telecommunications regulatory system. In July 1997, Brazils national congress
adopted the General Telecommunications Law, which provided for the
establishment of a new regulatory framework, the introduction of competition
and the privatization of the Telebrás System. 11




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In January 1998, in preparation for the restructuring and privatization of
the Telebrás System, the cellular telecommunications operations of the Telebrás
System were spun off into separate companies. In May 1998, the Telebrás System
was restructured to form, in addition to Telebrás, 12 new holding companies.
Virtually all of the Predecessor Companies assets and liabilities were
allocated to the new holding companies, which we refer to as the New Holding
Companies Tele Leste was one of the New Holding Companies. Tele Leste was allocated
all of the share capital held by Telebrás in Telebahia and Telergipe, the
cellular operating companies that had provided cellular telecommunications
service in the states of Bahia and Sergipe, respectively since 1993. The Brazilian federal governments common shares of Tele Lestes capital
stock were purchased by a consortium comprising Iberdrola Investimentos
Sociedade Unipessoal Ltda., an equity investment company controlled by
Iberdrola S.A., or Iberdrola (62%), and Telefónica Internacional S.A., a
subsidiary of Telefónica S.A. dealing with investments in the telecommunication
industry outside of Spain (38%). Purchase of Shares from Iberdrola On April 5, 2001, Telefónica S.A. and Iberdrola S.A. signed an agreement
through which Telefónica S.A. was going to acquire all the Iberdrola groups
shareholdings in the Brazilian telecommunications operators in which both
groups held interests. Telefónica S.A. acquired all the capital stock held directly and
indirectly by the Iberdrola group in our capital. In exchange, Iberdrola
received shares of Telefónica S.A. In May 2002 Telefónica S.A. contributed these shares to its affiliated
company Telefónica Móviles S.A. Brasilcel On January 23, 2001, Portugal Telecom and Telefónica Móviles entered into
a strategic agreement to create a mobile services company in Brazil that would
aggregate all of their investments in cellular telecommunications businesses to
the extent permitted under Brazilian law. In December 2002, Anatel approved
the joint venture between Portugal Telecom and Telefónica Móviles. This joint
venture, named Brasilcel N.V., or Brasilcel, with headquarters in the
Netherlands, has 56.2% of the total market in Brazil, with 20.7 million
customers at December 31, 2003, according to data published by
Anatel. Its operations cover an area of approximately 130 million inhabitants,
or 73% of the Brazilian population, and approximately 83% of its GDP. Portugal
Telecom and Telefónica Móviles are managing the joint venture on an equal
basis. In December 2002, Portugal Telecom and Telefónica transferred to Brasilcel
all of their direct and indirect interests in:  
    
    us;
    
    Telesp Celular Participações S.A., which controls an A Band
operator in the state of São Paulo, and a B Band operator in the
states of Paraná and Santa Catarina;
    
    Tele Sudeste Celular Participações S.A., which controls A
Band operators in the states of Rio de Janeiro and Espírito Santo;
and
    
    Celular CRT Participações S.A., which controls an A Band
operator in the state of Rio Grande do Sul. 12




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On December 31, 2003, we were controlled by Iberoleste Participações S.A.
(53.80% of the common shares and 21.90% of the total capital), Brasilcel N.V.
(3.17% of the common shares and 3.38% of the total capital) and Tagilo
Participações Ltda. (1.44% of the common shares and 2.42% of the total
capital). Iberoleste Participações S.A. and Tagilo Participações Ltda. are
controlled by Brasilcel (100% of the total capital). Vivo All of the operating companies participating in the joint venture between
Portugal Telecom and Telefónica Móviles, named Brasilcel, have been operating
under the brand name Vivo since April 2003. The consolidation of a unified
commercial model for the whole country centered on the Vivo brand, substituting
the different brands under which the different companies offered their services
in their respective states. The commercial strategy of Vivo is to increase the
operating companies customer base as well as revenues, by retaining customers
as well as maintaining their distribution channels. The launching of the Vivo
brand was accompanied by loyalty programs and other measures designed to
contribute to the success of the commercial strategy. Capital Expenditures The primary focus of our capital expenditure program has been, and
continues to be, the expansion of the capacity of the services we currently
offer and the provision of new services. The following table sets forth our capital expenditures for the periods
indicated: Year ended December 31,2003
    
    2002
    
    2001(in millions of reais)Automatic switching equipment
    
    
    12.2
    
    
    
    4.8
    
    
    
    8.0Other equipment
    
    
    16.5
    
    
    
    16.3
    
    
    
    35.4Real estate
    
    
    0.1
    
    
    
    5.4
    
    
    
    10.0Information technology
    
    
    8.5
    
    
    
    8.1
    
    
    
    21.6Other assets(1)(2)
    
    
    32.8
    
    
    
    42.0
    
    
    
    41.0Total capital expenditures
    
    
    70.2
    
    
    
    76.7
    
    
    
    116.0
   (1)
    
    Handsets for rental, network constructions, furniture and fixtures,
office equipment, and store layouts.(2)
    
    In 2003, Other assets are composed by: fixed apparels for rent (R$12.8
million), capitalized millstone (R$2.9 million), JOA (R$1.1 million), I
Project TIDE (R$ 1.1 million), stores (R$ 0.2 million), and others (R$
14.7 million). We anticipate that our capital expenditures for 2004 will be approximately
R$83 million. We intend to fund these capital expenditures with cash
generated from operations. See Item 5. Operating and Financial Review and
ProspectsLiquidity and Capital Resources. B. Business Overview Overview According to market share data published by Anatel, we are a leading
provider of cellular telecommunication services in Brazil through our
subsidiaries Telebahia Celular and Telergipe Celular in the Brazilian states of
Bahia and Sergipe, respectively, referred to in this annual report as our
Region. At December 31, 2003, we had 1,126,244 customers. Our net operating
revenues in 2003, 2002 and 2001 were as follows: 13




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Year ended December 31,2003
    
    2002
    
    2001(in millions of reais)Telebahia Celular
    
    
    370.6
    
    
    
    357.4
    
    
    
    320.5Telergipe Celular
    
    
    84.2
    
    
    
    82.7
    
    
    
    68.3Intercompany eliminations
    
    
    (13.5
    )
    
    
    (8.7
    )
    
    
    (2.7
    )Total
    
    
    441.3
    
    
    
    431.4
    
    
    
    386.1
 We provide mobile telecommunication services on a frequency range known as
A Band in Region I of the General Authorization PlanPGA, which covers 31% of
the municipalities and 68% of the population of our Region. At December 31,
2003, we had approximately 1,126 thousand lines in service, a 15.7% increase
from the end of the previous year, and a market share of approximately 55% in
our Region. Our Operations The following table sets forth information on our cellular
telecommunication base, coverage and related matters at the dates and for the
years indicated. 2003
    
    2002
    
    2001Cellular lines in service at year-end
    
    
    1,126,244
    
    
    
    972,729
    
    
    
    821,932Contract customers
    
    
    290,798
    
    
    
    299,376
    
    
    
    322,861Prepaid customers
    
    
    835,446
    
    
    
    673,353
    
    
    
    499,071Customer growth during the year
    
    
    16.4
    %
    
    
    18.3
    %
    
    
    22.0
    %Churn(1)
    
    
    33.0
    %
    
    
    25.5
    %
    
    
    19.8
    %Estimated population of region at year-end (million)(2)
    
    
    15.4
    
    
    
    15.1
    
    
    
    15.1Estimated covered population at year-end (million)(3)
    
    
    10.5
    
    
    
    9.5
    
    
    
    9.3Percentage of population covered at year-end(4)
    
    
    68
    %
    
    
    63
    %
    
    
    62
    %Penetration at year-end(5)
    
    
    13.4
    %
    
    
    10.6
    %
    
    
    8.9
    %Percentage of municipalities covered
    
    
    30.6
    %
    
    
    29.4
    %
    
    
    29.2
    %Average monthly minutes of use per customer(6)
    
    
    106
    
    
    
    101
    
    
    
    116Market share (7)
    
    
    55.2
    %
    
    
    60.4
    %
    
    
    64
    %
   (1)
    
    Churn is the number of customers that leave us during the year,
calculated as a percentage of the simple average of customers at the
beginning and the end of the year.(2)
    
    Projections based on estimates of the Instituto Brasileiro de Geografia e
EstatísticaIBGE.(3)
    
    Number of people within our Region that can access our cellular
telecommunication signal.(4)
    
    Percentage of the population in our Region that can access our cellular
telecommunication signal.(5)
    
    Number of cellular lines in service, including those of our competitors,
divided by the population of our Region.(6)
    
    Average monthly minutes of use per lines in service is the total minutes
of calls received and made by our customers divided by the simple average
of lines in service during the relevant year (includes roaming in and
excludes roaming out).(7)
    
    Information published by ANATEL. Our Services We provide cellular telecommunications services using both digital and
analog technologies. Our network provides both CDMA digital service and AMPS,
or analog services. All our services are provided in the frequency of 850 MHz. We provide voice service and ancillary services, including voicemail and
voicemail notification, call forwarding, three-way calling, caller
identification, short messaging, cellular chat room, and data service such as
wireless application protocol service through which clients can access WAP
sites and portals. We offer direct access to the Internet through either PCMCIA
(Personal Computer Memory Card International Association, an organization 14




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consisting of some 500 companies that has developed a standard for small,
credit card-sized devices, called PC Cards) cards designed to connect
compatible PDAs (Personal Digital Assistant, a handheld device that combines
computing, telephone/fax, Internet and networking features) and laptops or
cellular phones by cable connection that offers corporate subscribers secure
access to their intranet and office resources. In addition we launched in 2003 MMS (Multimedia Message Service) and MExE
(Mobile Execution Environment) that enable the handset to download applications
and execute them at the mobile. We also launched a user interface with icons at
the handset to identify the main services, such as Voice Mail, Downloads, SMS,
etc, for a friendlier access to our services. We offer roaming services, through agreements with local cellular service
providers throughout Brazil and other countries that allow our subscribers to
make and receive calls while out of our concession areas. We also provide
reciprocal roaming services to subscribers of those cellular service providers
while they are in our concession areas. Our Region The combined population of our Region is approximately 15.4 million,
representing 8.7% of Brazils total population, and encompassing 16
metropolitan areas with populations in excess of 100,000, including Salvador,
Brazils third largest city, which has approximately 2.6 million inhabitants.
Approximately 67% of the population of the state of Bahia and 71% of the
population of the state of Sergipe live in urban areas. We provide mobile telecommunication services on a frequency range known as
A band in an area that covers 30.6% of the municipalities and 67.5% of the
population of our Region. The following table sets forth population, gross domestic product (GDP)
and per capita income statistics for each state in our Region at the dates and
for the year indicated. At December 31, 2003
    
    Year ended December 31, 2003Population
    
    % of Brazils
    
    GDP (billions of
    
    % of Brazils
    
    Per capita incomeArea
    
    (millions)
    
    population
    
    reais)(1)(2)
    
    GDP(2)
    
    (reais)(1)(2)Bahia state
    
    
    13.6
    
    
    
    7.7
    %
    
    
    64.3
    
    
    
    4.3
    %
    
    
    4,726.42Sergipe state
    
    
    1.8
    
    
    
    1.0
    %
    
    
    8.2
    
    
    
    0.6
    %
    
    
    3,481.84Our Region
    
    
    15.4
    
    
    
    8.7
    %
    
    
    72.5
    
    
    
    4.9
    %
    
    
    4,697.30
   Source:
    
    IBGE. We calculated the GDP for the states based on percentages
published by IBGE in previous years.(1)
    
    Our estimates are expressed in nominal reais.(2)
    
    Nominal Brazilian GDP was R$1,515 billion as of December 2003. Our business, financial condition, results of operations and prospects
depend, in part, on the performance of the Brazilian economy. See Item 3D.
Risk Factors. Marketing and Sales We closely follow the developments in the markets where we operate and
constantly launch new promotions. A strong customer acquisition policy has been implemented across all the
companys operators through aggressive mass sales promotions and segmented
actions. Efforts to acquire new customers for prepaid and postpaid services
have mostly been made through joint promotions designed to increase intranet
traffic and stimulate the use of data services. 15




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With the premise of keeping a sustainable customer base, the acquisition
promotions have also been open to current customers who wish to change their
cell phones. The company is strongly involved in a high-value customer loyalty
program by offering aggressive discounts on cell phones through direct
marketing actions. Tele Leste currently has 22 shops and kiosks of its own, and an authorized
third-party network, on an exclusive or nonexclusive basis, with 290 service
points capable of selling services and cell phones. The credit recharges are
available for customers in more than 7.000 sites. Customer Service As part of the strategy for standardizing service provided by Tele Leste
operators to their customers, we have outsourced 100% of the customer services
while keeping full management control. These services are available on a
24-hour basis from our call center and our website. Satisfaction evaluation Customer satisfaction is evaluated by regular satisfaction surveys. More
than 8,700 Vivo customers were interviewed all over the country in 2003 for
aspects such as customer assistance, technical assistance, products and
services. The overall satisfaction mark was 8.25 on a range from 1 to 10.
Several actions have since been carried out in order to increase our customers
satisfaction. Assistance to customer claims Tele Leste is provided with a qualified staff designed to assist and
provide explanations to customers in any and all requests or doubts concerning
services provided. All customers are given a feedback to their requests. Vivo was ranked first in 2003 in a survey entitled Companies that most
respect consumers, carried out by the IBRC (Brazilian Institute of Customer
Relations) for the Consumidor Moderno(Modern Consumer) issue. Our Network Before November 1998, our network used only AMPS analog technology. After
privatization in 1998, we began to use CDMA digital and TDMA digital
technologies. Digitalization offers certain advantages, such as greater
network capacity and additional revenue through the sale of value-added
services. Digital cellular telecommunications service also reduces the risk of
fraud. We continue to increase network capacity and coverage to improve our
quality of service and to meet customer demand. Our network is connected primarily through a fiber-optic transmission
system we lease from Tele Norte Leste Participações S.A., or Telemar. It also
includes cellular switches, base stations, and other communication devices,
such as voicemail, prepaid service, SMS, Home Location Registers, Signalling
Transfer Point and gateways. NEC do Brasil S.A., Ericsson Telecomunicações
S.A., Nortel Networks  Northern Telecom do Brasil, Motorola Industrial Ltda.,
Motorola Services Ltda. and Lucent Technologies do Brasil, Ind. e Com. Ltda.
are our main suppliers. We continue to increase network capacity and coverage
to improve service quality and to meet consumer demand. As of December 31, 2003, Tele Leste network covered 315 of the
municipalities, or 67.5% of the population, of our Region. Our advanced network management technology ensures global management and
supervision of our network process and performance. The network management
center located in Salvador, which can identify any problems in our, and in
other, networks using the failure and signal monitoring systems. In addition,
quality and 16




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service standards are constantly monitored. The network management center
is integrated with the maintenance and operations center, which is designed to
supervise our Network Elements, Infrastructure and Transmission, and operate
the Radio Network Elements, Computing Centrals, Backbone and Service Platforms. Our network is equipped to provide continuity of service to our customers
in the event of network interruptions. We have developed contingency plans for
potential catastrophes in our switching centers, power supply interruptions and
security breaches. Telecommunication concessions or authorizations require companies to meet
certain obligations for service quality and annual network expansion. See
"Regulation of the Brazilian Telecommunications IndustryObligations of
Telecommunications Companies. We have already met all of our network
expansion obligations required under our authorization. Sources of Revenue We generate revenue from:  
    
    usage charges, which include charges for outgoing calls,
roaming charges, Internet access through wireless application
protocols and prepaid card charges;
    
    monthly subscription charges;
    
    network usage charges (or interconnection charges), which are
amounts that we charge to cellular, fixed-line and long distance
service providers for the use of our network;
    
    other charges, including charges for call forwarding, call
waiting, call blocking and Data Services, such as short message
service, wap, downloads and MMS services. They are charged only when
the customers plan does not include these services; and
    
    the sale of cellular handsets and accessories. Our rates are subject to approval by Anatel. See Regulation of the
Brazilian Telecommunications IndustryRate Regulation. The table below sets forth our net operating revenues by category of
activity: 17




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Year ended December 31,2003
    
    2002
    
    2001(thousands of reais)Usage charges
    
    
    276,958
    
    
    
    269,036
    
    
    
    241.881Monthly subscription charges
    
    
    38,412
    
    
    
    40,278
    
    
    
    35,026Interconnection charges
    
    
    181,097
    
    
    
    179,849
    
    
    
    169,325Other
    
    
    17,394
    
    
    
    12,947
    
    
    
    10.920Gross revenue from services
    
    
    513,861
    
    
    
    502,110
    
    
    
    57,152Handsets and accessories sales
    
    
    106,441
    
    
    
    86,477
    
    
    
    47,114Gross revenue
    
    
    620,302
    
    
    
    588,587
    
    
    
    504,266
 Contract Customers Since October 14, 1994, cellular telecommunications service in Brazil,
unlike in North America, has been offered on a calling-party-pays basis,
under which the customer pays only for calls that it originates. In addition,
customers pay roaming charges on calls made or received outside of their home
registration area. Customer charges are calculated based on the customers calling plan, the
location of the party called, the place from which the call originates and
certain other factors, as described below. Our Region is divided into six
registration areas, designated for payment purposes, comprised of five areas in
the state of Bahia and of one area in the state of Sergipe. Interconnection Charges We earn revenues from any call originated in another cellular or
fixed-line service provider network connecting one of our customers. We charge
the service provider from whose network the call originates a network usage
charge for every minute our network is used during the call. See Operating
AgreementsInterconnection Agreements. Tariff increases are subject to
Anatel  ́s review and approval. Bill and Keep Under the digital cellular telecommunications system known as SMP,
remuneration for network usage between SMP mobile operators will only be due if
traffic carried in the same registration area between two networks, in a given
direction, exceeds 55% of the total traffic exchanged between them. In this
case, only those calls which have surpassed the 55% threshold will be subject
to payment for network usage. This rule is valid until June 30, 2005.
Thereafter, SMP operators will adopt full Bill and Keep, by which no
remuneration will be due for network usage among SMP networks, regardless of
the amount of carried traffic. Roaming Fees We receive revenue pursuant to roaming agreements with other cellular
service providers. When a call is made from within our Region by a customer of
another cellular service provider, that service provider pays us for the call
at the applicable rate. Conversely, when one of our customers makes a cellular
call outside our Region, we must pay the charges associated with that call to
the cellular service provider in whose region the call originates. See
"Operating AgreementsRoaming Agreements. Handset Sales We sell dual-mode (800MHz CDMA/AMPS) and tri-mode (1900MHz CDMA and 800MHz
CDMA/AMPS) cellular handsets through our own stores and dealers. Although we
still have some customers using analog service (approximately 8.1% of our total
customer base at December 31, 2003), we have implemented a series of actions,
such as providing discounts on digital handsets, discounts on monthly fees for
digital services, digital handset rentals and free digital handsets to our high
value customers, to encourage analog customers to transfer to digital service.
Our current suppliers are Motorola, LG, Samsung and Nokia. 18




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Operating Agreements We have an agreement with Telemar to lease physical space, real estate,
air conditioning, energy, security and cleaning services. We lease from Telemar
transmission capacity necessary to complete the construction of our network
infrastructure. Interconnection Agreements The terms of our interconnection agreements include provisions with
respect to the number of connection points and traffic signals. See
"Regulation of the Brazilian Telecommunications IndustryObligations of
Telecommunications Companies and Interconnection. We believe that our subsidiaries have adequate interconnection agreements
with all the fixed line operators and long distance carriers they need for the
provision of their services. We also believe that our subsidiaries have all the
necessary interconnection agreements with local distance carriers. Roaming Agreements We are member of the Brazilian Roaming Committee, a group comprised of the
21 companies providing cellular services in Brazil through either A and B
bands. The Committee was created to standardize roaming services in Brazil and
elsewhere. The roaming agreements require us and the other cellular service providers
to provide service to roaming customers on the same basis that each member
provides service to its own customers, and to carry out a monthly
reconciliation of roaming customer usage charges. We offer automatic international roaming in Argentina, Uruguay, Chile,
Dominican Republic and South Korea. Currently the markets of the United States,
Mexico and Canada are offered to our customers through third-party partners, as
well as Japan. Since 2000, we provide international GSM services through the
use of GSM handsets in most parts of Europe, Africa, Asia and Oceania. Taxes on Telecommunications Services and Handset Sales The cost of telecommunications services and handset sales to customers
incorporates a variety of taxes, including:  
    
    ICMS. The principal tax is the Imposto sobre Circulação de
Mercadorias e Serviços, or ICMS. ICMS is a tax that the Brazilian
states impose at varying rates from 25% to 30% on certain revenues
from the sale of goods and services, including telecommunications
services.
    
    COFINS. The Contribuição Para Financiamento da Seguridade
Social, or COFINS, is a social contribution tax on gross operating
revenues at a rate of 3%.
    
    PIS. The Programa de Integração Social, or PIS, is another
social contribution tax that is imposed on gross operating revenue
at rates varying between 0.65% and 1.65%.
    
    FUST. On August 17, 2000, the Brazilian federal government,
created the Fundo de Universalização dos Serviços de
Telecomunicações, or FUST, a social contribution tax applicable to
all telecommunications services at a rate of 1%. The purpose of the
FUST tax is to fund a portion of the costs incurred by
telecommunication service providers to meet the universal service
targets required by Anatel, in case these costs are not entirely
recoverable through the provision of the telecommunications
services. 19




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
    
    FUNTTEL. On November 28, 2000, the Brazilian federal
government created the Fundo para Desenvolvimento Tecnológico das
Telecomunicações, or FUNTTEL, a social contribution tax applicable
to all telecommunications services at a rate of 0.5%. The purpose
of FUNTTEL is to promote the development of telecommunications
technology in Brazil and to improve competition.
    
    FISTEL. On July 7, 1966, the Brazilian federal government,
created the Fundo de Fiscalização das Telecomunicações, or FISTEL, a
tax applicable to telecommunications transmission equipment. The
purpose of FISTEL is to provide financial resources for the
Brazilian federal government to control and inspect the industry. The FISTEL tax is comprised of two different fees:  
    
    an installation and inspection fee that is assessed
every time we activate a new cellular number; and
    
    an operation and inspection fee, assessed annually on
the basis of the total number of cellular numbers in use and the
total number of radio base stations installed at the end of the
fiscal year. The installation and inspection fee is assessed based on the net
activation of cellular numbers, i.e., the number of new cellular activations
subtracted from the number of cancelled subscriptions, as well as on the basis
of the net additions of radio base stations. Billing and Collection Pursuant to Brazilian law, customers must receive a bill at least five
days before the due date and companies must allow customers at least 15 days
from the due date before suspending outgoing service for nonpayment. We have established a uniform policy for dealing with delinquent customer
accounts. Any suspension of service may be done only after providing notice to
the customer. If a customers payment is more than 15 days past due, outgoing
service is suspended, and if payment is more than 40 days past due, both
outgoing and incoming services are suspended until full payment for all
outstanding charges is received. If a customers payment is more than 90 days
past due, service is discontinued. In 2003 we estimated that approximately 52%
of our bills were paid in full within the due date, 69% before the first
reminder was sent, and 85% before the second reminder was sent. Our collection system has an excellent mechanism for tracking customers
who are delinquent in making payments. Our collections department has had a
continued success rate collecting payments from customers. In addition, we
have employed six outside collection agencies that recover payments from
customers that are more than 90 days past due. We provision for customer accounts over 90 days past due and write off
customer accounts related to telecommunication service charges for services
provided that are over 180 days past due. We wrote off approximately R$11.9
million for accounts more than 180 days past due in 2003. Our provisions for doubtful accounts were 3.2%, 2.3% and 2.6% of the gross
operating revenue in 2003, 2002 and 2001 respectively. See Item 5A. Operating
ResultsResults of Operations for 2003, 2002 and 2001Operating Expenses. After each collection cycle, we and other telecommunications service
providers settle the roaming and network usage fees and outstanding balances.
See Sources of RevenueRoaming Fees and Regulation of the Brazilian
Telecommunications IndustryInterconnection. For international calls made by
our customers, we charge Embratel  Empresa Brasileira de Telecomunicações S.A.
a fee for the use of our cellular telecommunications network, after forwarding
the gross amounts collected for such calls to Embratel. Domestic 20




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long distance fees are reconciled and distributed to each Brazilian
telecommunication operating company by a clearinghouse operated by Embratel. Fraud Detection and Prevention We incur costs associated with the unauthorized use of our wireless
networks, particularly our analog cellular networks. These costs include
administrative and capital costs associated with detecting, monitoring and
reducing the incidence of fraud. Fraud also affects interconnection costs,
capacity costs, administrative costs and payments to other carriers for
unbillable fraudulent roaming. The two most prevalent types of fraud are cloning fraud, and subscription
fraud. Cloning fraud consists of duplicating the cellular signal of a bona
fide customer, enabling the perpetrator of the fraud to make calls using the
customers signal. We ultimately bear the costs of all fraudulent calls
originating from our cell phone base. We have installed a fraud detection
system that analyzes various aspects of customers usage in order to detect
cloning fraud. In addition, the introduction of digital service is
significantly reducing the incidence of cloning fraud. We do not consider
cloning fraud a significant problem. Subscription fraud occurs when a person, typically using false or stolen
documents, obtains cellular telecommunications service, and then incurs
substantial charges that are billed to a customer who does not exist or who did
not request the service. In order to safeguard ourselves against these fraudulent activities, we
review documentation provided by customers and conduct a credit check prior to
initiating service. We use credit bureaus to enhance our reviews. We have implemented certain detection and prevention measures in an effort
to reduce fraud-related losses, including the automatic review of call detail
records in the states of Bahia and Sergipe to identify abnormal calling
patterns. Fraud prevention measures include restrictions on international
calls from a given number, restrictions on international calls to certain
high-risk destinations, automatic blocking of calls to certain high-risk
destinations and restrictions on three-way calling by customers with
international direct-dial access. We have installed, and are a part of, a nationwide fraud-detection system.
This system aids in fraud detection in various ways, including identifying
simultaneous usage by a single customer, call frequency and unusually high
usage patterns. We are able to monitor usage by our customers even when they
are located outside of our areas. Competition We face intense competition in all the areas in which we operate,
principally from other cellular service providers and also from fixed line
operators. Many of these competitors are part of large, national or
multinational groups and therefore have access to financing, new technologies
and other benefits that derives from being owned by such a group. Fixed line
operators generally charge much lower tariffs than cellular service providers. Tele Leste  ́s principal cellular competitor is Maxitel, which operates in
the states of Bahia, Sergipe and Minas Gerais. Maxitel began providing cellular telecommunications services based on the
Time Division Multiple Access, or TDMA, digital standard in our Region in April
1998. Maxitel also acquired a license to provide cellular telecommunications
services in the neighboring state of Minas Gerais. Maxitels rights and
obligations under its authorization are substantially identical to our rights
and obligations under our authorizations. Maxitels customers use dual-mode
cellular handsets, which operate with Advanced Mobile Phone Service analog
networks, such as ours, as well as TDMA networks and GSM handsets. As Maxitel
is indirectly controlled by TIM, since the 21




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beginning of 2002, it has been using the TIM brand as part of its
strategy. Therefore, the group controlled by Telecom Italia Mobile, or TIM,
may overlap in GSM/GPRS technology. Tele Leste  ́s principal fixed-line competitor is Telemar Norte Leste S.A. We also compete with certain other wireless telecommunications services,
such as mobile radio (including digital trunking technology, offered by
Nextel), paging and beeper services, which are used by some in our areas as a
substitute for cellular telecommunications services. These competing wireless
telecommunications services are generally less expensive than mobile
telecommunications services. Satellite services, which provide nationwide
coverage, are also available in Brazil. Although satellite services have the
benefit of covering a much greater area than cellular telecommunications
services, they are considerably more expensive than cellular telecommunications
services and do not offer comparable coverage inside buildings. We do not plan
to offer mobile satellite services (other than pursuant to a roaming
arrangement with a satellite service provider). Finally, we also face
intra-company competition, when we offer services that may be used by our
customers in substitution for mobile calls, such as SMS and Personal Digital
Assistance. Regulation of the Brazilian Telecommunications Industry General Our business, the services we provide and the prices we charge are subject
to regulation under the General Telecommunications Law and various
administrative enactments, which regulate the services provided by Brazilian
telecommunications operators. Anatel is the agency that regulates telecommunications under the General
Telecommunications Law and the July 2001 Regulamento da Agência Nacional de
Telecomunicações, known as the Anatel Decree. Anatel is financially
autonomous, and administratively independent of the federal government. Anatel
maintains a close relationship with the Ministry of Communications. Any
regulation proposed by Anatel is subject to a period of public comment, which
may include public hearings. Anatels actions may be challenged in the
Brazilian courts. On November 25, 1998, Anatel enacted Resolution 73 
Regulation of Telecommunication Services, which regulates, in detail, the new
comprehensive framework for the provision of telecommunications services in
Brazil established by the General Telecommunications Law. Concessions and Authorizations Before January 2000, Anatel had only authorized two mobile service
providers in each of the 10 franchise areas under A Band and B Band. A
Band and B Band mobile service providers were granted concessions pursuant to
the Lei Mínima, or the Minimum Law. Each concession is a specific grant of
authority to supply cellular telecommunications services, subject to certain
requirements contained in the applicable list of obligations appended to each
concession. If a mobile service provider wishes to offer any
telecommunications service other than those authorized by its concession, it
may apply to Anatel for an authorization to offer such other services. In accordance with the General Telecommunications Law, a concession
relates to the provision of telecommunication services under the public regime,
as determined by the public administration. A concession may only be granted
upon a prior auction bidding process. As a result, regulatory provisions are
included in the relevant concession agreements and the concessionaire is
subject to public service principles of continuity, changeability and equal
treatment of customers. Also, Anatel is empowered to direct and control the
performance of the services, to apply penalties and to declare the expiration
of the concession and the return of assets of the concessionaire to the
government authority upon termination of the concession. Another distinctive
feature is the right of the concessionaire under the concession agreement to be
able to maintain certain economic and financial standards. The concession is
granted for a fixed period of time and is generally renewable only once. 22




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An authorization is a permission granted by the public administration
under the private regime, which may or may not be granted upon a prior auction
bidding process, to the extent that the authorized party complies with the
objective and subjective conditions deemed necessary for the rendering of the
relevant type of telecommunication service in the private regime. The
authorization is granted for an indeterminate period of time. Under the
authorization, the government does not guarantee to the authorized company the
economic-financial equilibrium, as is the case under concessions. SMP Regulation In November 2000, Anatel adopted certain regulations for the issuance of
new licenses, which are authorizations to provide wireless communication
services through SMP, personal mobile service, to compete with the then
existing cellular operators in the various regions of Brazil. These
regulations divided Brazil into three main regions covering the same geographic
areas as the concessions for the fixed-line telecommunication services. Anatel
organized auctions for three new licenses for each of those regions. The new
licenses provided that the new services would be operated in the 1,800 MHz
radio frequency bands, and they were denominated C Band, D Band and E Band.
These new licenses were auctioned by Anatel and awarded during the first
quarter of 2001 and at the end of 2002. Under these new licenses:  
    
    services are to be provided using the 1,800 MHz frequency; and
    
    each operator may provide domestic and international long distance services in its licensed area;
    
    existing cellular service providers, as long as they do not
have partnerships with fixed-line operators, as well as new entrants
into the Brazilian telecommunications market can bid for C Band, D
Band and E Band SMP licenses. However, fixed-line operators, their
controlling shareholders and affiliated cellular providers can only
bid for D Band and E Band SMP licenses;
    
    a cellular operator, or its respective controlling
shareholders, may not have geographical overlap between licenses;
and
    
    current A Band and B Band cellular service providers can
apply for an extra frequency range. Pursuant to the SMP services regulation, each of the three main regions is
divided into registration areas, or tariff areas. In order to transfer our services to SMP, we were required to comply with
several technical and operational conditions, including, among others, the
adoption of a carrier selection code for long distance calls originating from
our network. Under the General Telecommunications Law, all mobile telecommunications
service providers must provide interconnection upon the request of any other
mobile or fixed-line telecommunications service provider. Until June 30, 2004,
SMP service providers may opt to establish a price cap or freely negotiate
their interconnection charges. The conditions of the network usage fee
negotiation will be regulated by Anatel. Thereafter, the terms and conditions
of the interconnection are freely negotiated between wireless and fixed-line
operators, subject to compliance with regulations established by Anatel
relating to the traffic capacity and interconnection infrastructure that must
be made available to requesting parties. If a service provider offers any
party an interconnection tariff below the price cap, it must offer the same
tariff to any other requesting party on a nondiscriminatory basis. If the
parties cannot reach an agreement on the terms of interconnection, including
with respect to the interconnection tariff, Anatel will act as the final
arbiter. Because Anatel considers us to be affiliated with Telefónica, which
already provides wireline long distance services in the state of São Paulo and
was awarded a license to provide these services nationwide, Anatel will not
award a wireline long distance license to us. Though we and other mobile
operators have requested that Anatel revise the current SMP regime, there can
be no assurance it will do so. Under 23




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the SMP regime, we will receive revenues from interconnection fees paid to
us by wireline long distance operators due to long distance traffic originating
and terminating on our network. The authorizations consist of two licenses: one to provide mobile
telecommunications services, and another to use the frequency spectrum for a
period of 15 years. The frequency license is renewable for another 15-year
period upon the payment of an additional license fee. Benefit of the SMP System According to the General Telecommunications Law and Decree No. 2056/96,
control of the concessionaire can only be transferred after five years from the
date of the privatization in the case of A Band concessionaires or the
commencement of services in the case of B Band concessionaires. On the other
hand, under the SMP system, the authorization or control of the authorized
party can be transferred through merger of the relevant cellular mobile service
provider, whether it is providing services under the A Band or the B Band. Obligations of Telecommunications Companies As a telecommunications service provider, we are subject to regulations
concerning quality of service and network expansion, as established in our
authorizations and our original concession agreements. Any breach by the companies of telecommunications legislation or of any
obligation set forth in their authorizations may result in a fine of up to R$50
million. Our authorizations impose obligations to meet quality of service
standards, such as: the systems ability to make and receive calls, call
failure rates, the networks capacity to handle peak periods, failed
interconnection of calls and customer complaints. Anatel published the method
for collecting these quality service standards data on April 23, 2003 (Anatel
Resolution No. 335/03). Interconnection Under the General Telecommunications Law, telecommunications service
providers are classified as providers of either collective or restricted
services. All cellular operators, including SMP service providers, are
classified by Anatel as collective service providers. All providers of
collective services are required to provide interconnection upon request to any
other collective service provider. The terms and conditions of interconnection
are freely negotiated between parties, subject to price caps and other rules
established by Anatel. Providers must enter into interconnection agreements,
regarding, among other things, tariffs, commercial conditions and technical
issues, with all requesting parties on a nondiscriminatory basis. If the
parties cannot agree upon the terms and conditions of interconnection, Anatel
may determine terms and conditions by arbitration. Interconnection agreements must be approved by Anatel and may be rejected
if they are contrary to the principles of free competition and the applicable
regulations. Rate Regulation Our authorizations continue to provide for a price-cap mechanism to set
and adjust rates on an annual basis. The cap is a maximum weighted average
price for a package of services. The package consists of the services in our
Basic Plan, including activation fees, monthly subscription fees, and certain
roaming charges, which are charged for the use of mobile services under the SMP
regime. The price cap is revised annually to reflect the rate of inflation as
measured by the IGP-DI. However, mobile operators are able to freely set the
rates for alternative service plans. The initial price cap agreed to by Anatel and us in our authorizations had
been based on the previously existing or bidding prices, and was adjusted
annually on the basis of a formula contained in our authorizations. The price
cap has been revised to reflect the rate of inflation as measured by the
IGP-DI. The weighted average price for the entire package of services may not
exceed the price cap, but the price for individual services within the package
may be increased. 24




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Other telecommunications companies that interconnect with and use our
network must pay certain fees, primarily an interconnection fee. The
interconnection fee is a flat fee charged per minute of use. The
interconnection fee charged by us and other A and B Band service providers is
still subject to a price cap stipulated by Anatel. This price cap is valid
until June 30, 2004 and, thereafter, the terms and conditions of the
interconnection are freely negotiated among the operators. Anatel will regulate
the conditions of the network usage fee negotiation. The price cap for the
interconnection fee varies from company to company, on the basis of the
underlying cost characteristics of each companys network. B Band service
providers are subject to price caps established during the auction process for
their licenses. Internet and Related Services in Brazil In Brazil, Internet service providers, or ISPs, are deemed to be suppliers
of value-added services and not telecommunications service providers. Anatels
Resolution 190 requires cable operators to act as carriers of third-party
Internet service providers. The Brazilian House of Representatives is
considering a law that would penalize Internet service providers for knowingly
providing services that allow illegal goods or services to be sold on the
Internet, and would impose confidentiality requirements on Internet service
providers regarding nonpublic information transmitted or stored on their
networks. C. Organizational Structure As of December 31, 2002, our voting shares were indirectly controlled by
two major shareholders: Portugal Telecom and Telefónica Móviles, through
Brasilcel N.V., with 55.25%of our voting stock, 7.94%of our preferred shares
and 24.32% of our total capital stock. Portugal Telecom and Telefónica Móviles
share their participation in Brasilcel in equal percentages. Our subsidiaries are: Telebahia Celular and Telergipe Celular.
Substantially all our assets consist of shares in our subsidiaries. We rely
very substantially on dividends from our subsidiaries to meet our needs for
cash, including cash to pay dividends to its shareholders. See Item
5Operating and Financial Review and ProspectsLiquidity and Capital
Resources. For a more detailed description of our ownership structure and the joint
venture between Portugal Telecom and Telefónica Móviles, see Our History and
Development. D. Property, Plant and Equipment Our principal physical property consists of transmission equipment,
switching equipment, base stations and other communication devices, such as
voicemail, prepaid service, SMS, Home Location Registers, Signalling Transfer
Point and gateways. All switches, cell sites, administrative buildings,
administrative facilities, warehouses and stores are insured against damages
for policy operation risks. At December 31, 2003, we had 9 cellular switches and other equipment
installed in two owned spaces, five shared places and one lease. We lease
almost all of the sites where our cellular telecommunications network equipment
is installed. Our 584 base stations were installed in 370 cell sites and the
average term of these leases is five years. In addition, we have our own
administrative buildings (approximately 19,012 square meters), warehouse space
(approximately 898 square meters) and also lease administrative facilities
(approximately 2,132 square meters), warehouse space (approximately 1,408
square meters) and 24 retail stores throughout our region. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion in conjunction with our
consolidated financial statements and accompanying notes and other financial
information included elsewhere in this annual report, and in conjunction with
the financial information included under Item 3A. Selected Financial Data. 25




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Critical Accounting Policies In preparing our consolidated financial statements, we have relied on
estimates and assumptions derived from historical experience and various other
factors that we deemed reasonable and relevant. Critical accounting policies
are those that are important to the portrayal of our financial condition and
results and utilize managements most difficult, subjective or complex
judgments, estimates and assumptions. The significant accounting policies that
we believe are critical to aid in fully understanding and evaluating our
reported financial position and results of operations reported under Brazilian
Corporate Law Method are described in Note 3 to our consolidated financial
statements. A description of the differences in accounting policies between
Brazilian Corporate Law Method and U.S. GAAP is included in Note 37 to our
consolidated financial statements. The application of these critical accounting
policies often requires judgments made by our management regarding the effects
of matters that are inherently uncertain on the carrying value of our assets
and liabilities and the results of our operations. Our results of operation
and financial condition may differ from those set forth in our consolidated
financial statements, if our actual experience differs from managements
assumptions and estimates. The following is a discussion of our critical
accounting policies, including some of the variables, assumptions and
sensitivities underlying the estimates relating to:  
    
    revenue recognition;
    
    depreciation of property, plant and equipment;
    
    valuation of property, plant and equipment;
    
    provisions for contingencies;
    
    deferred income taxes; and
    
    financial instruments. a. Revenue recognition Under Brazilian Corporate Law Method and U.S. GAAP, revenues from
customer calls are based on time used, according to Brazilian Corporate Law
Method, and recognized when services are provided. We consider revenue recognition to be a critical accounting policy,
because of the uncertainties caused by different factors such as the complex
information technology required, high volume of transactions, fraud and piracy,
accounting regulations, managements determination of collectibility and
uncertainties regarding our right to receive certain revenues (mainly revenues
for usage of our network). Significant changes in these factors could cause us
to fail to recognize revenues or to recognize revenues that we may not be able
to realize in the future, despite our internal controls and procedures. We
have not identified any significant need to change our revenue recognition
policy for U.S. GAAP or for Brazilian Corporate Law Method. b. Depreciation and Amortization Depreciation on property, plant and equipment is calculated on a
straight-line method of the estimated useful lives of the underlying assets,
which consider historical information available to us, as well as known
industry trends. The sensitivity of an impact in changes in the useful lives of
property, plant and equipment was assessed by applying a hypothetical decrease
of 10% to the useful lives of switching and transmission equipment existing at
December 31, 2003. This hypothetical change would result in an incremental
increase in the annual depreciation expense of R$7,670 million in the year of
the change. c. Valuation of property, plant and equipment In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying 26




