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As filed with the Securities and Exchange Commission on June 30, 2004   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 1934
 OR þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 OR o
    
    TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                  to Commission File Number 1-14483   TELEMIG CELULAR PARTICIPAÇÕES S.A.  TELEMIG CELLULAR HOLDING COMPANY  THE FEDERATIVE REPUBLIC OF BRAZIL    SCN Quadra 4, Bloco B, Ed. Centro Empresarial Varig, Torre Oeste, Sala 702-A
70714-000 Brasilia-DF, 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 registeredPreferred Shares without par value
    
    New York Stock Exchange*Depositary Shares, each representing
    
    New York Stock Exchange20,000 Preferred Shares
   *
    
    Not for trading, but only in connection with the registration of American Depositary Shares representing those
Preferred Shares, on the New York Stock Exchange. Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close
of the period covered by the annual report: Common Shares, without par value:
    
    
    128,963,300,563Preferred Shares, without par value:
    
    
    217,788,636,948
 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 þ            Noo Indicate by check mark which financial statement item the registrant has elected to follow: Item 17 o Item 18 þ




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TABLE OF CONTENTS  PART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORSITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLEITEM 3. KEY INFORMATIONITEM 4. INFORMATION ON THE COMPANYITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTSITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEESITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSITEM 8. FINANCIAL INFORMATIONITEM 9. THE OFFER AND LISTINGITEM 10. ADDITIONAL INFORMATIONITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSITEM 15. DISCLOSURE CONTROLS AND PROCEDURESITEM 16PART IIIITEM 17. FINANCIAL STATEMENTSITEM 18. FINANCIAL STATEMENTSITEM 19. EXHIBITSGLOSSARY OF TELECOMMUNICATIONS TERMSSIGNATURESREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOME            AND COMPREHENSIVE INCOMECONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSBYLAWSLETTER OF AUTHORIZATIONTERM OF CONCESSION OF AUTHORIZATIONCODE OF ETHICSCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION    Table of Contents  TABLE OF CONTENTS PagePART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    4ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    4ITEM 3. KEY INFORMATION
    
    
    4ITEM 4. INFORMATION ON THE COMPANY
    
    
    11ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    23ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    35ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    40ITEM 8. FINANCIAL INFORMATION
    
    
    41ITEM 9. THE OFFER AND LISTING
    
    
    46ITEM 10. ADDITIONAL INFORMATION
    
    
    50ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    67ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    68PART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    68ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    68ITEM 15. DISCLOSURE CONTROLS AND PROCEDURES
    
    
    68ITEM 16.
    
    
    69PART IIIITEM 17. FINANCIAL STATEMENTS
    
    
    70ITEM 18. FINANCIAL STATEMENTS
    
    
    71ITEM 19. EXHIBITS
    
    
    72GLOSSARY OF TELECOMMUNICATIONS TERMS
    
    
    74




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INTRODUCTION Telemig Celular Participações S.A., a corporation organized under the laws
of the Federative Republic of Brazil, is referred to in this annual report as
the Registrant. Telemig Celular S.A. is the Registrants operating
subsidiary and is referred to in this annual report as Telemig Celular, and,
together with the Registrant, as we, us and our unless the context
requires otherwise. References in this annual report to (i) to the real, reais and R$
are references to Brazilian reais(plural) and the Brazilian real(singular),
the currency of Brazil, (ii) U.S. dollars, dollars and US$ are references
to United States dollars, (iii) preferred shares and common shares are
references to the Registrants authorized and outstanding shares of non-voting
preferred shares, designated as ações preferenciaisand common shares,
designated as ações ordinárias, in each case without par value, (iv) ADSs are
references to the Registrants American Depositary Shares, each representing
20,000 preferred shares, (v) Commission are to the U.S. Securities and
Exchange Commission, (vi) CVM are to the Comissão de Valores Mobiliários, the
Brazilian securities commission, (vii) Central Bank are to the Banco Central
do Brasil,the Brazilian Central Bank, (viii) General Telecommunications Law
are to Lei Geral de Telecomunicações, as amended, which regulates the
telecommunications industry in Brazil, (ix) Anatel are to Agência Nacional de
Telecomunicações, the Brazilian independent telecommunication regulatory
agency, and (x) our region means the area covered by our authorization,
including the totality of the state of Minas Gerais, with the exception of its
westernmost part, corresponding to 93% of its municipalities and 91% of its
population. We are one of the companies formed as a result of the breakup of
Telecomunicações Brasileiras S.A.  Telebrás, or Telebrás, by the federal
government of Brazil in May 1998. Telemig Celular was formed in January 1998
to receive the cellular telecommunications operations of Telecomunicações de
Minas Gerais S.A., its predecessor, an operating company controlled by
Telebrás. References to Telemig Celulars operations prior to January 1998 are
to the cellular operations of its predecessor. See Item 4Information on the
CompanyHistorical Background. We have prepared our consolidated financial statements included in this
annual report in conformity with generally accepted accounting principles in
the United States, or U.S. GAAP, for the years 2001, 2002 and 2003 and they
have been audited by Ernst & Young Auditores Independentes S/S. Unless otherwise specified, data relating to the Brazilian
telecommunications industry included in this annual report was obtained from
Anatel. The Glossary of Telecommunications Terms that
begins on page 74
provides the definition of certain technical terms used in this annual report. FORWARD-LOOKING STATEMENTS This annual contains statements that may constitute forward-looking
statements. These include statements regarding our current expectations,
intentions and projections about future events and financial trends affecting
our business. These statements include, but are not limited to:  
    
    trends affecting our business, financial condition, revenues,
results of operations and prospects,
    
    any statements preceded by, followed by or that include the
words believes, expects, predicts, anticipates, intends,
estimates, should, may or similar expressions, and
    
    other statements contained in this annual report regarding
matters that are not historical facts. Because these statements are subject to uncertainty, actual results may
differ materially from those expressed or implied by these forward-looking
statements. Factors that could cause actual results to differ materially from
those contained in forward-looking statements include, but are not limited to:  
    
    the pursuit of business strategies that cause our business,
financial condition, revenues, results of operations or prospects to
change, including the migration of our network to GSM technology and
acquisitions or dispositions of assets or internal affiliates, 2




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
    
    governmental regulation and tax matters,
    
    inflation and changes in currency exchange rates,
    
    our ability to sustain or improve our performance,
    
    expectations and estimates of our management concerning
future capital expenditures, other investments to attract and retain
subscribers, financial performance, financing plans and the effects
of competition,
    
    competition in the Brazilian telecommunications industry,
    
    adverse legal or regulatory disputes,
    
    changes in regional, national and international business and
economic conditions, including inflation and currency devaluations,
    
    political, economic, regulatory and demographic developments
in Brazil generally and in the region in Brazil where we conduct our
business, and
    
    the factors discussed under Item 3DRisk Factors, which you
are urged to carefully review. You should not place undue reliance on these statements, which speak only
as of the date that they were made. These cautions should be considered in
connection with any written or oral forward-looking statements that we make. 3




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. Selected Financial Data The selected financial information presented below should be read in
conjunction with our consolidated financial statements as of December 31, 2002
and 2003 for the years ended December 31, 2001, 2002 and 2003, and the related
notes included in this annual report, as well as in Item 5Operating and
Financial Review and Prospects. U.S. GAAP Selected Financial Information Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Statement of operations data:Net revenues
    
    
    520,824
    
    
    
    744,261
    
    
    
    921,133
    
    
    
    1,008,203
    
    
    
    1,149,115Operating income
    
    
    45,487
    
    
    
    80,649
    
    
    
    199,448
    
    
    
    202,231
    
    
    
    236,694Cumulative effect of accounting
change
    
    
    
    
    
    
    
    
    
    
    5,325
    
    
    
    
    
    
    
    Net income
    
    
    13,736
    
    
    
    26,259
    
    
    
    87,214
    
    
    
    22,240
    
    
    
    215,583Basic and diluted income per
thousand common sharesBefore cumulative effect of
FAS 133
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.24
    
    
    
    0.07
    
    
    
    0.62Cumulative effect of FAS 133
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    Net income
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.26
    
    
    
    0.07
    
    
    
    0.62Basic and diluted income per
thousand preferred sharesBefore cumulative effect of
FAS 133
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.24
    
    
    
    0.07
    
    
    
    0.62Cumulative effect of FAS 133
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    Net income
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.26
    
    
    
    0.07
    
    
    
    0.62Dividends per thousand shares(1)
    
    
    0.14
    
    
    
    
    
    
    
    0.04
    
    
    
    0.07
    
    
    
    0.07Number of shares (in thousands)
    
    
    334,399,027
    
    
    
    334,746,033
    
    
    
    336,557,975
    
    
    
    340,431,374
    
    
    
    346,751,938Other financial data:Capital expenditures
    
    
    220,633
    
    
    
    228,323
    
    
    
    222,596
    
    
    
    73,800
    
    
    
    61,678
 As of December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003Balance sheet data:Cash and cash equivalents
    
    
    175,065
    
    
    
    278,376
    
    
    
    417,302
    
    
    
    585,999
    
    
    
    642,713Working capital
    
    
    18,520
    
    
    
    211,276
    
    
    
    382,657
    
    
    
    354,662
    
    
    
    556,075Total assets
    
    
    1,174,728
    
    
    
    1,419,980
    
    
    
    1,669,044
    
    
    
    1,858,461
    
    
    
    1,726,155Long-term debt (including
current portion)
    
    
    195,220
    
    
    
    467,440
    
    
    
    680,398
    
    
    
    849,994
    
    
    
    489,094Shareholders equity
    
    
    626,777
    
    
    
    666,614
    
    
    
    741,220
    
    
    
    739,075
    
    
    
    933,225
 4




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(1)
    
    For the period presented, dividends per preferred share were the same as dividends per common share and they were
calculated based upon the number of outstanding shares on the date the dividends were declared. Exchange Rates There are two principal foreign exchange markets in Brazil:  
    
    the commercial rate exchange market, or commercial market, and
    
    the floating rate exchange market. Most trade and financial foreign exchange transactions, including
transactions relating to the purchase or sale of preferred shares or the
payment of dividends with respect to preferred shares or ADSs, are carried out
on the commercial market at the applicable commercial market rate. Purchase of
foreign currencies in the commercial market may be carried out only through a
Brazilian bank authorized to buy and sell currency in that market. In both
markets, rates are freely negotiated but may be strongly influenced by Central
Bank intervention. Between March 1995 and January 1999, the Central Bank permitted the
gradual devaluation of the realagainst the U.S. dollar pursuant to an exchange
rate policy that established a band within which the real/U.S. dollar exchange
rate could fluctuate. Responding to pressure on the real, on January 13, 1999,
the Central Bank widened the foreign exchange band. When the pressure did not
ease, the Central Bank on January 15, 1999 allowed the realto float. Since
then, the reals high was R$1.4659 to the U.S. dollar on January 15, 1999 and
its low was R$3.9552 to the U.S. dollar on October 22, 2002. As of June 23,
2004, the commercial market rate for purchasing U.S. dollars was R$3.1260 to
U.S.$1.00. We can give no assurance that the realwill not again devalue
substantially. See Item 3DRisk Factors  Operating Results  Fluctuations in
the value of the realagainst the value of the U.S. dollar and other foreign
currencies may adversely affect our ability to service obligations payable in
or pegged to the U.S. dollar or other foreign currencies and could lower the
market value of our ADSs and the preferred shares. The following table sets forth information on the commercial market rate
for U.S. dollars for the periods and dates indicated. R$ per US$1.00Year
    
    Low
    
    High
    
    Average(1)
    
    Year-End1998
    
    
    1.1164
    
    
    
    1.2087
    
    
    
    1.1644
    
    
    
    1.20871999
    
    
    1.2078
    
    
    
    2.1647
    
    
    
    1.8514
    
    
    
    1.78902000
    
    
    1.7234
    
    
    
    1.9847
    
    
    
    1.8348
    
    
    
    1.95542001
    
    
    1.9357
    
    
    
    2.8007
    
    
    
    2.3532
    
    
    
    2.32042002
    
    
    2.2709
    
    
    
    3.9552
    
    
    
    2.9983
    
    
    
    3.53332003
    
    
    2.8219
    
    
    
    3.6623
    
    
    
    3.0600
    
    
    
    2.8892
   Source:Central Bank(1)
    
    Represents the average of the exchange rates on the last day of each month
during the relevant period. R$ per US$1.00Month
    