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amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Under Brazilian Corporate Law Method, the
recoverability of assets as mentioned above, if negative, would indicate the
amount that would be considered impaired. A determination of the fair value of an asset requires management to make
certain assumptions and estimates with respect to projected cash inflows and
outflows related to future revenues and expenditures and expenses. These
assumption and estimates can be influenced by different external and internal
factors, such as economic tendencies, industry trends, interest rates and
changes in the marketplace. The use of different assumptions and estimates
could significantly change our financial statements, for example, if we had
used more conservative assumptions and estimates the expected future net cash
flow may have led us to recognize impairment charges on our property, plant and
equipment, which would have decreased our results of operations and
shareholders equity. No impairment losses have been recognized for any of the
periods presented. d. Provisions for contingencies We are subject to proceedings, lawsuits and other claims related to tax,
labor and civil matters. We are required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential ranges of
probable losses. A determination of the amount of reserves required, if any,
for these contingencies is made after careful analysis of each individual
issue, based on legal advice. The required reserves may change in the future
due to new developments in each matter or changes in approach, such as a change
in settlement strategy in dealing with these matters. Future possible changes
in the recorded reserve amounts would impact our results of operations in the
period that such changes are recorded. e. Deferred income taxes We compute and pay income taxes based on results of operations under
Brazilian Corporate Law Method. Under U.S. GAAP, we recognize deferred tax
assets and liabilities based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We regularly
review the deferred tax assets for recoverability and establish a valuation
allowance if it is more likely than not that the deferred tax assets will not
be realized, based on historical taxable income, projected future taxable
income, and the expected timing of the reversals of existing temporary
differences. When performing such reviews, we are required to make significant
estimates and assumptions about future taxable income. In order to determine
future taxable income, we need to estimate future taxable revenues and
deductible expenses, which are subject to different external and internal
factors, such as economic tendencies, industry trends, interest rates, changes
in our business strategies and changes in the type of services we offer to the
market. The use of different assumptions and estimates could significantly
change our financial statements. For example, if we had used more conservative
assumptions and estimates with respect to our expected future taxable income,
we would be required to recognize valuation allowance charges on deferred
income tax assets, which would decrease our results of operations and
shareholders equity. If we operate at a loss or are unable to generate
sufficient future taxable income, or if there is a material change in the
actual effective tax rates, the time period within which the underlying
temporary differences become taxable or deductible, or any change in our future
projections, we could be required to establish a valuation allowance against
all or a significant portion of our deferred tax assets resulting in a
substantial increase of our effective tax rate and a material adverse impact on
our operating results. f. Financial instruments With respect to financial instruments, we must make assumptions as to
future foreign currency exchange and interest rates. For a discussion of the
possible impact of fluctuations in the foreign currency exchange and interest
rates on our principal financial instruments and positions, see Item
11Quantitative and Qualitative Disclosures About Market Risk. We have no majority-owned subsidiaries that are not included in our
consolidated financial statements, nor do we have any interests in, or
relationships with, any special purpose entities that are not reflected in our
consolidated financial statements. 27




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U.S. GAAP Reconciliation We prepare our consolidated financial statements in accordance with the
Brazilian Corporate Law Method, which differs in significant respects from U.S.
GAAP. Under U.S. GAAP, we recorded a net income (loss) for 2003, 2002 and 2001
of approximately (R$6.5) million, (R$56.0) million, and R$14.1 million,
respectively, compared to a net income (loss) of (R$42.7) million, (R$5.1)
million, and R$6.0 million under the Brazilian corporate law method.
Shareholders equity at December 31, 2003 and 2002 was R$430.7 million and
R$437.0 million, under U.S. GAAP, compared to R$401.3 million and R$443.0
million under the Brazilian Corporate Law Method. See Note 34 to our consolidated financial statements for a description of
the principal differences between the Brazilian corporate law method and U.S.
GAAP as they relate to us, and a reconciliation to U.S. GAAP of net income/loss
and total shareholders equity. New Accounting Pronouncements In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
result in any impact on the Companys financial statements. In April 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
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). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The adoption
of SFAS 150 did not result in any impact on the Companys financial statements. In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(FIN 46R or the Interpretation). FIN 46R clarifies the application of ARB
No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest entities
(VIEs), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entitys expected
losses, receive a majority of the entitys expected residual returns, or both. Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003, (b)
eased some implementation problems, and (c) added new scope exceptions. FIN 46R
deferred the effective date of the Interpretation for public companies, to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the provisions of the Interpretation
to entities that were previously considered special-purpose entities under
the FASB literature prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003. The Company does not
anticipate that the adoption of FIN 46R will have a material impact on its
financial position, cash flows and results of operations. In December 2003, the FASB issued SFAS No. 132, Revised 2003, (SFAS
132R), which requires an entity to make additional disclosures about pensions
and other postretirement benefits. These disclosures include information
describing the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows and components of net periodic benefit cost. SFAS
132R would be effective for any domestic plans beginning with fiscal years
ending after December 15, 2003 and any foreign plans beginning with fiscal
years ending after June 15, 2004. The Company has adopted these additional
disclosures for the year ended December 31, 2003 (See Note 38.a). 28




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In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is currently following the
guidance of SAB 104. In November 2002, the Emerging Issues Task Force (EITF), of the FASB
reached a consensus on EITF 00-21. EITF 00-21 provides guidance on how to
account for arrangements that may involve multiple revenue-generating
activities, for example, the delivery of products or performance of services,
and/or rights to use other assets. The requirements of EITF 00-21 will be
applicable to agreements entered into for periods beginning after June 15, 2003
and will therefore first apply to the Company for any arrangements entered into
from April 1, 2004. The adoption of this EITF had no impact on the Companys
financial position or results of operations. In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to clarify
the requirements of identifying whether an arrangement should be accounted for
as a lease at its inception. The guidance in the consensus is designed to
mandate reporting revenue as rental or leasing income that otherwise would be
reported as part of product sales or service revenue. EITF Issue No. 01-08
requires both parties to an arrangement to determine whether a service contract
or similar arrangement is, or includes, a lease within the scope of SFAS No.
13, Accounting for Leases. The Company does not anticipate that the adoption
of EITF Issue No. 01-08 will have a material effect on its consolidated results
of operations, cash flows or financial position. In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that
determining whether realized gains and losses on derivative contracts not held
for trading purposes should be reported on a net or gross basis is a matter of
judgment that depends on the relevant facts and circumstances and the economic
substance of the transaction. In analyzing the facts and circumstances, EITF
Issue No. 99-19, and Opinion No. 29, Accounting for Nonmonetary Transactions,
should be considered. EITF Issue No. 03-11 is effective for transactions or
arrangements entered into after September 30, 2003. The Company does not
anticipate that the adoption of EITF Issue No. 03-11 will have a material
effect on its consolidated results of operations, cash flows or financial
position. A. Operating Results Results of Operations for 2003, 2002 and 2001 Statement of Income The following table sets forth certain components of our income, as well
as the percentage change of each year from the prior year, for the years ended
December 31, 2003, 2002 and 2001. The financial statements referring to
December 31, 2002 and 2001 have been reclassified when applicable, for
comparative purposes. Year ended December 31,
    
    Percentage Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(in thousands of reais)Net operating revenue
    
    
    441,267
    
    
    
    431,395
    
    
    
    386,132
    
    
    
    2.3
    
    
    
    11.7Cost of services and sales
    
    
    (256,259
    )
    
    
    (241,362
    )
    
    
    (202,342
    )
    
    
    6.2
    
    
    
    19.3Gross profit
    
    
    185,008
    
    
    
    190,033
    
    
    
    183,790
    
    
    
    (2.6
    )
    
    
    3.4Operating expenses:Selling expense
    
    
    (145,010
    )
    
    
    (116,404
    )
    
    
    (97,766
    )
    
    
    24.6
    
    
    
    19.1General and administrative expense
    
    
    (52,345
    )
    
    
    (49,616
    )
    
    
    (55,405
    )
    
    
    5.5
    
    
    
    (10.4
    )Other net operating income (expense)
    
    
    (122
    )
    
    
    4,968
    
    
    
    2,559
    
    
    
    (102.5
    )
    
    
    94.1Operating income (loss)
    
    
    (12,469
    )
    
    
    28,981
    
    
    
    33,178
    
    
    
    (143.0
    )
    
    
    (12.6
    )Financial expense, net
    
    
    (30,286
    )
    
    
    (32,811
    )
    
    
    (24,111
    )
    
    
    (7.7
    )
    
    
    36.1Net non-operating income (expense)
    
    
    (661
    )
    
    
    (1,601
    )
    
    
    (560
    )
    
    
    (58.7
    )
    
    
    185.9
 29




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Year ended December 31,
    
    Percentage Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(in thousands of reais)Income (loss) before taxes and minority
interests
    
    
    (43,416
    )
    
    
    (5,431
    )
    
    
    8,507
    
    
    
    699.4
    
    
    
    (163.8
    )Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income and social contribution taxes
    
    
    754
    
    
    
    324
    
    
    
    (2,487
    )
    
    
    132.7
    
    
    
    (113.0
    )Net income (loss)
    
    
    (42,662
    )
    
    
    (5,107
    )
    
    
    6,020
    
    
    
    735.4
    
    
    
    (184.8
    )
 Operating Revenues We generate revenue from:  
    
    customer usage charges, which include charges for incoming
and outgoing calls, roaming charges, Internet access through
wireless application protocols and prepaid card charges;
    
    interconnection charges, which are amounts we charge other
cellular and fixed-line service providers for the use of our network
in order to complete calls originated outside our network;
    
    monthly subscription charges, which we charge exclusively to our contract plan customers;
    
    sale of cellular handsets and accessories; and
    
    other service charges, including charges for call forwarding,
call waiting, call blocking and SMS, which are charged only when the
customers plan does not include these services for free. The composition of our operating revenues has been affected by the shift
toward prepaid services (which generate usage charges and interconnection
charges but do not generate monthly subscription charges, and which have
attracted lower income customers to our services). The number of subscribers at
year-end increased 15.7% to 1,126 thousand at December 31,2003 from 973
thousand subscribers at December 31, 2002, which in turn represented an
increase of 18.4% from 822 thousand subscribers at December 31, 2001.
Interconnection tariffs increased by 10.0% in February 2002 and 22.0% since
February 2003. Anatel authorizes cellular operators to increase tariffs based
upon the prior 12-month periods cumulative inflation, measured by the IGP
variation from February to January of each year. As of July 6, 2003, cellular telecommunications operators in Brazil were
required by the SMP rules to implement long distance Carrier Selection Codes
(Códigos de Seleção de Prestadora, or CSP) used by customers to choose their
carrier for domestic long distance services (VC2 and VC3) and international
cellular calls. As a result, Tele Leste no longer receives revenues from VC2 or
VC3 calls and international. Additionally, in accordance with Anatel regulations, Bill & Keep rules
were adopted for interconnection charges in July 2003. The rules provide that
companies under the SMP regime are not required to pay tariffs for the use of
the local network of another SMP provider as long as customers use local
service (i.e., make calls in the same registration area) and as long as there
is a traffic balance between them. However, when traffic from the SMP provider
that originates the call to the SMP provider that terminates the call
represents more than 55% of the local traffic between the two providers, the
SMP provider who originates the higher traffic must pay the other provider the
local usage tariff for the portion of the traffic that exceeds 55%. The composition of operating revenues by category of services is presented
in our consolidated financial statements and discussed below. We do not
determine net operating revenues on a net basis (i.e. after deduction of taxes)
or allocate cost, by category of service. The following table sets forth certain components of our operating
revenues, as well as the percentage change of each from the prior year, for the
years ended December 31, 2003, 2002 and 2001. 30




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Year ended December 31,
    

    Percentage Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(thousands of reais)Usage charges
    
    
    276,958
    
    
    
    269,036
    
    
    
    241.881
    
    
    
    2.9
    
    
    
    11.2Monthly subscription charges
    
    
    38,412
    
    
    
    40,278
    
    
    
    35,026
    
    
    
    (4.6
    )
    
    
    15.0Interconnection charges
    
    
    181,097
    
    
    
    179,849
    
    
    
    169,325
    
    
    
    0.7
    
    
    
    6.2Other
    
    
    17,394
    
    
    
    12,947
    
    
    
    10.920
    
    
    
    34.3
    
    
    
    18.6Gross revenue from services
    
    
    513,861
    
    
    
    502,110
    
    
    
    57,152
    
    
    
    2.3
    
    
    
    9.8Handsets and accessories sales
    
    
    106,441
    
    
    
    86,477
    
    
    
    47,114
    
    
    
    23.1
    
    
    
    83.5Gross revenue
    
    
    620,302
    
    
    
    588,587
    
    
    
    504,266
    
    
    
    5.4
    
    
    
    16.7Value-added and other indirect taxes
    
    
    (119,436
    )
    
    
    (112,259
    )
    
    
    (90,922
    )
    
    
    6.4
    
    
    
    23.5Discounts granted and return of goods
    
    
    (59,599
    )
    
    
    (44,933
    )
    
    
    (27,212
    )
    
    
    32.6
    
    
    
    65.1Net operating revenues
    
    
    441,267
    
    
    
    431,395
    
    
    
    386,132
    
    
    
    2.3
    
    
    
    11.7
 Net operating revenue increased 2.3% to R$441.3 million in 2003 from
R$431.4 million in 2002, which in turn represented an 11.7% increase from
R$386.1 million in 2001. The tariff increase in 2003 was principally due to a
5.9% increase in local outgoing traffic; an increase of 16.4% in our customer
base, which resulted in an increase in usage charges; a 23.1% increase in sales
of cellular handsets and accessories; and a 34.3% increase in revenues from
other services, mainly due to campaigns addressed to users of SMS (Short
Message Service), WAP and 1xRTT services. The increase in net operating
revenues in 2002 was principally due to an increase of 18.4% in our customer
base, an increase in usage charges due to tariff increases; an increase in
revenues from products sold due to an increase in penetration and marketing
campaigns to attract new customers; and an increase in network usage charges
resulting from incoming calls, mainly due to the growth of the prepaid customer
base and an increase in rates charged to other companies. The increases in 2003 and 2002 were partially offset by lower average
monthly revenues per customer. The average number of customers, calculated as
the number of customers at the beginning of the year plus the number of
customers at the end of the year, divided by two, increased 16.9% to 1,049
thousand customers in 2003 from 897 thousand customers in 2002, representing in
turn a 19.9% increase from 748 thousand customers in 2001. Average monthly net
revenues from services per customer decreased principally as a result of an
increasing penetration into lower income customer segments; the introduction of
new service plans directed at customers with lower monthly subscription
charges; and an increase in the percentage of prepaid customers in relation to
total customers as a result of new customers acquired and customers switching
from contract plans to prepaid plans. Usage charges.Usage charges increased 2.9% to R$277.0 million in 2003,
from R$269.0 million in 2002, which in turn represented a 11.2% increase from
R$241.9 million in 2001. The increase in revenues from customer usage charges
in 2003 and in 2002 resulted principally from higher usage of our services due
to the increase in our customer base. Beginning in July 2003, this increase was
partially offset by the impact of the new rules relating to the long distance
Carrier Selection Code described above. The increase in revenues from customer
usage charges in 2002, compared to 2001, resulted principally from higher usage
of our services due to the increase in our customer base and launching of new
plans. Monthly subscription charges. Revenues from monthly subscription charges
decreased 4.6% to R$38.4 million in 2003, from R$40.3 million in 2002, which in
turn represented a 15% increase from R$35.0 million in 2001. The decrease in
2003 and 2002 resulted mainly from contract plan customers switching to service
plans with lower monthly subscription fees, which was partially offset by the
increase of the monthly subscription fees charged to the contract plan
customers. Interconnection charges.Our revenues from network usage charges
increased 0.7% to R$181.1 million in 2003, from R$179.8 million in 2002, which
in turn represented a 6.2% increase from R$169.3 million in 2001. The increases
in network usage revenues in 2003 and 2002 reflected the increase in our
average interconnection charges, which were higher due to rate increases,
partially offset by a reduction in the incoming calling traffic, despite the
increase in our customer base of prepaid customers. Other.Revenues from other services increased 34.3% to R$17.4 million in
2003, from R$12.9 million in 2002, which in turn represented a 18.6% increase
from R$10.9 million in 2001. The increase in revenues from other 31




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services in 2003 and 2002 resulted mainly from greater utilization of
supplementary services, such as caller identification, data transmission, SMS
services, voicemail, and other services aimed principally at corporate
customers . Handsets and accessories sales.Revenues from products sold (cellular
handsets and acessories) increased 23.1% to R$106.4 million in 2003, from
R$86.5 million in 2002, which in turn represented an 83.5% increase from R$47.1
million in 2001. Revenues from handsets sales increased in 2003 and 2002 as a
result of the increase in handset sale prices, with the purpose of minimizing
the impact of the increase in costs of handsets sold, as well as of the
increase in the quantity of more sophisticated handsets sold in comparison with
the previous year. Revenues from handset sales are reported before commissions
and promotional discounts, and include value-added taxes. In general, the
purpose of handset sales is to encourage growth in customers and traffic, as
opposed to generating profits on the sales, and we therefore subsidize portions
of the costs of handsets. Although profit margins vary from one handset model
to another and from time to time, on average, profit margins are negative after
taxes and discounts. The subsidy strategy resulted in a gross loss (calculated
as the difference from net operating revenues from sales minus the cost of
goods sold) of approximately R$19.5 million, R$7.9 million and R$4.8 million on
handsets sales in 2003, 2002 and 2001, respectively. Value-added and other indirect taxes.Value-added taxes and other indirect
taxes on operating revenues were 19.3% of our gross operating revenues in 2003,
19.1% in 2002 and 18.0% in 2001. Value-added taxes and other indirect taxes
increased 6.4% to R$119.4 million in 2003, from R$112.3 million in 2002, which
in turn represented a 23.5% increase from R$90.9 million in 2001. The
effective rate of taxes on gross operating revenues varies depending upon the
composition of our revenues. As the interconnection charges are not subject to
ICMS, the increase in our interconnection charges as a result of the increased
use of prepaid plans tends to reduce our effective tax rate. The increases in
2003 and in 2002 reflected the change in the composition of our gross operating
revenues, not all of which have been subject to value-added and other indirect
taxes over the entire period. See Item 4B. Business Overview  Taxes on
Telecommunications Services and Handset Sales. Discounts granted and return of goods.Discounts granted and return of
goods increased 32.6% to R$ 59.6 million in 2003, from R$ 44.9 million in 2002,
which in turn represented an 65.1% increase from R$ 27.2 million in 2001.
Discounts granted vary depending on how competitive the company intends to be. Cost of Services and Goods The following table sets forth the components of our costs of services and
goods sold, as well as the percentage change of each from the prior year, for
the years ended December 31, 2003, 2002 and 2001. Year ended December 31,
    
    Percentage Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(in thousands of reais)Depreciation
    
    
    (90,801
    )
    
    
    (79,613
    )
    
    
    (70,084
    )
    
    
    14.1
    
    
    
    13.6Personnel
    
    
    (4,499
    )
    
    
    (3,512
    )
    
    
    (3,286
    )
    
    
    28.1
    
    
    
    6.9Materials and services
    
    
    (12,423
    )
    
    
    (13,127
    )
    
    
    (7,673
    )
    
    
    (5.4
    )
    
    
    71.1Rental and insurance costs
    
    
    (9,596
    )
    
    
    (17,550
    )
    
    
    (17,181
    )
    
    
    (45.3
    )
    
    
    2.1Fixed-line network expenses
    
    
    (20,016
    )
    
    
    (19,540
    )
    
    
    (18,269
    )
    
    
    2.4
    
    
    
    7.0Interconnection
    
    
    (38,767
    )
    
    
    (42,593
    )
    
    
    (37,390
    )
    
    
    (9.0
    )
    
    
    13.9Taxes
    
    
    (16,849
    )
    
    
    (16,674
    )
    
    
    (17,779
    )
    
    
    1.0
    
    
    
    (6.2
    )Cost of services
    
    
    (192,951
    )
    
    
    (192,609
    )
    
    
    (171,662
    )
    
    
    0.2
    
    
    
    12.2Costs of goods sold
    
    
    (62,913
    )
    
    
    (48,520
    )
    
    
    (30,451
    )
    
    
    29.7
    
    
    
    59.3Other
    
    
    (395
    )
    
    
    (233
    )
    
    
    (229
    )
    
    
    69.5
    
    
    
    1.7Cost of services and goods sold
    
    
    (256,259
    )
    
    
    (241,362
    )
    
    
    (202,342
    )
    
    
    6.2
    
    
    
    19.3
 Cost of services and goods sold increased 6.2% to R$256.3 million in 2003,
from R$241.4 million in 2002, which in turn represented a 19.3% increase from
R$202.3 million in 2001. The increase in 2003 was principally due to a 29.7%
increase in the cost of goods sold; a 14.1% increase in depreciation and
amortization; and a 28.1% increase in Tele Lestes cost of personnel. The
increase in 2002 was principally due to an increase in the cost of goods sold;
and an increase in depreciation expense and in network usage charges, as a
result of the increase in the 32




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interconnection charges paid to other cellular service and fixed-line
providers. The gross profit margin (gross profit as a percentage of net
revenues) was 58.1% in 2003, compared to 55.9% in 2002, and 52.4% in 2001. Depreciation.Depreciation and amortization expenses increased 14.1% to
R$90.8 million in 2003, from R$79.6 million in 2002, which in turn represented
a 13.6% increase from R$70.1 million in 2001. The increases in 2003 and 2002
were due primarily to the expansion of our network and supporting systems,
resulting in an increase in depreciable assets. Personnel. Personnel expenses increased 28.1% to R$4.5 million in 2003,
from R$3.5 million in 2002, which in turn reflected a 6.9% increase from R$3.3
million in 2001. The personnel cost increase in 2003 principally derived from
the contract signed in December 2003, retroactive to November 1st, established
a linear increase of 7.5% in salaries in line with inflation. Furthermore, the
cost of personnel item was impacted by end-year bonus payments. The personnel
cost increase in 2002 principally derived from salary increases prescribed by
our union contract. Materials and services.Materials and services include costs of materials
purchased from, and services rendered by third parties and other
telecommunications service providers, such as network maintenance services, and
cost of other services, in particular, the cost of electric power. Cost of
materials and services decreased by 5.4% to R$12.4 million in 2003, from R$13.1
million in 2002, which in turn represented a 71.1% increase from R$7.7 million
in 2001. The decrease in 2003 was due primarily to costs we incurred in
connection with the expansion of our network, partially offset by a decrease in
the costs of third-party materials and services. The increase in 2002 was due
primarily to the increase in the cost of energy as a result of increases in
electric power rates and expansion of our cellular network and outsourced
services related to platform and equipment maintenance, due to the end of the
warranty period of some of our equipment. Rental and insurance costs. Rental and insurance include equipment
rental, insurance and other costs of providing our services. Rental and
insurance costs decreased by 45.3% to R$9.6 million in 2003, from R$17.6
million in 2002, which in turn represented a 2.1% increase from R$17.2 million
in 2001. The decrease in 2003 reflects the reduction in the number of rented
sites, due to the companys decision to reduce its dependence on the rental of
base station sites. The increase in 2002 was principally due to rent increases
resulting from inflationary adjustments, partially offset by a 1.1% reduction
in the number of base stations sites. Fixed-line network expenses. Fixed-line network expenses represent lease
payments to Telemar, the fixed-line service provider in our Region, for use of
circuits between our base stations, cellular sites and switching centers, and
between our network and the networks of Telemar and Embratel, the long distance
service provider. Such expenses increased by 2.4% to R$20.0 million in 2003,
from R$19.5 million in 2002, which in turn represented a 7.0% increase from
R$18.3 million in 2001. The increase of our fixed-line network expenses in
2003 resulted principally from the increase in the number of circuits leased.
The increase in 2002 was also due to inflation adjustments applicable to the
lease rates. Interconnections. Expenses from network usage charges include fees we
paid to other telecommunications service providers for the use of their network
to complete local, long distance and international calls originating in our
network. Network usage charges decreased 9.0% to R$38.8 million in 2003, from
R$42.6 million in 2002, which in turn represented a 13.9% increase from R$37.4
million in 2001. The decrease in 2003 resulted from the usage of other networks
by our subscribers despite an overall increase in traffic on our network. The
increase in 2002 resulted principally from an increase in the interconnection
rates and an increase in the number of minutes of outgoing calls from our
network, as a result of an increase in the number of calls originated by users
of our plans. Taxes.Taxes increased 12.5% to R$ 18.8 million in 2003, from R$ 16.7
million in 2002, which in turn represented a 6.2% decrease from R$17.8 million
in 2001. The increase in 2003 was principally due to the expansion of our
customer base. The decrease in 2002 was principally due to the reduction in the
amount of FISTEL tax due to the change in the assessment of this tax. Cost of goods sold. The cost of handsets sold increased 29.7% to R$62.9
million in 2003, from R$48.5 million in 2002, which in turn represented a 59.3%
increase from R$30.5 million in 2001. The increase in 2003 was principally due
to an increase in the sales of more sophisticated handsets. The increase in
2002 was mainly due to 33




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the higher volume of handsets sold, together with higher handset costs due
to the devaluation of the realand to changes in the mix of handsets sold, with
an increase in the number of more sophisticated handsets sold. Operating Expenses The following table sets forth certain components of our operating
expenses, as well as the percentage change of each component from the prior
year, for each of the years in the three-year period ended December 31, 2003. Year ended December 31,
    
    Percentage Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(in thousands of reais)Selling expense
    
    
    (145,010
    )
    
    
    (116,404
    )
    
    
    (97,766
    )
    
    
    24.6
    
    
    
    19.1General and administrative expense
    
    
    (52,345
    )
    
    
    (49,616
    )
    
    
    (55,405
    )
    
    
    5.5
    
    
    
    (10.4
    )Other net operating income (expense)
    
    
    (122
    )
    
    
    4,968
    
    
    
    2,559
    
    
    
    (102.5
    )
    
    
    94.1Operating expenses
    
    
    (197,477
    )
    
    
    (161,052
    )
    
    
    (150,612
    )
    
    
    22.6
    
    
    
    6.9
 Operating expenses increased 22.6% to R$197.5 million in 2003, from
R$161.1 million in 2002, which in turn represented a 6.9% increase from R$150.6
million in 2001. The increase in 2003 resulted mainly from a 24.6% increase in
selling expenses, as well as a 5.5% increase in general and administrative
expenses. The increase in 2002 resulted mainly from a 19.1% increase in selling
expenses. Selling expense. Selling expenses increased 24.6% to R$145.0 million in
2003, from R$116.4 million in 2002, which in turn represented a 19.1% increase
from R$97.8 million in 2001. The increase in 2003 was due principally to a
R$17.6 million increase in outsorced services and a R$16.2 million increase in
depreciation. The increase in 2002 was a result of a R$56.0 million increase
in outsorced services, as well as an increase in commissions, due to higher
subsidies and marketing campaigns to respond to higher competition during the
second half of 2002, following the entry of a new competitor. Provisions for the allowance for doubtful accounts and network usage
charges, included in our selling expenses, decreased 12.1% to R$11.7 million in
2003, from R$13.3 million in 2002, which in turn represented a 0.9% increase
from R$13.2 million in 2001. The decrease in 2003 and the stabilization in
2002 were primarily due to the improvement of the credit quality of new
contract plan customers as a result of the development of better credit risk
analysis, and the migration of lower-income customers to prepaid service plans. General and administrative expenses. General and administrative expenses
increased 5.5% to R$52.3 million in 2003, from R$49.6 million in 2002, which in
turn represented a 10.4% decrease from R$55.4 million in 2001. The increase in
2003 resulted mainly from a R$3.9 million increase in depreciation, related to
the apportionment of corporate costs. The decrease in 2002 resulted mainly
from a decrease in personnel, due to dismissals of employees. Other net operating income (expense). Other net operating income
(expense) decreased 102.5% to an expense of R$0.1 million in 2003, from other
net operating income of R$4.9 million in 2002, which in turn represented a
94.1% increase from other net operating income of R$2.6 million in 2001. The
increase in 2003, compared to 2002, resulted mainly from a R$3.0 million
increase in taxes other than income taxes and from a R$ 0.7 million increase in
provision for contingencies. The increase in 2002, compared to 2001, resulted
mainly from the increase in fines and expenses recovered and the decrease in
taxes and income taxes and in the provisions for contingencies. See Item 8A.
Consolidated Statements and Other Financial InformationLegal Matters. Net Financial Expense The following table sets forth certain components of our net financial
expenses, as well as the percentage change of each component from the prior
year, for each of the years in the three-year period ended December 31, 2003. 34




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##### Table of Contents



Year ended December 31,
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(in thousands of reais)Financial income
    
    
    8,124
    
    
    
    2,183
    
    
    
    11,529
    
    
    
    272.1
    
    
    
    (81.1
    )Exchange gains and losses
    
    
    68,374
    
    
    
    (157,319
    )
    
    
    (64.587
    )
    
    
    (143.5
    )
    
    
    143.6Gains on foreign currency derivative contracts
    
    
    (91,838
    )
    
    
    139,926
    
    
    
    56,668
    
    
    
    (165.6
    )
    
    
    146.9Other, net
    
    
    5,085
    
    
    
    5,162
    
    
    
    
    
    
    
    (1.5
    )
    
    
    Financial expenses
    
    
    (20,031
    )
    
    
    (22,763
    )
    
    
    (27,721
    )
    
    
    (12.0
    )
    
    
    (17.9
    )(30,286
    )
    
    
    (32,811
    )
    
    
    (24,111
    )
    
    
    (7.7
    )
    
    
    36.1
 Net financial expense reflects, among others, the net effect of interest
income and expense, and the net effect of exchange rate fluctuation affecting
our loans, financings and derivative operations. See Note 8 to our
consolidated financial statements. Our net financial expenses decreased by 7.7% in 2003 to R$30.3 million,
from R$32.8 million in 2002, mainly due to a R$225.7 million increase in the
exchange gain stemming from the Brazilian realappreciation in 2003. In 2002,
net financial expenses increased by 36.1% to R$32.8 million, from R$24.1
million in 2001, mainly as a result of an increase in expenses due to foreign
exchange variation caused by the Brazilian currency devaluation, partially
offset by an increase in income from derivative contracts and by lower interest
expenses. In 2003, we had a R$231.7 million decrease in loss from derivative
transactions. We had an R$83.3 million increase in gains from derivative
transactions in 2002. Income and Social Contribution Taxes We recorded an income and social contribution tax benefit in the amount of
R$0.8 million in 2003, a 132.7% increase from the tax benefit of R$0.3 million
in 2002, which in turn represented a decrease of 113.0%, when compared to
income tax expense in the amount of R$2,5 million in 2001. The effective rate
was approximately 1.7% in 2003, 6.0% in 2002 and 29.2% in 2001. See Note 10 to
our consolidated financial statements. B. Liquidity and Capital Resources Sources of Funds We generated cash flow from operations of R$126.2 million, R$204.8 million
and R$151.6 million in 2003, 2002 and 2001, respectively. See our consolidated
statements of cash flows. We had R$153.7 million of long-term loans and financing as of December 31,
2003. Our R$68.6 million in short-term loans and financing as of December 31,
2003 consisted primarily of funding from financial institutions applied to long
lived assets. At December 31, 2003, we had a working capital deficit (current
liabilities minus current assets) of R$49.4 million, attributable primarily to:
(i) an increase of R$38.0 million in trade accounts payable; (ii) a R$21.8
million decrease in cash and cash equivalents; and (iii) an increase of R$ 24.2
million in hedging operations. Our principal assets are the shares of Telebahia Celular and Telergipe
Celular, and we rely on dividends from our subsidiaries to meet our cash needs,
including the payment of dividends to our shareholders. We control the payment
of dividends by the subsidiaries, subject to limitations under Brazilian law.
There are no contractual restrictions on the payment of dividends by our
subsidiaries to us. We believe that our available
borrowing capacity, together with funds generated by operations,
should provide sufficient liquidity and capital resources to pursue
our business strategy for the foreseeable future, with respect to
working capital, capital expenditures and other operating needs. Uses of Funds Our principal uses of funds are for capital expenditures, servicing our
debt, and payments of dividends to shareholders. Acquisition of property,
plant and equipment used funds in the amount of R$70.2 million, R$76.7 million,
and R$116.0 million, in 2003, 2002, and 2001, respectively. Dividends and
interest on shareholders equity 35




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##### Table of Contents



payments consumed cash flows of R$0.04 million, R$12.2 million, and R$0.8
million, in 2003, 2002, and 2001, respectively. Payment of debt consumed cash
flows of R$82.1 million, R$78.8 million, and R$134.4 million, in 2003, 2002 and
2001, respectively. Capital Expenditures Capital Expenditures. The following table shows our capital expenditures
for property, plant and equipment in 2003, 2002 and 2001. Year ended December 31,2003
    
    2002
    
    2001(in millions of reais)Automatic switching equipment
    
    
    12.2
    
    
    
    4.8
    
    
    
    8.0Other equipment
    
    
    16.5
    
    
    
    16.3
    
    
    
    35.4Real estate
    
    
    0.1
    
    
    
    5.4
    
    
    
    10.0Information technology
    
    
    8.5
    
    
    
    8.1
    
    
    
    21.6Other assets(1) (2)
    
    
    32.8
    
    
    
    42.0
    
    
    
    41.0Total capital expenditures
    
    
    70.2
    
    
    
    76.7
    
    
    
    116.0
   (1)
    
    Handsets for rental, network constructions, furniture and fixtures,
office equipment, and store layouts.(2)
    
    In 2003, Other assets are composed by: fixed apparels for rent (R$12.8
million), capitalized millstone (R$2.9 million), JOA (R$1.1 million), I
Project TIDE (R$ 1.1 million), stores (R$ 0.2 million), and others (R$
14.7 million). We made capital expenditures of R$70.2 million, R$76.7 million and R$116.0
million in 2003, 2002, and 2001, respectively. These expenditures related
primarily to improvements and expansion of the capacity of the services we
currently offer, as well as to the provision of new services. The year of 2003
was also marked by investments related to the necessary adjustments in order to
transfer our services to the SMP system and to the implementation of a new
network with CDMA (1XRTT) technology. See Item 4A. Our History and
DevelopmentCapital Expenditures. We
have budgeted approximately R$82.5 million for 2004 capital expenditures, mainly for
investments in network expansion, introduction of new products and services
that will make customers lives easier and maximize the use of cellular
telephony, besides improving the quality of our services. Our management
expects to finance 2004 capital expenditures principally with cash generated
from operations. Payments of Dividends to Shareholders See Item 8Financial InformationConsolidated Statements and Other
Financial InformationPayment of Dividends. Debt As of December 31, 2003, Tele Lestes total debt position was as follows: 36




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Amount Outstandingas of December 31,Debt
    
    2003(R$ millions)Loans with financial institutions
    
    
    222.2Total long-term debt, excluding the short-term portion
    
    
    153.6Short-term debt
    
    
    68.6Total debt
    
    
    222.2
 As of December 31, 2003, Tele Lestes total debt was R$222.2 million, all
of which was denominated in U.S. dollars, and therefore exposed to currency
fluctuations. Devaluation of the realresults in exchange losses on foreign
currency indebtedness. In order to protect against the risk of devaluation of
the real, we have entered into over-the-counter derivatives transactions with
international and domestic financial institutions for the total amount of
R$222.2 million. In 2003, our derivatives positions produced a loss of R$91.8
million, which was largely offset by R$68.4 million of exchange gain from our
foreign currency-denominated debt. In 2002, our derivatives positions produced
a gain of R$139.9 million, which was offset by R$157.3 million of exchange loss
on our foreign currency-denominated debt. Our indebtedness consisted of loans from financial institutions and
equipment financing, 87% of which bore interest at floating rates and 13% at
fixed rates. Our R$68.6 million of short-term indebtedness at December 31,
2003 primarily consisted of working capital funding from financial
institutions. We have no committed lines of credit or other credit commitments
available to us. See Note 23 to our Consolidated Financial Statements. Some of the debt agreements of Tele Leste and its subsidiaries contain
restrictive covenants. Financial ratios involve (1) current ratios, (2)
capitalization ratios, (3) EBITDA margins, (4) interest coverage ratios and (5)
debt to capital ratios. As of December 31, 2003 and 2002, we are in compliance
with all of them.  C.
    
    Research and DevelopmentOur aggregate expenditures on research and development were R$0.7 million
in 2003 and R$0.4 million in 2001. We did not make any contributions or incur
any expenses relating to research and development during 2002.D.
    
    Trend InformationA significant growth in cellular telephony is expected to exceed Brazils
economic growth once again in 2004. In 2004, the maintenance of fierce
competition is expected, as a result of the entry of new competitors,
accelerating consolidation of national coverage and continuing efforts towards
improving network technology.E.
    
    Off-balance sheet arrangementsWe do not have any off-balance sheet financing. We have no majority-owned
subsidiaries that are not included in our consolidated financial statements,
nor do we have any interests in, or relationships with, any special purpose
entities that are not reflected in our consolidated financial statements. 37




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##### Table of Contents



F.
    
    Tabular disclosure of contractual obligation The following table represents our contractual obligations and commercial
commitments as of December 31, 2003: Payments due by period in thousands of reaisLess than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 year
    
    years
    
    years
    
    yearsContractual obligations:Long-term debt
    
    
    222,237
    
    
    
    68,582
    
    
    
    
    
    
    
    2,030
    
    
    
    151,625Capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    12,288
    
    
    
    1,686
    
    
    
    10,504
    
    
    
    98Unconditional purchase obligations
    
    
    10,530
    
    
    
    10,530
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    245,055
    
    
    
    80,798
    
    
    
    10,504
    
    
    
    2,128
    
    
    
    151,625
   (1)
    
    Contracted long-term suppliers or contracted short-term suppliers with
penalties for early termination. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management Board of Directors Our administration consists of a board of directors and a board of
executive officers. Our shareholders elect the members of the board of
directors. The board of directors must have between eight and 12 members, each
serving three-year terms. The board currently consists of 12 members. The
terms of the current members of the board of directors will expire in March
2006. The board of directors holds regular quarterly meetings, and the
chairman or two board members may call special meetings. The following are the current members of our board of directors and their
respective positions. Name
    
    Position
    
    Date ElectedFelix Pablo Ivorra Cano
    
    Chairman
    
    March 24, 2003Iriarte José Araújo Esteves
    
    Vice Chairman
    
    March 24, 2003Fernando Xavier Ferreira
    
    Director
    
    March 24, 2003Antonio Viana Baptista
    
    Director
    
    March 24, 2003Ernesto Lopez Mozo
    
    Director
    
    March 24, 2003Ignacio Aller Malo
    
    Director
    
    March 24, 2003Zeinal Abedin M. Bava
    
    Director
    
    March 24, 2003Carlos Manuel de Lucena e Vasconcellos Cruz
    
    Director
    
    March 24, 2003Eduardo Perestrelo Correia de Matos
    
    Director
    
    March 24, 2003Eduardo Carlos Gadelha de Faria
    
    Director
    
    March 24, 2003Pedro Manuel Brandão Rodrigues
    
    Director
    
    July 11, 2003Paulo Henrique de Almeida
    
    Director
    
    August 25, 2003
 Our directors will serve until the general shareholders meeting to be
held in 2006. Set forth below are brief biographical descriptions of the
directors. Félix Pablo Ivorra Cano, 58 years old, is the president of the board of
directors and has been a member of the board of directors since February 1999.
Mr. Ivorra currently is the president of the board of directors of Telefónica
Móviles and serves on the board of directors of Telecomunicações de São Paulo
S.A, Brasilcel N.V., Tele Leste Celular Participaçoes, S.A., Celular CRT
Participaçoes, S.A., Tele Sudeste Celular Participaçoes, S.A., Telesp Celular
Participaçoes, S.A., Tele Centro Oeste Celular Participaçoes, S.A., Telefónica
Móviles SAC Perú, 38




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Telefónica Móviles Perú Holding, S.A.A and MobiPay International, S.A. He
joined the Telefónica Group in July 1972 and served in the areas of Technical
Specifications, Network Planning, Commercial Planning and as General Director
of Advanced Communications. In 1993, he was appointed General Director of the
team that founded Telefónica Servicios Móviles, where he held several positions
including General Commercial Director and General Director of Business
Development. During 1997 and part of 1998, he was chairman of the board of
Telefónica Móviles group companies Mensatel, S.A. and Radiored, S.A. He has a
degree in telecommunication engineering from Escola Técnica Superior de
Engenharia  ETSI in Madrid, and a post-graduate degree in Business
Administration from the Instituto Católico de Administração de Empresas 
ICADE, also in Madrid. Iriarte José Araújo Esteves,54 years old, is currently the Executive
Vice-Chairman of the Board of Directors of PT Comunicações, S.A. since January
2004; Chief Executive Officer of TMNTelecomunicações Móveis Nacionais, S.A.
since 1998; Chief Executive Officer of PT Móveis, SGPS, S.A. since 2000;
Chairman of the Board of Directors of PT Prime  Soluções Empresariais de
Telecomunicações e Sistemas, S.A. since February 2004; Chairman of the Board of
Directors of PT Acessos de Internet WiFi, S.A. since January 2004; Member of
the Board of Directors of PT Corporate  Soluções Empresariais de
Telecomunicações e Sistemas, S.A. since June 2003; Member of the Board of
Directors of PT ComprasServiços de Consultoria e Negociação, S.A. since May
2003; Member of the Board of Directors of Fundação Portugal Telecom since March
2003; Member of the Board of Directors of Brasilcel, N.V. since December 2002;
Member of the Board of Directors of Portugal Telecom Brasil, S.A. since July
2002; Member of the Board of Directors of PT Prime, SGPS, S.A. since 2002;
Member of the Board of Directors of Telesp Celular Participações, S.A. since
April 10, 2001; Member of the Board of Directors of Tele Sudeste Participações,
S.A. since 2003; Member of the Board of Directors of Tele Leste Celular
Participações, S.A. since 2003; Member of the Board of Directors of CRT Celular
Participações, S.A. since 2003; Member of the Board of Directors of Tele Centro
Oeste Celular Participações, S.A. since 2003; Vice-Chairman of the Board of
Directors of Portugal Telecom Internacional, SGPS, S.A. from 2000 until 2002;
Chairman of the Board of Directors of Telepac from 1991 until 1997;
Vice-Chairman of the Board of Directors of TMNTelecomunicações Móveis
Nacionais, S.A. from 1991 until 1992; Member of the Board of Directors of CTT
from 1989 until 1992; Director-General of Telecommunications of CTT from 1986
until 1989; Deputy General Manager of Telecommunications of CTT from 1983 until
1986; Manager of the Telecommunications Business Planning Department of CTT
from 1982 until 1983; Regional Telecommunications General Manager of CTT from
1981 until 1982. He holds a degree in electronic engineering from the Higher
Education Technical Institute, Portugal. Fernando Xavier Ferreira,55 years old, is currently the Chief Executive
Officer of the Telefónica Group in Brazil and member among others of the Board
of Directors of Telefónica Móviles, Brasilcel, N.V. Tele Sudeste Celular
Participações, S.A., Tele Leste Celular Participaçoes, S.A., Celular CRT
Participações, S.A., Tele Centro Oeste Celular Participaçoes, S.A. and Telesp
Celular Participações, S.A. During 1998, Mr. Ferreira served as a member of
ANATEL. From 1995 to 1998, he was General Director of Telebrás and president
of the board of directors of Embratel and Telesp S.A. Mr. Ferreira was
President of Telecomunicações do Paraná S.A. Telepar from 1997 to 1999 and Vice
President of that company from 1979 to 1987. He is currently a member of the
Latin-America Committee of the New York Stock Exchange and the Global
Infrastructure Commission. He holds a degree in electrical engineering from the
Catholic University of Rio de Janeiro, Brazil. Antonio Viana-Baptista, 46 years old, is the Chairman and Chief Executive
Officer of Telefónica Móviles since August 2002. He is member of the board of
directors, the Delegate Committee and the Executive Committee of Telefónica
S.A. He is also Chairman of Telefónica Móviles España, S.A. and member of the
board of directors of Telefónica Internacional, S.A., Portugal Telecom SGPS,
Brasilcel N.V., CTC Chile, Telefónica de Argentina, S.A. and Telecomunicações
de São Paulo S.A. Until July 2002, he served as President of Telefónica
Internacional and Executive President of Telefónica Latinoamerica. Before that
he also served from 1991 until 1996, as Executive Director of BPI (Banco
Portugues de Investimento). From 1985 until 1991 Mr. Viana-Baptista was
Principal Partner of McKinsey & Co. in Madrid and Lisbon. He graduated from the
Catholic University of Lisbon in 1980. He has a post-graduate degree in
European Economy (1981) and an MBA, obtained with a mention of distinction from
INSEAD. Ernesto Lopez Mozo, 40 years old, serves as Chief Financial Officer
General Manager for Finance and Management Control of Telefónica Móviles S.A.
Mr. Lopez is a member of the board of directors of Telefónica Móviles de
España, S.A., Mobipay International, S.A., Telefónia Móviles México, S.A. de
C.V., Brasilcel N.V, 39




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Telesp Celular Participações, S.A., Tele Sudeste Celular Participações,
S.A., Tele Leste Celular Participaçoes, S.A., Tele Centro Oeste Celular
Participações S.A. and Celular CRT Participações, S.A. He was previously a
senior manager in the financing department of Telefónica, S.A., where he was
also responsible for relationships with credit rating agencies. Before joining
Telefónica in March 1999, Mr. Lopez worked for five years at J.P. Morgan. He
holds a degree in civil engineering from ETSICCP in Madrid and a masters
degree in business administration from the Wharton School. Ignacio Aller Malo, 59 years old, is a member of the board of directors of
Telefónia Móviles México, S.A. de C.V., Brasilcel N.V, Telesp Celular
Participações, S.A., Tele Sudeste Celular Participações, S.A., Tele Leste
Celular Participaçoes, S.A., Tele Centro Oeste Celular Participações S.A. and
Celular CRT Participações, S.A. Mr. Aller has served as Chief Operating
Officer of Telefónica Móviles S.A. by 2003 and has held several positions at
Telefónica de España since 1967. Zeinal Abedin Mahomed Bava,38 years old, is currently the Chief Financial
Officer of Portugal Telecom, SGPS, S.A. since 2000; Chief Executive Officer of
TV Cabo Portugal, S.A. since March 2004, Executive Vice-Chairman of the Board
of Directors of PT Comunicações, S.A. since January 2004; Member of the Board
of Directors of PT Corporate  Soluções Empresariais de Telecomunicações e
Sistemas, S.A. since June 2003; Chief Executive Officer of PT
MultimediaServiços de Telecomunicações e Multimedia, SGPS, S.A. since May
2003; Member of the Board of Directors of PT ComprasServiços de Consultoria e
Negociação, S.A. since May 2003; Member of the Board of Directors of Fundação
Portugal Telecom since March 2003; Chairman of the Board of Directors of
PrevisãoSociedade Gestora de Fundos de Pensões, S.A. since March 2003;
Chairman of the Board of Directors of PT Serviços de Gestão, S.A. since
February 2003; Member of the Board of Directors of Brasilcel, N.V. since
December 2002; Vice-Chairman of the Board of Directors of PT
MultimediaServiços de Telecomunicações e Multimedia, SGPS, S.A. since November
2002; Member of the Board of Directors of Portugal Telecom Brasil, S.A. since
July 2002; Member of the Board of Directors of BESTBanco Electrónico de
Serviço Total, S.A. since May 2001; Member of the Board of Directors of Telesp
Celular Participações S.A. since April 10, 2001; Member of the Board of
Directors of Tele Leste Celular Participações, S.A. since 2003; Member of the
Board of Directors of Tele Sudeste Participações, S.A. since 2003; Member of
the Board of Directors of CRT Celular Participações, S.A. since 2003; Member of
the Board of Directors of Tele Centro Oeste Celular Participações, S.A. since
2003; Vice-Chairman of the Board of Directors of PT Ventures, SGPS, S.A.
(formerly Portugal Telecom Internacional, SGPS, S.A.) from 2000 until 2002;
Director and Relationship Manager for Portugal of Merrill Lynch International
from 1998 until 1999; Executive Director of Deutsche Morgan Grenfell from 1996
until 1998; Executive Director of Warburg Dillon Read from 1989 until 1996. He
holds a degree in electronic and electrical engineering from the University of
London B.S.C. Carlos Manuel de Lucena e Vasconcellos Cruz,46 years old, is currently
the Chief Executive Officer of Portugal Telecom Investimentos
InternacionaisConsultoria Internacional S.A. and PT Ventures, SGPS, S.A. since
April 2004; Member of the Board of Directors of PT Corporate  Soluções
Empresariais de Telecomunicações e Sistemas, S.A. since June 2003; Chief
Executive Officer of PT Comunicações, S.A. from May 2002 until January 2004;
Chief Executive Officer of PT Prime, SGPS, S.A. from 2002 until January 2004;
Chairman of the Board of Directors of PT Prime, SGPS, S.A. from 2002 until
January 2004; Chairman of the Board of Directors of PT ContactTelemarketing e
Serviços de Informação, S.A. from 2002 until January 2004; Chief Executive
Officer of PTM.com, SGPS, S.A. from May 2003 until January 2004; Member of the
Board of Directors of PT ComprasServiços de Consultoria e Negociação, S.A.
since May 2003; Member of the Board of Directors of Fundação Portugal Telecom
since March 2003; Member of the Board of Directors of Brasilcel, N.V. since
December 2002; Member of the Board of Directors of Portugal Telecom Brasil,
S.A. since July 2002; Member of the Board of Directors of TMNTelecomunicações
Móveis Nacionais, S.A. from June 2002 until May 2003; Member of Board of
Directors of Telesp Celular Participações S.A. since April 2001; Vice-Chairman
of Telesp Celular Participações S.A. since 2001; Member of the Board of
Directors of Tele Sudeste Celular Participações, S.A. since 2003; Member of the
Board of Directors of Tele Leste Celular Participações, S.A. since 2003; Member
of the Board of Directors of CRT Celular Participações, S.A. since 2003; Member
of the Board of Directors of Tele Centro Oeste Celular Participações S.A. since
2003; Chairman and Chief Executive Officer of Telesp Celular S.A. from May 2001
until May 2002; President and Chief Executive Officer of Tradecom, SGPS, S.A.
from 2000 until 2001; Executive Board Member of PT Prime, SGPS, S.A. from 2000
until 2001; Invited Professor of Universidade Católica Portuguesa and ISCTE for
Post-Graduate Courses and MBA Program from 2000 until 2001; Member of World
Board of Dun & Bradstreet Corporation, Executive Vice-President of Dun &
Bradstreet Corporation, President and Chief Executive 40




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Officer of D&B GMC, Executive Vice President of D&B Europe, President and
Chief Executive Officer of D&B Iberia, Vice president of Trans Union España
Credit Burear S/A from 1997 until 1999; Senior Vice-President of Dun &
Bradstreet Corporation, Senior Vice-President of Dun & Bradstreet Europe,
President and Chief Executive Officer of D&B Iberia & Middle West,
Vice-President of A.P.E.I.N. (Associação Portuguesa de Empresas de Informação
de Negócio) in 1996; President & Chief Executive Officer of Dun & Bradstreet
Ibéria in 1995; President and Chief Executive Officer of Dun & Bradstreet
Portugal, Vice-President of Associação Portuguesa para a Qualidade from 1990
until 1993; President of European Customer Service group of Dun & Bradstreet
in 1992; General Director of Dun & Bradstreet France in 1989; General Director
of Sales of Dun & Bradstreet France in 1988; Commercial Director of Dun &
Bradstreet Portugal in 1987; National Director of Sales of Dun & Bradstreet
Portugal in 1986; Director of Sales Department of Dun & Bradstreet Portugal in
1985; Senior Economist of LEASEINVEST from 1983 until 1985; Economist of
Finance Ministry of Portugal from 1978 until 1983. Mr. Cruz holds a degree in
business from the I.S.C.T.E. (Instituto Superior de Ciências do Trabalho e da
Empresa or Higher Education Institute for Labor and Corporate Sciences),
Portugal, and a post-graduate degree in management from D.S.E. (the German
Foundation for International Development), Germany. Eduardo Perestrelo Correia de Matos, 55 years old, is currently the
president of Portugal Telecom Brasil S.A. and a member of the board of
directors of each of PT Móveis, Serviços de Telecomunicações, S.G.P.S., S.A.,
Tele Leste Celular Participações S.A., Tele Sudeste Celular Participações S.A.,
Tele Centro Oeste Celular Participações S.A. and Celular CRT Participações S.A.
From 1976 to 1987, Mr. Matos held various operational positions in the
planning and control areas of CTT  Corrêios e Telecomunicações de Portugal
S.A. and TLP-Telefones de Lisboa e Porto S.A. From 1987 to 1990 he was the
secretary of state for external transportation and communications in Portugal.
In addition, he served as president at Marconi S.G.P.S. Comunicações, S.A. from
1990 to 1991 and at Mobitel S.A. from 1991 to 1996. Mr. Matos was also a
member of the board of Portugal Telecom, S.G.P.S., S.A. from 1996 until May
2002. He holds a degree in economics from the Technical University of Lisbon,
Portugal. Pedro Manuel Brandão Rodrigues, 53 years old, is currently a member of the
board of directors and of the Executive Committe of PT Móveis, S.G.P.S., S.A.
and of Telecomunicações Móveis Nacionais  TMN. He was ellected for the
Assembly of the Republic in March 2002, and he is a member of the National
Council of Education of Portugal since July 2000. Mr. Brandão was a member of
the board of directors of several Portuguese corporations and, from 1993 to
2000, a member of the Executive Committee of Banco Mello and Banco Mello de
Investimentos. He holds a doctoral degree in engineering from the University of
Birmingham, England, a master degree in production process and management, and
an engineering degree from the Instituto Superior Técnico. Paulo Henrique de Almeida,42 years old, was the Chief Financial Officer
of Centrais Elétricas do Rio Jordão S/A in 2002 and the Chief Financial Officer
of Fundação Copel de Previdência e Assistência Social by December, 2003. He is
currently also the managing partner of Lomax Consultoria, Administração e
Participação. Mr. Almeida holds a degree in economics from the Federal
University of Paraná, a post-graduate degree in Business Administration from
Fundação Getúlio Vargas  SP, and a post-graduate degree in Economic Theory
from the Federal University of Paraná. Eduardo Carlos Gadelha de Faria, 46 years old, is currently also one of
the founding partners of Voga Capital S/C Ltda., an independent alternative
asset management company. From 1982 until 1986, Mr. Faria worked as a civil
engineer at Sir William Halcrow & Partners Consulting Engineers, London. From
1987 until 1990, he was a financial consultant at Price Waterhouse Management
Consultants, London, and, from 1990 until 1994, he served as an officer at
Foreign & Colonial Emerging Markets, London. From 1994 until 1997, Mr. Faria
was the chief of the sale division for foreign institutional customers at Banco
Icatu, Rio de Janeiro and New York, and, from 1997 until 2001, he worked as a
financial consultant for small and medium-sized companies in strategic
planning, corporate governance and investor relations. Mr. Faria holds an
engineering degree from the University of Surrey, England, and a masters
degree in finance from the City University Business School in London, England. In accordance with the shareholder  ́s agreement between Portugal Telecom
SGPS, S.A., PT Movéis SGPS, S.A. and Telefónica Móviles S.A., PT Movéis is
responsible for the appointment of our Chief Executive Officer and Telefónica
Móviles is responsible to appoint the Chief Financial Officer. PT Movéis and
Telefónica Móviles appointed 10 (five each) of the 11 members of our Board of
Directors. 41




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Board of Executive Officers The board of executive officers consists of eight members, each elected by
the board of directors for a term of three years. The chief executive officer
is the chairman and, in his absence or temporary inability to perform his
duties, he will be replaced by the vice president for finance, planning and
control. In the case of a vacancy in any position in the board of executive
officers, the respective replacement shall be appointed by the board of
directors; in case of any inability, the chief executive officer shall choose a
replacement for that officer among the remaining officers. One officer may be
elected for more than one position on the board of executive officers, but the
members of the board of executive officers cannot be elected to the board of
directors. The board of directors may remove executive officers from office at
any time. The following are the current executive officers and their respective
positions. Name
    
    Position
    
    Date appointedFrancisco José Azevedo Padinha
    
    Chief Executive Officer
    
    October 17, 2003Fernando Abella Garcia (1)
    
    Executive Vice President for Finance,
Planning and Control and Investors
Relations Officer
    
    April 16, 2003Paulo Cesar Pereira Teixeira
    
    Executive Vice President for Operations
    
    April 16, 2003Luis Filipe Saraiva Castel-Branco de Avelar
    
    Executive Vice President for Marketing
and Innovation
Executive Vice President for IT and
Product and Service Engineering
    
    June 12, 2003Javier Rodríguez García
    
    Executive Vice President for
Technology and Networks
    
    June 12, 2003Guilherme Silvério Portela Santos
    
    Executive Vice President for Customers
    
    October 10, 2003José Carlos de la Rosa Guardiola
    
    Executive Vice President for
Regulatory Matters and Institutional
Relations
    
    August 25, 2003
 (1) Mr. Arcádio Luis Martinez Garcia was formally appointed for this position,
but will be elected and take office as soon as he receives his permanent visa
from the Brazilian authorities. For the time being, this position is being
temporarily filled by Mr. Fernando Abella Garcia. Set forth below is a brief biographical description of our executive
officers. Francisco José Azevedo Padinha, 57 years old, is currently the chief
executive officer of each of Brasilcel N.V., Tele Sudeste Celular Participações
S.A., Tele Leste Celular Participações S/A, Telesp Celular Celular
Participações S.A., Celular CRT Participações S.A., Telerj Celular S.A., Telest
Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Celular CRT S.A.,
Telesp Celular S.A. and Global Telecom S.A.; the chairman of the board of
directors of each of PT Prime Tradecom Soluções Empresariais de Comércio
Electrónico, S.A., Megamedia Soluções Multimédia, S.A., PT Prime, SGPS, S.A.,
the vice chairman of the board of directors of PT Ventures S.A.; a member of
the board of directors of PT Comunicações S.A.; and a member of the scientific
committee of Taguspark Sociedade de Promoção e Desenvolvimento do Parque da
Ciência e Tecnologia da Área de Lisboa, S.A. He was also the chairman of the
board of directors of Prymesys  Soluções Empresariais S.A. From 1989 until
1992, Mr. Padinha was the manager of the central department for research and
development of Companhia Portuguesa Rádio Marconi, S.A., and from1992 until
1994 he was the chairman of the board of directors of Telecom Portugal, S.A.
From 2000 to 2001, Mr. Padinha was the chief executive officer of PT Prime
SGPS, S.A., and from 1994 until 2002, he was a member of the board of directors
of Portugal Telecom. He holds a telecommunications and electronic engineering
degree from the Technical University of Lisbon, Portugal, a degree in corporate
upper management from AESE/University of Navarra, Spain, and a masters degree
in innovation and technology management from the Sloan School of
Management/MIT, United States. Fernando Abella Garcia, 41 years old, is currently the executive vice
president for finance, planning and control of each of Brasilcel N.V., Tele
Sudeste Celular Participações S.A., Tele Leste Celular Participações S/A,
Celular CRT Participações S.A., Telesp Celular Participações S.A., Telerj
Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular
S.A., Celular CRT S.A., Telesp Celular S.A. and Global Telecom S.A. He 42




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is also Investor Relations Officer of Tele Sudeste Celular Participações
S.A., Telesp Celular Participações S.A., Celular CRT Participações S.A. and
Tele Leste Celular Participações S.A. and Executive Vice President for IT and
Product and Service Engineering of Tele Centro Oeste Celular Participações S/A;
and a member of the board of directors of Telefónica Factoring do Brasil Ltda.
From 1994 until 1997, Mr. Garcia worked as an external consultant for the
Telefónica Group in several different areas. Since joining he Telefónica Group
in 1997, he has served in different positions in the financial and strategic
planning areas in Spain and Brazil. He was also a member of the board of
directors of Telefónica Móviles S.A.C. in Peru, Telefónica Móvil S.A. in Chile,
Telefónica Móviles El Salvador, S.A. de C.V. in El Salvador and Telefónica
Centroamérica Guatemala, S.A. in Guatemala. Mr. Garcia holds a degree in
business from the Faculty of Economic and Corporate Sciences at Valladolid,
Spain, and masters degree in business administration from the Corporate
Institute of Madrid, Spain. Paulo Cesar Pereira Teixeira, 46 years old, is currently the executive
vice president for operations of Tele Sudeste Celular Participações S.A., Tele
Leste Celular participações S/A, Telesp Celular Participações S.A., Celular CRT
Participações S.A., Telerj Celular S.A., Telest Celular S.A., Telebahia Celular
S.A., Telergipe Celular S.A., Celular CRT S.A., Telesp Celular S.A. and Global
Telecom S.A. From 1980 until 1987, Mr. Teixeira performed several different
managerial duties in Companhia Riograndense de Telecomunicações S.A.-CRT and
was also a member of the board of directors (1985-1986). In 1987 and 1988, he
served at several different positions in Telebrás or in the companies of the
Telebrás Group. Mr. Teixeira holds an electrical engineering degree from the
Catholic University of Pelotas, Brazil. Luis Filipe Saraiva Castel-Branco de Avelar, 50 years old, is currently
the executive vice president for IT and product and service engineering of each
of Tele Sudeste Celular Participações S.A., Tele Leste Celular Participações,
Celular CRT Participações S.A., Telesp Celular Participações S.A., Telerj
Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular
S.A., Celular CRT S.A., Telesp Celular S.A. and Global Telecom S.A. In 1989,
1991 and 1993, Mr. Avelar was respectively the corporate accounts director of
Telefones de Lisboa e Porto, an expert in telecommunications services for the
European Commission (DG XIII, Telecom Policy Unit) and a strategic planning
director at Comunicações Nacionais. From 1993 to 1998 he was a consultant in
privatization and regulation projects for the World Bank, the European Bank for
Reconstruction and Development and the European Commission. From 1996 to 1998
he was a portfolio director of Portugal Telecom Group in the strategic
marketing board of Portugal Telecom. From 1998 to 2000, Mr. Avelar was a
special consultant to the president of Telesp Celular Participações S.A. for
the areas of marketing, sales, strategy, regulation and special projects, and,
from 2000 to 2001, he was a director at the internet and e-commerce business
unit at the same company. He holds an electrical-technical engineering degree
(specialized in telecommunications and electronics) from the Lisbon Higher
Education Technical Institute. Javier Rodríguez García, 47 years old, is currently executive vice
president for technology and networks of each Tele Sudeste Celular
Participações S.A., Tele Leste Celular Participações S/A, Celular CRT
Participações S.A., Telesp Celular Participações S.A., Telerj Celular S.A.,
Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Celular
CRT S.A., Telesp Celular S.A. and Global Telecom S.A. From 1986 until 1988,
Mr. García worked at INDELEC  Indústria Electrónica de Comunicaciones S.A., as
the manager responsible for the implementation of an automatic mobile
telecommunications project for Telefónica de España S.A. From 1988 until 1990,
he worked at Rede Electrica de España S.A., as the person responsible for the
project, installation and maintenance of radio mobile systems in Spain. From
1990 until 1992, Mr. García served as an engineering manager at Telcel S.A.,
where he was responsible for the implementation of automatic mobile
telecommunication system for Telefónica de España S.A. in Barcelona, Madrid and
Palma de Mallorca. From 1992 until 1996, he was an engineering manager
responsible for the installation and maintenance of systems at Compañia Europea
de Radiobusqueda S.A., and from 1996 until 1998, he worked in cellular
businesses for Telefónica Group in Spain and Peru, as a network quality manager
and technical area sub-manager, respectively. From 1998 until 2000, Mr. García
was the technology manager in the cellular business of Telefónica Group in
Brazil and from 2000 until 2002 he was the network manager of Telerj Celular
S.A. and Telest Celular S.A. He holds a degree in technical telecommunications
engineering from the Technical University of Madrid, Spain. Guilherme Silvério Portela Santos, 38 years old, is currently the
executive vice president for customers of each of Tele Sudeste Celular
Participações S.A., Tele Leste Cvelular Participações S/A, Telesp Celular
Participações S.A., Celular CRT Participações S.A., Telerj Celular S.A., Telest
Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Celular CRT S.A.,
Telesp Celular S.A. and Global Telecom S.A.; and an executive manager 43




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at PT Móveis, SGPS, S.A. From 1989 until 1993, Mr. Santos was a consultant at
McKinsey & Co., and from 1994 until 1998 he worked as an officer for operations
and an officer for special projects at Parque Expo98, S.A. He was also a
coordination officer at Companhia de Seguros Tranquilidade. Mr. Santos holds a
civil engineering degree from the Higher Education Technical Institute,
Portugal, and a masters degree from INSEAD, France. José Carlos de la Rosa Guardiola, 56 years old, is currently the executive
vice president for regulatory matters and institutional relations of each of
Telesp Celular Participações S.A., Tele Leste Celular Participações S/A, Tele
Sudeste Celular Participações S.A., Celular CRT Participações S.A., Telerj
Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular
S.A., Celular CRT S.A., Telesp Celular S.A. and Global Telecom S.A. From
November 1998 until February 2002, Mr. Guardiola was engaged in the Regulation
and Operations Departments of these companies, and occupied the function of
vice president of Operations responsible for the commercial, administrative and
operations activities of each of Telebahia Celular S.A. and Telergipe Celular
S.A. He is also member of the board of directors of Saint Gobain, France,
National Semiconductors, USA end NEC Eletronics, Japan. He holds a degree in
telecommunications engineering from Universidad Politecnica de Madrid, Spain. Board of Auditors (Conselho Fiscal) We have a permanent board of auditors that consists of a minimum of three
and a maximum of five members. They are elected annually at the annual general
shareholders meeting. The board currently consists of five members. The board of auditors is responsible for overseeing our management. Its main duties are:  
    
    to review and provide an opinion on the annual report of our management,  
    
    to review and approve the proposals of the management bodies
to be submitted to the shareholders meeting regarding changes to
share capital, issuance of debentures and subscription rights,
capital investment plans and budgets, distributions of dividends,
changes in corporate form, consolidations, mergers or split-up, and  
    
    to review and approve the financial statements for the fiscal
year. The Board of Auditors holds regular meetings every three months and
special meetings when called by the President or by any member of the Board of
Auditors. The following are the current members of our board of auditors and their
alternates: Name
    
    Position
    
    Date AppointedGustavo Lessa Campos Netto(1)
    
    Member
    
    March 22, 2004Luiz Alberto de Castro Falleiros(2)
    
    Member
    
    March 22, 2004Wolney Querino Schüler Carvalho(3)
    
    Member
    
    March 22, 2004João Luís Tenreiro Barroso(3)
    
    Member
    
    March 22, 2004Cleuton Augusto Alves(3)
    
    Member
    
    March 22, 2004Fábio Anderaos de Araújo(1)
    
    Alternate
    
    March 22, 2004Luciano Carvalho Ventura(2)
    
    Alternate
    
    March 22, 2004Oswaldo Vieira Luz(3)
    
    Alternate
    
    March 22, 2004José Guilherme Feijão Queiroz de Ataíde(3)
    
    Alternate
    
    March 22, 2004José Alberto Bettencourt da Câmara Graça(3)
    
    Alternate
    
    March 22, 2004
   (1)
    
    Appointed by our common minority
shareholders.(2)
    
    Appointed by our preferred shareholders.(3)
    
    Appointed by our controlling shareholder. 44




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B. Compensation For the year ended December 31, 2003, we paid to our directors and
executive officers, as compensation, an aggregate amount of R$0.4 million.
This amount includes performance remuneration and profit sharing arrangements
applicable to all employees. Furthermore, the members of our board of
executive officers are eligible to participate in the same complementary
retirement pension plan available to our employees. We did not set aside or accrue any amounts for, and our officers and
directors did not receive any pension, retirement or similar form of
compensation. C. Board Practices Our board of directors duties and responsibilities are set forth by
Brazilian law and our by-laws. Our board of directors is comprised of four members, all shareholders,
each serving a three-year term. Our directors are elected by our shareholders
at the annual general shareholders meeting. There are no service contracts
between us or our subsidiaries and any of our directors that provide for
benefits upon termination of employment. The board of directors holds regular
quarterly meetings, and the chairman or two board members may call special
meetings. For more detailed information, see Directors and Senior Management,
Board of Executive Officers, and Board of Auditors, above. D. Employees At December 31, 2003, we had 385 full-time employees and 7 temporary
employees. The following table sets forth the number of our employees and a breakdown
of employees by main category of activity as of the dates indicated: December 31,2003
    
    2002
    
    2001Total number of employees (including trainees)
    
    
    385
    
    
    
    531
    
    
    
    570Number by category of activity:Technical and operations area
    
    
    100
    
    
    
    130
    
    
    
    145Sales and marketing
    
    
    122
    
    
    
    161
    
    
    
    168Finance and administrative support
    
    
    79
    
    
    
    100
    
    
    
    108Customer service
    
    
    84
    
    
    
    140
    
    
    
    149
 Employees are represented by the Sindicato dos Trabalhadores em Empresas
de Telecomunicações no Estado da Bahia(SINTEL-BA) and by the Sindicato dos
Trabalhadores em Empresas de Telecomunicações no Estado de Sergipe(SINTEL-SE).
We negotiate new collective-bargaining agreements every year with the labor
unions. The collective-bargaining agreements currently in force include a
salary and benefit increase of 7.5% effective as of December 31, 2003. Our management considers the relations between our work force and us to be
satisfactory. We have not experienced any work stoppage that materially
affected our operations. Each of our subsidiaries negotiates a new collective-bargaining agreement
every year with each local union. The collective-bargaining agreements now in
force expire on October 31, 2004. 45




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Our employees also have the right to participate in private pension plans
and to receive payments based on our financial performance. The amount of the
payment is determined under an agreement between the unions representing our
employees and us.  E.
    
    Share Ownership As of December 31, 2002, each of the members of the board of directors and
the board of executive officers owned, directly or indirectly, less than 0.01%
of any class of our shares. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS  A.
    
    Major Shareholders Of our two classes of capital stock outstanding, only the common shares
have full voting rights. None of the principal shareholders have voting rights
that differ from those of the other holders of the common shares and preferred
shares. The preferred shares have voting rights under limited circumstances.
See Item 10. Additional InformationMemorandum and Articles of Association. The following table sets forth information concerning the ownership of
common shares by Iberoleste (wholly controlled by Brasilcel), Brasilcel Tagilo
Participações Ltda. (an equity investment company wholly controlled by
Brasilcel), Utilitivest II Delaware LLC (a private institutional fund), BNDES
Participações S.A. (a venture capital fund, controlled by Banco Nacional de
Desenvolvimento Econômico e Social, or BNDES, the Brazilian Development Bank)
and our officers and directors as a group, at May 31, 2004: Number of
    
    Percentage of
    
    Number of
    
    Percentage ofcommon shares
    
    outstanding
    
    preferred shares
    
    outstandingName of owner
    
    owned
    
    common shares
    
    owned
    
    preferred sharesIberoleste Participações S.A.
    
    
    90,432,403,486
    
    
    
    54.07
    
    
    
    15,699,537,789
    
    
    
    5.01
    %Brasilcel, N.V.
    
    
    5,265,273,319
    
    
    
    3.14
    %
    
    
    10,934,219,376
    
    
    
    3.49
    %Tagilo Participações Ltda.
    
    
    2,389,494,491
    
    
    
    1.43
    %
    
    
    9,190,099,460
    
    
    
    2.93
    %Utilitivest II Delaware LLC
    
    
    15,028,378,570
    
    
    
    8.99
    %
    
    
    
    
    
    
    0.00
    %BNDES Participações S.A.
    
    
    1,252,230,576
    
    
    
    0.75
    %
    
    
    19,058,384,218
    
    
    
    6.08
    %All directors and executive
officers as a group (12
persons)
    
    
    70,262
    
    
    
    0.00
    %
    
    
    800
    
    
    
    0.00
    %
 Any significant change in the percentage ownership held by any major
shareholders during the past three years is disclosed in Item 4A. Our History
and Development. We are not aware of any other shareholder owning more than 5.0% of our
common shares. None of these shareholders have voting rights different from
those of our other common shareholders. Brasilcel has the ability to control the election of our board of
directors and the direction of our future operations. See also Item 4A. Our
History and DevelopmentBrasilcel and Iberoleste Tender Offer. At May 31, 2004, there were approximately 74 record holders of ADSs in the
United States, representing approximately 54% of our preferred
shares. Brasilcel does not hold ADSs of TLE.  B.
    
    Related Party Transactions Each of our subsidiaries has entered into a Consulting Service Agreement
with Telefónica Móviles pursuant to which it receives marketing, technical and
business development advice. Under the Consulting Services Agreements, the
subsidiaries are obligated to make annual payments to Telefónica Móviles of
up to 2% of net operating revenues. 46




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We also carry on transactions with other companies controlled by
Telefónica, such as network use and long distance (roaming) cellular
communication agreements. The counterparties to these agreements are: Telerj
Celular S.A. and Telest Celular S.A. (both together, as Telesudeste, reported
revenues of R$ 0.1 million, R$4.0 million, and R$2.8 million, respectively in
2003, 2002 and 2001); Telesp (R$ 16.2 million, R$0.02 million of revenues in
2003 and 2002 and R$0.3 million of expenses in 2001); Celular CRT S.A. (R$0.02
million expenses in 2003 and R$0.4 million and R$0.4 million in revenues in
2002 and 2001); Telesp Celular S.A., Global Telecom S.A., Tele Centro Oeste
Celular, Telems Celular, Telecom Celular, Telemat Celular, Teleacre Celular,
Telegoiás Celular, NBT (all together, as TCP, reported R$0.4 million in
revenues in 2003 and R$0.07 million in expenses in 2002). The transactions
relating to roaming agreements are based on contracts entered into prior to the
Break-up of Telebrás, between Telebrás and each relevant Predecessor Company.
The terms of these agreements and of the ones for network use are regulated by
Anatel. The following services are rendered by companies controlled by Portugal
Telecom and Telefónica:  
    
    apportionment of general and administrative expenses with
carriers of the same group according to the costs actually incurred
with these services (R$5.7 million in expenses in 2003);
    
    corporate services centralized at Telerj Celular S.A. (R$5.0
million, R$4.9 million in expenses in 2002 and 2001 respectively)
and Telefónica Gestão de Serviços Compartilhados do Brasil Ltda.,
transferred to other companies at costs effectively incurred;
    
    call center services rendered by Atento Brasil S.A. to users
of telecommunications services of subsidiaries, (R$11.8 million , R$
8.9 million and R$7.4 million expenses respectively 2003, 2002 and
2001);
    
    implementation and maintenance of profitability and cost
control system by Telefónica Móbile Solution; and
    
    services of implementation of facilities security system
rendered by Telefónica Engenharia. We have engaged in a number of other transactions with related parties.
See note 27 to our consolidated financial statements.  C.
    
    Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION  A.
    