    Low
    
    HighOctober 2003
    
    
    2.8268
    
    
    
    2.9034November 2003
    
    
    2.8559
    
    
    
    2.9546December 2003
    
    
    2.8883
    
    
    
    2.9434January 2004
    
    
    2.8022
    
    
    
    2.9409February 2004
    
    
    2.9042
    
    
    
    2.9878March 2004
    
    
    2.8752
    
    
    
    2.9410April 2004
    
    
    2.8735
    
    
    
    2.9470May 2004
    
    
    2.9150
    
    
    
    3.1880June (through June 23)
    
    
    3.1120
    
    
    
    3.1650
   Source:Central Bank. B. Capitalization and Indebtedness Not applicable. 5




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C. Reasons for Offer and Use of Proceeds Not applicable. D. Risk Factors Our business, financial condition and results of operations could be
materially and adversely affected by any of the risks below. The trading price
of the ADSs could decline due to any one of these risks and you may lose all or
part of your investment. The risks described below are those that we currently
believe may materially affect us. Additional risks not presently known to us
or that we currently deem immaterial may also impair our business. 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 the business, financial condition,
revenues, results of operations and the market price of the ADSs and our
preferred shares. 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
included high interest rates, wage and price controls, currency devaluations,
capital controls, and limits on imports, among other things. Our business,
financial condition, revenues, results of operations and prospects may be
adversely affected by changes in government policies, as well as general
economic factors including:  
    
    currency fluctuations;
    
    inflation;
    
    price instability;
    
    energy policy;
    
    interest rate increases;
    
    liquidity of domestic capital and lending markets;
    
    changes in tax policy; and
    
    other political, diplomatic, social and economic developments in or affecting Brazil. At the end of 2002, Brazil elected a new president from the Labor Party,
Luís Inácio Lula da Silva. In the period leading up to his election and for a
time thereafter, there was substantial uncertainty relating to the policies
that the new government would pursue, including the potential implementation of
macroeconomic policies that differed significantly from those of the prior
administration. This uncertainty resulted in a lower level of confidence in
the Brazilian capital markets, contributing to the rapid devaluation of the
realagainst the U.S. dollar in that period. Although the new government has
not departed in any material way from previous policy, and the realregained
18.23% of its value against the U.S. dollar during 2003, there continues to be
concern about the policies of the Brazilian government. Uncertainty over
whether current policies will be continued or whether the Brazilian government
will adopt different policies in the future may contribute to economic
uncertainty in Brazil and to heightened volatility in the Brazilian capital
markets and securities issued abroad that are supported by Brazilian issuers,
such as ours ADSs. These and other future developments in the Brazilian
economy and governmental policies may adversely affect our business, operations
and the market price of the ADSs and our preferred shares. 6




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Inflation and government measures to curb inflation may contribute
significantly to economic uncertainty in Brazil and to heightened volatility in
the Brazilian securities market, which may adversely affect our business,
financial condition, revenues and results of operations. Brazil has historically experienced extremely high rates of inflation.
Inflation and certain government measures taken in the attempt to curb
inflation have had significant negative effects on the Brazilian economy.
Since 1994, when the Brazilian government introduced the realto replace the
cruzeiro realas the official currency of Brazil, 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 particular, the maintenance of a high interest
rate environment has adversely affected economic growth. Brazils general
price index, known as the IGP-DI, reflected inflation rates of 8.7% in 2003,
25.3% in 2002 and 10.4% in 2001. If Brazil experiences significant inflation,
we may be unable to increase the rates we charge to our customers in amounts
that are sufficient to cover inflation-based increases in our operating costs,
and our business, financial condition, revenues and results of operations may
be adversely affected as a consequence. Fluctuations in the value of the real against the value of the U.S. dollar
and other foreign currencies may adversely affect our ability to service
obligations payable in or pegged to the U.S. dollar or other foreign currencies
and could lower the market value of the ADSs and our preferred shares. The Brazilian currency has historically experienced frequent devaluations.
Although over longer periods, devaluations of the Brazilian currency generally
have correlated with the rate of inflation in Brazil, devaluations have
frequently resulted in significant short- to medium-term fluctuations in the
value of the Brazilian currency. 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
Brazilian elections and the global economic slowdown, devaluing against the
U.S. dollar by 52.3%. Although the realappreciated by 18.2% from December 31,
2002 through December 31, 2003, no assurance can be given that the realwill
not devalue again. Significant costs relating to our network infrastructure and handsets are
payable or linked to payment in U.S. dollars. However, other than revenues
derived from hedging transactions, all of our revenues are generated in reais.
If the value of the realdecreases relative to the U.S. dollar, our debt
becomes more expensive to service. Such decreases also make it more costly for
us to pay for the U.S. dollar-denominated technology and goods that are
necessary to operate our business, and we may be unable to pass the increased
costs to our customers. As of December 31, 2003, we had R$489.1 million in
total debt, of which R$320.5 million (or U.S.$ 110.9 million) was denominated
in U.S. dollars and R$50.6 million was denominated in reaisbut indexed to a
foreign currency basket. As of December 31, 2003, we had currency hedges in
place to cover all of our U.S. dollar and foreign currency denominated debt.
In January 2004, Telemig Celular issued US$80 million of debt securities, all
of which are denominated in U.S. dollars. Further devaluations of the realrelative to the U.S. dollar would also
reduce the U.S. dollar value of distributions and dividends on our ADSs and may
reduce the market value of the ADSs and our preferred shares. 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 backed 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 in such countries may differ significantly from economic
conditions in Brazil, the reaction of investors to developments in these other
countries may have an adverse effect on the market value of securities of
Brazilian issuers. 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. Crises in other
emerging market countries may hamper investor enthusiasm for securities of
Brazilian issuers, including ours. This could adversely affect the trading
price of the ADSs and our preferred shares and could also make it difficult for
us to access the capital markets and finance our operations in the future on
acceptable terms, or at all. 7




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Risks Relating to the Business and the Brazilian Telecommunications Industry Extensive government regulation of the telecommunications industry and our
operating license may limit our flexibility in responding to market conditions,
competition or change in our cost structure or affect our tariffs. Our business is subject to extensive government regulation. Anatel, which
is the telecommunications industry regulator in Brazil, regulates, among other
things:  
    
    licensing;
    
    tariffs;
    
    competition;
    
    service standards; and
    
    interconnection and settlement arrangements. Brazils telecommunications regulatory framework is continuously evolving.
The interpretation and enforcement of regulations, the assessment of
compliance with regulations and the flexibility of regulatory authorities are
all marked by uncertainty. As we operate under a license from the Brazilian
government, our ability to retain this license is a precondition to our
success. However, in light of the regulatory framework, we cannot assure you
that Anatel will not modify the terms of our license in an adverse manner.
Furthermore, according to the terms of our operating license, we are obligated
to meet certain requirements and to maintain minimum quality, coverage and
service standards. Failure by us to comply with these requirements may result
in the imposition of fines or other government actions, including the
termination of our operating license. Any partial or total revocation of our
operating license would have a material adverse effect on our business,
financial condition, revenues, results of operations and prospects. Our results of operations may be negatively affected by the application to
us of the SMP rules. On February 19, 2004, we signed a contract with Anatel to migrate from the
Cellular Mobile Service Contract, or SMC, regime to the Personal Mobile Service
Contract, or SMP, regime. Operating under the SMP regime involves becoming a
party to an authorization contract with Anatel in replacement of the concession
contract that applied to us when we operated under the SMC regime. One result
of operating under the SMP regime is that our customers will be entitled to
select their own long-distance carrier for outbound long distance traffic and
we will no longer receive payment from our customers for outbound long-distance
traffic. Instead, we will receive interconnection fees from the long-distance
service provider selected by our customers. There is no assurance that the
interconnection fees that we will receive from the long-distance operators will
fully offset the revenues that we would have received from our customers for
outbound long-distance traffic. The SMP regime also establishes the free negotiation of network usage fees
among telecommunication service providers, beginning as of June 30, 2004.
Under the SMC regime, interconnection fees, which comprise a significant
portion of our revenues, were determined on the basis of discussions
with Anatel. We expect that our current
interconnection fees will continue to apply until February 9, 2005, when the new, freely
negotiated interconnection fees become effective. However, we cannot assure
you that Anatel will not permit the freely negotiated interconnection fees with
other telecommunications service providers to apply before February 9, 2005.
In addition, we cannot assure you that the freely negotiated interconnection
fees, when they become applicable, will be as favorable to us as the
Anatel-determined interconnection fees that have applied to us to date. If the
freely negotiated interconnection fees are less favorable to us, our business,
financial condition, revenues, results of operations and prospects
could be
adversely affected. 8




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It is difficult to predict how the technological changes that the wireless
telecommunications industry is undergoing will affect our business. The global and the Brazilian wireless telecommunications industry is
experiencing significant changes, particularly relating to technological
development, ongoing improvements in the capacity, quality and data
transmission speed of digital technology, shorter development cycles for new
products, and changes in end-user needs and preferences. Alternative
technologies may be developed to provide services to customers that are
superior to those that we are able to provide. The time division multiple access, or TDMA, technology that we have used
since we began our operations is currently the most prevalent wireless
telecommunications technology in Brazil. However, trends in the choice of
technologies implemented or being implemented by other wireless service
providers worldwide indicated that the future of wireless service lies with
other technologies such as CDMA ONE and its updated version, CDMA 2000, and GSM
and its updated version, universal mobile telecommunications system, or UMTS.
In response to these developments, our Board of Directors approved the
migration our operating network from TDMA to GSM technology. While this
measure is being taken to ensure that we update our technology so as to remain
competitive and offer our customers high-quality service, new technologies may
emerge in the future that are more advanced than GSM technology. The emergence
of new more advanced technologies may create competitive pressures that force
us to make expenditures to further update our operating network or risk the
loss of our customer base to companies offering more advanced technology. The Brazilian wireless telecommunications industrys landscape is highly
competitive and is changing in a way that may adversely affect our market share
and our margins. At the beginning of 1998, we assumed the operations of Telecomunicações de
Minas Gerais S.A., a former cellular operator under the government-owned
Telebrás System, and we were initially the only cellular operator in our area.
Since that time, the emergence of other wireless telecommunications operators
in our area has created a very competitive environment. The arrival in
December 1998 of Maxitel S.A., the B Band frequency range operator primarily
owned by Telecom Italia that began operations in our area using TDMA technology
under the TIM brand name, and a subsidiary of Tele Norte Leste Participações
S.A., or Telemar, the D Band operator that commenced operations in our areas
using GSM technology in June 2002 under the brand name Oi, has resulted in
the gradual reduction of our market share, which was an estimated 58% at
December 31, 2003, as compared to 71% and 64% at December 31, 2001 and 2002,
respectively. The Brazilian government has auctioned additional bands of
spectrum for wireless use and granted SMP authorizations to operate in our
area. Vésper SMP S.A. acquired the E Band frequency authorization in our area,
but has returned it to Anatel. Anatel is expected to schedule the re-auction
of the E Band frequency in the coming months In addition, multinational market participants in other areas of Brazil
may seek to operate in the area served by us, most likely through the
acquisition of existing competitors in our area. Certain of the existing and
potential future competitors are larger and have greater financial, marketing
and management resources than we do. The ultimate impact that these existing new market entrants and future
competitors will have on our business is not yet clear. These competitors may
be able to offer lower prices than we do and to develop and deploy more rapidly
new or improved wireless technologies, services and products. Our responses to
the entry of these new competitors may require us to lower rates and/or to
extend higher subsidies to our customers for the acquisition of handsets,
thereby adversely affecting our margins. We experience a high rate of customer turnover. We have experienced a customer turnover, or churn rate, that is high in
comparison to other service providers in the Brazilian mobile
telecommunications industry. The turnover may be voluntary or involuntary,
depending on whether the customer freely decides to terminate our services or
we terminate the services due to lack of payment. Our average churn rate
during the last three years increased from 2.5% per month in 2001 to 3.1% per
month in 2002 before dropping back to 2.3% per month in 2003. To the extent
that our competition continues to increase or the Brazilian economy stagnates
or falters, our churn rate could increase, negatively affecting our business,
financial condition, revenues, results of operations and prospects. 9




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Use of wireless phones may pose health risks. Media reports have suggested that radio frequency emissions from wireless
handsets may be linked to various health problems, including cancer, and may
interfere with electronic medical devices, including hearing aids and
pacemakers. Although the we do not know of any definitive studies showing that
radio frequency raises health care concerns, concerns over radio frequency
emissions may discourage the use of wireless handsets or expose us to potential
litigation, which could have a material adverse effect on our business,
financial condition, revenues, results of operations and prospects. Certain covenants contained in our financial agreements limit our ability
to incur indebtedness. Our financing agreements limit our ability to incur indebtedness above a
certain level. As a result, our ability to raise capital above the limits
imposed by such agreements may be impaired, which may affect our ability to
obtain resources needed to switch or upgrade our technology. Risks Related to the ADSs and the Preferred Shares The relative volatility and illiquidity of the Brazilian securities
markets may substantially limit your ability to sell the preferred shares
underlying the ADSs at the price and time you desire. Investing in securities that trade in emerging markets, such as Brazil,
often involves greater risk than investing in securities of issuers in the
United States, and such investments are generally considered to be more
speculative in nature. The Brazilian securities market is substantially
smaller, less liquid, more concentrated and can be more volatile than major
securities markets in the United States. Accordingly, although you are
entitled to withdraw the preferred shares underlying the ADSs from the
depositary at any time, your ability to sell the preferred shares underlying
the ADSs at a price and time at which you wish to do so may be substantially
limited. There is also significantly greater concentration in the Brazilian
securities market than in major securities markets in the United States. The
ten largest companies in terms of market capitalization represented
approximately 56.3% of the aggregate market capitalization of the BOVESPA as of
December 31, 2003. The top ten stocks in terms of trading volume accounted for
approximately 56% and 53% of all shares traded on the BOVESPA in 2002 and 2003. Holders of the ADSs and the preferred shares may not receive any
dividends. According to our by-laws, we must generally pay our shareholders at least
25% of our annual net income as dividends, as determined and adjusted under
Brazilian GAAP. This adjusted income may be capitalized, used to absorb losses
or otherwise appropriated as allowed under the Brazilian corporation law and
may not be available to be paid as dividends. We may not pay dividends to our
shareholders in any particular fiscal year if our board of directors determines
that such distributions would be inadvisable in view of our financial
condition. If you surrender your ADSs and withdraw preferred shares, you risk losing
the ability to remit foreign currency abroad and certain Brazilian tax
advantages. As an ADS holder, you benefit from the electronic certificate of
foreign capital registration obtained by the custodian for our preferred
shares underlying the ADSs in Brazil, which permits the custodian to convert
dividends and other distributions with respect to the preferred shares into
non-Brazilian currency and remit the proceeds abroad. If you surrender your
ADSs and withdraw preferred shares, you will be entitled to continue to rely on
the custodians electronic certificate of foreign capital registration for only
five business days from the date of withdrawal. Thereafter, upon the
disposition of or distributions relating to the preferred shares, you will not
be able to remit abroad non-Brazilian currency unless you obtain your own
electronic certificate of foreign capital registration or you qualify under
Brazilian foreign investment regulations that entitle some foreign investors to
buy and sell shares on Brazilian stock exchanges without obtaining separate
electronic certificates of foreign capital registration. If you do not qualify
under the foreign investment regulations you will generally be subject to less
favorable tax treatment of dividends and distributions on, and the proceeds
from any sale of, the preferred shares. If you attempt to obtain your own electronic certificate of foreign
capital registration, you may incur expenses or suffer delays in the
application process, which could delay your ability to receive dividends or 10




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distributions relating to our preferred shares or the return of your
capital in a timely manner. The depositarys electronic certificate of foreign
capital registration may also be adversely affected by future legislative
changes. Changes in Brazilian tax laws may have an adverse impact on the taxes
applicable to a disposition of the ADSs or our preferred shares. According to Law No. 10,833, enacted on December 29, 2003, the disposition
of assets located in Brazil by a non-resident to either a Brazilian resident or
a non-resident is subject to taxation in Brazil, regardless of whether the
disposition occurs outside or within Brazil. In the event that the disposition
of assets is interpreted to include a disposition of the ADSs or our preferred
shares, this tax law could result in the imposition of withholding taxes on a
disposition of the ADSs or our preferred shares by a non-resident of Brazil to
another non-resident of Brazil. Due to the fact that Law No. 10,833 has been
recently enacted and no judicial guidance as to its application yet exists, we
are unable to predict whether an interpretation applying such tax laws to
dispositions of the ADSs or our preferred shares between non-residents could
ultimately prevail in the courts of Brazil. Holders of ADSs may be unable to exercise preemptive rights with respect
to our preferred shares. We may not be able to offer our preferred shares to U.S. holders of ADSs
pursuant to preemptive rights granted to holders of our preferred shares in
connection with any future issuance of our preferred shares unless a
registration statement under the Securities Act is effective with respect to
such preferred shares and preemptive rights, or an exemption from the
registration requirements of the Securities Act is available. We are not
obligated to file a registration statement relating to preemptive rights with
respect to our preferred shares, and we cannot assure you that we will file any
such registration statement. If such a registration statement is not filed and
an exemption from registration does not exist, The Bank of New York, as
depositary, will attempt to sell the preemptive rights, and you will be
entitled to receive the proceeds of such sale. However, these preemptive
rights will expire if the depositary does not sell them and U.S. holders of
ADSs will not realize any value from the granting of such preemptive rights. 
 ITEM 4. INFORMATION ON THE COMPANY We are the leading provider of cellular telecommunications services in the
state of Minas Gerais in Brazil. We operate on a frequency referred to as A
Band, initially under a concession granted in November 1997 by the federal
government of Brazil. Previously, we operated under a permission granted on
April 29, 1993 to our predecessor company, Telecomunicações de Minas Gerais
S.A. On February 19, 2004, we signed a contract with Anatel to migrate to the
Serviço Móvel Pessoal, or SMP, regime from the Serviço Móvel Celular, or SMC,
regime. Our SMP authorization is for an indeterminate period of time and
covers a region that includes 93% of the municipalities and approximately 90%
of the population in the state of Minas Gerais. At December 31, 2003, we had
2,321,620 subscribers, representing an estimated market share of 58% in our
region as opposed to 1,922,856 subscribers, or an estimated 64% market share,
at December 31, 2002. The Registrant owns 82.9% of the share capital, including 89.2% of the
voting shares, of Telemig Celular, and these shares constitute substantially
all of the Registrants assets, other than cash and cash equivalents. The
Registrant relies almost exclusively on dividends from Telemig Celular to meet
its cash needs, including cash to pay dividends to its shareholders. The Registrants legal and commercial name is Telemig Celular
Participações S.A. and it is a corporation (sociedade anônima) organized under
the laws of the Federative Republic of Brazil. Our headquarters are located at
SCN, Quadra 4, Bloco B, Edifício Centro Empresarial Varig, Torre Oeste, Sala
702-A, 70714-000 Brasília  DF, Brazil, and our telephone number is
55-61-429-5600. Our agent for service of process in the United States is
Puglisi & Associates, located at 850 Library Avenue, Suite 204, P.O. Box 885,
Newark, Delaware 19715. BUSINESS Our Region Our authorization area in Minas Gerais covers a region of more than 500,000
square kilometers, which is approximately 7% of Brazils territory, with a
population of approximately 17 million people, representing 11% of 11




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Brazils population. Minas Gerais is the second most populous state in
Brazil, and the third largest in terms of gross domestic product and the fourth
largest in terms of geographic area. At December 31, 2003, our region had 26
cities with populations in excess of 100,000 people, including the cities of
Belo Horizonte, Contagem, Juiz de Fora and Montes Claros. In 2000, the year
for which the latest information is available, the annual per capita income in
Minas Gerais was approximately R$5,925, and the state generated approximately
10% of Brazils gross domestic product. Of the 17 million inhabitants in our
region, approximately 25% use cellular services. Our business, financial
condition and results of operations depend largely on the performance of the
Brazilian economy and the economy of our region, in particular. See Item
5AOperating and Financial Review and ProspectsOperating ResultsBrazilian
Political and Economic Environment for a description of the Brazilian economy. The shaded portion of the following map shows the location of our area
within the state of Minas Gerais (MAP) 12




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Services We are the leading provider of cellular telephone services in Minas Gerais
and had an estimated market share of 58% as of December 31, 2003, as compared
to an estimated market share of 64% and 71% at December 31, 2002 and 2001,
respectively. Currently, our digital service is based upon Time Division
Multiple Access, or TDMA,technology and our analog service uses a technology
standard called Advanced Mobile Phone Service, or AMPS. However, trends in the
choice of technologies implemented or being implemented by other wireless
service providers worldwide indicate that the future of wireless service lies
with other technologies, such as the CDMA 2000, an updated version of CDMA One,
and the Universal Mobile Telecommunications System, or UMTS, an updated version
of GSM. In response to these developments, our Board of Directors has approved
the migration of our network to GSM technology, which incorporates updated
versions of General Packet Radio Service, or GPRS, and Enhanced Data Rates for
Global Evolution, or EDGE, technologies for data transmission. This migration
will involve the overlay of the new GSM technology onto our existing TDMA
network and we will operate both technologies simultaneously until the TDMA
technology has been completely phased out. We expect to begin offering
services based on GSM (including GPRS and EDGE technologies) technology to our
customers by the end of 2004. We expect that our introduction of GPRS and EDGE
technologies will enable us to further expand and enhance the quality and
variety of our data services. The primary considerations we evaluated when
deciding to switch to GSM were controlling capital expenditures, accommodating
customer service preferences, limiting handset subsidies and negotiating
favorable terms with suppliers. We offer digital service to subscribers in all
the cities in our region, covering over 373 localities. At December 31, 2003,
approximately 99% of our subscribers received digital service and 96% of all of
our wireless traffic was digital. Beginning in 2002, we offered a series of new services to prepaid and
contract subscribers, as well as new business solutions to corporate users. In
September 2002, we launched a new and innovative tariff plan commercially
branded as Plano Controle, or Control Plan. We identified a market niche
(which included some of our contract and prepaid subscribers) that would pay a
set fee as long as the fee was at a low and controlled rate. As a result, the
Plano Controlewas implemented, mixing the best features of prepaid and
contract plans. After the monthly amount of fixed minutes is used, no more
originating calls are allowed. However, the user is still able to receive
calls. The user can, at his or her option, recharge his or her phone with
extra calling minutes, just as in the prepaid plans. The minutes that are not
used can be carried over to the following month. Due to the plans popularity,
in April 2004 we began to offer three new Plano Controleplans with higher
denominations of fixed minutes to our customers. Our voice portal, which we launched in June 2002, generated more than 3.5
million user minutes in 2003 by more than 50,000 users. This portal offers
voice access to several services, including local and international news and
the ability to send and receive email. We were also the first
telecommunications company in Brazil to offer mobile service integrated chat
rooms through SMS. We also provide value-added services such as fax reception through the
mobile handset, voicemail, call forwarding, call waiting and call conferencing,
caller line identification and three-way calling. In addition, we provide
special services such as customized ring tones, real time play-by-play of
soccer matches, information searches (including accessing bank statements,
office or home information), and convenience services, ranging from providing
weather forecasts to finding locksmiths and plumbers, all through the
subscribers mobile handset. We constantly evaluate the readiness of our
network to respond to emerging market trends and customer demands for new
services. In order to attract subscribers, we also sell handsets at or near
cost. Through agreements with other mobile service providers, we offer automatic
roaming services throughout Brazil to our subscribers that allows them to make
and receive calls while out of our area. We also offer international roaming
in countries such as Argentina, Uruguay and the United States through
agreements with local mobile service providers based in those countries. In addition, we provide mobile telecommunications services to subscribers
of other cellular service providers while they are in our area. These other
service providers are charged by us under roaming agreements for the service
provided to their subscribers. Strategy Our strategy is to increase profitability by maintaining our market share
of high revenue subscribers and reducing and containing our costs. The key
elements in implementing this business strategy are to: 13




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
    
    Effectively manage the migration of our network to GSM technology.
We expect to start the migration of our network from TDMA to GSM
technology by the end of the third quarter of 2004, with the transition
from TDMA to GSM technology continuing over an approximately 3- to
5-year period. We intend to carefully manage the migration process by
paying particular attention to containing costs and maintaining our
quality of service.
    
    Retain the quality of our subscriber base by providing the best
customer service and service plan options to high revenue users.
Further penetration of the Brazilian wireless market will generally
involve the addition of subscribers who will purchase prepaid plans to
use a relatively small amount of airtime per month. While we expect to
continue to increase our subscriber base and to grow in this segment of
the market, we also plan to focus heavily on retaining our high revenue
subscriber base. We expect that our migration to GSM technology will
help to attain this objective. We also intend to accomplish this goal
by providing customers with the best service we can make available to
them, including preventing service disruptions during the migration
process, and customizing the services we provide them to better suit
their individual preferences and spending profiles.
    