    Consolidated Statements and Other Financial Information See Item 3A. Selected Financial Data and Item 18. Financial
Statements. Legal Matters Civil Litigation
Related to the Breakup of Telebrás The Breakup of Telebrás is the subject of several lawsuits in which the
plaintiffs are seeking injunctions. Some preliminary injunctions were granted,
but all were quashed by decisions of the relevant federal court. These courts
also decided that the court of the state of Minas Gerais has original
jurisdiction over the proceedings. Several decisions quashing preliminary
injunctions are on appeal, and, if any such appeals are successful, the
shareholders of Telebrás may have to reapprove the Breakup of Telebrás or
legislative action may be required. 47




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The theories on which the lawsuits regarding the Breakup of Telebrás are
based include:  
    
    that the Brazilian constitution requires that the General
Telecommunications Law specifically authorize the creation of the 12
New Holding Companies,
    
    that the Telebrás shareholders meeting held on May 22, 1998
which approved the Breakup of Telebrás was not properly convened,
    
    that national sovereignty will be threatened if Brazils
telecommunications companies are controlled by foreign entities, and
    
    that the General Telecommunications Law requires that certain
matters, such as the entry of new competitors and the administration
of development and technology funds, be regulated prior to the
Breakup of Telebrás either by an executive order of the President or
by an act of Congress. If any of these lawsuits ultimately succeeds, the Breakup of Telebrás will
have to be reinitiated. This could require, depending upon the prevailing
plaintiffs theory, one or both of the following actions:  
    
    amending the Telecommunications Law; and
    
    reconvening the May 22, 1998 Telebrás shareholders meeting. It is theoretically possible under Brazilian law for a court to require
that the Breakup of Telebrás be unwound, although we believe that this would
not be likely to occur. We believe that the ultimate resolution of the
proceedings will be favorable and will not have a material adverse effect on
our business or financial position. It is very difficult to quantify what the
potential impact to us would be if the Breakup of Telebrás were to be unwound.
This would require an assessment of the total amount of capital invested by
controlling shareholders in the 12 New Holding Companies and a prediction as to
any possible indemnification to which they may be entitled from the Brazilian
government. The results could be very far reaching and would affect all of the
New Holding Companies. Litigation
Arising Out of Events Prior to the Breakup of Telebrás Telebrás and our subsidiaries Predecessor Companies, our legal
predecessors, and our subsidiaries, respectively, are defendants in a number of
legal proceedings and subject to certain other claims and contingencies
relating to events prior to the Breakup of Telebrás. Liability for claims
arising out of acts committed by the Predecessor Companies prior to the
effective date of the spin-off of the cellular assets and liabilities of the
Predecessor Companies to our subsidiaries remains with the Predecessor
Companies, except for labor and tax claims (for which the Predecessor Companies
and our subsidiaries are jointly and severally liable, as the case may be, by
operation of law) and those liabilities with respect to which the Predecessor
Companies had made specific accounting provisions prior to the Breakup of
Telebrás, assigning them to our subsidiaries. Any claims against the
Predecessor Companies, which are not satisfied by the Predecessor Companies,
could result in claims against our subsidiaries to the extent that our
subsidiaries have received assets that might have been used to settle those
claims had they not been spun off from the Predecessor Companies. However,
under the shareholders resolution pursuant to which the spin-off was effected,
our subsidiaries have contribution rights against their Predecessor Companies
with respect to the entire amount of any payments made by our subsidiaries in
connection with any labor or tax claims brought against our subsidiaries and
relating to acts committed by the Predecessor Companies prior to the effective
date of the spin-off. We believe that the likelihood that claims of this kind will materialize
and have a material adverse financial effect on us is remote. Litigation Related to Tax
Credits Under certain conditions, Brazilian law permits companies to benefit from
tax credits related to the amortization of goodwill. Despite this fact, an
action was filed on December 16, 1999 against Anatel and the New 48




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Holding Companies, including us, that have undergone a corporate
restructuring in connection with the Breakup of Telebrás and that recognized
tax credits to offset premiums paid by their controlling shareholders at the
time of their acquisition. We filed our answer in 2002. We do not think this
action will succeed as we believe the restructuring was done in compliance with
Brazilian law; however, based on the opinion of legal counsel, the chance of an
unfavorable outcome is possible in this case. The extent of any potential liabilities in connection with this action
will be determined in a separate but related lawsuit known as the calculation
of the award, which will only take place if we are unsuccessful in its
defense. Litigation
Related to the Ownership of Caller ID In July 2002, we, together with other Brazilian mobile telecommunication
operators, were named as defendants in an action filed by Lune Projetos
Especiais Telecomunicação Comércio Ind. Ltda., or Lune, pursuant to which Lune
claims to be the owner of patents relating to Equipamento Controlador de
Chamadas Entrantes e do Terminal Telefônico, or Caller ID, and also that the
mobile telecommunication operators are using the patent without proper
authorization. Therefore, Lune demands that the operators cease to provide
Caller ID services and that it should be indemnified for the unauthorized use
of the Caller ID system, upon payment of fees received by the operators in
consideration to the use of the system by their customers. Based on the opinion of our legal counsel, the chance of an unfavorable
outcome is possible in this case. However the indemnification that is allegedly
due from the mobile operators cannot be accurately calculated as of yet due to
the fact that the cost of the caller ID service provided by the companies has
never been separately calculated. Litigation
Related to the Validity of the Minutes in the Prepaid Plans We are defendant in various lawsuits brought by the federal public
prosecutors office and an association for consumers protection which
challenge the imposition of an expiration date for the use of purchased prepaid
minutes. The plaintiffs allege that any prepaid minutes should not have a time
limitation for usage. Based on external counsels opinion, we do not believe that it will be
resolved against our interests. Tax-Related Litigation
Related to the Application of the ICMS In June, 1998, the CONFAZ (Conselho Nacional de Politica Fazendaria)
agreed to apply the ICMS tax to certain service revenues, such as activation
fees, and to make the application to such activation fees retroactive for the
five years preceding June 30, 1998. Telebahia Celular was assessed by the tax authorities for lack of payment
of the ICMS tax on activation fees, retroactive to February 1998, at the amount
of R$9.5 million. We believe that the extension of the ICMS tax to non-basic
telecommunications services such as cellular activation is unlawful because it
would subject to taxation certain services that are not telecommunications
services and because new taxes can not be applied retroactively. Litigation
Related to the Application of the COFINS and PIS On November 27, 1998, the method for calculating the PIS and COFINS social
contributions was modified by Law no. 9,718, which increased the COFINS
contribution rate from 2% to 3% and authorized the deduction of up to 1/3 of
the amount due as COFINS from the amount due as CSLL. Since our subsidiaries
had a negative tax calculation basis, they could not benefit from this
deduction. Also, Law no. 9,718 indirectly increased the amounts of COFINS and
PIS due by the subsidiaries by including financial revenues in their
calculation basis. 49




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Based on our external counsels advice, we believe that this increase is
unconstitutional because: (i) article 195 of the Brazilian constitution, which
was effective when Law no. 9,718 was enacted, provided that the PIS
contribution could only be levied on compensation of employees, revenues and
profits; (ii) in order to increase the COFINS and PIS contributions, it would
be necessary to enact a law called lei complementar,which requires a greater
quorum than the one required to approve a law called lei ordinária,such as law
nr. 9,718; and (iii) the law was made effective before the expiration of the
required 90-day waiting period. Telebahia Celular and Telergipe Celular obtained injunctions allowing them
to continue paying the COFINS and PIS contributions based on telecommunications
services and sales revenues and to continue paying the COFINS contribution at a
2% rate. However, the injunctions were partially reversed and, as a result:
(i) Telebahia Celular resumed payment of the COFINS contribution at a 3% rate,
including financial revenues in the basis; (ii) Telergipe Celular resumed
payment of the COFINS contribution at a 3% rate, but it was allowed to continue
paying it based on telecommunications services and sales revenues, having made
a deposit with the Court with respect to the other revenues, and (iii)
Telergipe Celular included financial revenues in the basis of the PIS. After December 2002 in the case of the PIS and December 2003 in the case
of the COFINS, and due to the changes introduced by laws 10,637/02 and
10,833/03, both Telebahia and Telergipe included financial revenue in their
calculation basis of PIS and COFINS. Litigation Related to ISS on use of network The municipality of Salvador, in the state of Bahia, filed administrative
proceedings against Telebahia Celular in order to collect amounts allegedly due
as Imposto sobre serviços(ISS). The municipality claims that the payments
received in consideration of the use of our network could be considered as
remuneration under a lease of a movable asset, and that therefore these
payments should be subject to the application of ISS. At December 2002, this
claim amounted to R$39.7 million. Based on external counsels opinion, we
believe that Telebahia Celular will be successful in these proceedings and
accordingly we did not record a provision for them. Litigation Related to ISS on tax substitution Telebahia Celular was also assessed, by the municipality of Salvador, for
lack of retention of the Imposto Sobre Servicos(ISS) on outside services.
Based on the opinion of legal counsel, we believe that the chances of
unfavorable outcome are probable in this case,; therefore we recorded a partial
provision of R$1.9 million for losses at December 31, 2003. Litigation Related to different aspects of the ICMS Both Telergipe Celular and Telebahía Celular were assessed for the lack of
full payment of the ICMS tax in 1998 and the lack of reversal of ICMS credits
on acquisition of tangible assets and lease of handsets. The total claim
amounted to R$6.8 million. Other Litigation We are also party to certain legal proceedings arising in the normal course of
business. Our reserve amounts are sufficient to cover our estimated losses due
to adverse legal judgments. We believe that adverse judgments arising from
these other legal proceedings would not have a material adverse effect on our
business, financial condition or results of operations. Dividend Policy and Dividends We pay our shareholders both dividends and interest on shareholders
equity, which is a form of distribution that is tax deductible in Brazil. The
following table summarizes our history of payments of dividends and interest on
shareholders equity for the years, 2003, 2002 and 2001. The table sets forth
amounts in reaisper thousand common shares and preferred shares and amounts in
U.S. dollars per ADS translated into U.S. dollars at 50




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the prevailing selling rate for Brazilian currency into U.S. dollars in
the commercial rate exchange market on each of the respective dates of
payments. Dividends plus interest on shareholders equity Year ended December 31,2003 (1)
    
    2002 (1)
    
    2001(R$ per
    
    (U.S.$
    
    (R$ per
    
    (R$ per
    
    (R$ per
    
    (U.S.$share)
    
    per ADS)
    
    share)
    
    share)
    
    share)
    
    per ADS)Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/A
    
    
    
    N/APreferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.03822
    
    
    
    0.5997
   (1)
    
    We recorded losses in 2003 and 2002 and, therefore, no dividends or
interests on shareholders  ́ equity were paid for these years. Under our by-laws, we are required to distribute as dividends in respect
of each fiscal year ending on December 31, to the extent amounts are available
for distribution, an aggregate amount equal to at least 25% of adjusted net
income on such date as mandatory dividend. Preferred shares are entitled to
receive minimum noncumulative cash dividends of 10% higher than those
attributed to common shares, or noncumulative minimum annual preferred
dividends of 6% of social capital attributed to those shares, whichever is
greater. The annual dividend distributed to our holders of our preferred
shares has priority in the allocation of adjusted net income. Under Brazilian corporate law, a company is permitted to suspend the
payment of the mandatory dividend in respect of its common and preferred shares
if:  
    
    its board of directors, independent auditors and board of
auditors report to the shareholders meeting that the distribution
would be incompatible with the financial conditions of that company;
and
    
    the shareholders ratify this conclusion at the shareholders
meeting. In this case,  
    
    the board of executive officers would forward to the
CVM, within five days of the shareholders meeting, an
explanation for the suspension of the payment of the mandatory
dividends; and
    
    the amounts which were not distributed are to be
recorded as a special reserve, and, if not absorbed by losses in
subsequent fiscal years, they must be distributed as dividends as
soon as the financial condition of that company permits.
Dividends may be distributed by us out of our retained earnings
or accumulated profits in any given fiscal year. For the purposes of Brazilian corporate law, accumulated profits are
defined as net income after the provision of income tax and social contribution
for the relevant fiscal year, net of any accumulated losses from prior fiscal
years and any amounts allocated to warrants, income bonds, employees and
managements participation in a companys profits. At each annual shareholders meeting, the board of directors is required
to determine how net profits for the preceding fiscal year are to be allocated.
Under Brazilian corporate law, we are required to maintain a statutory
reserve, to which we must allocate 5% of our net profits for each fiscal year
until the amount of such reserve equals 20% of our paid-in capital. Losses, if
any, may be charged against the statutory reserve. The Brazilian corporate law also provides for two additional discretionary
allocations of net profits that are subject to approval by the shareholders at
the annual shareholders meeting:  
    
    first, a percentage of net profits may be allocated to the
contingency reserve for anticipated losses that may be charged to it
in future years. Any amount so allocated in a prior year must be
either:  
    
    reversed in the fiscal year in which the loss was
anticipated if such loss does not in fact occur; or 51




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
    
    written off in the event that the anticipated loss
occurs;  
    
    second, if the amount of unrealized revenue exceeds the sum
of (i) the statutory reserve and (ii) retained earnings, such excess
may be allocated to the unrealized profit reserve at the direction
of the board of directors. Allocations may not hinder the payment of mandatory dividends. Unrealized
revenue reserve is defined under Brazilian corporate law as the sum of:  
    
    the share of equity earnings of affiliated companies, which is not paid as cash dividends; and
    
    profits as a result of income from operations after the end of the next succeeding fiscal year. The amounts available for distribution are determined on the basis of
financial statements prepared in accordance with Brazilian corporate law, which
differs from other financial statements such as our consolidated financial
statements included in this annual report, which are prepared in accordance
with Brazilian Corporate Law Method. Priority and Amount of Preferred Dividends Our by-laws provide for a minimum yearly per share dividend to the holders
of our preferred shares equal to the higher of 6% of the amount obtained by
dividing the total share capital by the total number of shares or 10% above the
amount distributed to the holders of our common shares. As a result of such
provision, holders of our preferred shares are entitled to receive, in any
year, distributions of cash dividends prior to the holders of our common shares
receiving any distribution of cash dividends in such year. In addition,
distributions of cash dividends in any year are made:  
    
    first, to the holders of preferred shares up to the amount of
the dividend that must be paid to the holders of preferred shares
for such year;
    
    then, to the holders of common shares until the amount
distributed in respect of each Preferred Share is 10% above the
amount distributed in respect of each common share, according to our
by-laws; and
    
    thereafter, to the holders of common shares and preferred shares, on the basis that the amount distributed in respect of each
preferred share is 10% above the amount distributed in respect of
each common share, according to our by-laws. If the mandatory dividend in any year is less than or equal to the
dividend that must be paid to the holders of preferred shares in that year, the
holders of common shares will not be entitled to receive any cash dividends
from us in that year, unless the holders of common shares approve dividends in
excess of dividends that must be paid to preferred shares. In such
circumstances, however, holders of preferred shares will be entitled to the
amount available for payment of dividends up to an aggregate amount equal to:  
    
    the minimum dividend to be paid to the holders of preferred shares; plus,
    
    in the event the minimum dividend to be paid to the holders
of preferred shares is higher than the amount available for payment
of dividends for that year, any retained earnings from previous
years, which may be used to make up for such shortfall. If the dividend to be paid to the holders of preferred shares is not paid
for a period of three years, holders of preferred shares will be entitled to
full voting rights until such time as that dividend is paid in full for any
year. 52




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Payment of Dividends We are required by Brazilian law and by our by-laws to hold an annual
shareholders meeting by April 30 of each year, at which, among other things,
an annual dividend may be declared by a decision of our shareholders on the
recommendation of our board of directors. The payment of annual dividends in
any given year is based on the financial statements prepared for the preceding
fiscal year ending December 31. Under Brazilian corporate law, dividends are
required to be paid within 60 days of the annual shareholders meeting, or on
the date determined at a shareholders meeting, but in any case prior to the
end of the fiscal year in which such dividend was declared. A shareholder has
a three-year period from the dividend payment date to claim dividends in
respect of its shares, after which time unclaimed dividends revert back to us.
Because our shares are issued in book-entry form, dividends will be credited to
the depositary, which is responsible for the delivery of the dividends to their
respective holders. We are not required to adjust the amount of paid-in
capital for inflation. Annual dividends may be paid to shareholders on a pro
ratabasis according to the date when the subscription price is paid to us. Our preferred shares underlying the ADSs are held in Brazil by a Brazilian
custodian, Banco Itaú S.A., as the agent for the depositary, which is the
registered owner of our shares. Payments of cash dividends and distributions, if any, will be made in
reaisto the Custodian on behalf of The Bank of New York, as depositary, which
will then convert those proceeds into U.S. dollars and will cause such U.S.
dollars to be delivered to the depositary for distribution to holders of ADRs.
In the event that the Custodian is unable to immediately convert the reais
received as dividends into U.S. dollars, the amount of U.S. dollars payable to
holders of ADRs may be adversely affected by devaluations of the realthat
occur before such dividends are converted and remitted. Dividends in respect
of our preferred shares paid to resident and non-resident shareholders,
including holders of ADSs, are not currently subject to Brazilian withholding
tax. Tele Leste recorded losses in 2003 and 2002 and, therefore, no dividends
or interest on equity were paid for those years.  B.
    
    Significant Changes None. 
 ITEM 9. THE OFFER AND LISTING  A.
    
    Offer and Listing Details Brazilian private equity and debt are principally traded on BOVESPA, which
is the trading market for our common and preferred shares. Our preferred
shares began trading on the Brazilian stock exchanges on September 21, 1998.
The following table sets forth the reported high and low closing sale prices
for our preferred shares on BOVESPA, for the periods indicated. Reais per 1,000 PreferredSharesLow
    
    High1999Annual
    
    
    0.56
    
    
    
    1.592000Annual
    
    
    1.09
    
    
    
    2.392001Annual
    
    
    0.55
    
    
    
    2.062002Annual
    
    
    0.35
    
    
    
    1.02First quarter
    
    
    0.80
    
    
    
    1.02Second quarter
    
    
    0.56
    
    
    
    0.84Third quarter
    
    
    0.36
    
    
    
    0.60
 53




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Reais per 1,000 PreferredSharesLow
    
    HighFourth quarter
    
    
    0.35
    
    
    
    0.472003Annual
    
    
    0.37
    
    
    
    0.85First quarter
    
    
    0.37
    
    
    
    0.54Second quarter
    
    
    0.42
    
    
    
    0.48Third quarter
    
    
    0.40
    
    
    
    0.58Fourth quarter
    
    
    0.55
    
    
    
    0.85Last Six MonthsDecember 2003
    
    
    0.70
    
    
    
    0.85January 2004
    
    
    0.72
    
    
    
    0.84February 2004
    
    
    0.63
    
    
    
    0.78March 2004
    
    
    0.57
    
    
    
    0.68April 2004
    
    
    0.60
    
    
    
    0.67May 2004
    
    
    0.61
    
    
    
    0.75June 2004 (until June 25, 2004)
    
    
    0.69
    
    
    
    0.87
 In the United States, our preferred shares trade in the form of ADSs, each
representing 50,000 Preferred Shares issued by The Bank of New York, as
depositary, pursuant to a Deposit Agreement among Tele Leste, the depositary,
and the registered holders and beneficial owners from time to time of ADRs.
The ADSs commenced trading on the New York Stock Exchange on November 16, 1998
under the symbol TBE. At May 31, 2004, there were approximately 74 record
holders of ADSs in the United States, representing approximately 54% of our
preferred shares. Brasilcel does not hold ADSs of TLE. The following table sets forth the reported low and high
closing sales prices for ADSs on the New York Stock Exchange for the dates and
periods indicated. U.S. dollars per ADSLow
    
    High1999Annual
    
    
    17.63
    
    
    
    44.122000Annual
    
    
    27.50
    
    
    
    67.062001Annual
    
    
    10.50
    
    
    
    44.252002Annual
    
    
    4.50
    
    
    
    22.42First quarter
    
    
    16.40
    
    
    
    22.42Second quarter
    
    
    9.89
    
    
    
    17.75Third quarter
    
    
    4.95
    
    
    
    10.30Fourth quarter
    
    
    4.50
    
    
    
    6.582003Annual
    
    
    5.05
    
    
    
    14.59First quarter
    
    
    5.05
    
    
    
    8.20Second quarter
    
    
    6.31
    
    
    
    8.73Third quarter
    
    
    6.32
    
    
    
    9.97Fourth quarter
    
    
    9.40
    
    
    
    14.59Last Six MonthsDecember 2003
    
    
    11.52
    
    
    
    14.59January 2004
    
    
    12.66
    
    
    
    14.80February 2004
    
    
    10.49
    
    
    
    13.04March 2004
    
    
    10.01
    
    
    
    11.75April 2004
    
    
    10.40
    
    
    
    11.70May 2004
    
    
    10.20
    
    
    
    11.82June 2004 (until June 25, 2004)
    
    
    10.83
    
    
    
    13.73
 54




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A.
    
    Plan of Distribution Not applicable.  B.
    
    Markets Trading on the São Paulo Stock Exchange (BOVESPA) The São Paulo Stock Exchange is a non-profit entity owned by its member
brokerage firms. Trading on this exchange is limited to member brokerage firms
and a limited number of authorized nonmembers. Since April 7, 2003, BOVESPA has open outcry trading sessions each day,
from 10:00 a.m. to 1:00 p.m. and from 2:00 p.m. to 4:45 p.m. Trading is also
conducted from 10:00 a.m. to 5:00 p.m. on an automated system on BOVESPA. On
September 20, 1999, BOVESPA launched the After-Market, with the objective of
expanding business opportunities and offering investors a more flexible trading
schedule. After-Market trading takes place from 5:45 p.m. to 7:00 p.m. All
stocks traded during the regular trading session of the day may be traded on
the After-Market. However, only cash market trading via BOVESPAs electronic
trading system is allowed. The maximum variation allowed for stock prices,
whether positive or negative, corresponds to 2% in relation to the closing
price at the regular trading session. In order to better control volatility, BOVESPA has adopted a circuit
breaker system pursuant to which trading sessions may be suspended for a
period of 30 minutes or one hour whenever its indices fall below the limits of
10% in relation to the index registered in the previous trading session. There are no specialists or market makers for our shares on BOVESPA.
Trading in securities listed on the BOVESPA may be effected off the Exchange in
certain circumstances, although such trading is very limited. Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for
shares is made through the facilities of a separate clearinghouse, which
maintains accounts for member brokerage firms. The seller is ordinarily
required to deliver the shares to the exchange on the second business day
following the trade date. The clearinghouse for BOVESPA is Companhia
Brasileira de Liquidação e Custódia S.A.  CBLC, which is wholly owned by that
Exchange. At December 31, 2003, the aggregate market capitalization of the 369
companies listed on BOVESPA was approximately U.S.$234.2 billion. Although all
the outstanding shares of an exchange-listed company may trade on BOVESPA, in
most cases the preferred shares or less than half of the listed common shares
are actually available for trading by the public, the remainder being held by
small groups of controlling persons that rarely trade their shares. For this
reason, data showing the total market capitalization of BOVESPA tends to
overstate the liquidity of the Brazilian equity securities market. The Brazilian equity market is relatively small and illiquid compared to
major world markets. In 2003, the combined dayly trading volumes on BOVESPA
averaged approximately U.S.$271.9 million. In 2003, the 10 most actively
traded shares represented approximately 53.5% of the total trading in the cash
market on BOVESPA. Trading on BOVESPA by nonresidents of Brazil is subject to
certain limitations under Brazilian foreign investment legislation. Regulation of Brazilian Securities Markets The Brazilian securities markets are regulated by the CVM, which has
authority over stock exchanges and the securities markets generally, by the
Conselho Monetário Nacional, or CMN, the National Monetary CounCIl and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by Law No. 6,385, as amended, known as
the Brazilian securities law, and by Law No. 6,404, as amended, known as the
Brazilian corporate law. 55




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Law No. 10,303 of December 31, 2001 amended the Brazilian corporate law
and the Brazilian securities law. Consequently, some major modifications
resulted for the businesses of the publicly traded companies. Among the changes, Law No. 10,303, along with Executive Order No. 8 and
Decree No. 3.995, all dated October 31, 2001, provided that the CVM was to have
the scope of its authority altered and expanded. Additionally, CVMs
positioning in the regulatory hierarchy as well as its autonomy were modified. The modifications include changes in the proportions of common and
preferred shares, new rules for the issuance of debentures, other parameters
governing the exercise of the right of withdrawal, duties and powers of the
members of the board of auditors and the board of directors, and the ability of
publicly traded companies to make publications available over the Internet.
Also provided is the pooling agreement, the so-called block voting by which the
shareholders agree during a prior meeting on the direction of the votes that
will be cast at the general meetings. The purpose of this type of vote is to
prevent any possible individual dissidents or interests from harming corporate
interests. The period established for companies to adapt their by-laws is one year
from the publication of the law on November 1, 2001. Our shareholders held a
general shareholders meeting on March 27, 2002, where they addressed these
modifications in our by-laws. The CVM, which is the agency in charge of regulating the market, now
handles some functions that were reserved to the Banco Central, for example,
the regulation and organization of the futures and commodities markets. Under the Brazilian corporate law, a company is either public, a companhia
aberta, such as our company, or private, a companhia fechada. All public
companies are registered with the CVM and are subject to reporting
requirements. A company registered with the CVM may have its securities traded
either on BOVESPA or on the Brazilian over-the-counter market. The shares of a
public company may also be traded privately, subject to certain limitations.
In order to be listed on the Brazilian stock exchanges, a company must apply
for registration with the CVM and the stock exchange. Once the stock exchange
lists a company and the CVM accepts its registration as a public company, its
securities may start to be traded. Trading in securities on BOVESPA may be suspended at the request of a
company in anticipation of a material announcement. Trading in the securities
of a particular company may also be suspended on the initiative of the BOVESPA
or the CVM, among other reasons, due to a belief that the company has provided
inadequate information regarding a material event or has provided inadequate
responses to inquiries by the CVM or BOVESPA. The Brazilian securities law, Brazilian corporate law and the regulations
issued by the CVM, the CMN and the Central Bank provide, among other things,
disclosure requirements and restrictions on insider trading, price manipulation
and protection of minority shareholders. However, the Brazilian securities
markets are not as highly regulated and supervised as the U.S. securities
markets or markets in some other jurisdictions. Principal Differences Between the Brazilian and the U.S. Corporate Governance
Practices The significant differences between our corporate governance practices and
the NYSE corporate governance standards are as follows: Independence of Directors and Independence Tests The Brazilian corporate law and our bylaws require that our directors be
elected by our shareholders at a general shareholders meeting. All our
directors are appointed by our controlling shareholders. Neither our board of directors nor our management test the independence of
the directors before such elections are made.However,both the Brazilian
corporate law and CVM establish rules in relation to certain qualification
requirements and restrictions, investiture, compensation, duties and
responsibilities of the companies executives and directors. Although we
believe these rules provide adequate assurances that our directors are 56




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independent, we believe such rules would permit us to have directors that would
not otherwise pass the independence tests established by the NYSE. Executive Sessions According to the Brazilian corporate law, up to 1/3 of the members of the
board of directors can be elected into executive positions. The remaining
non-management directors are not expressly empowered to serve as a check on
management and there is no requirement that those directors meet regularly
without management. Notwithstanding, under our bylaws, the members of the board
of executive officers cannot be elected to the board of directors. Committees We are not required under applicable Brazilian corporate law to have, and
accordingly we do not have, a Nominating Committee, Corporate Governance
Committee and Compensation Committee. Pursuant to our bylaws our directors are
elected by our shareholders at a general shareholders meeting. Compensation
for our directors and executive officers is established by our shareholders. Audit Committee and Audit Committee Additional Requirements The Brazilian corporate law requires us to have a board of auditors
(Conselho Fiscal) which is composed of three to five members elected at the
general shareholders meeting. The board of auditors operates independently
from our management and from our external auditors. Its main function is to
examine the financial statements of each fiscal year and provide a formal
report to our shareholders. We have a board of auditors that consists of five
members and five alternates and which meets once a quarter. In April 2003, the
SEC has stated that the listing of securities of foreign private issuers will
be exempt from the audit committee requirements if the issuer meets certain
requirements. We also have an audit committee, whose members do not follow the
independence requirements of the Exchange Act Rule 10A-3(c)(3), as we are
still exempt from such requirements by July 31, 2005 according to the Exchange
Act Rule 10A-3(a)(5)(A). See Item 16D  Exemptions from the Listing Standards
for Audit Committees. Under the Brazilian corporate law, an audit committee member may
simultaneously serve on the audit committees of more than three public
companies. In addition, our company does not impose limitations in this regard
and our board is not required to affirmatively determine and disclose that the
director  ́s ability to effectively serve is not impaired. We are aware that the
members of our audit committee also serve on the audit committees of all of the
other companies that have been operating under the brand name Vivo: TCP, TCO,
TSE and Celular CRT Participações S.A. Shareholder Approval of Equity Compensation Plans Our shareholders do not have the opportunity to vote on all equity
compensation plans. However, any issuance of new shares that exceeds the
authorized capital is subject to shareholder confirmation. Corporate Governance Guidelines We have not adopted any corporate governance guidelines in addition to the
rules imposed upon us by applicable Brazilian law. We believe that the
corporate governance guidelines applicable to us under Brazilian law, such as
those regarding insider trading, public disclosure of material information, and
rules on the negotiation of equities by management and controlling
shareholders, are consistent with some of the guidelines established by the
NYSE. 57




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Code of Business Conduct and Ethics Although the adoption of a code of ethics is not required by Brazilian
corporate law, we implemented in June, 2003 our Code of Ethics regulating the
conduct of our senior financial officers. See Item 16B  Code of Ethics. We
do not have a code of business conduct and ethics applicable to all our
Directors and employees.  C.
    
    Selling Shareholders Not applicable.  D.
    
    Dilution Not applicable.  E.
    
    Expenses of the Issue Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION  A.
    
    Share Capital Not applicable.  B.
    
    Memorandum and Articles of Association The following summarizes certain material provisions of our by-laws and
Brazilian law, the main bodies of regulation governing us. Copies of our
by-laws have been filed as exhibits to this annual report on Form 20-F. Register Our by-laws were registered with the Public Registry of the state of Bahia
on April 28, 2003, under company number (NIRE) 29300023892. Objectives and Purposes We are a publicly traded company duly registered with the Brazilian
securities commission. Article 2 of our by-laws provides that our corporate
purpose is to:  
    
    exercise the control of operating companies which provide
cellular mobile telecommunications services, personal mobile
services and other services in conformity with the concessions,
authorizations and permissions that have been granted to us;
    
    promote, through our subsidiaries or controlled companies,
the expansion and implementation of the telecommunications services
within our concessions, authorizations and permissions;
    
    promote, carry out and direct the financing of capital from
internal or external sources to be used by us or our controlled
companies;
    
    promote, carry out and encourage study and research
activities aimed at the development of the telecommunications
sector;
    
    perform, through our subsidiaries and affiliated companies,
specialized technical services related to the telecommunications
sector; 58




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
    
    promote, encourage, carry out and coordinate, through our
subsidiaries or controlled companies, the development and training
of personnel necessary to perform activities in the
telecommunications sector;
    
    carry out and promote the import of goods and services for
the operations of our subsidiaries and controlled companies;
    
    execute other activities connected or related to our objective;
    
    participate in the equity capital of other companies; and
    
    trade equipment and materials necessary or useful for providing telecommunications services. Directors Following is a description of some of the provisions of our by-laws
concerning the members of our board of directors:  
    
    The board of directors has the power to approve investments
and acquisition of assets, assume any obligation and execute
contracts not included in the budget for an amount exceeding R$300
million, the public issuance of promissory notes, and the
acquisition of our shares for cancellation or deposit with a
custodian; and
    
    The board of directors has the power to apportion the global
remuneration set forth by the shareholders meeting between the
directors and the executive officers. Pursuant to Brazilian corporate law, each member of the board of directors
must have at least one share of our capital stock to be elected as a Director.
There are no provisions in our by-laws with respect to:  
    
    age limits for retirement of directors; and
    
    anti-takeover mechanisms or other procedures designed to
delay, defer or prevent changes in our control. Although there are no provisions in our by-laws with respect to the
following, they are regulated by Brazilian corporate law and CVM regulations:  
    
    a Directors power to vote on proposals in which the Director
is materially interested;
    
    a Directors power to vote compensation to him or herself in
the absence of an independent quorum;
    
    borrowing powers exercisable by the directors;
    
    required shareholding for Director qualification; and
    
    disclosure of share ownership. Rights Attaching to Shares Dividend Rights See Item 8A. Consolidated Statements and Other Financial
InformationDividend Policy and Dividends, and -Payment of Dividends. 59




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Voting Rights Each common share entitles the holder to one vote at meetings of
shareholders. Our preferred shares do not entitle the holder to vote except as
discussed in our by-laws in Articles 7, 9 and 10. Holders of our preferred
shares are each entitled to attend or to address meetings of shareholders and
to elect members of our board of directors according to Article 141, fourth
paragraph, II, and Article 141, fifth paragraph, of Law No. 6,404/76, as
amended by Article 8, fourth paragraph of Law No. 10,303/01. One of the members of our board of auditors and his or her alternate are
elected by the majority vote of the holders of our preferred shares present at
the annual meeting of shareholders at which the members of the board of
auditors are elected. Brazilian corporate law provides that certain non-voting shares, such as
our preferred shares, acquire voting rights in the event we fail for three
consecutive fiscal years to pay the mandatory minimum dividend to which such
shares are entitled, until such payment is made. Our preferred shares are entitled to full voting rights in the event that
we fail to pay the mandatory minimum dividends to which they are entitled for
three consecutive years, and with respect to:  
    
    the approval of any long-term contract between us and our
controlled subsidiaries, on the one hand, and any controlling
shareholder or that shareholders affiliates and related parties, on
the other hand; and
    
    changes/eliminations of certain rights and obligations as
provided for in our by-laws. Any change in the preference, benefits, conditions of redemption and
amortization of our preferred shares, or the creation of a class of shares
having priority or preference over our preferred shares, would require the
approval of holders of a majority of our outstanding preferred shares at a
special meeting of holders of our preferred shares. Such a meeting would be
called by publication of a notice in the states official gazette and two other
Brazilian gazettes, as determined by the shareholders, at least thirty days
prior to the meeting, but would not generally require any other form of notice. In any circumstances in which holders of our preferred shares are entitled
to vote, each preferred share will entitle the holder to one vote. Meeting of Shareholders According to Brazilian law, shareholders must be previously convoked in
order for a general or extraordinary shareholders meeting to be installed.
The convocation must be published in the states official gazette and two other
gazettes, as determined by the shareholders, at least 15 days prior to the
meetings scheduled date. If the first meeting is not installed for some
reason, the second convocation must be published at least eight days before the
second meeting date. On the first call, meetings may only be installed with a minimum quorum of
one-fourth of the holders of voting shares. Extraordinary meetings, whose
object is the amendment of the by-laws, may only be installed on the first call
with a minimum of two-thirds of the voting capital present. In addition, some
decisions require the approval of at least one-half of the holders of voting
shares (qualified quorum). On a second call, the meetings are installed
regardless of quorum. Preemptive Rights Each of our shareholders has a general preemptive right to subscribe for
shares in any capital increase in proportion to its shareholding. A minimum
period of 30 days following the publication of notice of the capital increase
is allowed for the exercise of the right. 60




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In the event of a capital increase, which would maintain or increase the
proportion of capital represented by our preferred shares, holders of ADSs, or
of our preferred shares, would have preemptive rights to subscribe only to our
newly issued preferred shares. In the event of a capital increase, which would
reduce the proportion of capital represented by our preferred shares, holders
of ADSs, or of our preferred shares, would have preemptive rights to subscribe
to our preferred shares in proportion to their shareholdings and to our common
shares only to the extent necessary to prevent dilution of their interest. Preemptive rights to purchase shares may not be offered to U.S. holders of
our ADSs unless a registration statement under the Securities Act is effective
with respect to the shares underlying those rights, or an exemption from the
registration requirements of the Securities Act is available. Consequently, if
you are a holder of our ADSs who is a U.S. person or is located in the United
States, you may be restricted in your ability to participate in the exercise of
preemptive rights. Right of Redemption Brazilian corporate law provides for the right of redemption to minority
shareholders under certain circumstances. The right of a dissenting shareholder to seek redemption arises in case
our shareholders representing more than 50% of the voting shares, common shares
or preferred shares, as applicable, decide to:  
    
    change the preference of our preferred shares or to create a
class of shares having priority or preference over our preferred
            shares, except if such actions are expressly permitted in the
by-laws at the time of their adoption by our shareholders;
    
    change the preference of our preferred shares, any right they
carry, their amortization or redemption rights, or to create a class
of shares having priority or preference over our preferred shares;
    
    reduce the mandatory distribution of dividends;
    
    change our corporate purposes;
    
    transfer all of our shares to another company in order to
make us a wholly owned subsidiary of that company;
    
    approve the acquisition of another company, the price of
which exceeds certain limits set forth in Brazilian corporate law;
    
    participate in a group of companies if certain liquidity
standards are not met according to the Brazilian corporate law as
amended by Law No. 10,303/01;
    
    merge or consolidate us with another company if certain
liquidity standards are not met according to the Brazilian corporate
law as amended by Law No. 10,303/01; and
    
    cisão, or split-up, Tele Leste, according to the Brazilian
corporate law, as amended by Law No. 10,303/01, in any of the
following situations: (i) reduction of minimum dividends; (ii)
participation in a group of companies; or (iii) change of our
corporate purposes, except in case the company receiving our assets
has a corporate purpose substantially identical to ours. The right to redemption lapses 30 days after publication of the minutes of
the relevant shareholders meeting or, whenever the resolution requires the
approval of the holders of our preferred shares by vote taken in a special
meeting of a majority of the holders of our preferred shares affected by the
resolution, within 30 days from the publication of the minutes of that special
meeting. We would be entitled to reconsider any action giving rise to
redemption rights within 10 days following the expiration of those rights if
the redemption of shares of dissenting shareholders would jeopardize our
financial stability. 61




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Unless otherwise provided in our by-laws, which is not the case, shares
are redeemable at their book value, determined on the basis of the last annual
balance sheet approved by the shareholders. If the shareholders meeting
giving rise to redemption rights occurs more than 60 days after the date of the
last annual balance sheet, a shareholder may demand that its shares be valued
on the basis of a new balance sheet that is as of a date within 60 days of such
shareholders meeting. Form and Transfer Our shares are maintained in book-entry form with a transfer agent, Banco
ABN-AMRO Real S.A., and the transfer of our shares is made in accordance with
the applicable provision of Brazilian corporate law, which provides that a
transfer of shares is effected by an entry made by the transfer agent on its
books, debiting the share account of the seller and crediting the share account
of the purchaser against presentation of a written order of the seller or
judicial authorization or order in an appropriate document which remains in the
possession of the transfer agent. Our preferred shares underlying our ADSs are
registered on the records of BOVESPA in the name of The Bank of New York, as
depositary of the ADSs. Transfers of shares by a foreign investor are made in the same way and
executed by such investors local agent on the investors behalf except that,
if the original investment was registered with the Central Bank of Brazil under
the Brazilian foreign investment in capital markets regulations, the foreign
investor should also seek amendment, if necessary, through its local agent, of
the certificate of registration to reflect the new ownership. BOVESPA operates a central clearing system. A holder of our shares may
choose, at its discretion, to participate in this system. All shares elected
to be put into the system will be deposited in custody with the relevant stock
exchange through a Brazilian institution duly authorized to operate by the
Central Bank of Brazil and having a clearing account with the relevant stock
exchange. The fact that such shares are subject to custody with the relevant
stock exchange will be reflected in our register of shareholders. Each
participating shareholder will, in turn, be registered in our register of
beneficial shareholders maintained by the relevant stock exchange and will be
treated in the same way as registered shareholders.  C.
    
    Material Contracts On December 10, 2002, Telebahia Celular entered into an authorization
agreement with Anatel, acting as a representative of the Brazilian government,
which enables it to provide personal cellular services (SMP) in the state of
Bahia. The authorization replaces the concession agreement entered into with
Anatel on November 4, 1997, and authorizes Telebahia Celular to provide SMP
services until June 29, 2008. It may be renewed for an additional term of
fifteen years upon payment of 2% of Telebahia Celulars net revenues from usage
charges in its Region in the year prior to the year when payment is due, and
every two years during the extension period. In consideration for the
authorization, Telebahia Celular was required to pay R$9.0 thousand. The
authorization is a legal requirement for providing telecommunication services
in the region covered thereby. On December 10, 2002, Telergipe Celular entered into an authorization
agreement with Anatel, acting as a representative of the Brazilian government,
which enables it to provide personal cellular services (SMP) in the state of
Sergipe. The authorization replaces the concession agreement entered into with
Anatel on November 4, 1997, and authorizes Telebahia Celular to provide SMP
services until December 15, 2008. It may be renewed for an additional term of
fifteen years upon payment of 2% of Telergipe Celulars net revenues from usage
charges in its region in the year prior to the year when payment is due, and
every two years during the extension period. In consideration for the
authorization, Telergipe Celular was required to pay R$9.0 thousand. The
authorization is a legal requirement for providing telecommunication services
in the region covered thereby.  D.
    
    Exchange Controls There are no restrictions on ownership of preferred shares or common
shares by individuals or legal entities domiciled outside of Brazil. 62




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The right to convert dividend or interest payments and proceeds from the
sale of shares into foreign currency and to remit such amounts outside Brazil
is subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investments have been
registered with the Central Bank and the CVM. Such restrictions on the
remittance of foreign capital abroad may hinder or prevent the custodian for
our preferred shares represented by our ADSs or the holders of our preferred
shares from converting dividends, distributions or the proceeds from any sale
of these preferred shares into U.S. dollars and remitting the U.S. dollars
abroad. Holders of our ADSs could be adversely affected by delays in, or
refusal to grant any, required government approval to convert Brazilian
currency payments on the preferred shares underlying our ADSs and to remit the
proceeds abroad. Resolution No. 1,927 of the National Monetary Council provides for the
issuance of depositary receipts in foreign markets in respect of shares of
Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289 of
the National Monetary Council, known as the Annex V Regulations. The ADS
program was approved under the Annex V Regulations by the Central Bank and the
CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale
of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment
controls, and holders of the ADSs are entitled to favorable tax treatment. See
"#TaxationBrazilian Tax Considerations. Under Resolution 2,689 of the CMN, foreign investors registered with the
CVM may buy and sell Brazilian securities, including our preferred shares, on
Brazilian stock exchanges without obtaining separate certificates of
registration for each transaction. Registration is available to qualified
foreign investors, which principally include foreign financial institutions,
insurance companies, pension and investment funds, charitable foreign
institutions and other institutions that meet certain minimum capital and other
requirements. Resolution 2,689 also extends favorable tax treatment to
registered investors. See #TaxationBrazilian Tax Considerations. Pursuant to the Resolution 2,689 foreign investors must: (i) appoint at
least one representative in Brazil with the ability to perform actions
regarding the foreign investment; (ii) complete the appropriate foreign
investor registration form; (iii) obtain registration as a foreign investor
with CVM; and (iv) register the foreign investment with the Central Bank. The securities and other financial assets held by a foreign investor
pursuant to Resolution 2,689 must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
by the CVM or be registered in register, clearing and custody systems
authorized by the Central Bank or by the CVM. In addition, the trading of
securities is restricted to transactions carried out on the stock exchanges or
over-the-counter markets licensed by the CVM. Registered Capital Amounts invested in our preferred shares by a non-Brazilian holder who
qualifies under Resolution 2,689 and obtains registration with the CVM, or by
the depositary representing an ADS holder, are eligible for registration with
the Central Bank. This registration (the amount so registered is referred to
as registered capital) allows the remittance outside Brazil of foreign
currency, converted at the commercial market rate, acquired with the proceeds
of distributions on, and amounts realized through, dispositions of our
preferred shares. The registered capital per preferred share purchased in the
form of an ADS, or purchased in Brazil and deposited with the depositary in
exchange for an ADS, will be equal to its purchase price (stated in U.S.
dollars). The registered capital per preferred share withdrawn upon
cancellation of an ADS will be the U.S. dollar equivalent of (i) the average
price of a preferred share on the Brazilian stock exchange on which the most
preferred shares were traded on the day of withdrawal or (ii) if no preferred
shares were traded on that day, the average price on the Brazilian stock
exchange on which the most preferred shares were traded in the fifteen trading
sessions immediately preceding such withdrawal. The U.S. dollar equivalent
will be determined on the basis of the average commercial market rates quoted
by the Central Bank on these dates. A non-Brazilian holder of preferred shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. This
delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder. 63




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A certificate of registration has been issued in the name of the
depositary with respect to the ADSs and is maintained by the custodian on
behalf of the depositary. Pursuant to the certificate of registration, the
custodian and the depositary are able to convert dividends and other
distributions with respect to the preferred shares represented by our ADSs into
foreign currency and remit the proceeds outside Brazil. In the event that a
holder of ADSs exchanges such ADSs for preferred shares, such holder will be
entitled to continue to rely on the depositarys certificate of registration
for five business days after such exchange, following which such holder must
seek to obtain its own certificate of registration with the Central Bank.
Thereafter, any holder of preferred shares may not be able to convert into
foreign currency and remit outside Brazil the proceeds from the disposition of,
or distributions with respect to, such preferred shares, unless the holder is a
duly qualified investor under Resolution 2,689 or obtains its own certificate
of registration. A holder that obtains a certificate of registration will be
subject to less favorable Brazilian tax treatment than a holder of ADSs. See
"TaxationBrazilian Tax Considerations. If the holder does not qualify under Resolution 2,689 by registering with
the CVM and the Central Bank and appointing a representative in Brazil, the
holder will be subject to less favorable Brazilian tax treatment than a holder
of ADSs. Regardless of qualification under Resolution 2,689, residents in tax
havens are subject to less favorable tax treatment than other foreign
investors. See TaxationBrazilian Tax Considerations. Under current Brazilian legislation, the federal government may impose
temporary restrictions on remittances of foreign capital abroad in the event of
a serious imbalance or an anticipated serious imbalance of Brazils balance of
payments. For approximately six months in 1989 and early 1990, the federal
government froze all dividend and capital repatriations held by the Central
Bank that were owed to foreign equity investors, in order to conserve Brazils
foreign currency reserves. These amounts were subsequently released in
accordance with federal government directives. There can be no assurance that
the federal government will not impose similar restrictions on foreign
repatriations in the future. See Item 3.DRisk FactorsRisks Relating to
Brazil.  E.
    