    Streamline our costs of operations by realizing synergies with our
affiliate. We aim to achieve synergies by combining certain aspects of
our operations with those of our affiliate, Amazônia Celular S.A. By
continuing to centralize services related to billing systems and
customer service call centers, we believe that we can eliminate
unnecessary duplication of services, thereby increasing our operating
efficiency, reducing costs and increasing our margins. Subscribers The following table sets forth information regarding our operating data
and subscriber base for the periods indicated. Year ended December 31,2001
    
    2002
    
    2003Contract subscribers
    
    
    746,070
    
    
    
    656,791
    
    
    
    707,835Prepaid subscribers
    
    
    924,076
    
    
    
    1,266,065
    
    
    
    1,613,785Total
    
    
    1,670,146
    
    
    
    1,922,856
    
    
    
    2,321,620Net subscriber growth during year
    
    
    35
    %
    
    
    15
    %
    
    
    21
    %Estimated population of our region at year-end (in millions)(1)
    
    
    16.3
    
    
    
    16.4
    
    
    
    16.8Estimated covered population at year-end (in millions)(2)
    
    

    11.9
    
    
    
    12.3
    
    
    
    13.3Percentage of population covered at year-end(3)
    
    
    73
    %
    
    
    75
    %
    
    
    79
    %Penetration at year-end(4)
    
    
    14.1
    %
    
    
    15.7
    %
    
    
    23.9
    %Average monthly incoming minutes of use per subscriber:Contract subscribers
    
    
    80
    
    
    
    73
    
    
    
    64Prepaid subscribers
    
    
    63
    
    
    
    53
    
    
    
    39Average monthly outgoing minutes of use per subscriber:Contract subscribers
    
    
    94
    
    
    
    102
    
    
    
    130Prepaid subscribers
    
    
    14
    
    
    
    14
    
    
    
    11Average monthly revenues per subscriber(5)Contract subscribers
    
    R$
    66
    
    
    R$
    68
    
    
    R$
    79Prepaid subscribers
    
    R$
    22
    
    
    R$
    21
    
    
    R$
    19Total blended average
    
    R$
    45
    
    
    R$
    39
    
    
    R$
    39Cost of acquisition per subscriber
    
    R$
    131
    
    
    R$
    114
    
    
    R$
    117Average monthly churn
    
    
    2.5
    %
    
    
    3.1
    %
    
    
    2.3
    %Estimated market share
    
    
    71
    %
    
    
    64
    %
    
    
    58
    %
   (1)
    
    Estimates based on data from the Brazilian Institute of Geography and
Statistics (Instituto Brasileiro de Geografia e Estatica-IBGE) in 2000.(2)
    
    Estimates by our management of the number of people within our region who
can access our cellular telephone signal.(3)
    
    Estimates by our management of the percentage of the population of our
region which can access our cellular telephone signal.(4)
    
    Estimates by our management of the number of cellular lines in service in
our region.(5)
    
    In nominal reais, net of value-added taxes. 14




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Contract and Prepaid Market As of December 31, 2003, we had 2,321,620 subscribers, an increase of 21%
over December 31, 2002, and an estimated market share of 58%, compared to
estimated market shares of 64% and 71% at December 31, 2002 and 2001,
respectively. Our subscriber base consists of (i) contract subscribers, who
pay a monthly fee to enroll in one of our rate plans and who are invoiced
monthly after services have been provided to them; and (ii) prepaid subscribers
who purchase in advance cards containing a specified number of airtime credits
that can be used within the 180-day period after the prepaid card is activated.
Our contract subscribers consist primarily of higher income individuals who
use their handsets for both personal and business purposes. Our prepaid
subscribers are generally younger, have lower income than contract subscribers,
and use their handsets more to receive than to originate calls. Our contract subscribers used an average of 194 minutes of airtime per
month in 2003, a 10% increase from an average of 175 minutes per month in 2002.
Our prepaid subscribers used an average of 50 minutes of airtime per month in
2003, as compared to an average of 67 minutes per month in 2002. Decreases in
the average minutes of use per subscriber can be expected in the future as
further market penetration adds customers to our subscriber base who had
previously not been subscribers due to lower income or less active calling
habits, and who generally are pre-paid customers who use fewer minutes of
airtime per month. Recently, our prepaid subscriber base has grown
considerably, increasing by 27.5% from 1,266,065 at December 31, 2002 to
1,613,785 at December 31, 2003. During that time, our contract subscriber base
increased from 656,791 at December 31, 2002 to 707,835 at December 31, 2003.
As of December 31, 2003, 70% of our subscribers were prepaid customers and 30%
were contract customers, as compared to 66% and 34%, respectively, at December
31, 2002. The average cost of acquiring our subscribers remained fairly stable
at R$117 in 2003, as compared to R$114 in 2002. The growth of prepaid services is due to a number of factors, including
(i) previous market penetration efforts having already reached substantially
all those who fit the profile of contract subscribers; (ii) a calling party
pays environment whereby a prepaid subscriber does not incur charges in
responding to an incoming call while inside our area; (iii) the ability of
subscribers to make collect outgoing calls without incurring charges; and (iv)
ease of access to prepaid services because no credit checks are conducted in
connection with the provision of prepaid services. We believe that prepaid
plans are attractive to a wide range of cellular customers. In addition to
helping customers control costs, a prepaid program has no monthly invoice and
allows customers to prepay for cellular services in cash. The prepaid market
is comprised of customers who generally earn a variable income and prefer not
to make a fixed financial commitment, who do not have the credit profile
required to purchase a contract plan or who seek cellular services for
emergencies or limited use only. Benefits of an increased prepaid subscriber base include: (i) no billing
and collection expenses and no delinquent accounts; (ii) advance receipt of
cash from subscribers in exchange for services that may or may not have to be
provided, depending upon whether or not the prepaid card is used; and (iii) a
lower cost of acquisition for each prepaid subscriber as compared to a contract
subscriber due to, among other things, substantially lower subsidies for
prepaid subscribers handsets. However, offsetting these benefits is the fact
that prepaid customers generally spend about one-quarter as much as contract
customers on mobile telecommunications services, tend to roam less, and rarely
use other value-added services. Most of the revenue generated from the growth
of our prepaid subscriber base comes in the form of interconnection fees that
we charge when subscribers of other telecommunications services use our network
to make an incoming call to one of our prepaid subscribers. We charge the
telecommunications service provider from whose network the call originates a
fee for the use of our network to reach our prepaid subscriber. Despite the growth in the prepaid market, most Brazilian A Band companies,
including us, continue to have a lower percentage of prepaid customers than
their competitors because A Band companies were the first to offer cellular
services after the privatization of the Brazilian wireless sector and were
therefore the first to acquire business and higher-income customers, who are
generally contract subscribers. However, the growth of the subscriber base of
all Brazilian wireless telecommunications service providers, including A Band
operators, will likely be predominantly in the prepaid market in the future as
those who have the profiles of contract subscribers have usually already
contracted with a wireless service provider. Further market penetration will
largely involve those whose customer profile is better suited to the use of
prepaid services. A prepaid customer is no longer considered a customer when 240 days has
elapsed since the customer purchased and activated, or added credit to, his or
her last prepaid card. The customers number is then deactivated, and he or
she is considered to have turned over. Usually, prepaid card balances are
automatically cancelled if the customer has not activated a new card within 180
days after activation of the previous card. If a contract 15




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subscribers payment is more than 90 days past due, the subscriber is
considered to have turned over, except for the Plano Controlesubscribers, who
are churned if payment is more than 60 days past due. Churn We determine annualized churn rates for a given period by dividing the sum
of all subscribers disconnected since the beginning of the year by the average
number of subscribers at the beginning of each month since the beginning of the
year, dividing the product by the number of months in the period to be
measured, and multiplying by 12. Churn rates, which measure subscriber
turnover, are then expressed as a percentage. Contract subscribers who migrate
to prepaid service voluntarily within 30 days of becoming a subscriber are not
counted as being churned. Our average annualized churn rate in 2001, 2002 and 2003 was 29.7%, 37.0%
and 28.0%, respectively. The increase in contract churn between 2001 and 2002
was due to the increase in competition in our area, which prompted some
subscribers to change mobile service providers, and to contract terminations
linked to continuing economic problems in Brazil that have resulted in higher
unemployment and a decrease in salaries in real terms. During 2003, we
experienced a significant decrease in churn rates primarily due to an
improvement in the credit quality of the new customers and to the launching of
a new and innovative loyalty program branded Você, or You, that rewards our
clients according to their network usage and length of time as a customer.
Through our customer segmentation strategy and retention efforts, we were able
to contain churn rates among our high value customers to low levels. Network At December 31, 2003, our mobile telecommunications network covered
approximately 79% of the population in our area, and consisted of 13 cellular
switches and 744 cell sites, as compared to 75% of the population in our area
covered and 13 cellular switches and 725 cell sites at December 31, 2002. Our
network handled call traffic in 2003 totaling 2.4 billion minutes, 1.2 billion
of which were incoming and 1.2 billion of which were outgoing, representing a
4% increase over 2002. Our network is interconnected directly with the local
public fixed-line telephone network in Minas Gerais and with every A Band and B
Band service provider in the country, giving our subscribers access to roaming
services automatically when they travel in areas of Brazil where mobile
telecommunications services are available. The majority of the
interconnections between our switches and the public fixed-line telephone
network in Minas Gerais are completed through our own network backbone. We
lease the connections between our cell sites and our switches. Currently, our
switches and cell sites have the capacity to provide services to approximately
2.5 million subscribers. Nortel Networks do Brasil Ltda., a subsidiary of
Nortel Networks Limited, is the principal supplier of our network equipment. We will continue to expand our mobile telecommunications network to cover
as broad a geographical area as is economically feasible in order to meet
consumer demand. In connection with our migration to GSM technology, we expect
that we will continue to use a significant portion of our existing network
infrastructure. As we have already met the network expansion obligations we
are required to meet under the terms of our license, we did not expand our
coverage to a significant number of new localities in 2003 and do not expect to
do so in 2004. However, at the outset of the migration process, the number of
localities we serve using GSM technology will be lower than the number of
localities we currently serve using TDMA technology. As the migration
progresses, we expect that the number of localities we serve using GSM
technology will increase. See Regulation of the Brazilian telecommunications
industryObligations of telecommunications companies for a description of
network expansion obligations. In addition to network expansion, in the past we have increased the
capacity and improved the quality of our existing network in anticipation of
changes in customer demand by building new base stations and adding channels.
As a result of these measures to improve service quality, our rate of
interrupted calls decreased to 1.0% in 2003, as compared to 1.2% in 2002, and
our blocked call rate remained relatively steady at 0.4% in 2003, as compared
to 0.3% in 2002. Our authorization requires us to meet quality of service
obligations and we will continue to evaluate opportunities to improve the
quality of our network in response to these requirements and customer demand.
We are currently in compliance with our regulatory obligations relating to
quality of service and we believe that going forward we will continue to be
able to do so. See Regulation of the Brazilian telecommunications
industryObligations of telecommunications companies for a description of
these obligations. 16