    Taxation The following discussion contains a description of the material Brazilian
and U.S. federal income tax consequences of the ownership and disposition of
preferred shares or ADSs by certain holders. This summary is based upon the
tax laws of Brazil and the United States as in effect on the date of this
annual report, which are subject to change, possibly with retroactive effect,
and to differing interpretations. You should consult your own tax advisors as
to the Brazilian, U.S. federal or other tax consequences of the purchase,
ownership and disposition of preferred shares or ADSs, including, in
particular, the effect of any state, local or non-U.S., non-Brazilian tax laws. Although there is presently no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
whether or when a treaty will enter into force or how it will affect the U.S.
holders of preferred shares or ADSs. Brazilian Tax Considerations The following discussion mainly summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs by a U.S. holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a U.S. holder). This discussion does not address all the Brazilian
tax considerations that may be applicable to any particular non-Brazilian
holder, and each non-Brazilian holder should consult its own tax advisor about
the Brazilian tax consequences of investing in preferred shares or ADSs. Taxation of Dividends Dividends paid by us in cash or in kind from profits generated on or after
January 1, 1996 (i) to the depositary in respect of preferred shares underlying
ADSs or (ii) to a U.S. holder or non-Brazilian holder in respect of preferred
shares will generally not be subject to Brazilian withholding tax. We do not
have any undistributed profits generated before January 1, 1996. 64




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Distributions of Interest on Capital Brazilian corporations may make payments to shareholders characterized as
interest on capital as an alternative form of making dividend distributions.
The rate of interest may not be higher than the federal governments long-term
interest rate, or the TJLP, as determined by the Central Bank from time to time
(10% per annum for the three-month period beginning January 2004). The total
amount distributed as interest on capital may not exceed the greater of (i) 50%
of net income (before taking the distribution and any deductions for income
taxes into account) for the year in respect of which the payment is made or
(ii) 50% of retained earnings for the year prior to the year in respect of
which the payment is made. Payments of interest on capital are decided by the
shareholders on the basis of recommendations of the companys board of
directors. Distributions of interest on capital paid to Brazilian and non-Brazilian
holders of preferred shares, including payments to the depositary in respect of
preferred shares underlying ADSs, are deductible by us for Brazilian corporate
income tax purposes. These payments to U.S. holders or non-Brazilian holders
are subject to Brazilian withholding tax at the rate of 15%. If the recipient
of the payment is domiciled in a tax haven jurisdiction (i.e, a country that
does not impose any income tax or that imposes tax at a rate of less than 20%),
the rate will be 25%. No assurance can be given that our board of directors will not recommend
that future distributions of profits will be made by means of interest on
capital instead of by means of dividends. Amounts paid as interest on capital (net of applicable withholding tax)
may be treated as payments in respect of the dividends we are obligated to
distribute to our shareholders in accordance with our by-laws (estatutos) and
the Brazilian corporate law. Distributions of interest on capital in respect
of the preferred shares, including distributions to the depositary in respect
of preferred shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls. Taxation of Gains Gains realized outside Brazil by a U.S. holder or a non-Brazilian holder
on the disposition of ADSs or preferred shares to another U.S. holder or
non-Brazilian holder are not subject to Brazilian tax. Gains realized by a U.S. holder or a non-Brazilian holder on dispositions
of preferred shares in Brazil or in transactions with Brazilian residents may
be free of Brazilian tax, taxed at a rate of 20% or taxed at a rate of 15%,
depending on the circumstances. Gains on the disposition of preferred shares obtained upon cancellation of
ADSs are not taxed in Brazil if the disposition is made and the proceeds are
remitted abroad within five business days after cancellation, unless the
investor is a resident of a jurisdiction that, under Brazilian law, is deemed
to be a tax haven. Gains realized through transactions with Brazilian residents or through
transactions in Brazil off of the Brazilian stock exchanges are generally
subject to tax at a rate of 15%. Gains realized through transactions on Brazilian stock exchanges are
generally subject to tax at a rate of 20%, unless the investor is entitled to
tax-free treatment for the transaction under Resolution 2,689 of the National
Monetary Council Regulations, described immediately below. Resolution 2,689, which as of March 31, 2000 superseded the Annex IV
Regulations that previously provided tax benefits to foreign investors, extends
favorable tax treatment to a U.S. holder or non-Brazilian holder of preferred
shares who has (i) appointed a representative in Brazil with power to take
action relating to the investment in preferred shares, (ii) registered as a
foreign investor with the CVM and (iii) registered its investment in preferred
shares with the Central Bank. Under Resolution 2,689 securities held by
foreign investors must be maintained under the custody of, or in deposit
accounts with, financial institutions duly authorized by the Central Bank and
the CVM. In addition, the trading of securities is restricted under Resolution
2,689 to transactions on Brazilian stock exchanges or qualified
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under the Annex IV Regulations were required to bring their investments
into conformity with Resolution 2,689 by June 30, 2000. The preferential
treatment generally afforded under Resolution 2,689 and afforded to investors
in ADSs is not available to residents of tax havens. There can be no assurance that the current preferential treatment for U.S.
holders and non-Brazilian holders of ADSs and U.S. holders and non-Brazilian
holders of preferred shares under Resolution 2,689 will be maintained. Gain on the disposition of preferred shares is measured by the difference
between the amount in Brazilian currency realized on the sale or exchange and
the acquisition cost of the shares sold, measured in Brazilian currency,
without any correction for inflation. The acquisition cost of shares
registered as an investment with the Central Bank is calculated on the basis of
the foreign currency amount registered with the Central Bank. See Registered
Capital. Under current law, the tax rate for transactions on a Brazilian stock
exchange is 20% for transactions occurring on or after January 1, 2002.
Brazils tax treaties do not grant relief from taxes on gains realized on sales
or exchanges of preferred shares. Gains realized by a U.S. holder and non-Brazilian holder upon the
redemption of preferred shares will be treated as gains from the disposition of
such preferred shares to a Brazilian resident occurring off of a stock exchange
and will accordingly be subject to tax at a rate of 15%. Any exercise of preemptive rights relating to the preferred shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the preferred shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the depositary or the investor and (ii) whether the transaction takes
place on a Brazilian stock exchange. Gains on sales or assignments made by the
depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on
other sales or assignments may be subject to tax at rates up to 15%. The deposit of preferred shares in exchange for the ADSs is not subject to
Brazilian income tax if the preferred shares we registered under Resolution
2,689 and the respective holder is not in a tax haven jurisdiction. If the
preferred shares are not so registered or the holder is in a tax haven
jurisdiction, the deposit of preferred shares in exchange for ADSs may be
subject to Brazilian capital gains tax at a rate of 15%. The withdrawal of preferred shares in exchange for ADSs is not subject to
Brazilian tax. On receipt of the underlying preferred shares, a U.S. holder or
non-Brazilian holder entitled to benefits under Resolution 2,689 will be
entitled to register the U.S. dollar value of such shares with the Central Bank
as described above, under "Registered Capital. If a U.S. holder or non-Brazilian holder does not
qualify under Resolution 2,689, he will be subject to the less favorable tax
treatment described above in respect of exchanges of preferred shares. Other Brazilian Taxes There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of preferred shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some
states in Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil or in the relevant state to
individuals or entities that are resident or domiciled within this state in
Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or
duties payable by holders of preferred shares or ADSs. A financial transaction tax, or the IOF tax, may be imposed on a variety
of transactions, including the conversion of Brazilian currency into foreign
currency (e.g., for purposes of paying dividends and interest). The IOF tax
rate on such conversions is currently 0%, but the minister of finance has the
legal power to increase the rate to a maximum of 25%.Any increase will be
applicable only prospectively. The IOF may also be levied on transactions involving bonds or securities,
or IOF/Títulos, even if the transactions are effected on Brazilian stock,
futures or commodities exchanges. The rate of the IOF/Títulos with 66




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respect to preferred shares and ADSs is currently 0%. The minister of
finance, however, has the legal power to increase the rate to a maximum of 1.5%
of the amount of the taxed transaction per each day of the investors holding
period, but only to the extent of gain realized on the transaction and only on
a prospective basis. In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions, or
the CPMF tax, will be imposed on distributions in respect of ADSs at the time
these distributions are converted into U.S. dollars and remitted abroad by the
Custodian. The CPMF tax was to expire in June 2002, but was extended until
December 31, 2004. It is currently imposed at a rate of 0.38%. From July 13,
2002, transactions conducted through the Brazilian stock exchanges in current
accounts specified for stock exchange transactions are exempt from the CPMF
tax. U.S. Federal Income Tax Considerations The following discussion is a summary of the material U.S. federal income
tax consequences of the ownership and disposition of our preferred shares or
our ADSs by U.S. Holders, as defined below. This summary is based on the
Internal Revenue Code of 1986, as amended (referred to herein as the Code),
final, temporary and proposed Treasury regulations, administrative
pronouncements of the U.S. Internal Revenue Service (the IRS) and judicial
decisions, all as currently in effect and all of which are subject to change
(possibly with retroactive effect), and to different interpretations. It is
also based in part on representations by the depositary and assumes that each
obligation under the Deposit Agreement and any related agreement will be
performed in accordance with its terms. This discussion deals only with
preferred shares and ADSs held as capital assets (generally, for investment
purposes). It does not discuss all of the tax consequences that may be
relevant to a U.S. Holder in light of the U.S. Holders particular
circumstances or to U.S. Holders subject to special rules, such as financial
institutions, insurance companies, tax-exempt entities, dealers in securities
or foreign currencies, partnerships and other pass-through entities, investors
liable for the alternative minimum tax, persons who hold preferred shares or
ADSs as part of an integrated investment (including a straddle) comprised of a
preferred share or ADS and one or more other positions for tax purposes,
persons whose functional currency is not the U.S. dollar or persons who
actually or constructively own (directly or indirectly) 10% or more of our
voting stock. Holders of preferred shares or ADSs should consult their own tax
advisors with regard to the application of the U.S. federal income tax laws to
their particular situations as well as any tax consequences arising under the
laws of any state, local or non-U.S. taxing jurisdiction. As used herein, the term U.S. Holder means a beneficial owner of
preferred shares or ADSs that is, for U.S. federal income tax purposes, (1) a
citizen or individual resident of the United States, (2) a corporation (or
other entity treated as a corporation for U.S. federal income tax purposes)
organized under the laws of the United States or of any political subdivision
thereof, (3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (4) a trust (i) if a U.S. court can
exercise primary supervision over the trusts administration and one or more
U.S. persons are authorized to control all substantial decisions of the trust
or (ii) if the trust has a valid election in effect under applicable Treasury
regulations to be treated as a U.S. person. The U.S. federal income tax
treatment of a partner in a partnership that holds our preferred shares or ADSs
will depend on the status of the partner and the activities of the partnership.
Partners in such partnerships should consult their own tax advisors. THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS
INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. PROSPECTIVE PURCHASERS OF
PREFERRED SHARES OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF
PREFERRED SHARES OR ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAWS. General In general, for U.S. federal income tax purposes, holders of American
depositary receipts evidencing ADSs will be treated as the beneficial owners of
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Taxation of Dividends Distributions made by us of cash or property generally will constitute a
taxable dividend to the extent paid out of our current or accumulated earnings
and profits, as determined under U.S. federal income tax principles. The full
amount of any dividend paid in respect of our preferred shares or ADSs
(including the amount of Brazilian withholding taxes imposed on such dividend)
will be included in the gross income of a U.S. Holder, as ordinary income from
sources outside the United States, at the time that the dividend is received by
the U.S. Holder, in the case of our preferred shares, or by the depositary, in
the case of ADSs. If a distribution made by us exceeds our current and
accumulated earnings and profits, as determined under U.S. federal income tax
principles, such excess will be treated first as a nontaxable return of capital
to the extent of the U.S. Holders adjusted tax basis in our preferred shares
or ADSs, and thereafter as capital gain. The amount of any dividend paid in reaisgenerally will be measured by
reference to the spot rate for converting reaisinto U.S. dollars in effect on
the date that the dividend is received by the U.S. Holder, in the case of our
preferred shares, or by the depositary, in the case of ADSs. A U.S. Holder may
recognize foreign currency gain or loss, which would be treated as ordinary
gain or loss, upon a subsequent conversion of reaisinto U.S. dollars. U.S.
Holders should consult their own tax advisors regarding the calculation and
U.S. federal income tax treatment of foreign currency gain or loss. The amount
of any distribution of property other than cash will be the fair market value
of such property on the date of distribution. Subject to certain exceptions for short-term and hedged positions, the
U.S. dollar amount of dividends received by an individual prior to January 1,
2009 with respect to the ADSs will be subject to taxation at a maximum rate of
15% if the dividends represent qualified dividend income. Dividends paid on
the ADSs will be treated as qualified dividend income if (i) the ADSs are
readily tradable on an established securities market in the United States and
(ii) we were not in the year prior to the year in which the dividend was paid,
and are not in the year in which the dividend is paid, a passive foreign
investment company (PFIC), foreign personal holding company (FPHC) or
foreign investment company (FIC). The ADSs are listed on the New York Stock
Exchange, and may qualify as readily tradable on an established securities
market in the United States so long as they are so listed. However, no
assurances can be given that the ADSs will be or remain readily tradable.
Based on our audited financial statements as well as relevant market and
shareholder data, we believe that we were not treated as a PFIC, FPHC or FIC
for United States federal income tax purposes with respect to our 2003 taxable
year. In addition, based on the our audited financial statements and current
expectations regarding the value and nature of its assets, the sources and
nature of its income, and relevant market and shareholder data, we do not
anticipate becoming a PFIC, FPHC or FIC for its 2004 taxable year. Because
these determinations are based on the nature of our income and assets from time
to time, and involve the application of complex tax rules, no assurances can be
provided that we will not be considered a PFIC, FPHC, or FIC for the current,
or any past or future tax year. Based on existing guidance, it is not entirely clear whether dividends
received with respect to the preferred shares will be treated as qualified
dividends, because the preferred shares are not themselves listed on a United
States exchange. In addition, the United States Treasury Department has
announced its intention to promulgate rules pursuant to which holders of ADSs
or preferred stock and intermediaries though whom such securities are held will
be permitted to rely on certifications from issuers to establish that dividends
are treated as qualified dividends. Because such procedures have not yet been
issued, we are not certain that we will be able to comply with them. U.S.
Holders of ADSs and preferred shares should consult their own tax advisors
regarding the availability of the reduced dividend tax rate in the light of
their own particular circumstances. Subject to certain limitations and restrictions, a U.S. Holder will be
entitled to a foreign tax credit against its U.S. federal income tax liability,
or a deduction in computing its U.S. federal taxable income, for Brazilian
income taxes withheld by us. The limitation on foreign taxes eligible for
credit is determined separately with respect to specific classes of income.
For this purpose, dividends paid by us with respect to our preferred shares or
ADSs will generally constitute passive income or, in the case of certain U.S.
Holders, financial services income from sources outside the United States.
The U.S. Treasury Department has expressed concerns that parties to whom
depositary shares such as the ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. Holders of such
ADSs. Accordingly, the analysis of the creditability of Brazilian taxes
described above could be affected by future actions that may be taken by the
U.S. Treasury. The rules relating to the 68




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calculation of foreign tax credits and the applicable limitations are
complex. U.S. Holders should consult their own advisors concerning the
implications of the foreign tax credit rules in light of their particular
circumstances. Taxation of Capital Gains or Losses Upon a sale or other taxable disposition of preferred shares or ADSs, a
U.S. Holder will recognize capital gain or loss for U.S. federal income tax
purposes equal to the difference, if any, between the amount realized on the
sale or other taxable disposition and the U.S. Holders adjusted tax basis in
the preferred shares or ADSs. Such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if the U.S. Holders holding period
in the preferred shares or ADSs exceeds one year at the time of the sale or
other taxable disposition. Certain U.S. Holders (including individuals) may be
eligible for preferential rates of U.S. federal income tax in respect of
long-term capital gains. The deductibility of capital losses is subject to
limitations under the Code. Gain or loss derived from the sale or other disposition of our preferred
shares or ADSs generally will be treated as U.S. source income or loss for
foreign tax credit purposes. Consequently, if a Brazilian withholding tax is
imposed on the sale or disposition of preferred shares or ADSs, and a U.S.
Holder does not receive significant foreign source income from other sources,
such U.S. Holder may not be able to derive effective U.S. foreign tax credit
benefits in respect of such Brazilian withholding tax. If a Brazilian tax is
withheld on the sale or disposition of preferred shares or ADSs, a U.S.
Holders amount realized will include the gross amount of the proceeds of such
sale or disposition before deduction of the Brazilian tax. See Brazilian Tax
ConsiderationsTaxation of Gains for a description of when a disposition may
be subject to taxation by Brazil. Deposits and withdrawals of preferred shares in exchange for ADSs will not
result in the realization of gain or loss for U.S. federal income tax purposes. Information Reporting and Backup Withholding Information returns may be filed with the IRS in connection with
distributions on our preferred shares or our ADSs and the payment of proceeds
from their sale or other disposition. A U.S. Holder may be subject to U.S.
backup withholding tax (currently at a rate of 28%) on these payments if such
U.S. Holder fails to provide its taxpayer identification number or comply with
certain certification procedures or otherwise establish an exemption from
backup withholding. Backup withholding is not an additional tax. The amount
of any backup withholding from a payment to a U.S. Holder will be allowed as a
credit against such U.S. Holders U.S. federal income tax liability, if any,
and may entitle such U.S. Holder to a refund, provided that the required
information is timely furnished to the IRS. U.S. HOLDERS AND PROSPECTIVE PURCHASERS OF OUR PREFERRED SHARES OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE BRAZILIAN, U.S. FEDERAL, STATE,
LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR
PREFERRED SHARES OR ADSs BASED UPON THEIR PARTICULAR CIRCUMSTANCES.  F.
    
    Dividends and Paying Agents Not applicable.  G.
    
    Statement of Experts Not applicable.  H.
    
    Documents on Display We are subject to the information requirements of the Exchange Act, except
that, as a foreign issuer, we are not subject to the proxy rules or the
short-swing profit disclosure rules of the Exchange Act. In accordance with
these statutory requirements, we file or furnish reports and other information
with the Commission. Reports and other information filed or furnished by us
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facilities maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commissions Regional Offices at 233
Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You may also inspect these reports and other information at the offices
of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on
which our ADSs are listed. In addition, the Commission maintains a website that contains information
filed electronically, which can be accessed over the Internet at
http://www.sec.gov. We also file financial statements and other periodic reports with the CVM.
Copies of our annual report on Form 20-F and documents referred to in this
annual report and our by-laws will be available for inspection upon request at
our offices at Av. Silveira Martins 1036, Cabula, 41150-000 Salvador, BA,
Brazil.  I.
    
    Subsidiary Information Not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in both foreign currency
exchange rates and interest rates. We are exposed to foreign currency exchange
rate risk because certain of our costs (mostly interest on debt, capital
expenditures and purchase of handsets) are all or partially denominated in
currencies (primarily the U.S. dollar) other than those in which we earn
revenues (primarily the real). Similarly, we are subject to market risk
deriving from changes in interest rates, which may affect the cost of our
financing. We have entered into derivative instruments, such as foreign currency
options and foreign currency swaps to manage the exchange rate risk. We do not
hold or issue derivative or other financial instruments for trading purposes. Exchange Rate Risk The principal foreign exchange rate risk faced by us arises from our U.S.
dollar-denominated indebtedness. At December 31, 2003, our subsidiaries had
U.S.$76.9 million of financial indebtedness and U.S.$8.1 million of other liabilities
(equivalent to R$222.2 million and R$23.3 million, respectively, at a rate of
U.S.$1 = R$2.8892, the closing rate on December 31, 2003). Our revenues are
earned almost entirely in reaisand we have no material U.S. dollar-denominated
assets (except for our hedge contracts). At December 31, 2003, all of our
U.S. dollar financial indebtedness and other foreign exchange liabilities were covered by
long positions of derivative arrangements. Under those derivative
arrangements, our subsidiaries U.S. dollar-denominated obligations are swapped
for real-denominated obligations bearing interest at rates linked to the
Certificado de Dep#sito Interban#ario(Interbank Deposit Certificate), or CDI.
As such, at December 31, 2003, all of our U.S. dollar fixed- and floating-rate
loans are converted to floating-rate loans through our derivative transactions.
Also, 100% of our other U.S. dollar liabilities were covered by derivative
agreements. At December 31, 2003, we recorded financial expense from foreign
currency derivative transactions of R$91.8 million against financial income
from monetary and foreign exchange gains variations of approximately R$68.4
million. The potential loss to us over one year that would result from a
hypothetical, instantaneous and unfavorable change of 1,000 basis points in the
foreign exchange applicable to financial assets and liabilities on December 31,
2003 would be approximately R$24.5 million. On the other hand, our derivatives
instruments would have a gross gain of R$ 24.6 million. The net gain would be R$
0.06 million. Exchange rate sensitivity analysis was made by applying a 10% change to
the Brazilian Central Bank exchange rate on December 31, 2003 of R$2.8892 to
U.S.$1.0, which would represent a devaluation of the realof R$0.2889. We then
assumed that this unfavorable currency move would be sustained from December
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through December 31, 2004. The foreign exchange loss that affects
financial expenses was calculated by applying such devaluation to our
indebtedness and foreign exchange purchase commitments (essentially handset
purchases), net of derivative instruments. Interest Rate Risk We are exposed to interest rate risk as a consequence of our floating rate
debt in U.S. dollars. At December 31, 2003, we had total debt of R$222.2
million of which approximately 86.3% of our indebtedness bore interest at
floating rates and 13.7% bore interest at fixed rates. We are also exposed to
interest rate risk due to the nature of our derivative contracts, whereby our
U.S. dollar-denominated obligations are swapped into real-denominated
obligations bearing interest linked to the CDI. We have not entered into
derivative contracts or made other arrangements to hedge against this risk.
Thus, if market interest rates rise, then it is probable that our financing
expenses will increase. We continuously monitor interest rates with a view
toward considering whether we should enter into derivative arrangements to
protect against the risk of interest rate volatility. The potential loss to us over one year that would result from a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rate applicable to financial assets and liabilities on December 31,
2003 would be approximately R$ 3.9 million. Interest rate sensitivity analysis was made by applying a 10% increase to
all floating-rate-denominated debt, assuming that the different indexes (CDI
and TJLP, LIBOR and EURIBOR) would all rise by 10% instantaneously on December
31, 2003 and that this unfavorable move would continue for one year. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 71




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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 Evaluation of disclosure controls and procedures.Under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2003.. Based on that evaluation, our principal executive officer
and principal financial officer have concluded that these controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely fashion. Changes in internal controls. No significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses, were made as a
result of the evaluation. 
 ITEM 16. [RESERVED] 
 ITEM 16A. Audit Committee Financial Expert As of yet, we have not appointed an audit committee financial expert, as
defined by the SEC. As disclosed in item 16D below, we are currently exempt
from complying with the independence requirements of the audit committee
pursuant to the Exchange Act Rule 10A-3(a)(5)(A). 
 ITEM 16B. Code of Ethics In June, 2003, we approved a code of ethics to regulate the conduct of our
senior financial officers. Our code of ethics deals with the following issues:  
    
    honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
    
    full, fair, accurate, timely and understandable disclosure in
reports and documents that we file with, or submits to, the CVM
and/or the SEC and in other public communications made by us;
    
    compliance with applicable governmental laws, rules and
regulations;
    
    prompt internal reporting of violations of the code to the
Internal Audit Officer who, after review, has to report them to the
CEO and CFO; and
    
    accountability for adherence to the code. A copy of our code of ethics is filed as an exhibit to this annual report.
A copy of this document is also available on our website (www.vivo.com.br). 72




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##### Table of Contents



There have been no waivers to our code of ethics in 2003. ITEM 16C. Principal
Accountant Fees and Services Deloitte Touche Tohmatsu Auditores Independentes, or DTT, acted as our
independent auditor for the fiscal years ended December 31, 2003 and 2002. The
chart below sets forth the total amount billed to us by DTT for services
performed in the years 2003 and 2002, and breaks down these amounts by category
of service: Total Fees(in thousands of reais)2003
    
    2002Audit Fees
    
    
    343.0
    
    
    
    251.0Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total
    
    
    343.0
    
    
    
    251.0
 Audit Fees Audit Fees are the aggregate fees billed by Deloitte Touche Tohmatsu for
the audit of our consolidated and annual financial statements, reviews of
interim financial statements and attestation services that are provided in
connection with statutory and regulatory filings or engagements. Pre-Approval Policies and Procedures We
have not set pre-approval policies and procedures for audit,
audit-related services, tax services and other services to be
provided by auditors, since we are not required to comply with such
audit committee rule by July 31, 2005, according to Exchange Act
Rule 10A-3(a)(5)(A) ITEM 16D. Exemptions from the Listing Standards for Audit Committees Pursuant to the exemption under Exchange Act Rule 10A-3(c)(3), we have a
conselho fiscal,a statutory board of auditors which follows the requirements
presented by such rule. Furthermore, our current audit committee does not
follow the independence requirements of such rule as we are still exempt from
such requirements by July 31, 2005 according to Exchange Act Rule
10A-3(a)(5)(A). ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers Not required for the year ended December 31, 2003. 73




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##### Table of Contents



PART III ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS See our consolidated financial statements beginning on Page F-1. ITEM 19. EXHIBITS Documents filed as exhibits to this annual report: ExhibitNumber
    
    Description1.1
    
    
    By-Laws (Estatuto Social) of Tele Leste,
as amended (English translation).4.1
    
    
    Authorization Term of the Personal Mobile
Service entered by Anatel and Telebahia (English translation),
incorporated by reference to our annual report Form 20-F for the
fiscal year ended December 31, 2002, filed on June 24, 2003.4.2
    
    
    Authorization Term of the Personal Mobile
Service entered by Anatel and Telergipe (English translation),
incorporated by reference to our annual report Form 20-F for the
fiscal year ended December 31, 2002, filed on June 24, 2003.8.1
    
    
    List of Subsidiaries11.1
    
    
    Code of Ethics (Código de
Ética) of TeleLeste (English translation).12.1
    
    
    Certification by Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.12.2
    
    
    Certification by Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.13.1
    
    
    Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    
    Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 There are omitted from the
exhibits filed with or incorporated by reference into this annual
report, certain promissory notes and other instruments and agreements
with respect to our long-term debt, none of which authorizes
securities in a total amount that exceeds 10% of our total assets. We
hereby agree to furnish to the Securities and Exchange Commission
copies of any such omitted promissory notes or other instruments or
agreements as the Commission requests. 74




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##### Table of Contents

\

SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. TELE LESTE CELULAR PARTICIPAÇÕES S.A.By:
    /s/ Francisco José Azevedo PadinhaName:
    Francisco José Azevedo PadinhaTitle:
    Acting Chief Executive Officer By:
    /s/ Fernando Abella GarciaName:
    Fernando Abella GarciaTitle:
    Chief Financial Officer and interim Chief
Executive Officer Date: June 30, 2004




---



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 and FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER
31, 2003 CONTENTS Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Operations
    
    
    F-4Consolidated Statements of Changes in Financial Position
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to the Consolidated Financial Statements
    
    
    F-8
  F-1




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##### Table of Contents



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of
Tele Leste Celular Participações S.A.
Salvador, Brazil:  (1)
    
    We have audited the accompanying consolidated balance sheets of Tele
Leste Celular Participações S.A. and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of
income, changes in financial position and changes in shareholders equity
for each of the three years in the period ended December 31, 2003. 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 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 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 Tele Leste Celular Participações S.A. and subsidiaries as of
December 31, 2003 and 2002, the results of their operations and the
changes in their financial position, and in shareholders equity for each
of the three years in the period ended December 31, 2003, in conformity
with accounting practices adopted in Brazil.(4)
    
    Accounting practices adopted in Brazil vary in certain significant
respects from accounting principles generally accepted in the United
States of America. Information relating to the nature and effect of such
differences is presented in Note 34 to the consolidated financial
statements.(5)
    
    Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The consolidated statements
of cash flows for each of the three years in the period ended December 31,
2003 are presented for purposes of additional analysis and is not a
required part of the basic financial statements under accounting practices
adopted in Brazil. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.(6)
    
    As discussed in note 2.c, the Company has changed the basis of
presentation of the consolidated financial statements from the Constant
Currency Method to the Brazilian Corporate Law Method. DELOITTE TOUCHE TOHMATSU
Auditores Independentes Salvador, Brazil
June 15, 2004




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED BALANCE SHEETS
 As at December 31, 2003 and 2002
(In thousands of Brazilian reais)
 Note
    
    2003
    
    2002Current assets:Cash and cash equivalents
    
    12
    
    
    59,427
    
    
    
    81,259Trade accounts receivable, net
    
    13
    
    
    104,355
    
    
    
    80,204Deferred and recoverable taxes
    
    14
    
    
    18,586
    
    
    
    32,744Inventories
    
    15
    
    
    12,934
    
    
    
    17,784Derivative contracts
    
    23d
    
    
    
    
    
    
    7,751Prepaid expenses
    
    16
    
    
    6,737
    
    
    
    4,365Other current assets
    
    17
    
    
    14,909
    
    
    
    1,299Total current assets
    
    
    
    
    216,948
    
    
    
    225,406Noncurrent assets:Deferred and recoverable taxes
    
    14
    
    
    202,105
    
    
    
    198,036Derivative contracts
    
    23d
    
    
    15,186
    
    
    
    64,582Prepaid expenses
    
    16
    
    
    1,795
    
    
    
    2,108Other assets
    
    17
    
    
    3,150
    
    
    
    2,059Total noncurrent assets
    
    
    
    
    222,236
    
    
    
    266,785Permanent assets:Property, plant and equipment, net
    
    18
    
    
    392,473
    
    
    
    464,546Total permanent assets
    
    
    
    
    392,473
    
    
    
    464,546Total assets
    
    
    
    
    831,657
    
    
    
    956,737Current liabilities:Payroll and related accruals
    
    19
    
    
    2,666
    
    
    
    2,902Accounts payable and accrued expenses
    
    20
    
    
    144,547
    
    
    
    106,521Taxes other than taxes on income
    
    21
    
    
    21,676
    
    
    
    17,630Dividends payable
    
    26e
    
    
    489
    
    
    
    526Deferred income taxes
    
    
    
    
    
    
    
    
    223Loans and financing
    
    23
    
    
    68,582
    
    
    
    99,665Derivative contracts
    
    23
    
    
    16,512
    
    
    
    Other current liabilities
    
    22
    
    
    11,869
    
    
    
    10,872Total current liabilities
    
    
    
    
    266,341
    
    
    
    238,339Noncurrent liabilities:Loans and financing
    
    23
    
    
    153,655
    
    
    
    269,891Derivative contracts
    
    23d
    
    
    4,184
    
    
    
    Provision for pensions
    
    25
    
    
    270
    
    
    
    401Reserve for contingencies
    
    24
    
    
    5,920
    
    
    
    5,058Total noncurrent liabilities
    
    
    
    
    164,029
    
    
    
    275,350Shareholders equity:Share capital
    
    26a
    
    
    305,396
    
    
    
    305,396Treasury shares
    
    26b
    
    
    (35
    )
    
    
    Capital reserves
    
    26c
    
    
    124,344
    
    
    
    124,401Income reserves
    
    26d
    
    
    
    
    
    
    13,214Accumulated deficit
    
    
    
    
    (28,455
    )
    
    
    Total shareholders equity
    
    
    
    
    401,250
    
    
    
    443,011Funds for capitalization
    
    
    
    
    37
    
    
    
    37Total liabilities and shareholders equity
    
    
    
    
    831,657
    
    
    
    956,737
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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TELE LESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years ended December 31, 2003, 2002 and 2001
(In thousands of Brazilian reais, except share and per share data)
 Years ended December 31,Note
    
    2003
    
    2002
    
    2001Net operating revenue
    
    4
    
    
    441,267
    
    
    
    431,395
    
    
    
    386,132Cost of services and goods sold
    
    5
    
    
    (256,259
    )
    
    
    (241,362
    )
    
    
    (202,342
    )Gross profit
    
    
    
    
    185,008
    
    
    
    190,033
    
    
    
    183,790Operating (expenses) income:Selling expense
    
    6a
    
    
    (145,010
    )
    
    
    (116,404
    )
    
    
    (97,766
    )General and administrative expense
    
    6b
    
    
    (52,345
    )
    
    
    (49,616
    )
    
    
    (55,405
    )Other operating income (expense), net
    
    7
    
    
    (122
    )
    
    
    4,968
    
    
    
    2,559(197,477
    )
    
    
    (161,052
    )
    
    
    (150,612
    )Operating income (loss) before financial expense
    
    
    
    
    (12,469
    )
    
    
    28,981
    
    
    
    33,178Financial expense, net
    
    8
    
    
    (30,286
    )
    
    
    (32,811
    )
    
    
    (24,111
    )Operating loss
    
    
    
    
    (42,755
    )
    
    
    (3,830
    )
    
    
    9,067Net nonoperating expenses
    
    9
    
    
    (661
    )
    
    
    (1,601
    )
    
    
    (560
    )Income (Loss) before minority interests and taxes
    
    
    
    
    (43,416
    )
    
    
    (5,431
    )
    
    
    8,507Income and social contribution taxes
    
    10
    
    
    754
    
    
    
    324
    
    
    
    (2,487
    )Net income (loss) for the year
    
    
    
    
    (42,662
    )
    
    
    (5,107
    )
    
    
    6,020Shares outstanding at the balance sheet date
(thousands)
    
    
    
    
    479,393,884
    
    
    
    479,445,039
    
    
    
    479,445,039Net income (loss) per thousand shares
outstanding at the balance sheet date (Brazilian
reais)
    
    
    
    
    (0.09
    )
    
    
    (0.01
    )
    
    
    0.01
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
 Years ended December 31, 2003, 2002 and 2001
(In thousands of Brazilian reais)
 Years ended December 31,2003
    
    2002
    
    2001SOURCES OF FUNDS:From operations (see below)
    
    
    99,911
    
    
    
    150,235
    
    
    
    150,951From shareholders-Unclaimed Dividends
    
    
    
    
    
    
    2,183
    
    
    
    From third parties-Transfer from noncurrent assets to current assets
    
    
    15,327
    
    
    
    11,691
    
    
    
    4,414Transfer from permanent assets to current assets
    
    
    
    
    
    
    461
    
    
    
    939Increase in noncurrent liabilities
    
    
    
    
    
    
    
    
    
    
    7,471Donations for investments
    
    
    936
    
    
    
    416
    
    
    
    Total sources
    
    
    116,174
    
    
    
    164,986
    
    
    
    163,775USES OF FUNDS:Proposed dividends
    
    
    
    
    
    
    
    
    
    
    11,979Transfers from noncurrent to current liabilities
    
    
    69,621
    
    
    
    77,223
    
    
    
    48,077Increase in noncurrent assets
    
    
    11,814
    
    
    
    25,225
    
    
    
    14,163Additions to permanent assets
    
    
    71,164
    
    
    
    77,082
    
    
    
    116,049Treasury shares
    
    
    35
    
    
    
    
    
    
    
    Total uses
    
    
    152,634
    
    
    
    179,530
    
    
    
    190,268INCREASE (DECREASE) IN WORKING CAPITAL
    
    
    (36,460
    )
    
    
    (14,544
    )
    
    
    (26,493
    )REPRESENTED BY:CURRENT ASSETS AT YEAR END
    
    
    216,948
    
    
    
    225,406
    
    
    
    175,731CURRENT LIABILITIES AT YEAR END
    
    
    (266,341
    )
    
    
    (238,339
    )
    
    
    (174,120
    )Working capital at year end
    
    
    (49,393
    )
    
    
    (12,933
    )
    
    
    1,611Working capital at the beginning of the year
    
    
    (12,933
    )
    
    
    1,611
    
    
    
    28,104INCREASE (DECREASE) IN WORKING CAPITAL
    
    
    (36,460
    )
    
    
    (14,544
    )
    
    
    (26,493
    )FUNDS PROVIDED FROM OPERATIONS:Net income (loss)
    
    
    (42,662
    )
    
    
    (5,107
    )
    
    
    6,020Items not affecting working capital-Depreciation and amortization
    
    
    138,273
    
    
    
    108,454
    
    
    
    90,858Net book value of permanent asset disposals.
    