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Billing and Collection We bill our contract customers through monthly invoices providing detail
about minutes of calling time and the use of additional services. Six
staggered billing cycles are used each month to smooth the billing and
collection process. Our billing policy stipulates that if a subscribers
payment is past due and a customer has not responded after receiving a payment
request, service is suspended until full payment for all outstanding charges is
received. If a contract subscribers payment is more than 90 days past due,
the subscriber is churned, except for the Plano Controlesubscribers, who are
churned if payment is more than 60 days past due. Provisions for doubtful accounts were 3.6%, 2.1% and 1.3% of net service
revenues in 2001, 2002 and 2003, respectively. We have integrated certain
aspects of our billing and collection system with that of our affiliate,
Amazônia Celular S.A. This integration is designed to reduce administrative
costs by eliminating unnecessary duplication of services. Fraud Detection and Prevention Cloning fraud consists of duplicating the cellular signal of a subscriber
and it enables the perpetrator of the fraud to make telephone calls using the
subscribers signal. We have implemented a fraud management system designed to
monitor calling patterns, making it possible to detect the presence of cloning
activities within or two days after it begins. If part of a fraudulent call is
carried by the network of another service provider, we are obligated to pay
that service provider the applicable network usage fee, regardless of whether
or not it writes off the receivable associated with the call. Subscription fraud occurs when a person, typically using a fictitious
identification and address, obtains mobile telecommunications services with no
intention of paying for them and then incurs substantial charges before the
service provider is able to identify the fraud and terminate service. When we
discover that a receivable has been generated by subscription fraud, we write
off the receivable. We have implemented fraud-detection and prevention measures to reduce
fraud-related losses. Fraud-detection measures consist of computerized reviews
of call records to detect abnormal calling patterns. When abnormal patterns
are found, the subscriber is contacted by our fraud control staff and, if
cloning has occurred, the subscribers number or handset is changed.
Fraud-prevention measures include restrictions on international calls from a
given number and restrictions on three-way calling by customers with
international direct-dial access. We have also implemented a fraud management
system to detect cloning in respect of international calls. We expect that
our migration to GSM technology will reduce our incidence of cloning fraud. Sales, Marketing and Customer Service We sell handsets, accessories, calling cards and provide activation
services through four primary distribution channels: (i) an extensive network
of mostly exclusive independent local distributors; (ii) a network of
company-owned stores; (iii) a direct sales force targeting corporate accounts,
government accounts and high-volume consumers; and (iv) for prepaid cards, a
wide variety of points-of-sale, including supermarkets, lottery ticket stands,
newsstands and other retail outlets. The number of points-of-sale for prepaid
cards was approximately 20,000 at December 31, 2003, unchanged from 2002, and
representing an increase of approximately 40% over 2001. While operating
company-owned stores is the most cost-effective means of distribution in
centers with higher populations due to savings on independent distributor
commissions, lower sales volumes outside of major urban centers make it more
cost-effective to use independent local distributors to avoid the overhead
costs associated with operating company-owned stores. We develop customer
awareness through marketing and promotion efforts and high-quality customer
care, building upon the strength of its brand name to increase consumer
awareness and customer loyalty, and advertising through print, radio,
television, and sponsoring sports events and outdoor advertising campaigns. A
project to automatically monitor the effectiveness of our points of
distribution has been in operation since the beginning of the second half of
2003. This initiative is designed to improve the performance analysis of each
point-of-sale, by making available comparative data on prepaid card sales. 17




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Independent Distributors Independent distributors sell handsets, accessories, calling cards and
provide activation services and sales coverage across our area with minimal
capital investment being made or operating expenses being incurred by us.
Independent retailers provide customers with the convenience of being
accessible from a greater number of locations. Independent distributors are
paid a variable commission for each new contract customer they sign up for
service, provided that the customer retains and pays for service for at least
three months. Independent distributors also receive a variable commission for
each new prepaid customer, as well as a mark-up margin on sales of handsets and
prepaid card kits. In addition, independent distributors are eligible for
bonuses for meeting or exceeding sales targets. At December 31, 2003, we had 576 independent distributor points-of-sale,
located primarily in metropolitan centers, as compared to 491 at December 31,
2002. We have exclusivity arrangements with more than 90% of these
distributors. Our exclusive independent retail network includes well-known
retail chains, drugstores and supermarkets with well-traveled points of sale
and active sales promotions. All independent retailers receive marketing
support from us to help assure that they maintain specified standards of
service and participate in promotions. Company Stores We sell telecommunications services, handsets and accessories through
company-owned stores located throughout Minas Gerais. These stores are
effective in building image and brand awareness and providing high-quality
levels of service, greater accountability and ensuring consistent customer
service. Although the majority of sales at company-owned stores consist of
subscriptions for mobile telecommunications services, the company-owned stores
also sell handsets to contract and prepaid customers. At December 31, 2003, we
had 15 company-owned stores as compared to 16 company-owned stores at December
31, 2002. Distributors and Marketing We make prepaid cards available at over 20,000 points-of-sale located
throughout Minas Gerais, including national and regional retail franchise
chains, lottery stands, newsstands and banking branches. In addition, we
engage in telemarketing and mailing efforts aimed at increasing average revenue
per user through the sales of value-added services, directing customers to
service plans that best fit their usage patterns, and soliciting potential
customers. We have also implemented a customer rewards program based upon the
number of minutes of airtime used and length of time as a customer. Customer Service One of our primary goals is to provide subscribers with excellent customer
care. New subscribers are contacted six times during their first year of
service and asked about their degree of customer satisfaction, if they have had
any service-related problems or questions, and to ensure they are receiving the
plans and services that are best suited to their level of usage and
preferences. We provide our subscribers with 24-hour customer service to
answer questions and solve service problems through a call center
infrastructure that can accommodate up to 14,000 calls per hour during peak
hours. Through our customer service attendants, we are able to provide
immediate accessibility to customers for requests relating to matters such as
reactivation, addition of value-added services and number changes. During
2003, our customer service department answered, on average, approximately
1,060,000 calls per month and responded to an average of 6,080 letters and
e-mails per month, as compared to an average of 1,380,000 calls per month and
1,835 letters and e-mails per month in 2002. In 2003, the customer satisfaction
rate among our subscribers reached 84%, and 78% of all complaints threatening
termination of subscription were satisfactorily resolved with the customer
deciding to retain his or her subscription, unchanged from 2002. Sources of Revenue We generate revenue from (i) usage charges, which include measured service
charges for outgoing calls and roaming and other similar charges; (ii) monthly
subscription charges; (iii) network usage fees, which are amounts charged by us
to other telecommunications services providers, including other cellular,
fixed-line and long-distance service providers, for incoming calls requiring
the use of our network; (iv) sales of handsets; and (v) other charges, 18




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such as charges for internet access, short messaging, call forwarding,
call waiting and call blocking. The rates that we charge in connection with
our service plans and network usage are subject to regulation by Anatel. Subscriber Rates Mobile telecommunications services in Brazil are offered on a calling
party pays basis, under which the subscriber pays only for calls that he or
she originates, except that roaming charges are applicable to calls received
outside the subscribers home registration area. In addition, cellular
subscribers wishing to place calls may avoid incurring airtime charges by
making collect calls. There are no charges for collect calls. Subscriber
charges are computed based on factors such as the subscribers service plan,
the location of the party called, the place from which the call originated and
the duration of the call. Subscribers pay for at least 30 seconds of airtime
even if their calls last less than 30 seconds, but they are not required to
make any payment if their calls last less than 3 seconds. After the first 30
seconds of a call have elapsed, we charge subscribers for airtime based only
upon the number of seconds actually used. We provide contract services through a variety of rate plans, mostly under
the Idealbrand name, ranging from plans offering a fixed number of free
minutes each month to plans offering rate discounts to subscribers using
wireless services during specified times of the day or on weekends. During
2003, we generated approximately 21% of our service revenues from monthly fees
in connection with contract service plans, as compared to approximately 20% in
2002. We offer four prepaid service plans that are mostly tailored for use
during specified times of the day or on weekends. Together, monthly contract
service fees and airtime charges for outgoing calls generated 51% of our net
service revenues during 2003, as compared to 48% during 2002. We also offer our subscribers an internet-related service called
i.telemigcelular. The i.telemigcelular services include communication, news
and entertainment services and internet and remote access to personal
computers. The most popular of the i.telemigcelular options is the
short-messaging option, which is now used by approximately 56.1% of our digital
subscribers. The i.telemigcelular service can also be used to participate in
chat rooms, customize ring tones and play games. Our internet-related services
do not comprise a significant portion of our overall revenues, accounting for
approximately 3% during 2003 and 2% in 2002. Roaming Fees We also receive revenue from roaming agreements with other cellular
service providers. When a call is made from within our area by a subscriber of
another cellular service provider, that service provider pays us for the call.
Conversely, when one of our subscribers makes a cellular call outside our area,
we must pay charges associated with that call to the mobile telecommunications
service provider in whose area the call originates. During 2003, roaming fees
accounted for 4% of our net service revenues, as compared to 5% during 2002. Network Usage Fees We earn revenues from any call, cellular or fixed-line, originating with
another service provider and terminating on the handset of one of our
subscribers or a roaming client of another operator within our area. We charge
the service provider from whose network the call originates a network usage fee
for every minute our network is used in connection with the call. From
February 2003 until January 2004, the network usage fee, or interconnection
fee, we charged was R$0.3856 per minute, net of taxes. As of February 2004,
the interconnection fee increased to R$0.41611 per minute. We offer the
incumbent fixed-line operator in our area a 30% discount on this fee for
off-peak calls. Network usage fees accounted for approximately 40% of our net
service revenues during 2003 and 41% in 2002. The SMP regime that we are implementing provides for free negotiation of
network usage fees among telecommunication service providers, beginning as of
June 30, 2004. Under the SMC regime, interconnection fees were determined on
the basis of discussions with Anatel. However, we cannot assure you that Anatel
will not permit the freely negotiated interconnection fees with other
telecommunications service providers to apply before February 9, 2005. In
addition, we cannot assure you that the freely negotiated interconnection fees,
when they become applicable, will be as favorable to us as the
Anatel-determined interconnection fees that have applied to us to date. Technology The time division multiple access, or TDMA technology that we currently
use is the most prevalent wireless telecommunications technology in Brazil.
However, trends in the choice of technologies implemented or being 19




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implemented by other wireless service providers in Brazil and worldwide
indicate that the future of wireless service lies with other technologies, such
as CDMA ONE and its updated version, CDMA 2000, and GSM and its updated
version, UMTS. At the same time, there has been a significant reduction in the
number of models of TDMA handsets and the number of manufacturers of TDMA
handsets. As a result, our board of directors decided to migrate our network
technology from TDMA to GSM. The migration is expected to begin in the coming
months and should continue over an approximately 3- to 5-year period. We based
our technology migration decision on a number of factors so as to manage the
migration in a way that will yield the best economic return. The primary items
of consideration included controlling capital expenditures, accommodating
subscriber service preferences, evaluating handset subsidies associated with
the alternative technologies and negotiating favorable terms with suppliers and
with other operators in Brazil for roaming purposes. Competition Until May 2002, the only direct competition that we faced in our area came
from the B Band frequency range operator in Minas Gerais. The B Band license
in our area was granted to Maxitel S.A., a company owned primarily by Telecom
Italia, which operates under the TIM brand name. The B Band license
agreement covers a geographic area similar to the area covered by our
concession agreement plus the area of Companhia de Telecomunicações do Brasil
Central,or CTBC Telecom, which offers cellular telecommunications services in
the westernmost part of Minas Gerais, including the 7% of the municipalities
and 9% of the population of Minas Gerais that are not a part of our area. Since June 2002, we have been facing direct competition from an additional
wireless telecommunications provider. An auction was held in February 2001 for
the D Band frequency range for SMP licenses covering a geographic region that
included our area. A subsidiary of Tele Norte Leste Participações S.A., or
Telemar, a holding company that owns the principal fixed-line service provider
in our area, won the bid. Telemars subsidiary launched its services on June
24, 2002, using the brand name Oi. SMP services operate on the 1.8GHz
frequency band. As of December 31, 2003, we had an estimated market share of 58%, while
TIM and Oi had estimated market shares of 23% and 19%, respectively, in the
state of Minas Gerais. As of December 31, 2002, we had an estimated 64% market
share, and TIM and Oi had estimated market shares of 27% and 9%, respectively. Another auction was held in November 2002 for the E Band frequency range
for SMP licenses covering a geographic region that included our area. Vésper
SMP S.A. acquired the E Band frequency but later returned it to Anatel. Anatel
is expected to schedule the re-auction of the E Band frequency in the coming
months. It is also possible that Anatel may decide in the future to auction
authorizations to acquire frequencies to operate so-called third generation,
or 3G, wireless telecommunications services in our area. Despite the increase in direct competition that we face in our area, we
believe that we have certain competitive advantages that will help us to
maintain our operating performance and market position. We were the first
cellular operator in our area following the privatization of the Telebrás
System and we were therefore able to establish a strong contract subscriber
base and a widely recognized name brand that we inherited from our predecessor
operator that was a part of the Telebrás System. We have been able to build
upon that foundation by seeking to understand subscriber needs and preferences
in our area and to anticipate subscriber behavior and trends. In addition, we
have considerable network coverage over the highways in Minas Gerais, spanning
2,477 kilometers. We believe that this feature is important to customers when
selecting a wireless service provider because the extent of the wireless
service providers coverage will help to minimize the number of dropped calls
or network unavailability when its subscribers are traveling the highways of
the region. See Item 3D-Risk Factors-The Brazilian wireless
telecommunications industrys landscape is highly competitive and is changing
in a way that may adversely affect our market share and our margins. We also compete with fixed-line telephone service providers, the most
important of which in Minas Gerais is Telemar. We do not believe that
fixed-line service providers present a significant threat or new competition in
the telecommunications service market. We also compete with other wireless
telecommunications services, such as mobile radio, paging and beeper services,
where the most important service provider is Nextel, which are used in our area
as a substitute for cellular telecommunications services because they are
generally less expensive than cellular 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 20