    
    4,964
    
    
    
    520
    
    
    
    120Monetary and exchange variations on
noncurrent items
    
    
    (636
    )
    
    
    46,567
    
    
    
    47,734Provision for losses on tax incentives
    
    
    
    
    
    
    1,447
    
    
    
    Reserve for contingencies
    
    
    945
    
    
    
    1,166
    
    
    
    2,001Deferred income taxes
    
    
    (842
    )
    
    
    (2,627
    )
    
    
    4,218Pension and other postretirement plans
    
    
    (131
    )
    
    
    (185
    )
    
    
    Total from operations
    
    
    99,911
    
    
    
    150,235
    
    
    
    150,951
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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TELE LESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 Years ended December 31, 2003, 2002 and 2001
(In thousands of Brazilian reais)
 Capital Reserves
    
    Income ReservesSpecialCapital
    
    Treasure
    
    Fiscal
    
    Premium
    
    Legal
    
    For
    
    AccumulatedStock
    
    shares
    
    Incentives
    
    Reserve
    
    reserve
    
    Expansion
    
    Deficit
    
    TotalBalance as of
December 31,
2000
    
    
    305,396
    
    
    
    
    
    
    
    57
    
    
    
    124,344
    
    
    
    6,491
    
    
    
    15,638
    
    
    
    
    
    
    
    451,926Pension and other
postretirement
benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (448
    )
    
    
    (448
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,020
    
    
    
    6,020Legal
Reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    (301
    )
    
    
    Reversal of
reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,708
    )
    
    
    6,708
    
    
    
    Proposed
dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,979
    )
    
    
    (11,979
    )Balance as of
December 31,
2001
    
    
    305,396
    
    
    
    
    
    
    
    57
    
    
    
    124,344
    
    
    
    6,792
    
    
    
    8,930
    
    
    
    
    
    
    
    445,519Unclaimed dividends
at holding
Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,695
    
    
    
    1,695Net
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,107
    )
    
    
    (5,107
    )Reversal of
reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,508
    )
    
    
    2,508
    
    
    
    Consolidation
adjustments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Donations for
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    416Unclaimed
dividends at
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488
    
    
    
    488Balance as of
December 31,
2002
    
    
    305,396
    
    
    
    
    
    
    
    57
    
    
    
    124,344
    
    
    
    6,792
    
    
    
    6,422
    
    
    
    
    
    
    
    443,011Treasury
shares
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )Net
loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,662
    )
    
    
    (42,662
    )Reversal of
reserves
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (6,792
    )
    
    
    (6,422
    )
    
    
    13,271
    
    
    
    Consolidation
adjustments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Donations for
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936
    
    
    
    936Balance as of
December 31,
2003
    
    
    305,396
    
    
    
    (35
    )
    
    
    
    
    
    
    124,344
    
    
    
    
    
    
    
    
    
    
    
    (28,455
    )
    
    
    401,250
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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TELE LESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years ended December 31, 2003, 2002 and 2001
(In thousands of Brazilian reais)
 Years ended December 31,2003
    
    2002
    
    2001Cash flows provided by operations:Net income (loss)
    
    
    (42,662
    )
    
    
    (5,107
    )
    
    
    6,020Adjustments to reconcile to cash provided by
(used in) operating activities:Depreciation and
amortization
    
    
    138,273
    
    
    
    108,454
    
    
    
    90,858Monetary and exchange variations on loans
and financing
    
    
    (63,626
    )
    
    
    141,085
    
    
    
    67,595Losses on permanent asset
disposals
    
    
    661
    
    
    
    149
    
    
    
    643Provision for doubtful
accounts
    
    
    11,701
    
    
    
    13,311
    
    
    
    13,186Decrease (increase) in customer accounts
receivable, gross
    
    
    (35,852
    )
    
    
    (18,270
    )
    
    
    (17,170
    )Increase in deferred and recoverable
taxes
    
    
    10,089
    
    
    
    (2,942
    )
    
    
    (18,708
    )(Increase) decrease in other current
assets and inventories
    
    
    (11,132
    )
    
    
    (3,483
    )
    
    
    14,216(Increase) decrease in other noncurrent
assets
    
    
    (778
    )
    
    
    (551
    )
    
    
    4,033(Increase) decrease in derivative
contracts  assets
    
    
    57,147
    
    
    
    (64,216
    )
    
    
    (5,010
    )Increase (decrease) in payroll and
related accruals
    
    
    (236
    )
    
    
    112
    
    
    
    188Increase (decrease) in accounts payable
and accrued expenses
    
    
    38,026
    
    
    
    27,501
    
    
    
    (2,456
    )Increase (decrease) in taxes other than
income taxes
    
    
    4,046
    
    
    
    4,290
    
    
    
    (1,665
    )Increase (decrease) in other current
liabilities
    
    
    997
    
    
    
    3,287
    
    
    
    6,101Increase (decrease) in accrued
interest
    
    
    (1,620
    )
    
    
    (318
    )
    
    
    (10,212
    )Increase (decrease) in income
taxes
    
    
    (223
    )
    
    
    223
    
    
    
    Increase (decrease) in reserve for
contingencies
    
    
    862
    
    
    
    256
    
    
    
    (419
    )Increase (decrease) in provision for
pension fund
    
    
    (131
    )
    
    
    (279
    )
    
    
    Increase in derivative contracts 
liabilities
    
    
    20,696
    
    
    
    1,279
    
    
    
    4,391Net cash provided by
operations
    
    
    126,238
    
    
    
    204,781
    
    
    
    151,591Cash flows used in investing activities:Additions to property, plant and
equipment
    
    
    (70,228
    )
    
    
    (76,666
    )
    
    
    (116,049
    )Proceeds from asset
disposals
    
    
    4,302
    
    
    
    370
    
    
    
    153Net cash used in investing
activities
    
    
    (65,926
    )
    
    
    (76,296
    )
    
    
    (115,896
    )Cash flows provided by (used in) financing activities:Loans
repaid
    
    
    (82,072
    )
    
    
    (78,766
    )
    
    
    (134,368
    )New loans
obtained
    
    
    
    
    
    
    14,779
    
    
    
    12,404Purchase of treasury
shares
    
    
    (35
    )
    
    
    
    
    
    
    Dividends
paid
    
    
    (37
    )
    
    
    (12,214
    )
    
    
    (798
    )Net cash provided by (used in) financing
activities
    
    
    (82,144
    )
    
    
    (76,201
    )
    
    
    (122,762
    )Increase (decrease) in cash and cash
equivalents
    
    
    (21,832
    )
    
    
    52,284
    
    
    
    (87,067
    )Cash and cash equivalents at beginning of
year
    
    
    81,259
    
    
    
    28,975
    
    
    
    116,042Cash and cash equivalents at end of
year
    
    
    59,427
    
    
    
    81,259
    
    
    
    28,975
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A. 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts expressed in thousands of reais, unless otherwise indicated)
 1. Operations and background Tele Leste Celular Participações S.A. was formed on May 22, 1998, through
the spin-off of certain assets and liabilities of Telebrás, a state-owned
company which hold the monopoly for the telecommunication services in Brazil,
including 89.1% and 73.6% of the share capital of Telebahia Celular S.A. and
Telergipe Celular S.A., respectively. Until August 4, 1998, the Companies were
controlled by the Federal Government. On July 29, 1998, the Federal Government
separated Telebrás into twelve newly formed holding companies (the New Holding
Companies) and sold to buyers (the New Controlling Shareholders) its rights
to receive shares of the twelve New Holding Companies. In connection with this
sale, the Federal Government assigned to the New Controlling Shareholders
substantially all its economic and voting rights with respect to the New
Holding Companies and, as a consequence, effective August 4, 1998 the New
Controlling Shareholders controlled the New Holding Companies. Telebahia Celular S.A. and Telergipe Celular S.A. (the Subsidiaries)
were formed on January 5, 1998 and subsequently received on January 30, 1998
from Telecomunicações da Bahia S.A. and Telecomunicações de Sergipe S.A. the
assets and liabilities comprising their respective cellular telecommunications
services. On December 31, 2003, Tele Leste Celular Participações S.A (the Holding
Company or together with its subsidiaries, the Company) holds 100% of the
capital of Telebahia Celular S.A. (Telebahia) and Telergipe Celular S.A
(Telergipe) (collectively, the Subsidiaries), who are providers of cellular
telecommunications services in the States of Bahia and Sergipe, respectively,
and are also engaged in related activities required or useful for the
performance of these services, in conformity with the concessions and
authorizations granted to them. The Subsidiaries activities, including services that they may provide,
are regulated by Agência Nacional de Telecomunicações  ANATEL, the regulatory
authority for the Brazilian telecommunications industry, pursuant to Law No.
9,472, of July 16, 1997. On December 31, 2003, Tele Leste Celular Participações S.A was controlled
by Iberoleste Participações S.A. (21.90% of the total capital), BRASILCEL N.V.
(3.38% of the total capital) and Tagilo Participações Ltda. (2.42% of the total
capital). Iberoleste Participações S.A. and Tagilo Participações Ltda. are
controlled by BRASILCEL N.V (100.00% of the total capital). BRASILCEL N.V. is controlled by Telefónica Móviles S.A. (50.00% of the
total capital), PT Móveis, Serviços de Telecomunicações, SGPS S.A. (49.999% of
the total capital), and Portugal Telecom, SGPS S.A. (0.001% of the total
capital). The Holding Company and the Subsidiaries are hereinafter referred to as
the Company. Migration from SMC to SMP On December 10, 2002 the Authorization Term for Personal Mobile System
(SMP) was signed between ANATEL and the affiliated companies Telebahia and
Telergipe, which became effective as of the publication in the Official
Government Daily Newspaper, which occurred on December 12, 2002. The authorizations granted to the subsidiaries Telebahia and Telergipe are
effective for the remaining period of their concessions, previously granted and
presently substituted through, July 29, 2008 and December 15, 2008,
respectively, and will be renewable, for an additional period, for a 15 year
term, subject to a renewable fee. On July 6, 2003, wireless operators in Brazil implemented the Carriers
Selection Code (CSP) on national (VC2 and VC3) and international long distance
calls, according to SMP rules. The operators no longer receive VC2 and VC3
revenues; instead, they receive interconnection revenues for the use of their
networks on these calls. F-8




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 2. Presentation of financial statements  a.
    
    Presentation of consolidated financial statements as of and for the
years ended December 31, 2003, 2002 and 2001 The accompanying financial statements are a translation and adaptation
from those originally issued in Brazil. Certain reclassifications,
modifications and changes in terminology have been made in order to conform
more closely to reporting practices in the United States.  b.
    
    Methods of presentation of the Financial Statements Until December 31, 1995, publicly-traded companies in Brazil were
required to prepare financial statements pursuant to two methods: (i) the
corporate law method, which was and remains valid for all legal purposes,
including the basis for determining income taxes and calculation of mandatory
minimum dividends; and (ii) the constant currency method, to present
supplementary price-level adjusted financial statements, pursuant to standards
prescribed by the Brazilian Securities Commission (CVM).  (i)
    
    The Corporate Law Method  The corporate law method provided a simplified methodology for accounting
for the effects of inflation until December 31, 1995. It consisted of
restating permanent assets (property, plant and equipment, investments and
deferred charges), and stockholders equity accounts using indices mandated
by the Federal Government. The net effect of these restatements was
credited or charged to the statement of operations in a single caption,
usually entitled Monetary correction adjustments or Inflation
adjustments.  (ii)
    
    The Constant Currency Method  Under the Constant Currency Method, all historical Brazilian real amounts
in the financial statements and notes thereto are expressed in constant
purchasing power as of latest balance sheet date, in accordance with
standards prescribed by the CVM for publicly traded entities. Under the
Constant Currency Method, financial statements are adjusted for inflation
up to December 31, 2000.  c.
    
    Change in Basis of Presentation of Presentation of Financial Statements The accompanying consolidated financial statements are prepared in
accordance with Brazilian corporate law standards applicable to
concessionaries of public telecommunications services, and accounting
standards and procedures established by the CVM which includes monetary
restatement of permanent assets and shareholders equity through December 31,
1995. (hereinafter referred to as BR CL). In prior periods, the Company had prepared its financial statements for
presentation in the United States in accordance with the Constant Currency
Method. In order to conform the financial statements for the use of its
shareholders in the United States to the same basis used in the primary market
in Brazil, the management of Tele Leste Celular Participações S.A. has elected
to present its financial statements in accordance with BR CL. F-9




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated)  d.
    
    Summarized financial statements information previously reported under
the Constant Currency MethodThe summarized financial statements information, previously reported under
the Constant Currency Method, with a reconciliation to the Corporate Law
Method (BR CL) is as follows: Constant Currency Method December 31,2002
    
    2001AssetsCurrent assets
    
    
    226,683
    
    
    
    176,545Noncurrent assets
    
    
    266,785
    
    
    
    188,027Permanent assets
    
    
    547,798
    
    
    
    610,957Total assets
    
    
    1,041,266
    
    
    
    975,529Liabilities and Shareholders equityTotal current liabilities
    
    
    244,091
    
    
    
    179,867Total noncurrent liabilities
    
    
    299,181
    
    
    
    274,827Total shareholders equity
    
    
    497,946
    
    
    
    520,787Total funds for capitalization
    
    
    48
    
    
    
    48Total liabilities and shareholders equity
    
    
    1,041,266
    
    
    
    975,529
 Years ended December 31,2002
    
    2001Income StatementNet operating
revenue
    
    
    431,395
    
    
    
    386,299Cost of goods and services
sold
    
    
    (264,011
    )
    
    
    (224,696
    )Gross
profit
    
    
    167,384
    
    
    
    161,603Loss before taxes and minority
interest
    
    
    (36,238
    )
    
    
    (21,208
    )Net loss for the year
    
    
    (25,440
    )
    
    
    (13,592
    )
 Reconciliation of net income (loss) and shareholders equity balances between
BR CL and the Constant Currency Method is as follows: 2002
    
    2001Income StatementNet income (loss) according to BR
CL
    
    
    (5,107
    )
    
    
    6,020(-) realization of assets (depreciation,
amortization and
write-offs)
    
    
    (30,807
    )
    
    
    (29,715
    )(+)Reversal of deferred
taxes,
    
    
    10,474
    
    
    
    10,103(=) Net loss according to the Constant Currency
Method
    
    
    (25,440
    )
    
    
    (13,592
    )
 2002
    
    2001Shareholders equity as of December 31, according
to BR CL
    
    
    443,011
    
    
    
    445,519(+)Balance remaining from the constant currency
appreciation until December
31,2000
    
    
    83,241
    
    
    
    114,048(-)Deferred taxes on above
balance
    
    
    (28,306
    )
    
    
    (38,780
    )(=)Shareholders equity as of December 31,
according to the Constant Currency
Method
    
    
    497,946
    
    
    
    520,787
 F-10




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) e. Principles of consolidation These consolidated financial statements include the accounts and
operations of the Holding Company and its subsidiaries Telebahia and Telergipe
as of December 31, 2003 and 2002 and for the three years in the period ended
December 31, 2003. All inter-company balances and transactions have been
eliminated on consolidation. f. Reclassifications Certain reclassifications have been made to the prior periods to conform
to the 2003 presentation. 3. Summary of significant accounting policies a. Cash and cash equivalents Cash equivalents are considered to be all highly liquid temporary cash
investments with original maturity dates of three months or less and are stated
at cost plus accrued interest to the balance sheet date. b. Trade accounts receivable Trade accounts receivable from telecommunication services are stated at
the tariffs prevailing on the date the services are rendered. They also
include accounts receivable for services rendered but not yet billed at the
balance sheet date. Additionally, this caption includes balances from the sale
of cellular handsets and accessories. c. Provision for doubtful accounts Provision is recognized for trade accounts receivable for which
recoverability is not considered probable. d. Foreign currency transactions Are recorded at the prevailing exchange rate at the date of the related
transactions. Foreign currency denominated assets and liabilities are
translated using the exchange rate at the balance sheet date. Resulting gains
and losses related to exchange variations on foreign currency denominated
assets and liabilities are recognized in the statements of income, as part of
financial expense, net. Exchange variation and premiums related to foreign currency are calculated
and recorded on an accrual basis regardless of the settlement period. e. Inventories Inventories are represented by cellular handsets and accessories stated at
average acquisition cost. An allowance is recognized to reduce inventories to
net realizable value for products considered obsolete or whose quantities are
higher than those usually sold by the Subsidiaries over a reasonable period. f. Prepaid expenses Prepaid expenses represent disbursements for expenses not yet incurred. F-11




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) g. Property, plant and equipment Property, plant and equipment are stated at acquisition or construction
cost less accumulated depreciation. Costs for improvements and maintenance that
increase installed capacity or the useful life of existing property are
capitalized while other maintenance and repair costs are charged to expense as
incurred. Materials allocated to specific projects are added to
construction-in-progress. Depreciation is provided using the straight-line
method based on the estimated useful lives of the underlying assets.
Depreciation rates are shown in Note 18 (b). Through 1998, capitalized interest was calculated monthly at a rate of 12%
per annum on construction-in-progress. For the three-year period ended December
31, 2003, the Company capitalized interest attributable to
construction-in-progress using the specific interest rates of the loans that
financed the construction-in-progress. An aggregate amount of R$1,121, R$4,211,
and R$7,391, was capitalized in 2003, 2002 and 2001, respectively. h. Vacation pay accrual Cumulative vacation pay due to employees is accrued as earned. i. Accrual for rewards program An accrual is recorded for future costs under rewards programs based on
points earned as of the balance sheet date, considering the cost of the
cellular handsets and the expected utilization based on the registered
customers consumption profile. j. Income and social contribution taxes Taxes on income are calculated and recorded at the effective tax rates
prevailing on the balance sheet date on the accrual basis. Deferred income
taxes attributable to temporary differences and loss carryforwards are recorded
as assets or liabilities when it is more likely than not that the assets will
be realized. k. Loans and financing Loans and financing include exchange variation and interest accrued to the
balance sheet date. l. Fistel fees Fistel (Telecommunication Inspection Fund) fees paid on the activation of
subscribers is deferred and amortized over the customers estimated retention
period of 24 months. m. Reserve for contingencies Reserves for loss contingencies are established based on legal counsel and
managements opinion as to the probable result of pending litigation and
updated to the balance sheet date in an amount considered sufficient to cover
probable losses, based on the nature of each contingency. n. Pension and postretirement benefits The Subsidiaries, together with other companies of the Telecommunications
System, sponsor a private pension entity (SISTEL) to manage the pension funds
(defined benefit and defined contribution) and other postretirement benefits to
their employees. Actuarial liabilities are determined using the projected
until credit method and plan assets are stated at fair market. Actuarial gains
and losses are recorded in income. (See note 25). F-12




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) o. Revenue recognition Revenue from services is recognized when the services are rendered.
Billing is on a monthly basis. Unbilled revenue from the billing date through
the end of the month is estimated and recognized as revenue in the month in
which the service is rendered. Revenues from sales of prepaid cellular
handsets cards are deferred and recognized in income when such cards are used,
based on minute usage. Revenue from the sale of handsets and accessories is
recorded at the moment of the sale to the customer. p. Financial expense, net Financial income (expenses) is represented by interest, monetary
restatement and exchange variations on cash and other investments and loans and
financing. Gains and losses on derivative contracts are also included as a
component of financial expense, net. q. Derivatives The Company enters into certain derivative contracts to manage the
exposure of its cash flows denominated in foreign currencies to interest and
exchange rate fluctuations in relation to the Brazilian real. These derivative
contracts are recorded based on their contractual terms and interest and
exchange rates in effect at the balance sheet date. Premiums received or
prepaid are deferred and amortized over the life of the respective contracts.
Gains and losses, realized and unrealized, are recorded as part Financial
expense, net. r. Research and development Research and development costs are charged to expense as incurred. s. Advertising expense Advertising costs are charged to expense as incurred. Prepaid advertising
costs represent disbursements for expenses not yet incurred. t. Employees profit sharing Accruals are made to recognize the expenses for employees profit sharing,
for which payment is subject to approval at the annual shareholders meeting. u. Loss per thousand shares Loss per thousand shares is computed based on the number of shares
outstanding at the balance sheet date. v. Segment information The Company operates in one segment for local and regional cellular
telecommunications. All revenues are generated in relation to services
provided in or routed through the states of Bahia and Sergipe. w. Use of estimates The preparation of consolidated financial statements in conformity with BR
CL and US GAAP requires management to make estimates and assumptions relating
to the reporting of assets and liabilities and the F-13




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the period reported. Actual results could differ from those estimates. 4. Net operating revenue 2003
    
    2002
    
    2001Monthly subscription charges
    
    
    38,412
    
    
    
    40,278
    
    
    
    35,026Usage charges
    
    
    250,156
    
    
    
    237,996
    
    
    
    214,362Charges for use outside the concession area
    
    
    3,223
    
    
    
    6,805
    
    
    
    6,984Additional charges per call
    
    
    25,029
    
    
    
    24,931
    
    
    
    21,688Interconnection
    
    
    179,647
    
    
    
    179,153
    
    
    
    168,172Additional services
    
    
    13,468
    
    
    
    12,253
    
    
    
    10,920Other services
    
    
    3,926
    
    
    
    694
    
    
    
    Gross operating revenue from services
    
    
    513,861
    
    
    
    502,110
    
    
    
    457,152Value-added tax on sales and services  ICMS
    
    
    (85,633
    )
    
    
    (82,374
    )
    
    
    (67,869
    )Employees profit participation program  PIS
    
    
    (3,400
    )
    
    
    (3,241
    )
    
    
    (2,906
    )Social contribution on billing  COFINS
    
    
    (15,185
    )
    
    
    (14,936
    )
    
    
    (13,414
    )Other taxes
    
    
    (284
    )
    
    
    (240
    )
    
    
    Discounts granted
    
    
    (11,541
    )
    
    
    (10,502
    )
    
    
    (12,488
    )Net operating revenue from services
    
    
    397,818
    
    
    
    390,817
    
    
    
    360,475Handsets and accessories sold
    
    
    106,441
    
    
    
    86,477
    
    
    
    47,114Value-added tax on sales and services  ICMS
    
    
    (12,222
    )
    
    
    (9,639
    )
    
    
    (5,543
    )Employees profit participation program  PIS
    
    
    (2,044
    )
    
    
    (1,635
    )
    
    
    (978
    )Social contribution on billing  COFINS
    
    
    (668
    )
    
    
    (194
    )
    
    
    (212
    )Discounts granted and returns of goods
    
    
    (48,058
    )
    
    
    (34,431
    )
    
    
    (14,724
    )Net operating revenue from sales of handset
and accessories
    
    
    (43,449
    )
    
    
    (40,578
    )
    
    
    (25,657
    )Net operating revenue
    
    
    441,267
    
    
    
    431,395
    
    
    
    386,132
 There are no customers who represented more than 1% of gross operating
revenues of the Company in 2003, 2002 and 2001, except for Telecomunicações da
Bahia S.A.  Telemar, the fixed service provider for the area that represented
approximately 20% of 2003 total gross operating revenues (22.4% in 2002 and 21%
in 2001), mainly in relation to network usage charges. 5. Cost of services and goods sold 2003
    
    2002
    
    2001Personnel
    
    
    (4,499
    )
    
    
    (3,512
    )
    
    
    (3,286
    )Outsourced services
    
    
    (12,423
    )
    
    
    (13,127
    )
    
    
    (7,673
    )Network connections
    
    
    (20,016
    )
    
    
    (19,540
    )
    
    
    (18,269
    )Rent, insurance and building services fees
    
    
    (9,596
    )
    
    
    (17,550
    )
    
    
    (17,181
    )Interconnection
    
    
    (38,767
    )
    
    
    (42,593
    )
    
    
    (37,390
    )FISTEL
    
    
    (16,849
    )
    
    
    (16,674
    )
    
    
    (17,779
    )Depreciation
    
    
    (90,801
    )
    
    
    (79,613
    )
    
    
    (70,084
    )Products sold
    
    
    (62,913
    )
    
    
    (48,520
    )
    
    
    (30,451
    )Other
    
    
    (395
    )
    
    
    (233
    )
    
    
    (229
    )(256,259
    )
    
    
    (241,362
    )
    
    
    (202,342
    )
 6. Operating (expenses) a. Selling expenses 2003
    
    2002
    
    2001Personnel
    
    
    (12,741
    )
    
    
    (17,293
    )
    
    
    (11,792
    )Materials
    
    
    (797
    )
    
    
    (898
    )
    
    
    (735
    )Outsourced services (i)
    
    
    (76,205
    )
    
    
    (58,607
    )
    
    
    (2,587
    )
 F-14




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 2003
    
    2002
    
    2001Rent, insurance and building services fees
    
    
    (3,323
    )
    
    
    (2,874
    )
    
    
    (51,600
    )Depreciation
    
    
    (39,074
    )
    
    
    (22,843
    )
    
    
    (15,708
    )Provision for doubtful accounts
    
    
    (11,701
    )
    
    
    (13,311
    )
    
    
    (13,186
    )Other
    
    
    (1,169
    )
    
    
    (578
    )
    
    
    (2,158
    )(145,010
    )
    
    
    (116,404
    )
    
    
    (97,766
    )
  (i)
    
    Outsourced services include advertising expenses of R$17,530 , R$11,486 and
R$9,668 for 2003, 2002 and 2001, respectively. b. General and administrative expense 2003
    
    2002
    
    2001Personnel
    
    
    (13,931
    )
    
    
    (13,171
    )
    
    
    (16,717
    )Materials
    
    
    (699
    )
    
    
    (703
    )
    
    
    (674
    )Outsourced services
    
    
    (21,832
    )
    
    
    (25,283
    )
    
    
    (28,586
    )Rent, insurance and building services fees
    
    
    (1,700
    )
    
    
    (859
    )
    
    
    (859
    )Depreciation
    
    
    (9,933
    )
    
    
    (5,997
    )
    
    
    (5,067
    )Others
    
    
    (4,250
    )
    
    
    (3,603
    )
    
    
    (3,502
    )(52,345
    )
    
    
    (49,616
    )
    
    
    (55,405
    )
 7. Other operating income (expense), net 2003
    
    2002
    
    2001Donations and sponsorships
    
    
    (186
    )
    
    
    (206
    )
    
    
    (1
    )Fines and expenses recovered
    
    
    4,697
    
    
    
    5,909
    
    
    
    3,659Network connections  common use
    
    
    1,281
    
    
    
    1,709
    
    
    
    1,223Taxes other than income taxes
    
    
    (4,789
    )
    
    
    (1,786
    )
    
    
    (4,623
    )Reserve for contingencies
    
    
    (945
    )
    
    
    (1,166
    )
    
    
    (2,001
    )Others
    
    
    (180
    )
    
    
    508
    
    
    
    4,302(122
    )
    
    
    4,968
    
    
    
    2,559
 8. Financial expense, net 2003
    
    2002
    
    2001Interest income
    
    
    13,209
    
    
    
    7,345
    
    
    
    11,529Interest expense
    
    
    (20,031
    )
    
    
    (22,763
    )
    
    
    (27,721
    )Monetary/exchange variation
    
    
    68,374
    
    
    
    (157,319
    )
    
    
    (64,587
    )Net gain (loss) on derivative transactions
    
    
    (91,838
    )
    
    
    139,926
    
    
    
    56,668(30,286
    )
    
    
    (32,811
    )
    
    
    (24,111
    )
 In 2003, 2002 and 2001 financial expense is presented net of capitalized
interest in the amount of R$ 1,121, R$4,211 and R$7,391, respectively. 9. Net nonoperating expenses 2003
    
    2002
    
    2001Proceeds from asset disposals
    
    
    4,302
    
    
    
    370
    
    
    
    153Write-off of fiscal incentives (noncurrent assets)
    
    
    
    
    
    
    (1,447
    )
    
    
    Others
    
    
    (4,963
    )
    
    
    (524
    )
    
    
    (713
    )(661
    )
    
    
    (1,601
    )
    
    
    (560
    )
 F-15




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 10. Income and social contribution taxes Brazilian income taxes comprise federal income tax and the social
contribution tax. For the three-year period ended December 2003 the income tax
rate was 25%, and the social contribution tax rate was 9%. The tax expense and
taxes on temporary differences and tax loss carryforwards have been calculated
at the combined rate of 34%. The composition of the income tax benefit (expense) is as follows: 2003
    
    2002
    
    2001Current taxes:Income tax
    
    
    (65
    )
    
    
    (1,739
    )
    
    
    (1,875
    )Social contribution tax
    
    
    (26
    )
    
    
    (564
    )
    
    
    (612
    )Deferred taxes
    
    
    845
    
    
    
    2,627
    
    
    
    Total income tax benefit (expense)
    
    
    754
    
    
    
    324
    
    
    
    (2,487
    )
 The following is a reconciliation of the reported income tax benefit
(expense) and the amounts computed by applying the combined statutory tax rate
of 34%: 2003
    
    2002
    
    2001Income (loss) before taxes as reported in the
accompanying financial statements
    
    
    (43,416
    )
    
    
    (5,431
    )
    
    
    8,507Tax benefit at the combined statutory rate
    
    
    14,761
    
    
    
    1,847
    
    
    
    (2,892
    )Permanent additions/exclusions:Nondeductible expenses
    
    
    (924
    )
    
    
    (683
    )
    
    
    (455
    )FINOR (Northeast Investment Fund)
    
    
    
    
    
    
    (492
    )
    
    
    Other
    
    
    (37
    )
    
    
    68
    
    
    
    Other itemsUnrecorded tax credit
    
    
    (13,041
    )
    
    
    
    
    
    
    860Other
    
    
    (5
    )
    
    
    (416
    )
    
    
    Total tax benefit (expense)
    
    
    754
    
    
    
    324
    
    
    
    (2,487
    )
 The main components of deferred income and social contribution taxes are
as follows: 2003
    
    2002Deferred tax assets:Tax loss carryforwards
    
    
    98,283
    
    
    
    87,875Tax credits from corporate restructuring
    
    
    71,095
    
    
    
    82,032Reserve for contingencies
    
    
    1,795
    
    
    
    1,719Allowance for doubtful accounts
    
    
    5,042
    
    
    
    4,979Provision for pension and other postretirement
benefit plans
    
    
    91
    
    
    
    136Accrual for rewards program
    
    
    1,151
    
    
    
    1,237Allowance for inventory obsolescence
    
    
    391
    
    
    
    335Accelerated depreciation
    
    
    5,860
    
    
    
    4,684Other
    
    
    1,293
    
    
    
    1,156Total (Note 14)
    
    
    185,001
    
    
    
    184,153Current
    
    
    927
    
    
    
    1,829Noncurrent
    
    
    184,074
    
    
    
    182,324
 The deferred tax credits have been recognized on the assumption of future
realization, as follows:  a.
    
    Tax carryforwards will be compensated up to a limit of 30% of the tax
basis for upcoming years. The Company estimates based on projected
future taxable income that these tax carryforwards will be recovered
within 10 years.b.
    
    Tax credits from corporate restructuring - represented by the balance
of goodwill net of the equity maintenance reserve (see Note 30). The
realization of those tax credits occurs in the same proportion as F-16




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated)  the amortization of goodwill on the Subsidiaries. Studies by external
consultants used in the restructuring process originally supported, the
recovery of the amount in ten years and five years for Telergipe and
Telebahia, respectively. Considering the economic and operating results
up to date and the trends of recoverability, technical studies were
performed, which extended the goodwill amortization period, for Telebahia,
to ten years, since January 01, 2002.  c.
    
    Temporary differences: The realization will occur by payment of
provisions, the effective loss on allowance for doubtful accounts or
provision for obsolescence of inventories. 11. Supplemental cash flow information 2003
    
    2002
    
    2001Interest paid
    
    
    17,158
    
    
    
    20,046
    
    
    
    40,963Non-cash transactions:Donations for investments
    
    
    936
    
    
    
    416
    
    
    
    
 12. Cash and cash equivalents 2003
    
    2002Banks
    
    
    7,303
    
    
    
    2,286Short-term investments
    
    
    52,124
    
    
    
    78,97359,427
    
    
    
    81,259
 Temporary cash investments refer principally to bank deposit certificates
(CDBs) which are indexed to interbank deposit (CDI) rates. 13. Trade accounts receivable, net 2003
    
    2002Unbilled services
    
    
    18,534
    
    
    
    16,263Billed services
    
    
    43,759
    
    
    
    37,579Interconnection
    
    
    28,460
    
    
    
    22,202Receivables from sales of handsets and accessories
    
    
    28,036
    
    
    
    18,804Allowance for doubtful accounts
    
    
    (14,434
    )
    
    
    (14,644
    )104,355
    
    
    
    80,204
 As of December 31, 2003, R$ 16,943 (R$13,158 as of December, 31, 2002) of
the total interconnection receivable is due from Telecomunicações da Bahia S.A.
 Telemar, which is in the process of settlement negotiation. The amount
recognized in theses financial statements represents managements estimate of
the amount that will be receivable from Telemar. There were no customer who contributed more than 10% of trade accounts
receivable of the Company in 2003 and 2002, except for TELEMAR, the fixed
service provider for the area that contributed approximately 20.3% and 13.9% of
such account in 2003 and 2002, respectively, mainly in relation to
interconnection charges. Changes in the allowance for doubtful accounts are as follows: 2003
    
    2002
    
    2001Beginning balance
    
    
    14,644
    
    
    
    11,605
    
    
    
    11,394Provision charged to selling expense
    
    
    11,701
    
    
    
    13,311
    
    
    
    13,186Write-offs
    
    
    (11,911
    )
    
    
    (10,272
    )
    
    
    (12,974
    )Ending balance
    
    
    14,434
    
    
    
    14,644
    
    
    
    11,606
 F-17




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 14. Deferred and recoverable taxes 2003
    
    2002Federal income tax
    
    
    3,103
    
    
    
    16,266Social contribution tax
    
    
    13,095
    
    
    
    11,587Deferred tax assets (Note 10)
    
    
    185,001
    
    
    
    184,153Recoverable state value-added tax
    
    
    17,647
    
    
    
    15,994Withholding income tax
    
    
    1,256
    
    
    
    2,318Other
    
    
    589
    
    
    
    462220,691
    
    
    
    230,780Current
    
    
    18,586
    
    
    
    32,744Noncurrent
    
    
    202,105
    
    
    
    198,036
 15. Inventories 2003
    
    2002Cellular handsets
    
    
    14,339
    
    
    
    18,565Materials
    
    
    203
    
    
    
    204Provision for obsolescence
    
    
    (1,608
    )
    
    
    (985
    )12,934
    
    
    
    17,784
 Reserve for obsolescence is calculated for cellular handsets which are
considered to be obsolete or for slow moving inventories. 16. Prepaid expenses 2003
    
    2002Prepaid expensesFistel fee
    
    
    4,799
    
    
    
    4,008Advertising
    
    
    2,617
    
    
    
    Financial charges
    
    
    496
    
    
    
    821Other
    
    

    620
    
    
    
    1,6448,532
    
    
    
    6,473Current
    
    
    6,737
    
    
    
    4,365Noncurrent
    
    
    1,795
    
    
    
    2,108
 17. Other assets 2003
    
    2002Other assetsRecoverable advances
    
    
    3,174
    
    
    
    844Credit with suppliers
    
    
    6,366
    
    
    
    Escrow deposit (Note 24)
    
    
    3,028
    
    
    
    1,873Other
    
    
    5,491
    
    
    
    64118,059
    
    
    
    3,358Current
    
    
    14,909
    
    
    
    1,299Noncurrent
    
    
    3,150
    
    
    
    2,059
 The balance of escrow deposits refer to Cofins deposits in the amount of
R$2,334 (R$1,873 in 2002, Note 24) and others labor deposits. F-18




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 18. Property, plant and equipment, net a. Composition 2003
    
    2002Net
    
    
    
    
    
    
    
    
    
    NetAccumulated
    
    Book
    
    
    
    
    
    Accumulated
    
    BookCost
    
    Depreciation
    
    Value
    
    Cost
    
    Depreciation
    
    ValueConstruction-in-progress
    
    
    59,874
    
    
    
    
    
    
    
    59,874
    
    
    
    48,991
    
    
    
    
    
    
    
    48,991Transmission
equipment
    
    
    413,462
    
    
    
    (288,233
    )
    
    
    125,229
    
    
    
    398,146
    
    
    
    (232,642
    )
    
    
    165,504Automatic switching equipment
    
    
    123,261
    
    
    
    (68,585
    )
    
    
    54,676
    
    
    
    109,232
    
    
    
    (51,625
    )
    
    
    57,607Infrastructure
    
    
    110,728
    
    
    
    (44,723
    )
    
    
    61,470
    
    
    
    108,313
    
    
    
    (33,335
    )
    
    
    70,449Handsets
    
    
    65,017
    
    
    
    (54,801
    )
    
    
    10,216
    
    
    
    57,460
    
    
    
    (28,879
    )
    
    
    28,581Buildings
    
    
    26,553
    
    
    
    (4,718
    )
    
    
    21,835
    
    
    
    26,231
    
    
    
    (3,664
    )
    
    
    22,567Software
    
    
    67,305
    
    
    
    (31,658
    )
    
    
    35,647
    
    
    
    59,559
    
    
    
    (17,547
    )
    
    
    42,012Other
assets
    
    
    45,654
    
    
    
    (26,663
    )
    
    
    23,526
    
    
    
    44,527
    
    
    
    (20,221
    )
    
    
    28,835Total
    
    
    911,854
    
    
    
    (519,381
    )
    
    
    392,473
    
    
    
    852,459
    
    
    
    (387,913
    )
    
    
    464,546
 Starting on January 2003, the handsets useful lives were reduced from 36
to 18 months to better reflect current operational condition. Those change
resulted in an increase in depreciation expense in the amount of R$ 15,467
compared to the prior year. In 2003, 2002 and 2001,financial expenses incurred on loans to finance the
construction in progress, in the amount of R$1,121 (R$4,211 in 2002 and R$7,391
in 2001), were capitalized. On December 31, 2003 the Company had fixed assets pledged as collateral of
lawsuits in the amount of R$11,564. b. Depreciation rates The annual depreciation rates applied to property, plant and equipment are
as follows: 2003
    
    2002%
    
    %Automatic switching equipment
    
    
    14.29
    
    
    
    14.29Transmission equipment
    
    
    14.29
    
    
    
    14.29Terminal equipment
    
    
    66.67
    
    
    
    33.33Buildings
    
    
    4.00
    
    
    
    4.00Infrastructure
    
    
    4.00 - 14.29
    
    
    
    4.00 - 14.29Intangible assets
    
    
    20.00
    
    
    
    20.00Other assets (excluding land)
    
    
    10.00 - 20.00
    
    
    
    10.00 - 20.00
 c. Rentals The Subsidiaries rent equipment and real estate through a number of
operating leases agreements that expire on different dates. Total annual rent
expenses under these agreements was R$11,804 in 2003, R$18,483 in 2002 and
R$17,193 in 2001. As of December 31, 2003, rental commitments primarily related to
buildings. The future minimum rental payments under non-cancelable leases are
as follows: F-19




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 2004
    
    
    1,6862005
    
    
    8442006
    
    
    3942007
    
    
    1252008 and thereafter
    
    
    98Total minimum payments
    
    
    3,147
 19. Payroll and related accruals 2003
    
    2002Accrued salaries and social securities charges
    
    
    2,194
    
    
    
    2,629Accrued benefits
    
    
    274
    
    
    
    250Income tax withheld
    
    
    198
    
    
    
    232,666
    
    
    
    2,902
 20. Accounts payable and accrued expenses 2003
    
    2002Amounts payable to suppliers
    
    
    100,152
    
    
    
    76,842Technical assistance
    
    
    23,323
    
    
    
    23,865Interconnection
    
    
    4,547
    
    
    
    5,578Amounts due under SMP
    
    
    16,479
    
    
    
    Other
    
    
    46
    
    
    
    236144,547
    
    
    
    106,521
 21. Taxes other than taxes on income 2003
    
    2002Value-added taxes (ICMS)
    
    
    10,876
    
    
    
    10,353Other indirect taxes on operating revenues:COFINS (tax on gross revenue)
    
    
    4,430
    
    
    
    3,310PIS (tax on gross revenue)
    
    
    3,535
    
    
    
    3,051FISTEL (regulatory charge)
    
    
    2,141
    
    
    
    646FUST and FUNTEL (regulatory charges)
    
    
    242
    
    
    
    270Other
    
    
    452
    
    
    
    21,676
    
    
    
    17,630
 In January 2000, the subsidiaries filed a lawsuit challenging the
constitutionality of Law No. 9,718/98, and claiming the suspension of the
difference arising from expanding the PIS and COFINS calculation bases. Of the
accrued amounts of PIS, R$ 3,273 (R$ 2,752 on 2002), refers to the amount which
has not been paid by the subsidiary Telebahia until November 2002 due to the
changes imposed by the new law n° 10.637/02, related to the non-cumulativeness
on the computation of PIS, effective in December 2002. The subsidiary
Telebahia, as of this date, began paying the amounts due. The accrued amounts
of COFINS of R$ 2,334 (R$ 1,873 on 2002) is being deposited in court by the
subsidiary Telergipe, based on preliminary decisions that determined the
suspension of the payments (Note 24), until a final decision is ruled. 22. Other current liabilities 2003
    
    2002Salary premiums
    
    
    2,917
    
    
    
    2,108Advances from customers  prepaid calling cards
    
    
    3,047
    
    
    
    2,559Accrual for rewards program
    
    
    1,985
    
    
    
    3,639Other
    
    
    3,920
    
    
    
    2,56611,869
    
    
    
    10,872
 F-20




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 23. Loans and financing a. Composition of Debt at December 31: Currency
    
    Annual Charges
    
    Maturity
    
    2003
    
    2002(1)Financial institutions:Citibank  OPIC
    
    US$
    
    3.0% + LIBOR
    
    
    2004
    
    
    
    36,115
    
    
    
    88,332Several  Resolution No. 63
    
    US$
    
    
    14.35
    %
    
    
    2004 to 2005
    
    
    
    28,892
    
    
    
    82,9430.6875% - 2.5% +NEC do Brasil S.A.
    
    US$
    
    LIBOR and 7.3%
    
    
    2004 to 2005
    
    
    
    4,059
    
    
    
    8,215European Investment Bank
    
    US$
    
    0.15% + LIBOR
    
    
    2008
    
    
    
    151,626
    
    
    
    185,428ABN Amro Bank Real
    
    US$
    
    0.4% + LIBOR
    
    
    
    
    
    
    
    
    
    
    509Accrued interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,545
    
    
    
    4,129222,237
    
    
    
    369,556Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,582
    
    
    
    99,665Noncurrent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,655
    
    
    
    269,891
  (1)
    
    At December 31, 2003 and 2002, 1(one) US dollar has equivalent to R$2.8892
and R$3.5333, respectively. Loans from the European Investment Bank, Citibank and Resolution 63 refer
to financing for the expansion and modernization of the cellular telephone
network. The balances with NEC do Brasil S.A. refer to financing of equipment
        . b. Maturities The long-term portion as of December 31, 2003 matures as follows: December 31, 20032005
    
    
    2,0292008
    
    
    151,626Total
    
    
    153,655
 c. Restrictive covenants The financing from Citibank  OPIC, European Investment Bank (BEI) and
Resolution No. 63 (Bank Boston) have restrictive covenants, of which the main
items are related to indebtedness levels, EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization) and financial expenses, which have been
fulfilled by the Company at December 31, 2003. d. Derivatives On December 31, 2003, the subsidiaries had outstanding currency swap
contracts in the amounts of US$ 85,184 thousand (US$ 112,470 thousand on 2002),
to hedge liabilities denominated in foreign currency. These swaps contain rates
ranging from US$+1.7% a.a. to US$+27.8%a.a and maturities from January 5, 2004
to June 12, 2008. Until that date, the subsidiaries had recorded an accounting net loss of
R$ 5,510 (and a gain of R$72,333 on 2002) related to its outstands derivative
contracts represented by balance recorded as long-term assets in the amount of
R$ 15,186 (R$64,582 in 2002) and a balance recorded under liabilities in the
amount of R$ 20,696 of which R$ 16,512 is recorded on short-term and R$ 4,184
on long-term. On December 31, 2002 the subsidiaries had a balance recorded as
short term assets in the amount of R$7,751. F-21




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) e. Guarantees Bank
    
    GuaranteesCitibank
    
    Overseas Private Investment
Corporation (OPIC) guarantee  only
for politic riskBank Boston  Res. 63
    
    Guarantee, avalNEC do Brasil S.A
    
    Guarantee, avalEuropean Investment Bank Telebahia
    
    Commercial risk guaranteed by Banque Sudameris  BancaCelular
S.A. Telergipe Celular S.A.
    
    Commerciale Italiana
Commercial risk guaranteed by Banque Sudameris  BancaCommerciale Italiana and aval.
 24. Reserve for contingencies The Company is party to a number of lawsuits, related to labor, tax and
civil claims. Management, based on external legal counsels opinion, has
recognized a provision for those claims for which an unfavorable outcome is
considered probable. Components of the reserves are as follows: 2003
    
    2002Labor
    
    
    1,761
    
    
    
    1,662Tax
    
    
    1,978
    
    
    
    1,653Civil
    
    
    2,181
    
    
    
    1,7435,920
    
    
    
    5,058
 The changes in the reserve for contingencies are as follows: 2003
    
    2002
    
    2001Beginning balance
    
    
    5,058
    
    
    
    4,802
    
    
    
    5,221Additional reserve
    
    
    945
    
    
    
    1,166
    
    
    
    2,001Payments
    
    
    (83
    )
    
    
    (910
    )
    
    
    (2,420
    )Ending balance
    
    
    5,920
    
    
    
    5,058
    
    
    
    4,802
 Tax lawsuits Probable Losses ISS Failure to withhold ISS due under tax substitution system This involves a tax assessment notice issued in the amount of R$ 5,538 by
the Municipality of Salvador against Telebahia for failure to withhold Service
Tax (ISS) due under tax substitution system from March to June 1998. Based on
the opinion of the legal counsel, a partial accrual was recorded. The amount
provisioned is approximately R$ 1,962. Other tax assessments The subsidiary Telebahia received tax assessment notices regarding various
matters, totaling R$16. F-22




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Possible loss Based on the Companys external legal counsel tax advisors, the Companys
management believes that the probability of an adverse outcome relating to the
claims described below is possible and consequently, a provision has not been
recorded for these items. ICMS ICMS on activation and supplementary services In June 1998, CONFAZ (National Council of Fiscal Policy) approved ICMS
Agreement No. 69/98, which, among other things, determined that beginning July
1, 1998 the amounts charged for cellular activation and other supplementary
services be included in the ICMS tax basis. Agreement also determined that the
ICMS could be applied retroactively on services provided within five years
before June 30, 1998. Based on the aforementioned Agreement, two tax assessment notices were
issued against Telebahia requiring payment of ICMS on cellular activation and
other supplementary services in the total amount of R$ 9,516. Only one tax
assessment notice, in the amount of R$ 504, was issued against Telergipe. According to legal counsels opinion, the management believes that this
requirement is unconstitutional, since the ICMS taxation hypothesis was
extended to administrative activities, with no relation to telecommunications
services. In addition, the creation of new taxation hypotheses or change in
calculation methodology that would result in tax burden increase could not be
applied to facts that occurred before the Agreement came into effect. Management believes that the predecessors of its subsidiaries are liable
for any tax liabilities arising from the retroactive levy of ICMS on revenues
from activation fees accounted for in periods prior to 1998. No accrual has
been recorded in the consolidated financial statements for the periods prior to
1998. Other tax assessments The subsidiaries Telebahia and Telergipe have received tax assessments
totaling R$ 6,868, for: (i) failure to perform a reversal proportional to the
ICMS credit referring to the acquisition of fixed assets, electric energy and
communication services due to the providing of untaxed communication services;
(ii) failure to reverse ICMS credits related to shipments of handsets as rental

or loan for use; (iii) payment of ICMS outside the period from February to
March 1998. ISS ISS on mobile network user tariff Based on the understanding that the assignment of use of
telecommunications networks is a communication service subject to ICMS, and not
rental of chattels, Telebahia was assessed by the Municipality of Salvador,
which required payment of ISS on the mobile network user tariff (TUM). The
amount involved is approximately R$ 39,742. Other tax assessments Tax assessment notices have been issued against Telergipe requiring: (i)
payment of ISS on supplementary services in the period from February to
December 1998; (ii) payment of ISS on caller identification in the period from
July 2000 to October 2001. The amount involved is approximately R$ 58. F-23




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) PIS and COFINS Law No. 9718/98 On November 27, 1998, the calculation of PIS and COFINS was changed by Law
No. 9718, which (i) increased the COFINS rate from 2% to 3%, (ii) authorized a
deduction of up to 1/3 of the COFINS amount from the CSLL amount, and (iii)
indirectly increased COFINS and PIS due by the subsidiaries, requiring the
inclusion of excess revenues in their tax bases. According to the Companys external legal counsel, this increase is
unconstitutional, since: (i) article 195 of the Brazilian Federal Constitution,
in force at the date Law 9,718 was enacted, established that the PIS and COFINS
tax would only be due on payroll, billing and profits; (ii) the Federal
Government made use of an improper means to increase the rate of the PIS and
the COFINS taxes, i.e., the increase was introduced through an ordinary law,
instead of a complementary law.; (iii) the Government did not comply with the
ninety-day term as from publication for the increase in tax rate to take
effect. Both Telebahia and Telergipe have obtained decisions authorizing exclusion
of excess revenues in their PIS and COFINS tax bases, as well as authorizing
payment of COFINS to remain at the rate of 2% (two percent). These decisions,
however, have been changed. Accordingly. Telebahia resumed payment of COFINS at
the rate of 3% (three percent), including excess revenues in its tax basis. The
amounts for which accruals were recognized during the period in which the
injunction was in effect have already been paid. Telergipe resumed payment of COFINS at the rate of 3% (three percent),
considering only revenue from the sale of handsets and from telecommunications
services. Regarding other revenues, the amounts are being deposited in an
escrow account. Telergipe resumed inclusion of excess revenues in the PIS tax basis, in
accordance with Law No. 9718/98. Due to the changes introduced by Law No. 10,637/02, in December 2002 the
subsidiary Telebahia began including excess revenues in the PIS tax basis. Hedges A COFINS tax assessment notice was issued to Telebahia, in reference to
deductions for losses incurred in hedge operations in determining the COFINS
tax basis, in the amount of R$5,882. Labor and Civil The company is subject to a number of labor and civil claims, for which a
reserve has been recognized as shown above, in an amount considered to be
sufficient to cover probable losses. In the cases in which the chance of loss is classified as possible, the
amount involved is R$ 8,948 for civil claims and R$ 2,324 for labor claims. Litigation Related to the Ownership of Caller ID In July 2002, we, together with other Brazilian mobile telecommunication
operators, were named as defendants in an action filed by Lune Projetos
Especiais Telecomunicação Comércio Ind. Ltda., or Lune, pursuant to which Lune
claims to be the owner of patents relating to Equipamento Controlador de
Chamadas Entrantes e do Terminal Telefônico, or Caller ID, and also that the
mobile telecommunication operators are using the patent without proper
authorization. Therefore, Lune demands that the operators cease to provide
Caller ID services and that it should be indemnified for the unauthorized use
of the Caller ID system, upon payment of fees received by the operators in
consideration to the use of the system by their customers. Based on the opinion of our legal counsel, the chance of an unfavorable
outcome is possible in this case. However the indemnification that is allegedly
due from the mobile operators cannot be accurately calculated as F-24




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) of yet due to the fact that the cost of the caller ID service provided by
the companies has never been separately calculated. Litigation Related to the Validity of the Minutes in the Prepaid Plans We are defendant in various lawsuits brought by the federal public
prosecutors office and an association for consumers protection which
challenge the imposition of an expiration date for the use of purchased prepaid
minutes. The plaintiffs allege that any prepaid minutes should not have a time
limitation for usage. Based on external counsels opinion, we do not believe that it will be
resolved against our interests. 25. Pension and other postretirement benefit plans The Subsidiaries, together with other companies of the former Telebrás
System, participate in a multi-employer defined benefit pension plan and other
post retirement benefit plans administered by the Fundação Telebrás de
Seguridade Social(Sistel). Until December 1999, all sponsors of the plans managed by Sistel were
joint and severally liable participants in relation to all plans then existent.
On December 28, 1999, a single-employer sponsored pension plan for active
employees was created (PBS-Tele Leste Celular Plan). Retired employees (PBS-A)
and post-retirement health care benefits (PAMA) remained as multiemployer
plans. The implementation of the restructuring was approved by the Secretaria
de Previdência Complementar (Secretary for Social Security and Supplementary
Benefits) on January 13, 2000. Due to the withdrawal of active participants in December 1999, the
Subsidiaries individually sponsor a single-employer defined benefit plan (PBS
Tele Leste Celular Plan), which covers approximately 1% of the Companys
employees. In addition to the supplementary pension benefit, a multi-employer
health care plan (PAMA) is provided to retired employees and their dependents,
at shared costs
Contributions to the PBS Tele Leste Celular Plan are determined based on
actuarial valuations prepared by independent actuaries, in accordance with the
standards applicable in Brazil. The method used for cost determination is the
capitalization method and the sponsors contribution represents 13.5% of the
participating employees payroll, 12% of which is earmarked for PBS Tele Leste
Celular Plan and 1.5 % for the PAMA Plan. For 89% of the subsidiaries employees, there is an individual defined
contribution plan  Visão Celular Benefit Plan, established by SISTEL in August
2000. The Visão Celular Plan is supported by contributions made by the
participants (employees) and by the sponsor, which are credited to
participants individual accounts. The subsidiaries are responsible for the
costing of all administrative and maintenance expenses, including risks of
death and disability of participants. The employees participating in the
defined benefit plan (PBS Tele Leste Celular) were granted the option of
migrating to the Visão Celular Plan. This option was extended to employees who
did not participate in the PBS Tele Leste Celular Plan, as well as to all new
hires. The Companys contributions to the Visão Celular Plan are similar to
those of the participants, varying from 0% to 7% of the contribution salary,
according to the percentage opted for by the participant. For the period ended December 31, 2003, the subsidiaries did not
contribute, (R$ 3 on 2002) to PBS Tele Leste Celular Plan, and contributed the
amount of R$ 507 (R$ 692 on 2002) to Visão Celular Plan. As permitted by CVM Instruction N°. 371, of December 13, 2000, the Company
elected to recognize the actuarial liabilities of its benefit plans directly in
shareholders equity as of December 31, 2001, net of related tax effects. On
December 31, 2003 and 2002, the Company recognized the actuarial liabilities of
its benefit plans directly as expense of the year. Regarding the actuarial
valuation of the plans, the Company established the projected unit credit
method for the plans positions as of November 30, 2003 and November 30, 2002,
respectively. For multi-sponsored plans (PAMA and PBS-A), the apportionment of
the plans assets was made in accordance with the Companys actuarial
liabilities, in comparison with the plans total liabilities. The status of the plan was as follows: F-25




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Plan
    
    2003
    
    2002PBS Visão Telebahia / Telergipe
    
    
    (420
    )
    
    
    140PAMA Telebahia / Telergipe
    
    
    270
    
    
    
    261PBS-A Telebahia / Telergipe
    
    
    (407
    )
    
    
    (440
    )Subtotals  consolidated
    
    
    (557
    )
    
    
    (39
    )Non-recorded surplus plans
    
    
    827
    
    
    
    440Accrued Benefits obligations on December, 31
    
    
    270
    
    
    
    401
 a) Reconciliation of funded status: December 31, 2003PBS/Visão (i)
    
    PAMA
    
    PBS-ATelebahia/Telergipe
    
    (ii)
    
    (ii) (iii)Projected benefit
obligation
    
    
    1,742
    
    
    
    616
    
    
    
    2,092Fair value of plan
assets
    
    
    2,162
    
    
    
    346
    
    
    
    2,499Funded
status
    
    
    (420
    )
    
    
    270
    
    
    
    (407
    )
 December 31, 2002PBS/Visão (i)
    
    PAMA
    
    PBS-ATelebahia/Telergipe
    
    (ii)
    
    (ii) (iii)Projected benefit
obligation
    
    
    1,767
    
    
    
    469
    
    
    
    1,766Fair value of plan
assets
    
    
    1,627
    
    
    
    208
    
    
    
    2,206Accrued (prepaid)
pension
cost
    
    
    140
    
    
    
    261
    
    
    
    (440
    )
  (i)
    
    Even though the Visão Telebahia and Telergipe plans are defined
contribution plans, there is an actuarial risk of death and disability of
participants, which is beared by the sponsor, requiring an actuarial
estimate of those risks.  (ii)
    
    Refers to proportional participation of Telebahia and Telergipe in
assets and liabilities of the multi-sponsored plan  PAMA and PBS-A.  (iii)
    
    While though PBS  A has a surplus as of December 31, 2003 and 2002,
no assets were recognized by the sponsor, due to the legal impossibility of
reimbursement of this surplus and the fact that as a non-contributory plan,
reduction of contributions by the sponsor in the future is precluded . b) Total net periodic costs recognized in the statements of operations. December 31, 2003PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-AService
cost
    
    
    147
    
    
    
    5
    
    
    
    192Interest
cost
    
    
    169
    
    
    
    52
    
    
    
    Expected return on
assets
    
    
    (162
    )
    
    
    (29
    )
    
    
    (309
    )Employees
contributions
    
    
    (6
    )
    
    
    
    
    
    
    148
    
    
    
    28
    
    
    
    (117
    )
 F-26




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-AService
cost
    
    
    117
    
    
    
    
    
    
    
    188Interest
cost
    
    
    143
    
    
    
    37
    
    
    
    Expected return on
assets
    
    
    (144
    )
    
    
    (11
    )
    
    
    (259
    )Employees
contributions
    
    
    (1
    )
    
    
    
    
    
    
    115
    
    
    
    26
    
    
    
    (71
    )
 c) Changes in the accrued (prepaid) costs PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-AAccrued costs as of
December 31,
2002
    
    
    140
    
    
    
    261
    
    
    
    (440
    )Net periodic
cost
    
    
    148
    
    
    
    28
    
    
    
    (117
    )Employers
contributions in
2003
    
    
    (87
    )
    
    
    (1
    )
    
    
    Actuarial (gains)
losses during the
year
    
    
    (621
    )
    
    
    (18
    )
    
    
    150Accrued prepaid costs
as of December 31,
2003
    
    
    (420
    )
    
    
    270
    
    
    
    (407
    )
 December 31, 2002PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-AAccrued pension cost
as of December 31,
2001
    
    
    254
    
    
    
    426
    
    
    
    (135
    )Net periodic cost
    
    
    115
    
    
    
    26
    
    
    
    (71
    )Employers
contributions in
2002
    
    
    (96
    )
    
    
    (1
    )
    
    
    Recognized gain
(loss) for the
years
    
    
    (133
    )
    
    
    (190
    )
    
    
    (234
    )Accrued pension cost
as of December 31,
2002
    
    
    140
    
    
    
    261
    
    
    
    (440
    )
 d) Changes in benefit obligation December 31, 2003PBS/VisãoTelebahia/Telergipe
    
    PAMA (i)
    
    PBS-A (i)Benefit obligation as of December 31,
2002
    
    
    1,767
    
    
    
    469
    
    
    
    1,766Service
cost
    
    
    147
    
    
    
    5
    
    
    
    Interest
cost
    
    
    169
    
    
    
    52
    
    
    
    192Benefits paid in the
year
    
    
    (48
    )
    
    
    (26
    )
    
    
    (159
    )Actuarial (Gains) losses of the
year
    
    
    (293
    )
    
    
    116
    
    
    
    293Benefit obligation as of December 31, 2003
    
    
    1,742
    
    
    
    616
    
    
    
    2,092
 December 31, 2002PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-ABenefit obligation as of December 31, 2001
    
    
    1,498
    
    
    
    628
    
    
    
    1,723Service
costs
    
    
    117
    
    
    
    
    
    
    
    Interest
cost
    
    
    143
    
    
    
    37
    
    
    
    188Benefits paid in the
year
    
    
    (43
    )
    
    
    (17
    )
    
    
    (145
    )Actuarial (Gain) losses of the
year
    
    
    52
    
    
    
    (179
    )
    
    
    Benefit obligation as of December 31, 2002
    
    
    1,767
    
    
    
    469
    
    
    
    1,766
 e) Changes in plan assets F-27




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) December 31, 2003PBS/Visão
    
    PAMA
    
    PBS-ATelebahia/Telergipe
    
    (i)
    
    (i)Fair value of plan assets as of December 31,
2002
    
    
    1,627
    
    
    
    208
    
    
    
    2,206Benefits paid in the
year
    
    
    (48
    )
    
    
    (26
    )
    
    
    (159
    )Sponsors contribution in the year
    
    
    96
    
    
    
    1
    
    
    
    Return on plan assets in the
year
    
    
    487
    
    
    
    163
    
    
    
    452Fair value of plan assets as of December 31,
2003
    
    
    2,162
    
    
    
    346
    
    
    
    2,499
 December 31, 2002PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-AFair value of plan assets as of December 31,
2001
    
    
    1,244
    
    
    
    202
    
    
    
    1,858Benefits paid in the
year
    
    
    (43
    )
    
    
    (17
    )
    
    
    (145
    )Sponsors contribution in the year
    
    
    96
    
    
    
    1
    
    
    
    Income from plan assets in the year
    
    
    330
    
    
    
    22
    
    
    
    493Fair value of plan assets as of December 31, 2002
    
    
    1,627
    
    
    
    208
    
    
    
    2,206
 f) Actuarial Assumptions December 31, 2003PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-ADiscount rate for
determining
projected benefit
obligation
    
    11.30% p.a.
    
    11.30% p.a.
    
    11.30% p.a.Plan assets
expected return
rate
    
    11.83% p.a.
    
    11.30% p.a.
    
    14.45% p.a.Salary increase
rate
    
    7.10% p.a.
    
    7.10% p.a.
    
    7.10% p.a.Long term inflation
rate
    
    5.00% p.a.
    
    5.00% p.a.
    
    5.00% p.a.Medical costs
increase
rate
    
    Not applicable
    
    8.15% p.a.
    
    Not applicableBenefits increase
rate
    
    5.00% p.a.
    
    5.00% p.a.
    
    5.00% p.a.Mortality rate
    
    UP84 with one yearseveritySegregated bysex
    
    UP84 with oneyear severity
    
    UP84 with oneyear severityDisability
mortality rate
    
    IAPB-57
    
    
    
    Disability rate
    
    Mercer disability
    
    Mercer disability
    
    Not applicable% of married active
participants on
retirement
date
    
    95%
    
    
    
    Number of Plan
active
participants
    
    
    
    4
    
    Number of Plan
assisted +
beneficiaries
    
    
    
    17
    
    7Number of PBS Plan
active participants
Telebahia/Telergipe
    
    4
    
    
    
    Number of Visão
Plan active
participants
Telebahia/Telergipe
    
    7
    
    
    
    Number of PBS Plan
active participants
Telebahia/Telergipe
    
    383
    
    
    
    
 F-28




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) December 31, 2002 (*)PBS/VisãoTelebahia/Telergipe
    
    PAMA
    
    PBS-ADiscount rate for
determining
projected benefit
obligation
    
    
    10.24% p.a.
    
    
    
    11.30% p.a.
    
    
    
    11.30% p.a.Plan assets
expected return
rate
    
    
    10.24% p.a.
    
    
    
    14.45% p.a.
    
    
    
    14.45% p.a.Salary increase
rate
    
    
    6.08% p.a.
    
    
    
    8.15% p.a.
    
    
    
    8.15% p.a.Long term inflation
rate
    
    
    4.00% p.a.
    
    
    
    5.00% p.a.
    
    
    
    5.00% p.a.Medical costs
increase
rate
    
    Not applicable
    
    
    10.62% p.a.
    
    
    Not applicableBenefits increase
rate
    
    
    4.00% p.a.
    
    
    
    5.00% p.a.
    
    
    
    5.00% p.a.Mortality
rate
    
    GAM-71
    
    GAM-71
    
    UP84 with one year severityDisability
mortality
rate
    
    
    RRB1944
    
    
    UP84 with one year severity
    
    
    Disability
rate
    
    
    RRB1944
    
    
    Mercer
    
    Mercer% of married active
participants on
retirement
date
    
    
    95%
    
    
    
    
    
    
    
    Number of Plan
active
participants
    
    
    
    
    
    
    4
    
    
    
    Number of Plan
assisted +
beneficiaries
    
    
    
    
    
    
    14
    
    
    
    7Number of PBS Plan
active participants
Telebahia/Telergipe
    
    
    4
    
    
    
    
    
    
    
    Number of Visão
Plan active
participants
Telebahia/Telergipe
    
    
    7
    
    
    
    
    
    
    
    Number of PBS Plan
active participants
Telebahia/Telergipe
    
    
    509
    
    
    
    
    
    
    
    
  (*) In 2002 was used nominal rate. 26. Shareholders equity a. Share capital Capital subscribed and paid-in at December 31, 2003 was represented by the
following shares, without par value: Common
    
    Preferred
    
    TotalAs at December 31, 2003 (in thousands)
    
    
    166,008,044
    
    
    
    313,436,995
    
    
    
    479,445,039Treasury shares (in thousands)
    
    
    (252
    )
    
    
    (50,903
    )
    
    
    (51,155
    )Outstanding as at December 31,
2003
    
    
    166,007,792
    
    
    
    313,386,092
    
    
    
    479,393,884
 The capital may be increased only by a decision taken at a shareholders
meeting or by the Board of Directors in connection with the capitalization of
profits or reserves previously allocated to capital increases at a
shareholders meeting. Preferred shares are entitled to receive cash dividends 10% higher than
those attributed to common shares, or non cumulative minimum annual preferred
dividends of 6% of their nominal capital value social capital attributed to
those shares, whichever is greater. In the case of the payment of minimum
annual preferred dividends of 6% of social capital attributable to preferred
shares, after the minimum dividend is paid to preferred shareholders, holders
of common shares may receive the same amount of dividends as those paid on
preferred shares, as long as there is an available balance. Additional
dividends declared by the Company will be ratably divided between common and
preferred shareholders. The preferred shares are non-voting except under limited circumstances and
have priority over the common shares in the case of liquidation of the Company. F-29




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Under the Brazilian Corporation Law, the number of non-voting shares or
shares with limited voting rights, such as the preferred shares, may not exceed
two-thirds of the total number of shares. b. Treasury Stock The purpose of these shares acquisition is to reimburse dissident
shareholders for the shares in the custody of the Brazilian Clearing and
Depository Corporation (CBLC), in the merger of Tele Leste Celular
Participações S.A., and are comprised of 50,903,277 preferred shares and
252.498 common shares. The average acquisition cost was R$ 0.00068 per share
and the minimum and maximum costs are R$ 1.49 and R$ 1.60, respectively. These
shares market value, considering the average quotation on the stock exchange,
is R$ 0.74 and R$ 0.81 as of December 31, 2003. c. Capital reserves Special reserve  Goodwill This reserve represents the formation of a special reserve for goodwill as
a result of the Corporate restructuring (see Note 30). According to CVM
Instruction No. 319, of December 3, 1999, this reserve shall be used in future
capital increases on behalf of the controlling shareholder (Iberoleste
Participações S.A.) whenever the amortization of the goodwill paid in the
acquisition of the Company results in a reduction of income tax and social
contribution liabilities. Fiscal Incentive Comprised of income tax reduction incentives, which are converted into
investment certificates. d. Income reserves Legal reserve Brazilian corporations are required to appropriate 5% of annual net income
to a legal reserve until that reserve equals 20% of paid-in share capital, or
that reserve plus capital reserves equals 30% of nominal paid-in share capital;
thereafter, appropriations to this reserve are not compulsory. This reserve
can be used only to increase share capital or offset accumulated losses. Special reserve for expansion and modernization This reserve was recognized to cover expansion and modernization of the
installations and services of the subsidiaries. Formation of this reserve was
approved on March 9, 2000. Under the terms of Article 189 of Brazilian
corporate law, in December 2001, a portion (R$6,708) of this reserve was offset
against retained earnings to be distributed as part of dividends and to offset
prior year adjustments generated by the recognition of liabilities related to
the pension plan. Finally, in 2003 and 2002 a portion of R$6,422 and R$2,508,
respectively, of this reserve was offset against the net loss. e. Dividends Pursuant to its by-laws, the Company is required to distribute as
dividends in respect of each fiscal year ending on December 31, to the extent
amounts are available for distribution, an aggregate amount equal to at least
25% of Adjusted Net Income (as defined below) on such date. The annual
dividend distributed to holders of preferred shares (the Preferred Dividend)
has priority in the allocation of Adjusted Net Income. Remaining amounts to be
distributed are allocated first to the payment of a dividend to holders of
common shares in an amount equal to the Preferred Dividend and the remainder is
distributed equally among holders of preferred shares and common shares. For the purposes of the Brazilian Corporation Law, and in accordance with
the Companys by-laws, the Adjusted Net Income is an amount equal to the
Companys net profits adjusted to reflect allocations to or from F-30




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) (i) the legal
reserve, (ii) the statutory reserve, (iii) a contingency reserve for
anticipated losses, if any, and (iv) an unrealized income reserve, if any. Pursuant to its by-laws, management did not propose any dividends to be
approved at the Shareholders Meeting for the year ended December 31, 2003 and
2002. The amount of R$489 and R$526 with respect to dividends payable in 2003
and 2002, respectively, represent the remaining unclaimed balance of approved
dividends relating to 2001. 27. Transactions with related parties The main transactions with unconsolidated related parties are as follows:  a)
    
    Use of Network and Long-distance (Roaming) Cellular Communication -
These transactions involve the companies owned by same controller
group: Telesp Celular S.A., Global Telecom S.A., Telerj Celular S.A.,
Telest Celular S.A., Telecomunicações de São Paulo S.A. - Telesp,
Celular CRT S.A, Tele Centro Oeste Celular, Telems Celular, Telecom
Celular, Telemat Celular, Teleacre Celular, Telegoiás Celular e NBT.
Part of these transactions were established based on contracts between
Telebrás and the operating concessionaires before privatization and
interconnection agreements. The terms of these transactions are
regulated by ANATEL.b)
    
    Technical Assistance  - due by subsidiaries to Telefónica Móviles
S.A. for technical service, calculated based on a percentage of net
revenue from services, monetarily restated based on currency variation.
The amount of R$3,754 R$3,393 and R$7,562, excluding taxes and
currency exchange, was recorded in operating expenses for the years
ended December 31, 2003, 2002 and 2001, respectively.c)
    
    Corporate services - corporate services provided by other companies
under common control are transferred to company at cost actually
incurred in these services.d)
    
    Provision of call center services - by Atento Brasil S.A. to the
users of the subsidiaries telecommunications services, contracted for
12 (twelve) months, renewable for an equal period of time. F-31




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) A summary of the balances and transactions with unconsolidated related
parties, made under usual market conditions for these types of operations, is
as follows: 2003
    
    2002Current AssetsAccounts
receivables
    
    
    7,005
    
    
    
    1,451Current LiabilitiesTechnical
assistance
    
    
    23,323
    
    
    
    23,865Suppliers and
Consignations
    
    
    9,879
    
    
    
    3,507
 Revenue
    
    2003
    
    2002
    
    2001Revenue from telecommunication services
    
    
    18,894
    (a)
    
    
    9,293
    
    
    
    7,189Telesp
    
    
    16,256
    
    
    
    34
    
    
    
    83Tele Sudeste and
Subsidiaries
    
    
    1,033
    
    
    
    8,180
    
    
    
    6,384TCP and
Subsidiaries
    
    
    1,538
    
    
    
    316
    
    
    
    CRT
    
    
    67
    
    
    
    763
    
    
    
    722Recovery of expenses with JV
apportionment
    
    
    7,176
    (c)
    
    
    
    
    
    
    TCP and
Subsidiaries
    
    
    4,519
    
    
    
    Tele Sudeste and
Subsidiaries
    
    
    1,761
    
    
    
    CRT
    
    
    896
    
    
    
    ExpensesSales expenses
    
    
    11,793
    
    
    
    8,945
    
    
    
    7,427Atento
    
    
    11,793
    (d)
    
    
    8,945
    
    
    
    7,427Cost of sales and services
    
    
    2,214
    (a)
    
    
    4,906
    
    
    
    4,410Tele Sudeste and
Subsidiaries
    
    
    931
    
    
    
    4,142
    
    
    
    3,633CRT
    
    
    83
    
    
    
    364
    
    
    
    356TCP and
Subsidiaries
    
    
    1,140
    
    
    
    388
    
    
    
    Telesp
    
    
    60
    
    
    
    12
    
    
    
    421Expenses with JV apportionment
    
    
    12,888
    (c)
    
    
    
    
    
    
    TCP and
Subsidiaries
    
    
    7,468
    
    
    
    Tele Sudeste and
Subsidiaries
    
    
    4,987
    
    
    
    CRT
    
    
    433
    
    
    
    General and administrative Expenses
    
    
    3,959
    
    
    
    10,265
    
    
    
    12,526DGLA (Latin
America)
    
    
    
    (c)
    
    
    145
    
    
    
    Telefónica Móviles
S/A
    
    
    3,754
    (b)
    
    
    3,393
    
    
    
    7,562Tele
Sudeste
    
    
    
    (c)
    
    
    4,867
    
    
    
    4,964Telesp
    
    
    205
    (c)
    
    
    1,860
    
    
    
    
 F-32




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 28. Commitments a. Capital expenditures The Subsidiaries have capital expenditure commitments related to the
technical development and continuing expansion of telecommunication services.
These commitments amount to approximately R$82.5 million as of December 31,
2003, which are expected to be disbursed during the year 2004. b. Commitments to Anatel Goals The Company is subject to obligations concerning quality of services,
network expansion and modernization. Failure to meet these obligations may
result in fines and penalties until the Company complies with its obligations,
as well as potential revocation of the concession. Commitments with ANATEL are being monitored by the subsidiaries. The
Company believes that it is currently in compliance with its quality of service
and expansion obligations 29. Management compensation The company paid, during the period of 2003, 2002 and 2001, management
fees on the amount of R$354, R$576 and R$948, respectively , which were
accrued as expenses. 30. Corporate restructuring On November 29, 2000, the corporate restructuring process was concluded,
in which the goodwill paid on the privatization process of the Company was
transferred to its subsidiaries. The financial statements maintained for the Companies corporate and tax
purposes include specific accounts related to transferred goodwill and
reserves, and corresponding amortization, reversals and tax credits, the
balances of which, as of December, 31 2003 and December, 31 2002, are
demonstrated as follows: Balances as of
    
    Partial spin-off
    
    December31, 2002
    
    December31, 2003Spin-off date
    
    Telebahia
    
    Telergipe
    
    Consolidated
    
    ConsolidatedBalance sheet:Goodwill -
spun-off
    
    
    376,316
    
    
    
    (355,879
    )
    
    
    (14,285
    )
    
    
    251,868
    
    
    
    219,699Reserves -
spun-off
    
    
    (251,972
    )
    
    
    238,282
    
    
    
    9,571
    
    
    
    (169,836
    )
    
    
    (148,604
    )Net effect
equivalent toTax credit from
corporate
restructuring
    
    
    124,344
    
    
    
    117,597
    
    
    
    4,714
    
    
    
    82,032
    
    
    
    71,095Statements of
income:Goodwill
amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,169
    
    
    
    32,169Reversal of
reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,232
    )
    
    
    (21,232
    )Tax
credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,937
    )
    
    
    (10,937
    )Net effect on income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 As shown above, the amortization of goodwill, net of the reversal of the
reserve and of the corresponding tax credit, results in a zero effect on income
and, consequently, on the basis for calculating the minimum mandatory dividend.
The net amount of R$71,095 as of December 31, 2003 (R$82,032 as of December 31,
2002), which, in essence, represents the tax credit from the partial spin-off,
has been classified in the balance sheet as a noncurrent asset - deferred taxes
(see Note 14). F-33




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 31. Insurance The Companys management has established policies to monitor inherent
risks on its operations. Therefore, as of December 31, 2003, the Company have
contracted insurance to cover operational risks, loss of income, civil
liabilities, heath etc. Management believes that the insurance cover amount is
sufficient to cover operating risks, civil liability, health, etc.. The main
assets, responsibilities, or cover interest by insurance and the respective
amount are shown bellow: Classification
    
    CoverageOperating
risks
    
    US$
    300 millionGeneral civil
liabilities
    
    
    R$7,325Vehicle
fleet
    
    
    R$1,000
 32. Financial instruments and risk management a. Risks considerations The subsidiaries Telebahia and Telergipe, which provide cellular
communications services in the States of Bahia and Sergipe , under concessions
from the Federal Government. Both of them are also engaged in activities of
purchasing and distribution of cellular handsets through their own
distribution network in order to increase their business operations. The main market risks that Telebahia and Telergipe are exposed to on their
activities are:  
    
    Credit Risk: originates from the difficulties in
which these companies have in collecting the service charges for
rendered services to their clients, including the sales of
cellular handsets to the distribution networks.
    
    Interest Rate Risk: originates from a portion of the
debt and the derivatives premium contracted on floating rates,
and involves financial expenses increase risk by unfavorable
movement on interest rates (principally Libor and CDI).
    
    Exchange Rate Risk: originates from the debt and the
derivatives contracted on foreign currency and is related to
potential losses on unfavorable movement on exchange rates. From the beginning, Telebahia and Telergipe have exercised an active
position towards management of the various risks they are subjected to, by
means of widespread initiatives, procedures and wide operational policies that
permit a mitigation of the risks inherent to the exercise of their normal
activities. Credit Risk Credit risk from providing telecommunication services is minimized by
strictly monitoring the customer portfolio and actively addressing delinquent
receivables by means of clear policies relating to postpaid services. Tele Leste has 74.3%(71.9% on 2002) of its client basis participating on
prepaid mode, which requires prepaid handset cards and not represent credit
risk. Costumers indebtedness represented 3.2% of gross revenue in December 31,
2003 (2.3% on December 31, 2002). The credit risk related to cellular handsets sales is managed by the
conservative politic for granting of credit, through updated management
methods, which involves the credit scoring, technical application, balance
analysis and commercial data basis consultation as well as the automatic
control for sales authorization integrated to ERP software distribution system.
Network distributions indebtedness represented about 0.5% of cellular handsets
sales on 2003 (1.8% on 2002). The Company has established a uniform policy for dealing with delinquent
customer accounts. Any suspension of service may be done only after providing
notice to the customer. If a customers payment is more than 15 days past due,
outgoing service is suspended, and if payment is more than 40 days past due,
both F-34




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) outgoing and incoming services are suspended until full payment for all
outstanding charges is received. If a customers payment is more than 90 days
past due, service is discontinued. Interest Rate Risk The Company is exposed to the risk of rises in interest rates, especially
interest associated with the cost of Interbank Deposit Certificates (CDIs), due
to liabilities in exchange rate derivative operations. As of December 31, 2003,
these operations total R$ 251,625. Likewise, loans in foreign currency have interest rate risk associated
with possible rises in foreign loans. As of December 31, 2003, these operations
totaled R$ 187,741. Exchange Rate Risk Telebahia and Telergipe entered into derivative contracts in order to
hedge their foreign currency loans from exchange rate variation. The related
instruments used are swaps. As of December 31, 2003 and 2002, the Companys net exposure to exchange
rate risk, at book value, is as follows: 2003
    
    2002(Thousands
    
    (Thousandsof US$)
    
    of US$)Loans and
financing
    
    
    (76,920
    )
    
    
    104,593Other liabilities in foreign
currency
    
    
    (8,072
    )
    
    
    6,754Derivative positions  swaps
    
    
    85,184
    
    
    
    (112,470
    )Overage (net exposure)
    
    
    192
    
    
    
    (1,123
    )
 b. Derivative operations The table below shows book value and estimated market value of loans and
financing and foreign currency liabilities, as well as derivative contracts as
of December 31, 2003 and 2002: 2003Gain (Loss)Book value
    
    Market value
    
    UnrealizedLoans and
financing
    
    
    (222,237
    )
    
    
    (215,244
    )
    
    
    6,993Other
liabilities
    
    
    (23,323
    )
    
    
    (23,323
    )
    
    
    Derivative
asset
positions
(exchange
swap)
    
    
    (5,510
    )
    
    
    15,107
    
    
    
    20,617Total
    
    
    (251,070
    )
    
    
    (223,460
    )
    
    
    27,610
 2002Gain (Loss)Book value
    
    Market value
    
    UnrealizedLoans and
financing
    
    
    (369,556
    )
    
    
    (277,853
    )
    
    
    91,703Other
liabilities
    
    
    (23,865
    )
    
    
    (23,865
    )
    
    
    Derivative
asset
positions(exchange
swap)
    
    
    397,390
    
    
    
    350,647
    
    
    
    (46,743
    )Total
    
    
    3,969
    
    
    
    48,929
    
    
    
    44,960
 The market value of loans and financing, as well as swaps were
estimated, based on discounted cash flows, using available interest rate and
foreign currency projections. The market values are calculated at a specific moment in time, based on
available information and using internal valuation methodologies; therefore,
the indicated market values do not necessarily represent the values at which
the transactions may be able to be settled in a current market transaction. The
use of different assumptions or methodologies could have a significant effect
on the estimated market values. F-35




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Where no comparison of book versus fair value is presented for a financial
asset or liability line item in the schedule above, no significant difference
in value is believed to exist. c. Fair value of other financial instruments The market values of loans and financing, swaps and forward contracts
were determined based on the discounted cash flows, utilizing projected
available interest rate and foreign currency information. Estimated market values of the Companys financial assets and
liabilities have been determined using available market information and
appropriate valuation methodologies. Accordingly, the estimates presented
above are not necessarily indicative of the amounts that could be realized
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated market
values. 33. Telefónica Móviles Stock Plan In May, 2001, Telefónica Móviles, S.A. (Telefónica Móviles) launched a
stock option plan based on Telefónica Móviles stock (the Plan) that covered
the employees of the Company. Pursuant to the Plan, between May 20 and July
20, 2002, Telefónica Móviles granted a total of 231,016 stock options to the
Companys employees, vesting over a four-year period. The options were granted
in Series A, B and C, with exercise prices of 11.00 Euros, 16.50 Euros and 7.23
Euros, respectively. The total options granted to each employee consisted of
25% Series A options, 25% Series B options, and 50% Series C options. The
market price of Telefónica Móviles stock as traded at the Madrid Stock
Exchange was 8.28 Euros on December 31, 2003. The Plan also gives the Companys
employees the option to receive in cash, the appreciation in the market price
of Telefónica Móviles stock over the respective exercise price. In accordance with the conditions of the Options Program for the shares of
Telefónica Móviles S.A. (MOS Program), the Companys employees failed to
qualify due to said programs basic premise, which is the holding by Telefónica
Móviles S.A. of controlling interest in the company in which the employees are
enrolled. Accordingly, on December 31, 2003 the existing options were settled
in advance. The settlement value was calculated for 50% of the C series options
considering the closing quotation on January 2, 2004 of Telefônica Móviles S.A.
shares, translated at the average exchange rate on the payment date. Under BR CL, the Company is not obliged to account for the effects of the
plan offered to the employees by the major stockholder and, therefore, no
effects were recorded in the financial statements of the Company. 34. Summary of the differences between Brazilian and US GAAP The Companies accounting policies comply with generally accepted
accounting principles in Brazil (BR CL). Accounting policies that differ
significantly from generally accepted accounting principles in the United
States of America (US GAAP) are described below: As discussed in Note 2.c., the Company changed the basis of presentation
of these financial statements from the Constant Currency Method to BR CL in
2003. Under the Constant Currency Method, the effects of monetary restatement
were recorded until December 31, 2000. This effect was not eliminated in the
prior period reconciliations to US GAAP because the application of inflation
restatement represented a comprehensive measure of accounting for the effects
of Brazilian price-level changes. Under BR CL, the effects of monetary
restatement are recorded until December 31, 1995. Since Brazil was still
considered a highly inflationary economy until 1997, the U.S. GAAP
reconciliation presented below includes an adjustment to record monetary
restatement up to December 31, 1997 (see Note 34.f.). The applicable prior
period US GAAP adjustments have also been restated to reflect this change in
basis of presentation. Following is a reconciliation of shareholders equity
and net income under US GAAP as of December 31, 2002 and for the two years in
the period ended December 31, 2002 between the originally reported amounts and
the restated amounts. F-36




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Shareholdersequity
    
    Net income2002
    
    2002
    
    2001US GAAP as originally
reported
    
    
    478,369
    
    
    
    (71,246
    )
    
    
    261Effect of change in
monetary restatement on US
GAAP:Adjustments
    
    
    (55,393
    )
    
    
    20,414
    
    
    
    18,409Interest tax on above
adjustments
    
    
    14,055
    
    
    
    (5,180
    )
    
    
    (4,568
    )US GAAP as
restated
    
    
    437,031
    
    
    
    (56,012
    )
    
    
    (14,102
    )
 a. Different criteria for capitalizing and amortizing capitalized interest Until December 31, 1993 capitalized interest was not added to the
individual assets in property, plant and equipment; instead it was capitalized
separately and amortized over a time period different from the useful lives of
the related assets. Under US GAAP, capitalized interest is added to the
individual assets and is amortized over their useful lives. Also, until December 31, 1998, under BR CL as applied to companies in the
telecommunications industry, interest attributable to construction-in-progress
was computed at the rate of 12% per annum of the balance of
construction-in-progress and that part which relates to interest on third-party
loans was credited to interest expense based on actual interest costs, with the
balance relating to the Companies own capital being credited to capital
reserves. For the three-year period ended December 31, 2003, the Company did
not capitalize interest attributable to construction-in-progress at the rate of
12%; rather the actual effective interest related to construction-in-progress
was used to determine capitalized interest. Under US GAAP, in accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 34, Capitalization of Interest Costs,
interest incurred on borrowings is capitalized to the extent that borrowings do
not exceed construction-in-progress. The credit is a reduction of interest
expense. Under US GAAP, the amount of interest capitalized excludes the
monetary gain associated with local currency borrowings and any foreign
exchange gains and losses on foreign currency borrowings. The effects of these
different criteria for capitalizing and amortizing capitalized interest are
presented below: 2003
    
    2002
    
    2001Capitalized interest differenceUS GAAP capitalized interest:Interest capitalized during the period
    
    
    1,615
    
    
    
    5,392
    
    
    
    7,842Capitalized interest on disposals
    
    
    (471
    )
    
    
    (253
    )
    
    
    (7
    )1,144
    
    
    
    5,139
    
    
    
    7,835Less BR CL capitalized interest:Interest capitalized during the period
    
    
    (1,121
    )
    
    
    (4,211
    )
    
    
    (7,391
    )Capitalized interest on disposals
    
    
    485
    
    
    
    272
    
    
    
    8636
    
    
    
    3,939
    
    
    
    7,383US GAAP difference
    
    
    508
    
    
    
    1,200
    
    
    
    452Amortization of capitalized interest differenceAmortization under BR CL
    
    
    7,049
    
    
    
    5,071
    
    
    
    3,963Capitalized interest on disposals
    
    
    (280
    )
    
    
    (251
    )
    
    
    (4
    )6,769
    
    
    
    4,820
    
    
    
    3,959Less amortization under US GAAP
    
    
    (6,885
    )
    
    
    (4,779
    )
    
    
    (3,579
    )Capitalized interest on disposals
    
    
    272
    
    
    
    234
    
    
    
    3(6,613
    )
    
    
    (4,545
    )
    
    
    (3,576
    )US GAAP difference
    
    
    156
    
    
    
    275
    
    
    
    383
 F-37




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) b. Proposed dividends Under BR CL proposed dividends are accrued for in the financial statements
in anticipation of their approval at the shareholders meeting. Under US GAAP,
dividends are not accrued until they are formally declared. The interest on shareholders equity is a legal liability from the date it
is declared, therefore, these amounts must be included as dividends in the year
they are proposed for US GAAP purposes. c. Pension and other post retirement benefits The Subsidiaries participate in two multiemployer benefit plans (PBS-A and
PAMA) that are operated and administrated by Sistel and provide for the costs
of pension and other postretirement benefits based on a fixed percentage of
remuneration, as recommended annually by independent actuaries. For purposes
of US GAAP, multiemployer plans are accounted for similar to defined
contribution plans and consequently, the Company is required to disclose its
annual contributions and funded status of those plans. The Subsidiaries also
sponsor a single-employer defined pension benefit plan (PBS-Tele Leste). The
provisions of SFAS No. 87, Employees Accounting for Pensions, for the
purposes of calculating the funded status, were applied with effect from
January 1, 1992, because it was not feasible to apply them from the effective
date specified in the standard (See Note 35). On December 13, 2000, CVM issued Instruction No. 371, which provisions are
very similar to SFAS No. 87 and SFAS No. 106, except for the following
differences:  
    
    A company that participates in a multiemployer defined benefit pension
or postretirement benefit plan is required to recognize any assets or
liabilities in respect to its participation in such plans, while US
GAAP requires only the disclosure of funded status of those plans.  
    