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comparable coverage inside buildings and therefore do not represent an
attractive alternative for most wireless customers. Operating Agreements Interconnection Agreements Incumbent fixed-line providers are obliged to provide interconnection
services to wireless operators with the incumbents own installations. We have
entered into interconnection agreements with TIM, our B Band competitor, Oi,
our D Band competitor, Embratel and Intelig, the two long distance carriers
operating in our area, and Telemar and Vésper S.A., the two local carriers
operating in our area. The terms of these interconnection agreements include
provisions for the number of connection points, the method by which signals
must be received and transmitted and the costs and fees of interconnection.
Network usage fees are also assessed based on the terms of these agreements.
See Regulation of the Brazilian telecommunications industryObligations of
telecommunications companiesInterconnection. Roaming Agreements Roaming services must be made available to other wireless operators upon
the request of that operator. Within the state of Minas Gerais, we are a party
to an operating agreement with CTBC Telecom that allows our subscribers to use
CTBC Telecoms network and pay as a regular customer of CTBC Telecom, without
being charged for any roaming fees. This agreement extends our coverage to 434
localities in Minas Gerais. We have entered into agreements for automatic
roaming with all other A and B Band service providers outside our area. These
roaming agreements permit our subscribers to have access to the networks of
other cellular service providers while traveling or roaming outside our area.
Conversely, we are required to provide roaming services to subscribers of
those wireless operators from outside its area when they are within our area.
The agreements require the parties to provide service to roaming subscribers on
the same basis as they provide service to their own subscribers and to carry
out a monthly reconciliation of roaming subscriber usage charges. The roaming
agreements have a three-year term, which is automatically renewable for further
one-year terms. We have also entered into international roaming agreements
with foreign carriers that permit our subscribers to use roaming services in
Argentina, Uruguay and the United States and that enable subscribers of those
carriers to use roaming services in our area. Historical Background Before the incorporation of Telebrás in 1972, there were more than 900
telecommunications companies operating throughout Brazil. Between 1972 and
1975, Telebrás and its operating subsidiaries, collectively the Telebrás
System, acquired almost all of the other telephone companies in Brazil and
monopolized the provision of public telecommunications services in almost all
areas of the country. Beginning in 1995, the federal government initiated 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. 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, twelve new holding
companies. Virtually all assets and liabilities of Telebrás, including the
shares held by Telebrás in the Telebrás System, were allocated to the new
holding companies. The resulting holding companies, together with their
respective subsidiaries, consisted of (i) eight cellular holding companies,
each in one of eight cellular regions, holding one or more operating companies
providing cellular services; (ii) three wireline holding companies, each in one
of three wireline regions, holding one or more operating companies providing
local and intraregional long-distance services; and (iii) Embratel
Participações S.A., a holding company of Telecomunicações Brasileiras S.A. 
Embratel, which provides domestic and international long-distance telephone
services throughout Brazil. The Registrant is one of the eight cellular holding companies formed in
connection with the Telebrás restructuring. In connection with the breakup of
Telebrás, the Registrant was allocated all the share capital held by Telebrás
in Telemig Celular. In July 1998, the federal government sold substantially
all of its shares of the new holding companies, including the Registrants, to
private-sector buyers. The majority of the Registrants voting shares were
purchased by Telpart Participações S.A., see  Organizational Structure. 21




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Regulation of the Brazilian Telecommunications Industry Our business, including the nature of the services we provide and the
rates we charge, is subject to comprehensive regulation under the General
Telecommunications Law, which was enacted in July 1997. Anatel is the
regulatory agency that oversees our activities and enforces the General
Telecommunications Law. Anatel is administratively independent and financially
autonomous. Anatel has the authority to propose and issue regulations pursuant
to the General Telecommunications Law that are legally binding on
telecommunications service providers. Before becoming effective, proposed
regulations must undergo a period of public comment, which may include public
hearings. Licenses 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
inserted in the relevant concession agreements and the concessionaire is
subject to public service principles of continuity, changeability and equal
treatment of subscribers. Also, Anatel is entitled 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, all in accordance with
the relevant provisions of law or the concession agreement. The concession is
granted for a determinate period of time and is generally renewable once. On February 19, 2004, we signed a contract with Anatel to migrate from the
SMC regime to the SMP regime, which involves the former concessionaire becoming
a party to an authorization contract. An authorization is a permission granted
by the public administration under the private regime, which may or 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 exploitation of the relevant type of telecommunication service in the
private regime. Our authorization has been granted for an indeterminate period
of time. As a result of our migration to the SMP regime, we will no longer be
subject to regulatory uncertainties relating to the renewal of our
authorization agreement, as it is granted for an indeterminate period of time,
but we will still be required to apply to the Anatel for an extension of the
right to use radio frequencies. Our current radio frequency expires in 2008.
We have acquired from Anatel additional spectrum on the 1,800 Mhz frequency
range, which is required to complete the migration to GSM technology. Obligations of Telecommunications Companies As a telecommunications service provider, we are subject to requirements
concerning quality of service and network expansion, as established in
applicable regulations, our authorizations and our original concession
agreements. If we fail to meet these obligations we may be fined, subject to a
maximum penalty amount, until we are in full compliance with our obligations.
While it is possible for an authorization to be revoked for non-compliance with
the obligations imposed by its terms, there are no precedents for such a
revocation. Our authorizations impose obligations on us to meet quality of service
standards relating to our networks ability to make and receive calls, call
failure rates, capacity to handle peak periods, failed interconnection of calls
and customer complaints. These quality of service standards are defined by
Anatel and information in respect of these standards must be reported by us to
Anatel. In addition, we are also required to meet network coverage obligations by
providing cellular services to 70% of the municipalities within our region with
more than 30,000 inhabitants. We have met these network expansion obligations
and are presently in compliance with our quality of service obligations. Interconnection 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. Under the SMP
regime, the terms and conditions of the interconnection will be freely
negotiated between wireless and fixed-line operators, beginning June 30, 2004,
subject to a price cap and compliance with regulations established by Anatel
relating to traffic capacity and interconnection infrastructure that must be
made available to requesting 22




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parties. If a service provider offers any party an interconnection tariff
below the price cap, it must offer the same tariff to other requesting parties
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. We expect that our current
interconnection fees will apply until February 9, 2005, when the new, freely
negotiated interconnection fees become effective. Rate Regulation Currently, our ability to adjust rates relating to existing customer
service plans is restricted. The price cap for the Basic Plan, which is the
base plan established under our previous concession agreement, is adjusted on
an annual basis under a formula that reflects the rate of inflation, offset by
an Anatel-determined productivity rate. The productivity rate is determined on
a case-by-case annual basis between the service provider and Anatel. The other
service plans rates may be adjusted on an annual basis according to inflation.
We may introduce new service plans after receiving Anatels approval. Once
these plans become effective, they are thereafter subject to the annual
price-cap mechanism. While subscribers cannot be forced to migrate to new
plans, existing plans can be terminated after six months advance notice has
been given to all subscribers under the plan being terminated. Other telecommunications companies wishing to interconnect with and use
our network must pay a network usage fee to us. The network usage fee is a
flat fee charged per minute of use. However, under the authorization contract
rules, traffic carried between SMP operators within the same code area and who
share approximately equal amounts of incoming traffic from each others network
(within a 45-55% range) are neither paid nor collected by any of the parties
under a bill and keep rule. Under this rule, only usage fees in respect of
traffic that exceeds this range will be paid from one SMP operator to another. Organizational Structure The Registrant has one subsidiary, Telemig Celular, which is a corporation
organized under the laws of the Federative Republic of Brazil. The Registrant
owns 82.9% of the share capital, and 89.2% of the voting shares of Telemig
Celular. The Registrant is part of a group of companies controlled by Telpart
Participações S.A., a consortium comprised of: (i) Newtel Participações S.A.,
which owns 51.07% of Telepart, and is controlled indirectly by investment and
mutual funds managed by Banco Opportunity, a private Brazilian investment bank,
and several Brazilian pension funds; (ii) TPSA do Brasil Ltda. (TPSA do
Brasil), which owns 48.90% of Telpart, and is controlled indirectly by
investment and mutual funds managed by Opportunity; and (iii) others, who own
0.03% of Telpart. See Item 7Major Shareholders and Related Party
Transactions. Telpart Participações S.A. also controls Tele Norte Celular
Participações S.A., which is the holding company for Amazônia Celular, a
Brazilian cellular telecommunications services provider that covers the states
of Pará, Amazonas, Maranhão, Amapá and Roraima. Property, Plant and Equipment Our principal physical properties consist of transmission equipment,
switching equipment and base stations. Our headquarters are located in Belo
Horizonte, in the state of Minas Gerais. We lease approximately 18,000 square
meters of space in our area. At December 31, 2003, we had 13 cellular switches and 744 cell sites.
Currently, our switches and cell sites have a total capacity of approximately
2.5 million subscribers. Nortel Networks do Brasil Ltda., a subsidiary of
Nortel Networks Limited, is the principal supplier of our network equipment. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. Operating Results The following discussion should be read in conjunction with our
consolidated financial statements and accompanying notes and other information
appearing elsewhere in this annual report, and in conjunction with the
financial statements included under Item 3A  Key information  Selected
Financial Data. Except as otherwise indicated, all financial information in
this annual report has been prepared in accordance with U.S. GAAP and is 23




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presented in reais. For certain purposes, such as providing reports to
our Brazilian shareholders, filing financial statements with the Comissão de
Valores Mobiliários,or CVM (the Brazilian securities commission), and
determining dividend payments and other distributions and tax liabilities in
Brazil, we have prepared and will continue to be required to prepare financial
statements in accordance with applicable Brazilian accounting practices and
Brazilian Corporation Law. Overview Our results of operations are significantly affected by the following key
factors, among others. Brazilian Political and Economic Environment As a company with all of its operations currently in Brazil, we are
affected by general economic conditions in the country. In particular, we have
been affected by overall growth or declines in Brazils per capita income, the
devaluation of the real, inflation and measures taken by the Brazilian
government to combat inflation, principally through the setting of interest
rates. Our business is directly affected by the macroeconomic trends of the
global economy in general and the Brazilian economy in particular. If the
Brazilian economy enters a period of rising interest rates and continued
recession, demand for telecommunications services is likely to be negatively
affected. Further declines in the value of the realwould reduce the
purchasing power of Brazilian consumers, negatively affecting demand for mobile
telecommunications services. Realdevaluations would also affect our margins
by increasing the carrying costs of our U.S. dollar- and other foreign
currency-denominated debt and increasing those of our costs and expenses that
are linked to the U.S. dollar and other foreign currencies. Our results of operations are affected by currency fluctuations. All of
our revenues are denominated in reais, but a significant part of our operating
expenses are either payable in or affected by the U.S. dollar, such as those
relating to our network infrastructure and handsets. Inflation has also had,
and may continue to have, effects on our financial condition and results of
operations. Almost all of our operating expenses are denominated in reaisand
the suppliers and service providers of these expense items generally attempt to
increase their prices to reflect Brazilian inflation. Since our privatization, the economic environment has been volatile with
respect to inflation as well as exchange rate variations, and characterized by
low growth rates. The growth of the Brazilian economy slowed in 2001 (when
real GDP grew by only 1.3%, as compared to 4.4% in 2000). The realdepreciated
by 18.7% against the U.S. dollar during 2001 and inflation was 10.4%, as
measured by the IGP-M index. Presidential elections were held in Brazil in 2002. The country went
through a period of market turmoil in the second half of the year as investors
feared that, if elected, the Labor Party led by Luiz Inácio Lula da Silva would
change the economic policies of the previous administration. The real
fluctuated significantly as a result, depreciating by 52.3% during the year and
closing at R$3.5333 to US$1.00 on December 31, 2002. Inflation for the year,
as measured by the IGP-M index, was 25.3% and real GDP grew by 1.9%. In 2003, the new government administration largely continued the
macroeconomic policies of the previous administration, focusing on fiscal
responsibility. Investor confidence rebounded as a result and the real
appreciated by 18.2% against the U.S. dollar to R$2.8892 per US$1.00 at
December 31, 2003. The benchmark BOVESPA index rose 97% in 2003. Inflation
for the year, as measured by the IGP-M index, decreased to 8.7%. However,
Brazils real GDP decreased by 0.2% during 2003, largely because the very high
interest rates that prevailed at the beginning of 2003 to combat inflationary
pressures acted to also constrain economic growth. The Brazilian economy
showed signs of improvement in the fourth quarter of 2003, growing by
approximately 1.5% as compared to the third quarter of 2003. The Brazilian
Central Bank reduced interest rates seven times during 2003, ending at a rate
of 16.5% as of December 31, 2003. The following table shows data for GDP, inflation, interest rates, and the
U.S. dollar exchange rate for and as at the periods indicated. December 31,2001
    
    2002
    
    2003Real growth in gross domestic product
    
    
    1.3
    %
    
    
    1.9
    %
    
    
    (0.2
    )%Inflation (IGP-M)(1)
    
    
    10.4
    %
    
    
    25.3
    %
    
    
    8.7
    %Inflation (IPCA)(2)
    
    
    7.7
    %
    
    
    12.5
    %
    
    
    9.3
    %
 24




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December 31,2001
    
    2002
    
    2003Depreciation (appreciation) of the
realvs. U.S. dollar
    
    
    18.7
    %
    
    
    52.3
    %
    
    
    (18.2
    )%CDI rate(3)
    
    
    19.0
    %
    
    
    22.9
    %
    
    
    16.8
    %LIBOR rate(4)
    
    
    1.9
    %
    
    
    1.4
    %
    
    
    1.1
    %Period-end exchange rateUS$1.00
    
    
    R$2.3204
    
    
    
    R$3.5333
    
    
    
    R$2.8892Average exchange rateUS$1.00(5)
    
    
    R$2.3532
    
    
    
    R$2.9983
    
    
    
    R$3.0600
   Sources: Fundação Getúlio Vargas, the Central Bank and Bloomberg(1)
    
    Inflation (IGP-M) is the general market price index measured by the
Fundação Getúlio Vargas.(2)
    
    Inflation (IPCA) is a broad consumer price index measured by the
Instituto Brasileiro de Geografia e Estatística.(3)
    
    The CDI rate is average of daily inter-bank overnight rates in Brazil
(accumulated for period-end month, annualized).(4)
    
    Three-month U.S. dollar LIBOR rate as of the last date of the
period. The LIBOR rate is the London inter-bank offer rate, which
is the rate applicable to the short-term international inter-bank
market.(5)
    
    Represents the average of the exchange rates on the last day of each
month during the period. Effects of Inflation in Our Results of Operations After the introduction of the realas the Brazilian currency in July 1994,
inflation remained under control until January 1999, when it increased due to
the devaluation of the real. During periods of high inflation, wages in
Brazilian currency tended to fall because salaries typically did not increase
as quickly as inflation. The effect was a progressive decline in purchasing
power of wage earners. The reduction and stabilization of inflation following
the implementation of the realplan resulted in increased spending on services
and goods (including wireless telecommunication services), higher real income
growth, increased consumer confidence and the increased availability of credit.
It also resulted in relatively higher labor costs. However, if Brazil
experiences significant inflation, we may be unable to increase the service
rates we charge to our customers in amounts that are sufficient to cover our
operating costs, and our business may be adversely affected as a consequence. The table below shows the Brazilian general price inflation (according to
the IGP-DI and the IPCA indices) for the years ended December 31, 1999 through
2003: Inflation Rate (%) as
    
    Inflation Rate (%) asMeasured by IGP-DI (1)
    
    Measured by IPCA (2)December 31, 2003
    
    
    7.7
    
    
    
    9.3December 31, 2002
    
    
    26.4
    
    
    
    12.5December 31, 2001
    
    
    10.4
    
    
    
    7.7December 31, 2000
    
    
    9.8
    
    
    
    6.0December 31, 1999
    
    
    20.0
    
    
    
    8.9
   (1)
    
    Source:IGP-DI, as published by the Fundação Getúlio Vargas.(2)
    
    Source:IPCA, which is a consumer price index. Composition of Operating Revenues and Expenses Operating Revenues We generate operating revenues from:  
    
    usage charges, which include measured service charges of outgoing
calls and roaming and other similar charges, all of which depend upon
which service plan has been selected by the customer;
    
    monthly subscription payments, which depend upon which service plan
has been selected by the contract customer;
    
    network usage fees, which are the amounts charged by us to other
cellular and fixed-line telephone services providers for use of our
network by customers of these service providers;
    
    sales of handsets and accessories; and
    
    other services and charges. 25




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Unbilled revenues for the few days in between the billing date and
month-end are estimated and recognized as revenue during the month in which the
service is provided. Revenue from the sales of prepaid cards is recognized as
actually used on a minute-by-minute basis. In Brazil, cellular
telecommunications service providers may not charge customers for incoming
calls, unless the customer is roaming. The SMP regime to which we are migrating provides for the free negotiation
of network usage fees among telecommunication service providers, beginning as
of June 30, 2004. Under the SMC regime from which we migrated, interconnection
fees, which comprise a significant portion of our revenues, were determined on
the basis of discussions with Anatel. We expect that our current
interconnection fees will apply until February 9, 2005, when the new, freely
negotiated interconnection fees become effective. However, we cannot assure
you that Anatel will not permit the freely negotiated interconnection fees with
other telecommunications service providers to apply before February 9, 2005.
In addition, we cannot assure you that the freely negotiated interconnection
fees, when they become applicable, will be as favorable to us as the
Anatel-determined interconnection fees that have applied to us to date. Operating Expenses and Costs Operating expenses consist of cost of services, selling, general and
administrative expenses, bad debt expense and depreciation and amortization.
Cost of services consists primarily of fixed costs such as leased line charges,
site rental and network maintenance, including overhead, as well as variable
costs such as certain interconnection charges and FISTEL inspection fees. Cost
of goods consists primarily of handsets. Selling, general and administrative
expenses consist primarily of salaries, wages and related benefits for
administrative personnel, advertising and promotional expenses, distributors
commissions and other overhead expenses. For the purposes of bad debt expense,
we maintain an allowance for past-due accounts receivable in an amount equal to
our estimate of probable future losses on these accounts, based on historical
losses and the current level of overdue accounts receivable. We also
immediately write-off any accounts receivable arising from fraud. The Effects of the Increase of Our Prepaid Customer Base on Our Results of
Operations Since the inception of our prepaid plans in March 1999, the number of
prepaid customers has steadily grown to represent 55%, 66% and 70% of our total
customer base at December 31, 2001, 2002 and 2003, respectively. Prepaid
customers, on average, have substantially lower minutes of use than contract
customers and do not pay monthly fees and, as a result, generate substantially
lower average monthly revenues per customer. Prepaid customers use their
cellular phones predominantly for incoming calls, so prepaid customer revenues
consist primarily of interconnection fees. We expect that the growth of our
customer base will continue to be predominately in the prepaid customer
segment. Consolidation of Operations with Our Affiliate In order to create operating efficiencies and reduce costs, we are a party
to a shared services arrangement with our affiliate, Tele Norte Celular
Participações S.A. and its operating subsidiary, Amazônia Celular S.A. Pursuant
to this arrangement, various segments of the financial, marketing, call center
and human resources departments, as well as portions of the engineering
departments of each company are now managed by a single team. Regulatory and Competitive Factors Our business, including the services we provide and the rates we charge,
is subject to comprehensive regulation under the General Telecommunications
Law. As a result, our business, results of operations, revenue and financial
condition could be negatively affected by the actions of the Brazilian
authorities, including, in particular, the following:  
    
    delays in the granting of, or the failure to grant, approvals for rate increases;
    
    the granting of operating licenses in our area; and
    
    the introduction of new or stricter operational requirements. We began to face competition in our area in the fourth quarter of 1998 and
competition has contributed to declining prices for cellular telecommunications
services and increased pressure on operating margins. Our market 26




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share, business, financial condition, revenues and results of operations
depend significantly on a variety of factors, including:  
    
    our ability to attract new customers;
    
    our ability to succeed in the technological migration of our network to GSM;
    
    the response of our customer base to the implementation of the new GSM technology;
    
    the rate of growth of our customer base;
    
    the usage and revenue generated from our customers;
    
    the level of airtime usage;
    
    equipment prices;
    
    the rate of churn; and
    
    our ability to control costs. In 2002, a subsidiary of Telemar began operations in our area on the D Band
SMP frequency range under the Oi brand name and Maxitel S.A. began operating
under the brand name TIM. As a result, our estimated market share has
decreased to 58% in 2003, from 64% and 71% in 2002 and 2001, respectively. The
extent that increased and ongoing competition will ultimately have on our
market share, business, financial condition, revenues and results of operations
will depend on a variety of factors that we cannot yet precisely assess and
many of which may be beyond our control. Anatel is expected to schedule the
re-auction of the E Band frequency in our area in the coming months. As a
result, we may face additional competition in our market in the near future. Taxes on Telecommunications Services The cost of telecommunications services to customers includes a variety of
taxes. The average rate of all such taxes, as a percentage of our gross
operating revenues, was approximately 22% in each of 2001, 2002 and 2003. The
principal tax is a state value-added tax, the Imposto sobre Circulação de
Mercadorias e Serviços, commonly known as the ICMS. The ICMS is a tax that the
Brazilian states impose at varying rates on revenues from the sale of goods and
services, including telecommunications services. The ICMS rate for domestic
telecommunications services in the state of Minas Gerais is 25%. In June 1998, the governments of the individual Brazilian states approved
an agreement to interpret existing Brazilian tax law to apply the ICMS,
effective July 1, 1998, to some services to which the ICMS had not previously
been applied, including cellular activation and monthly subscription. The
agreement also provides that the ICMS may be applied retroactively to
activation services rendered during the five years preceding June 30, 1998.
See Item 8AFinancial InformationConsolidated Statements and Other Financial
InformationLegal Proceedings for a fuller description of these developments. Other taxes on gross operating revenues include two federal social
contribution taxes, the Programa de Integração Social, referred to as PIS, and
the Contribuição para Financiamento da Seguridade Social, known as COFINS,
which are imposed on the gross revenues derived from telecommunications
services at a combined rate of 3.65%. In addition, the following contributions are imposed on certain
telecommunications services revenues:  
    
    Contribution for the Fund for Universal Access to
Telecommunications Services,or FUST.FUST was established by Law
9,998 of August 17, 2000 to provide resources to cover the cost
exclusively attributed to fulfilling obligations of universal access to
telecommunications services that cannot be recovered with efficient
service exploration or that is not the responsibility of the service
provider. Contribution to FUST by all telecommunication services
companies started on January 2, 2001 at the rate of 1% of net operating
telecommunication services revenue (excepting interconnection
revenues), and it may not be passed on to customers.
    