    The unrecognized net obligation existing at the date of initial
application of this standard shall be amortized over five years or
remaining service period or remaining life expectancy, whichever is
lower. Alternatively, companies were granted the option to amortize
such initial transition obligation as of December 31, 2001, directly
to shareholders  equity. Such option has been adopted by the Company.
Under SFAS No. 87, the unrecognized net obligation existing at the
date of its initial application is being amortized over the remaining
service period.  
    
    Under BR CL, actuarial gains and losses are recorded in income when
incurred up to the amount of pension liability recorded. Under U.S.
GAAP, certain actuarial gains and losses are deferred and amortized
over the remaining service period of the active employees expected to
receive benefits under the plan. The effects of these different criteria for recognition of pension and
other postretirement benefits on accrued pension (postretirement) benefit as of
December 31, 2003 and 2002, are presented below: 2003
    
    2002US
    
    BR
    
    Accumulated
    
    US
    
    BR
    
    AccumulatedDescription
    
    GAAP
    
    CL
    
    Difference
    
    GAAP
    
    CL
    
    DifferenceActive employees
defined pension 
PBS Tele
Leste
    
    
    547
    
    
    
    
    
    
    
    547
    
    
    
    467
    
    
    
    140
    
    
    
    327Multiemployer
health care plan 
PAMA
    
    
    
    
    
    
    270
    
    
    
    (270
    )
    
    
    
    
    
    
    261
    
    
    
    (261
    )Accrued pension
(postretirement)
benefit
    
    
    547
    
    
    
    270
    
    
    
    277
    
    
    
    467
    
    
    
    401
    
    
    
    66
 d. Financial expense, net BR CL requires interest to be shown as part of operating income. Under US
GAAP interest income (expense) would be shown after operating income. F-38




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) e. Permanent assets BR CL has a class of assets called permanent assets. This is the
collective name for all assets on which indexation adjustments were calculated
until December 31, 1995 in the corporate and fiscal law accounts of Brazilian
companies. Under US GAAP the assets in this classification would be noncurrent
assets. f. Monetary Restatement of 1996 and 1997 The amortization of the asset appreciation, which originated from the
inflation accounting during 1996 and 1997, when Brazil was still considered as
high inflationary economy for US GAAP purposes, has been recognized as an
adjustment to income in the reconciliation to US GAAP. The loss related to
monetary restatement on disposals of such assets is classified for US GAAP
purposes as a component operating income. g. Items posted directly to shareholders equity Under BR CL various items are posted directly to shareholders equity,
which under US GAAP would be posted to the consolidated statements of
operations. The posting of such items to shareholders equity gives rise to
adjustments in the consolidated statements of changes in shareholders equity.
Since the original postings to the equity accounts would, under US GAAP, be
made directly to the consolidated statements of operations, the adjustment is
included in the reconciliation of the income differences between US GAAP and BR
CL. Deferred income tax effects of indexation adjustments and fiscal
incentives are adjusted in Companys financial statements for US GAAP purposes. h. Taxes on income The Company fully accrues for deferred income taxes on temporary
differences between tax and accounting records. The existing policies for
providing for deferred taxes are substantially in accordance with SFAS No.109,
Accounting for Income Taxes, except with respect to social contribution rate
adopted, as explained below:  
    
    Under BR CL, at December 31,1999 the Company recognized a change in
the combined tax rate from 33% to 34% based on a provisional measure
for an increase in the social contribution rate from 8% to 9%
effective January 1, 2000. Provisional measures are temporary and must
be re-approved every 30 days or they lapse. Under SFAS 109, the
provisional measures discussed are not considered to be enacted law.
Therefore, for 2001 the combined deferred tax effect calculated on
temporary differences would be 33%, not 34%. For 2003 and 2002, no
difference related to the social contribution tax rate was considered
as the provisional measure was approved in Law 10,637, as of December
30, 2002.  
    
    Under BR CL, the deferred taxes are presented gross. Under U.S. GAAP,
the deferred taxes are presented net. i. Earnings per share Under BR CL, net income (loss) per share is calculated based on the number
of shares outstanding at the balance sheet date. In these consolidated
financial statements, information is disclosed per lot of one thousand shares,
because this is the minimum number of shares that can be traded on the
Brazilian stock exchanges. Each American Depositary Share (ADS) is
equivalent to fifty thousand of preferred shares. In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. This statement became effective December 15,
1997, and provides computation, presentation and disclosure requirements for
earnings per share. Since the preferred and common stockholders have different dividend,
voting and liquidation rights, basic and diluted earnings per share have been
calculated using the two-class method. The two-class method is an
earnings allocation formula that determines earnings per share for preferred
and common stock according to the dividends to be paid as required by the
Companys by-laws and participation rights in undistributed earnings. Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred
shareholders and dividing net income available to common shareholders by the
number of common shares outstanding. Net income available to preferred
shareholders is the sum of the F-39




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) preferred stock dividends (a minimum of 6% of preferred capital or 10% higher
than those attributed to common shares, whichever is higher, as defined in the
Companys by-laws) and the preferred shareholders portion of undistributed net
income. Undistributed net income is computed by deducting total dividends (the
sum of preferred and common stock dividends) from net income. Undistributed
net income is allocated to preferred shares 10% higher than that attributed to
common shares on a pro rata basis. Total dividends are calculated as described
in Note 26. On December 31, 2003, 2002 and 2001, the Company was obligated to
issue shares to the controlling shareholder for the amount of the tax benefit
realized on the amortization of the intangible transferred in the merger. The
number of shares issuable are considered dilutive as defined in SFAS No. 128
and have been included in the weighted average common shares  diluted
presented below. The number of shares issuable was computed considering the
balance of the special premiums reserve (R$124,344 in 2003, 2002 and 2001 by
corporate law) by the average price of common shares traded on the São Paulo
Stock Exchange (Bovespa) on the last 20 trading days of each year. Since the
Company had net losses for the years ended December 31, 2003 and 2002, the
Company did not pay any dividends for these years. Additionally, the
contingently issued shares described above were not considered in the
calculation of loss per share for the years ended December 31, 2003 and 2002
because the effect of the contingently issuable shares would have been
anti-dilutive. The weighted-average number of common and preferred shares used in
computing basic and diluted earnings per share for 2003, 2002 and 2001 was as
follows: 2003
    
    2002
    
    2001Weighted average
(thousand) common shares
- basic
    
    
    166,007,792
    
    
    
    166,008,044
    
    
    
    166,008,044Weighted average
(thousand) common shares
- diluted
    
    
    325,981,220
    
    
    
    359,088,789
    
    
    
    253,574,241Weighted average (thousand) preferred
shares basic
and diluted
    
    
    313,386,092
    
    
    
    313,436,995
    
    
    
    313,436,995
 The Companys preferred shares are non-voting, except under certain
limited circumstances, and are entitled to a preferential, noncumulative
dividend and to priority over the common shares in the event of liquidation of
the Company. In 2001, dividends of R$ 11,979 were paid only to preferred
shareholders. j. Revenue Recognition For U.S. GAAP, the Company recognizes service revenue as the services are
provided. Prepaid service revenue is deferred and amortized based on
subscriber airtime usage. Sales of handsets along with the related cost of the
handsets are amortized over their estimated useful life. The excess of the
cost over the amount of deferred revenue related to handset sales is recognized
on the date of sale. (i) Value-added and other sales taxes Under BR CL, these taxes are recorded in revenue net of the related tax
expense. Under U.S. GAAP, these taxes are recorded gross as revenue and related
cost of services and goods. Accordingly, this difference in accounting has no
impact in net income (loss) or in shareholders equity. The impact of this
difference under US GAAP was to increase both revenues and costs of services
and goods by R$119,436, R$112,259 and R$90,922 for 2003, 2002 and 2001,
respectively, for U.S. GAAP as compared to amounts reported under BR CL. (ii) Deferred revenue sales of handsets Under BR CL, revenues and costs related to handset sales, including applicable
value added and other sales taxes, are recognized when sold. Under U.S. GAAP,
revenue on sales of handsets along with the related cost of the handset,
including applicable value added and other sales taxes, are amortized over
their estimated useful life. Any excess of the cost over the amount of
deferred revenue related to handset sales is recognized on the date of sale.
As substantially all of the Companys handsets are sold below cost, this
difference in accounting policy had no impact on net income (loss) or in
shareholders equity. The unamortized balance of deferred handset revenue and
the related balance of unamortized deferred handset costs was R$49,216,
R$48,148 and F-40




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) R$32,207 at December 31, 2003, 2002 and 2001, respectively. The
impact of this difference under U.S. GAAP
was to decrease both net revenues and cost of services and goods by R$798,
R$16,211 and R$8,645 at December 31, 2003, 2002 and 2001, respectively. k. Fistel fee Beginning in 1999, the Fistel (Telecommunication Inspection Fund) fee,
assessed on each activation of a new cellular line, is being deferred and
amortized over the customers estimated subscription period for BR CL. For US
GAAP purposes, this tax would be charged directly to the consolidated statement
of operations. Therefore, deferred Fistel taxes on activation fees at December
31, 2003, 2002 and 2001 is being adjusted in the reconciliation of the income
differences between US GAAP and BR CL. l. Computer software developed for internal use Under BR CL, the costs incurred during the computer software preliminary
project stage are capitalized and amortized on a straight-line basis over a
period of five to ten years. Under US GAAP, the costs incurred with computer
software preliminary project stage must meet specific characteristics to be
capitalized. The effect of these different criteria for capitalizing computer
software is adjusted in the reconciliation of the income differences between US
GAAP and BR CL. m. Derivative instruments As mentioned in Note 23, the Subsidiaries have entered into foreign
currency swap contracts for long-term agreements at various exchange rates, in
the amount of US$85,184 thousands (US$112,470 thousands at December 31, 2002).
Under BR CL, foreign currency swap contracts are recorded at the notional
amount multiplied by the terms of the contract as if they had been settled at
the balance sheet date. In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which was
subsequently amended by SFAS Nos. 137 and 138. SFAS No. 133 must be applied to
all derivative instruments and certain derivative instruments embedded in
hybrid instruments and requires that such instruments be recorded in the
balance sheet either as an asset or liability measured at its fair value.
Changes in the derivatives fair value are recognized currently in earnings
unless specific hedge accounting criteria are met. The adoption of SFAS No. 133
on January 1, 2000, did not have a material effect on the Companys financial
statements. If the derivative is designated as a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives that are considered to be
effective, as defined, will either offset the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or will be
recorded in other comprehensive income until the hedged item is recorded in
earnings. Any portion of a change in a derivatives fair value that is
considered to be ineffective, as defined, must be immediately recorded in
earnings. Any portion of a change in a derivatives fair value that the Company
has elected to exclude from its measurement of effectiveness, such as the
change in time value of option contracts, will also be recorded in earnings. For US GAAP purposes, the Subsidiaries have not designated their
derivative as accounting hedges, as defined by SFAS No. 133, and consequently,
the Subsidiaries derivative contracts. US GAAP requires that financial
instruments of this nature be recorded at fair value with resulting changes in
fair value recorded through earnings. n. Purchase Accounting As described in Note 30, on November 29, 2000, the Holding Company
acquired the minority interests in its Subsidiaries in a transaction involving
the exchange of shares. Under BR CL, this transaction was recorded at the book
value of the minority interests acquired. Under US GAAP, the acquisition of
minority interests was recorded using the purchase method of accounting
pursuant to APB 16, Business Combinations, and the related interpretations.
Under US GAAP, the purchase price was determined based on the market price of
the Holding Companys shares for a reasonable period before and after the date
the terms of the acquisition were agreed to and announced publicly. The excess
purchase price over the book value of the minority interests F-41




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) acquired was
recorded based on managements estimate of the fair values of the underlying
assets and liabilities as follows: Fixed assets
    
    
    7,215Subscriber base intangible asset
    
    
    2,382Concession
    
    
    33,657Deferred income tax effects
    
    
    (14,274
    )Excess purchase price under US GAAP
    
    
    28,980
 The subscriber base intangible asset is being amortized over the estimated
contractual relationship with subscribers, representing a period of 48 months. The concession in being amortized based on the remaining concession period
of the operating companies (until June 2008 for Telebahia Celular S.A. and
December 2008 for Telergipe Celular S.A.). o. Stock compensation  Telefónica Móviles Stock Plan As described in Note 33, in May, 2001, Telefónica Móviles, S.A.
(Telefónica Móviles) launched a stock option plan based on Telefónica
Móviles stock (the Plan) that covered the employees of the Company.
Pursuant to the Plan, between May 20 and July 20, 2002, Telefónica Móviles
granted a total of 231,016 stock options to the Companys employees, vesting
over a four-year period. The options were granted in Series A, B and C, with
exercise prices of 11.00 Euros, 16.50 Euros and 7.23 Euros, respectively. The
total options granted to each employee consisted of 25% Series A options, 25%
Series B options, and 50% Series C options. The market price of Telefónica
Móviles stock as traded at the Madrid Stock Exchange was 8.28 Euros on
December 31, 2003. The Plan also gives the Companys employees the option to
receive in cash, the appreciation in the market price of Telefónica Móviles
stock over the respective exercise price. In accordance with the conditions of the Options Program for the shares of
Telefónica Móviles S.A. (MOS Program), the Companys employees failed to
qualify due to said programs basic premise, which is the holding by Telefónica
Móviles S.A. of controlling interest in the company in which the employees are
enrolled. Accordingly, on December 31, 2003 the existing options were settled
in advance. The adjusted settlement value was calculated for 50% of the C series
options considering the closing quotation on January 2, 2004 of Telefônica
Moviles S.A. shares, converted after average exchange at the date of payment. Under BR CL, the Company is not obliged to account for the effects of the
plan offered to the employees by the major stockholder and, therefore, no
effects were recorded in the financial statements of the Company. Although the Telefonica Móviles, rather than the Company offered the
shares to employees, under U.S. GAAP, the deemed compensation amount is pushed
down to the Company in accordance with the number of shares purchased by each
employee of Tele Leste Celular and its subsidiaries. Reconciliation of the income differences between US GAAP and BR CL 2003
    
    2002
    
    2001Consolidated net loss under BR CL
    
    
    (42,662
    )
    
    
    (5,107
    )
    
    
    6,020Add (deduct):Different accounting criteria for:Amortization of monetary
restatement of 1996 and
1997
    
    
    (6,373
    )
    
    
    (6,036
    )
    
    
    (6,052
    )Loss on disposal of assets
monetarily restated in 1996
and
1997
    
    
    (43
    )
    
    
    (3
    )
    
    
    (2
    )
 F-42




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 2003
    
    2002
    
    2001Capitalized interest
    
    
    508
    
    
    
    1,200
    
    
    
    452Amortization of capitalized
interest
    
    
    156
    
    
    
    275
    
    
    
    383Depreciation of
donations
    
    
    59
    
    
    
    
    
    
    
    Purchase accounting:Depreciation of fixed
assets adjustment
    
    
    (1,585
    )
    
    
    (1,585
    )
    
    
    (1,585
    )Amortization of
concession
    
    
    (4,440
    )
    
    
    (4,440
    )
    
    
    (4,440
    )Amortization of
intangible assets
    
    
    (600
    )
    
    
    (600
    )
    
    
    (600
    )Pension and other
postretirement benefits
    
    
    (211
    )
    
    
    (322
    )
    
    
    (14
    )Fistel fee
    
    
    (790
    )
    
    
    1,558
    
    
    
    3,629Computer software developed
for internal use
    
    
    711
    
    
    
    (154
    )
    
    
    (910
    )Derivative instruments
    
    
    67,360
    
    
    
    (70,133
    )
    
    
    17,018Stock compensation  MOS
Program
    
    
    (407
    )
    
    
    
    
    
    
    Deferred income tax effects of
above adjustments
    
    
    (18,159
    )
    
    
    26,707
    
    
    
    (2,601
    )Difference in social
contribution tax rate
    
    
    
    
    
    
    2,628
    
    
    
    2,804US GAAP net income (loss)
    
    
    (6,476
    )
    
    
    (56,012
    )
    
    
    14,102
 Net income (loss) per thousand shares in accordance with US GAAP (in thousands) 2003
    
    2002
    
    2001Loss per share -
Common shares
(basic and
diluted)
    
    
    (0.01
    )
    
    
    (0.12
    )
    
    
    Weighted average
(thousand) common
shares -
basic
    
    
    166,007,792
    
    
    
    166,008,044
    
    
    
    166,008,044Weighted average
(thousand) common
shares - diluted
    
    
    166,007,792
    
    
    
    166,008,044
    
    
    
    166,008,044
 2003
    
    2002
    
    2001Earnings (Loss) per share -
Preferred shares (basic and
diluted)
    
    
    (0.01
    )
    
    
    (0.12
    )
    
    
    0.04Weighted average (thousand)
preferred shares basic and
diluted
    
    
    313,386,092
    
    
    
    313,436,995
    
    
    
    313,436,995
 F-43




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Reconciliation of the shareholders equity differences between US GAAP and BR CL 2003
    
    2002Total shareholders equity under BR
CL
    
    
    401,250
    
    
    
    443,011Add (deduct):Different accounting criteria for:Monetary restatement of 1996 and
1997
    
    
    47,353
    
    
    
    47,428Amortization of monetary restatement of 1996 and
1997
    
    
    (40,390
    )
    
    
    (34,049
    )Capitalized interest
    
    
    (438
    )
    
    
    (946
    )Depreciation of capitalized interest
    
    
    1,756
    
    
    
    1,600Donations for investments
    
    
    (1,352
    )
    
    
    (416
    )Amortization of donations
    
    
    59
    
    
    
    Purchase accounting:Fixed assets adjustment
    
    
    7,215
    
    
    
    7,215Depreciation of fixed assets adjustment
    
    
    (4,872
    )
    
    
    (3,287
    )Intangible assets
    
    
    36,039
    
    
    
    36,039Amortization on intangible assets
    
    
    (15,540
    )
    
    
    (10,500
    )Pension and other postretirement benefits
    
    
    (277
    )
    
    
    (66
    )Fistel fee
    
    
    (4,799
    )
    
    
    (4,009
    )Computer software developed for internal use
    
    
    (615
    )
    
    
    (1,326
    )Derivatives instruments
    
    
    20,617
    
    
    
    (46,743
    )Deferred tax effects of above adjustments
    
    
    (15,217
    )
    
    
    3,080Total shareholders equity under US GAAP
    
    
    430,789
    
    
    
    437,031
 Changes in shareholders equity in accordance with US GAAP 2003
    
    2002
    
    2001Shareholders equity under US GAAP as of ending of the year
    
    
    437,031
    
    
    
    502,839
    
    
    
    488,737Unclaimed dividends
    
    
    
    
    
    
    2,183
    
    
    
    Dividends approved during the year
    
    
    
    
    
    
    (11,979
    )
    
    
    Net income (loss) for the year
    
    
    (6,476
    )
    
    
    (56,012
    )
    
    
    14,102Purchase of treasury shares
    
    
    (35
    )
    
    
    
    
    
    
    Stock compensation  MOS program
    
    
    269
    
    
    
    
    
    
    
    430,789
    
    
    
    437,031
    
    
    
    502,839
 US GAAP supplementary information Reconciliation of operating income (loss) under BR CL
          to operating income (loss) under US GAAP- 2003
    
    2002
    
    2001BR CL operating income
(loss)
    
    
    (42,755
    )
    
    
    (3,830
    )
    
    
    9,067Reversal of financial expense,
net
    
    
    30,286
    
    
    
    32,811
    
    
    
    24,111US GAAP adjustments-Amortization of monetary restatement of 1996 and
1997
    
    
    (6,373
    )
    
    
    (6,036
    )
    
    
    (6,052
    )Loss on disposal of assets monetarily restated in 1996 and
1997
    
    
    (43
    )
    
    
    (3
    )
    
    
    (2
    )Amortization of capitalized
interest
    
    
    156
    
    
    
    275
    
    
    
    383Purchase
accounting-Depreciation of fixed assets
adjustment
    
    
    (1,585
    )
    
    
    (1,585
    )
    
    
    (1,585
    )Amortization of subscriber base intangible
asset
    
    
    (600
    )
    
    
    (600
    )
    
    
    (600
    )Amortization of
concession
    
    
    (4,440
    )
    
    
    (4,440
    )
    
    
    (4,440
    )Deferred Fistel tax on activation
fee
    
    
    (790
    )
    
    
    1,558
    
    
    
    3,629Computer software developed for internal
use
    
    
    711
    
    
    
    (154
    )
    
    
    (910
    )Stock option compensation  MOS
Plan
    
    
    (407
    )
    
    
    
    
    
    
    Pension and other postretirement
benefits
    
    
    (211
    )
    
    
    (322
    )
    
    
    (14
    )Depreciation of
donations
    
    
    59
    
    
    
    
    
    
    
    US GAAP operating
income(loss)
    
    
    (25,992
    )
    
    
    17,674
    
    
    
    23,587
 F-44




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##### Table of Contents



TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Reconciliation of net revenues and costs under BR CL
     to net revenues and costs under US GAAP- 2003
    
    2002
    
    2001BR CL net
revenues
    
    
    441,267
    
    
    
    431,395
    
    
    
    386,132Reclassification to cost of services and goods sold
taxes on
sales
    
    
    119,436
    
    
    
    112,259
    
    
    
    90,922US GAAP adjustments-Deferred revenues on handset sales, net of
amortization
    
    
    (798
    )
    
    
    (16,211
    )
    
    
    (8,645
    )US GAAP net revenues
    
    
    559,905
    
    
    
    527,443
    
    
    
    468,409
 2003
    
    2002
    
    2001BR CL cost of services and
goods
    
    
    (256,259
    )
    
    
    (241,362
    )
    
    
    (202,342
    )Reclassification
from net revenues  taxes on
sales
    
    
    (119,436
    )
    
    
    (112,259
    )
    
    
    (90,922
    )Reclassification
from selling expense  Rewards program
expense
    
    
    
    
    
    
    (1,878
    )
    
    
    (1,761
    )US GAAP
adjustments-Amortization of monetary restatement of 1996 and
1997
    
    
    (6,373
    )
    
    
    (6,036
    )
    
    
    (6,052
    )Loss on disposal of assets monetarily restated in 1996 and
1997
    
    
    (43
    )
    
    
    (3
    )
    
    
    (2
    )Amortization of capitalized
interest
    
    
    156
    
    
    
    275
    
    
    
    383Purchase
accounting-Depreciation of fixed assets
adjustment
    
    
    (1,585
    )
    
    
    (1,585
    )
    
    
    (1,585
    )Amortization of subscriber base intangible
asset
    
    
    (600
    )
    
    
    (600
    )
    
    
    (600
    )Amortization of
concession
    
    
    (4,440
    )
    
    
    (4,440
    )
    
    
    (4,440
    )Deferred Fistel tax on activation
fee
    
    
    (790
    )
    
    
    1,558
    
    
    
    3,629Stock option compensation  MOS
Plan
    
    
    (407
    )
    
    
    
    
    
    
    Pension and other postretirement
benefits
    
    
    (211
    )
    
    
    (322
    )
    
    
    (14
    )Deferred costs on handset sales, including taxes on sales, net of
amortizations during the
year
    
    
    798
    
    
    
    16,211
    
    
    
    8,645US GAAP cost of
services
    
    
    (389,190
    )
    
    
    (350,441
    )
    
    
    (295,061
    )US GAAP gross
profit
    
    
    170,715
    
    
    
    177,002
    
    
    
    173,348
 2003
    
    2002Total assets
    
    
    876,690
    
    
    
    947,743Property, plant and equipment
    
    
    895,221
    
    
    
    846,457Accumulated depreciation
    
    
    (529,679
    )
    
    
    (406,572
    )Net property, plant and equipment
    
    
    365,542
    
    
    
    439,885
 F-45




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) 35. Additional disclosures required by US GAAP a. Pension and postretirement benefits A summary of the liability as of December 31, 2003 and 2002 for the
Companies active employees defined benefit pension plan (PBS- Tele Leste) is as
follows: Reconciliation of Funded Status PBS  Tele Leste 2003
    
    2002Accumulated benefit obligation:Vested
    
    
    769
    
    
    
    806Nonvested
    
    
    692
    
    
    
    677Total
    
    
    1,461
    
    
    
    1,483Projected benefit obligation
    
    
    1,742
    
    
    
    1,767Fair value of plan assets
    
    
    2,162
    
    
    
    1,627Funded status
    
    
    (420
    )
    
    
    140Unrecognized gains
    
    
    1,016
    
    
    
    384Unrecognized net transition obligation
    
    
    (49
    )
    
    
    (57
    )Accrued pension cost
    
    
    547
    
    
    
    467
 Weighted-average assumptions used to determine benefit obligations 2003
    
    2002Discount rate
    
    
    11.30
    %
    
    
    10.24
    %Rate of compensation increase
    
    
    7.10
    %
    
    
    6.08
    %
 Disclosure of net periodic pension cost 2003
    
    2002Service cost (net of employee
contributions)
    
    
    140
    
    
    
    117Interest cost on PBO
    
    
    169
    
    
    
    143Expected return on assets
    
    
    (162
    )
    
    
    (124
    )Amortization of initial
transition obligation
    
    
    8
    
    
    
    8Amortization of gains
    
    
    12
    
    
    
    (5
    )Net periodic pension cost
    
    
    167
    
    
    
    139
 Weighted-average assumptions used to determine net cost 2003
    
    2002Discount rate
    
    
    10.24
    %
    
    
    6,00
    %Rate of compensation
    
    
    6.08
    %
    
    
    2.00
    %Expected return on plan assets
    
    
    10.24
    %
    
    
    6.00
    %
 Change in accrued pension cost 2003
    
    2002Accrued pension cost at beginning of year
    
    
    467
    
    
    
    424Net periodic pension cost
    
    
    167
    
    
    
    139Actual contributions
    
    
    (87
    )
    
    
    (96
    )Accrued pension cost at end of year
    
    
    547
    
    
    
    467
 F-46




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Change in benefit obligation PBOBenefit obligation at December 31, 2001
    
    
    1,498Service cost
    
    
    118Interest cost
    
    
    143Benefits payments and expenses
    
    
    (43
    )Liability experience loss (gain)
    
    
    51Benefit obligation at December 31, 2002
    
    
    1,767Service cost
    
    
    147Interest cost
    
    
    169Benefits payments and expenses
    
    
    (48
    )Liability experience loss (gain)
    
    
    (293
    )Benefit obligation at December 31, 2003
    
    
    1,742
 Expected Cash Flows The expected employer contributions for 2004 are estimated
to be R$2. Change in plan assets 2003
    
    2002Plan assets at beginning of year
    
    
    1,627
    
    
    
    1,245Actual contributions
    
    
    96
    
    
    
    101Actual distributions and expenses
    
    
    (48
    )
    
    
    (43
    )Actual return on plan assets
    
    
    487
    
    
    
    324Plan assets at end of year
    
    
    2,162
    
    
    
    1,627
 Asset allocation The asset allocation for the Companys pension plans at the end of 2003
and 2002, and the target allocation for 2004, by asset category, follows. Percentage of Plan AssetsTarget Allocation for
    
    at Year End2004
    
    2003
    
    2002Asset categoryEquity
securities
    
    
    4
    %
    
    
    19
    %
    
    
    12
    %Loans
    
    
    2
    %
    
    
    1
    %
    
    
    2
    %Fixed
income
    
    
    94
    %
    
    
    80
    %
    
    
    86
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 The plan investment strategy is based on a long-term macroeconomic
scenario. This scenario presents low Brazils risk, moderate economic growth,
stable inflation and exchange rates, and moderate interest rates. The devised asset mix is the same for both plans (PBS and Visão) and is
composed by fixed income, equities and loans. The fixed income target
allocation ranges form 65% to 100%, equities target allocation is up to 35% and
loans, up to 5%. The 2004 expected return for this mix is around 6.3% and 6.5%. The expected return on plan assets is the average after-tax return of each
asset category weighted by target allocations. Asset categories returns are
based on long-term macroeconomic scenarios. F-47




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) The actuarial assumptions used in 2003 and 2002 were as follows: 2003
    
    2002Discount rate for determining projected benefit
obligations
    
    
    11.30
    %
    
    
    10.24
    %Rate of increase in compensation levels
    
    
    7.10
    %
    
    
    6.08
    %Benefit adjustments
    
    
    5.00
    %
    
    
    4.00
    %Expected long-term rate of return on plan assets
    
    
    11.83
    %
    
    
    10.24
    %Inflation
    
    
    5.00
    %
    
    
    4.00
    %Number of active participants  PBS  Tele Leste
    
    
    4
    
    
    
    4Number of retirees and beneficiaries  PBS  Tele Leste
    
    
    7
    
    
    
    7
 A summary of the Sistel pension plan as of December 31, 2003 and 2002 for
the multiemployer portion (inactive employees pension plan)  PBS-A, is as
follows: Pension benefit plan  PBS-A 2003
    
    2002Funded status:Accumulated benefit obligation
Vested
    
    
    3,484,245
    
    
    
    2,922,542Projected benefit obligation
    
    
    3,484,245
    
    
    
    2,922,542Fair value of plan assets
    
    
    4,163,102
    
    
    
    3,650,789Funded status
    
    
    (678,857
    )
    
    
    (728,247
    )
 A summary of the postretirement benefits plan (health care plan  PAMA),
which remains as multiemployer plan, is as follows: Health Care Plan  PAMA 2003
    
    2002Funded Status:Accumulated postretirement benefit obligation:Active participants
    
    
    25,678
    
    
    
    46,107Inactive participants
    
    
    783,525
    
    
    
    867,041809,203
    
    
    
    913,148Fair value of plan assets
    
    
    456,509
    
    
    
    405,732Obligations in excess of plan assets
    
    
    352,694
    
    
    
    507,416
 b. Intangible assets subject to amortization Following is a summary of the Companys intangible assets subject to
amortization under US GAAP: 2003
    
    2002Subscriber
    
    
    
    
    
    
    
    
    
    SubscriberSoftware
    
    Concession
    
    base
    
    Software
    
    Concession
    
    baseGross
    
    
    67,305
    
    
    
    33,657
    
    
    
    2,382
    
    
    
    59,559
    
    
    
    33,657
    
    
    
    2,382Accumulated amortization
    
    
    (31,658
    )
    
    
    (13,690
    )
    
    
    (1,850
    )
    
    
    (17,547
    )
    
    
    (9,250
    )
    
    
    (1,250
    )Net
    
    
    35,647
    
    
    
    19,967
    
    
    
    532
    
    
    
    42,012
    
    
    
    24,407
    
    
    
    1,132
 Aggregate amortization expense for the above intangible assets amounted to
R$20,009, R$13,278 and R$9,416 for the years ended December 31, 2003, 2002 and
2001, respectively. The estimated aggregate amortization expense for the next five years is as
follows: F-48




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Amount2004
    
    
    18,4332005
    
    
    17,9012006
    
    
    13,1652007
    
    
    4,4402008
    
    
    2,207
 c. Concentration of risks The credit risk with respect to trade accounts receivable is diversified.
The Companies continually monitor the level of trade accounts receivable and
limit the exposure to bad debts by cutting access to originate calls if any
invoice is 15 days or more past due. Exceptions comprise telephone services
that must be maintained for reasons of safety or national security. In conducting its businesses, Telebahia Celular S.A. and Telergipe Celular
S.A. are fully dependent upon the cellular telecommunications concession
[authorization] as granted by the Federal Government. Approximately 15% of all employees are members of state labor unions
associated with either the Federação Nacional dos Trabalhadores em
Telecomunicações(Fenattel), or with the Federação Interestadual dos
Trabalhadores em Telecomunicações(Fittel). The Companies negotiate new
collective labor agreements every year with the local union. The collective
agreements currently in force expire on December, 2004. There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that could, if
suddenly eliminated, severely impact the Companies operations. d. New accounting pronouncements FIN No. 46  Consolidation of Variable Interest Entities  an interpretation of
ARB No. 51 In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(FIN 46R or the Interpretation). FIN 46R clarifies the application of ARB
No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest entities
(VIEs), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entitys expected
losses, receive a majority of the entitys expected residual returns, or both. Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003, (b)
eased some implementation problems, and (c) added new scope exceptions. FIN 46R
deferred the effective date of the Interpretation for public companies, to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the provisions of the Interpretation
to entities that were previously considered special-purpose entities under
the FASB literature prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003. The Company does not
anticipate that the adoption of FIN 46R will have a material impact on its
financial position, cash flows and results of operations. SFAS No. 132 (Revised 2003)  Employers Disclosures about Pensions and Other
Postretirement Benefits In December 2003, the FASB issued SFAS No. 132, Revised 2003, (SFAS
132R), which requires an entity to make additional disclosures about pensions
and other postretirement benefits. These disclosures include information
describing the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows and components of net periodic benefit cost. SFAS
132R would be effective for any domestic (Brazilian) plans beginning with
fiscal years ending after December 15, 2003 and any foreign (non-Brazilian)
plans beginning with fiscal years ending after June 15, 2004. The Company
adopted SFAS 132R for all its plans in effect on Form 20-F for the year ending
December 31, 2003, except for the information about the benefits F-49




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) expected to be paid in each of the next five years, and in aggregate for the
five fiscal year thereafter, which disclosures requirements will be effective
for fiscal years ending after June 15, 2004. SAB No. 104  Revenue Recognition In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is currently following the
guidance of SAB 104. EITF 00-21  Accounting for Revenue Arrangements with Multiple Element
Deliverables In November 2002, the Emerging Issues Task Force (EITF), of the FASB
reached a consensus on EITF 00-21. EITF 00-21 provides guidance on how to
account for arrangements that may involve multiple revenue-generating
activities, for example, the delivery of products or performance of services,
and/or rights to use other assets. The requirements of EITF 00-21 will be
applicable to agreements entered into for periods beginning after 15 June 2003
and will therefore first apply to the Company for any arrangements entered into
from 1 April 2004. The adoption of this EITF had no impact on the Companys
financial position or results of operations. EITF Issue No. 01-08  Determining Whether an Arrangement Contains a Lease In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to clarify
the requirements of identifying whether an arrangement should be accounted for
as a lease at its inception. The guidance in the consensus is designed to
mandate reporting revenue as rental or leasing income that otherwise would be
reported as part of product sales or service revenue. EITF Issue No. 01-08
requires both parties to an arrangement to determine whether a service contract
or similar arrangement is, or includes, a lease within the scope of SFAS No.
13, Accounting for Leases. The Company does not anticipate that the adoption
of EITF Issue No. 01-08 will have a material effect on its consolidated results
of operations, cash flows or financial position. EITF Issue No. 03-11  Reporting Realized Gains and Losses on Derivative
Instruments That Are Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for Trading
Purposes In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that
determining whether realized gains and losses on derivative contracts not held
for trading purposes should be reported on a net or gross basis is a matter of
judgment that depends on the relevant facts and circumstances and the economic
substance of the transaction. In analyzing the facts and circumstances, EITF
Issue No. 99-19, and Opinion No. 29, Accounting for Nonmonetary Transactions,
should be considered. EITF Issue No. 03-11 is effective for transactions or
arrangements entered into after September 30, 2003. The Company does not
anticipate that the adoption of EITF Issue No. 03-11 will have a material
effect on its consolidated results of operations, cash flows or financial
position. Amendment of Statement 133 on Derivative Instruments and Hedging Activities In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In the opinion of our and Tele
Lestes management the adoption of this rule has not had an effect on net
income or shareholders equity. F-50




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TELE LESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of reais, unless otherwise indicated) Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity In April 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
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). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. In the opinion
of our and Tele Lestes management, the adoption of the rule has not had effect
on net income or shareholders equity. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * F-51