    Contribution for the Fund of Telecommunications Technological
Development,or FUNTTEL.FUNTTEL was established by Law 10,052 of
November 28, 2000 in order to stimulate technological innovation, 27




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enhance human resources capacity, create employment opportunities and
promote access by small- and medium-sized companies to capital resources
so as to increase the competitiveness of the Brazilian telecommunications
industry. Contribution to FUNTTEL by all telecommunication services
companies started on March 28, 2001 at the rate of 0.5% of net operating
telecommunication services revenue (excepting interconnection revenues),
and it may not be passed on to customers. We must also pay the Contribution for the Fund of Telecommunications
Fiscalization, or FISTEL. FISTEL is a fund supported by a tax applicable to
telecommunications operators (the FISTEL Tax) that was established in 1966 to
provide financial resources to the Brazilian government for the regulation and
inspection of the telecommunications sector. The FISTEL Tax consists of two
types of fees: (i) an installation inspection fee assessed on
telecommunications stations (which could be a base, a repeater or a mobile
station) upon the issuance of their authorization certificates; and (ii) an
annual operations inspection fee that is based on the number of authorized
stations in operation at the end of the previous calendar year. The amount of
the installation inspection fee is a fixed value, depending upon the kind of
equipment installed in the authorized telecommunications station. The
operations inspection fee equals 50% of the total amount of the installation
inspection fee that would have been paid with respect to existing equipment. Discussion of Critical Accounting Estimates and Policies General The preparation of the consolidated financial statements included in this
annual report necessarily involves certain assumptions, which are derived from
historical experience and various other factors that we deemed reasonable and
relevant. The portrayal of our financial condition and results of operations
often requires our management to make judgments regarding the effects on our
financial condition and results of operations or matters that are inherently
uncertain. Actual results may differ from those estimated under different
variables, assumptions or conditions. Note 3 of our consolidated financial
statements includes a summary of the significant accounting policies and
methods used in the preparation of our consolidated financial statements. Deferred Taxes As of December 31, 2003, we had a net deferred tax asset of R$216.2
million, as compared to R$262.1 million at December 31, 2002, related to
paid-in capital, tax loss carryforwards and other temporary differences
(primarily with respect to provision for contingencies, allowance for doubtful
accounts and accrued expenses) that may be used to offset future taxable
income. We believe that we may be able to offset this tax credit against our
taxable income in the future. Long-lived Assets We consider the effects of obsolescence, competition, changes in
technology and other economic factors when assigning useful lives to our
operating assets. For example, the results for the years-ended 2001 and 2002
were affected by the acceleration of the depreciation of our billing system,
which was replaced in August 2003. Changes in the lives of operating assets
that have a significant impact on our consolidated financial statements are
disclosed whenever they occur. In 2003, due to our plan to migrate our technology from TDMA to GSM, we
have decided to reduce the useful lives of our TDMA network and related
equipment. Accordingly, the expected useful lives of these assets were reduced
from eight to four years, beginning on January 1, 2003. As a result,
depreciation and amortization expense increased by 38% to R$248.8 million in
2003, as compared to R$179.8 million in 2002. Contingencies We do not believe that we are a party to any legal proceedings that will
have a material adverse effect on our consolidated financial position. In December
1998, we were granted an injunction by the Treasury Court of the State of Minas
Gerais related to the application of ICMS to monthly fees, rentals and
additional services. We do not believe such services should be subject to
ICMS, as they do not constitute telecommunications services. However, each
Brazilian state has approved an agreement, effective from July 1, 1998, to
apply ICMS to certain services in respect of which ICMS was not previously
applied. Some courts in Brazil have upheld the validity of the agreement. We
have deposited amounts equal to uncollected ICMS amounts with the applicable
courts and provisions have been made in our consolidated financial statements
in 28




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respect of these amounts. We recognize the costs of legal defense in the
periods incurred. Accordingly, the costs of defending claims are not included
in the provisions because legal expenses are determined on the basis of success
fees. New U.S. GAAP Accounting Pronouncements In 2003, the Financial Accounting Standards Board, or FASB, issued a
revision of FASB Statement no. 132, Employers Disclosures about Pensions and
Other Postretirement Benefits, to improve financial disclosures for defined
benefit plans. The standard requires that companies provide more detail about
their plan assets, benefit obligations, cash flows, benefit costs and other
relevant information. For example, companies now are required to provide
financial statement users with a breakdown of plan assets by category, such as
equity, debt and real estate. A description of investment policies and
strategies and target allocation percentages, or target ranges, for these asset
categories also are required in financial statements. Results of Operations The following table shows the components of our net income for 2003, 2002
and 2001. Year Ended December 31,2003
    
    2002
    
    2001(in thousands of reais)Revenues:Services provided to third parties
    
    
    1,055,865
    
    
    
    930,610
    
    
    
    846,340Sale of handsets
    
    
    93,250
    
    
    
    77,593
    
    
    
    74,7931,149,115
    
    
    
    1,008,203
    
    
    
    921,133Cost of services
    
    
    326,390
    
    
    
    281,382
    
    
    
    251,522Cost of handsets
    
    
    106,739
    
    
    
    87,886
    
    
    
    81,606Selling, general and administrative expenses
    
    
    218,105
    
    
    
    240,712
    
    
    
    215,526Bad debt expense
    
    
    13,376
    
    
    
    18,190
    
    
    
    28,403Other net operating income
    
    
    (968
    )
    
    
    (1,963
    )
    
    
    (9,306
    )Depreciation and amortization
    
    
    248,779
    
    
    
    179,765
    
    
    
    153,934Operating income
    
    
    236,694
    
    
    
    202,231
    
    
    
    199,448Interest income
    
    
    136,391
    
    
    
    (161,950
    )
    
    
    (70,533
    )Interest expense
    
    
    97,060
    
    
    
    88,137
    
    
    
    59,705Foreign exchange loss
    
    
    (112,764
    )
    
    
    249,195
    
    
    
    60,286Income before minority interest and taxes
    
    
    388,789
    
    
    
    26,849
    
    
    
    149,990Income taxes
    
    
    128,786
    
    
    
    1,135
    
    
    
    49,317Minority interest
    
    
    44,420
    
    
    
    3,474
    
    
    
    18,784Income before cumulative effect of accounting change
    
    
    215,583
    
    
    
    22,240
    
    
    
    81,889Cumulative effect of accounting change(1)
    
    
    
    
    
    
    
    
    
    
    (5,325
    )Net income and comprehensive income
    
    
    215,583
    
    
    
    22,240
    
    
    
    87,214
 29




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(1)
    
    See Note 3 (j) to the financial statements. Results of Operations for Year Ended December 31, 2003 Compared to Year Ended
December 31, 2002 Net Revenues Our service revenues are comprised mainly of monthly fees, service charges
from outgoing traffic and interconnection revenues from incoming traffic. Net
revenues increased 14% to R$1,149.1 million in 2003 from R$1,008.2 million in
2002. This increase is mostly attributable to the 13% increase in net services
revenue to R$1,055.9 million, as compared to R$930.6 million in 2002. The
growth in net services revenue was primarily due to a 21% increase in our
customer base from 1,922,856 to 2,321,620 customers. This growth in customer
base in turn contributed to a 22% increase in outgoing traffic revenues, and a
21% increase in monthly fees revenues. In addition, a 22% increase in
interconnection rates was authorized by Anatel in February 2003. Revenues from the sale of handsets rose 20% to R$93.3 million in 2003 from
R$77.6 million in 2002 due to a 27% increase in the number of handsets sold and
an 8% increase in gross additions stemming from the expansion of our customer
base, partially offset by an increase in handset subsidies. Cost of Services The cost of services increased 16% to R$326.4 million in 2003 from R$281.4
million in 2002, primarily as a result of an 18% increase in interconnection
fees paid by us to other providers (due to 20% higher outgoing traffic) and
higher interconnection rates, as well as a 25% increase in FISTEL taxes paid
due to our larger customer base. Cost of Handsets The cost of handsets increased 21% to R$106.7 million in 2003 from R$87.9
million in 2002, in line with the increase in revenues from handset sales. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased 10% to R$218.1
million in 2003, as compared to R$240.7 million in 2002. As a percentage of
net services revenue, selling, general and administrative expenses decreased to
21% in 2003, as compared to 26% in 2002. Selling expenses decreased 9% to R$148.5 million in 2003 from R$162.4
million in 2002. As a percentage of net services revenue, selling expenses
fell to 14% in 2003, as compared to 17% in 2002. This decrease was primarily
the result of fewer, more focused advertising and promotional campaigns and
stable independent distributor commissions. General and administrative expenses decreased 11% to R$69.6 million in
2003 from R$78.3 million in 2002. As a percentage of net services revenue,
general and administrative expenses decreased to 7% in 2003, as compared to 8%
in 2002. This decrease is primarily attributable to the reversal of a
contingency in respect of ICMS taxes of R$8.4 million. Bad Debt Expense Bad debt expense decreased 26% to R$13.4 million in 2003 from R$18.2
million in 2002. Expressed as a percentage of net services revenue, bad debt
expense fell to 1% in 2003, as compared to 2% in 2002, due primarily to
continued tightening of credit controls, more active collection policies and
the growth of our prepaid customer base. Other Net Operating Income Other net operating income decreased to R$1.0 million in 2003 from R$2.0
million in 2002. Depreciation and Amortization Depreciation and amortization expense increased by 38% to R$248.8 million
in 2003, as compared to R$179.8 million in 2002. This increase is due to our plan to migrate our
technology from TDMA to GSM, as a result of which we decided to 30




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reduce the expected useful lives of our TDMA network and related equipment
from eight to four years, beginning on January 1, 2003. Operating Income Operating income increased to R$236.7 million in 2003 from R$202.2 million
in 2002 as a result of the factors described above. Interest Income Interest income decreased 16% to R$136.4 million in 2003 from R$162.0
million in 2002. This decrease was directly related to the positive results of
our hedging operations in 2002, which totaled R$62.0 million due to the 52%
devaluation of the realagainst the U.S. dollar in 2002, partially offset by a
22% growth in the average balance of our invested cash. Interest Expense Interest expense increased 10% to R$97.1 million in 2003 from R$88.1
million in 2002. This increase was directly related to the negative results of
our hedging operations during 2003, totaling R$31.2 million, due to the 18%
appreciation of the realagainst the U.S dollar, partially offset by a 13%
decrease in our average indebtedness in 2003. Foreign Exchange Loss (Gain) As a result of the 18% appreciation of the realagainst the U.S. dollar
during 2003, we recorded a foreign exchange gain of R$112.8 million, as
compared to a R$249.2 million foreign exchange loss during 2002 when the real
devalued against the U.S. dollar by 52%. Income Taxes Income taxes increased significantly to R$128.8 million in 2003, as
compared to R$1.1 million in 2002, as a result of income before taxes of
R$132.2 million in 2003, as compared to R$9.1 million in 2002. The effective
tax rate during 2003 was 33%, as compared to 4% during 2002. Under Brazilian
law, interest on capital is tax deductible. Net Income As a result of the above factors, net income increased to R$215.6 million
during 2003, as compared to R$22.2 million in 2002. Results of Operations for Year Ended December 31, 2002 Compared to Year Ended
December 31, 2001 Net Revenues Net revenues increased 10% to R$1,008.2 million in 2002, as compared to
R$921.1 million in 2001. The growth in net revenues was almost entirely
attributable to a 10% increase in net service revenues to R$930.6 million in
2002 from R$846.3 million in 2001. The increase in net service revenues was
primarily due to the increase in interconnection revenues, which grew by 13%
during 2002, mainly due to an increase of 10% in interconnection fees per
minute authorized by Anatel in February 2002. The increase in net service
revenues can be linked, to a lesser extent, to the 15% increase in our customer
base. By year-end 2002, our customer base had reached 1,922,856, with 66% of
clients in the prepaid segment and 34% in the contract segment. Revenues from the sale of handsets increased 4% in 2002 as compared to
2001. This increase can be explained by the 6% increase in the number of gross
additions in 2002 as compared to 2001. Cost of Services The cost of services increased 12% to R$281.4 million in 2002 from R$251.5
million in 2001. This increase is the due to an 18% increase in
interconnection costs, which resulted from an 8% increase in outgoing traffic
volume and an increase of 10% in the interconnection fees paid by us to other
operators due to an increase in the interconnection cost per minute with other
wireless and fixed-line operators. Additionally, FISTEL tax increased 31




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35% in 2002 to R$23.3 million. These amounts were offset by a 10%
decrease in leased lines costs to R$20.4 million in 2002 , as compared to
R$22.5 million in 2001. Cost of Handsets The cost of handsets increased 8% to R$87.9 million in 2002 from R$81.6
million in 2001 as a result of the increase in the number of handsets sold.
The cost of handsets increased at a rate higher than the sale of handsets as a
result of subsidies we offered our clients, which increased in 2002 from 2001. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 12% to R$240.7
million in 2002 from R$215.5 million in 2001. As a percentage of net services
revenue, selling, general and administrative expenses increased to 26% in 2002
from 25% in 2001. Selling expenses increased 5% to R$162.4 million in 2002 from R$154.1
million in 2001. This increase is mainly attributable to higher costs incurred
during 2002 to retain high use clients and to higher payroll expenses due to an
increase in salaries and the payment of severance expenses. These increases
were partially offset by the decrease in the amount of commissions paid to
independent distributors in 2002 as compared to 2001. However, as a percentage
of net services revenue, selling expenses decreased slightly to 17% in 2002
from 18% in 2001. General and administrative expenses increased 28% to R$78.3 million in
2002 from R$61.4 million in 2001. The increase was primarily related to a 16%
increase in payroll; a 79% increase in bonuses due substantially to the
implementation of our employee retention program; a 37% increase in consulting
fees; and a 90% increase in software maintenance and expenses related to our
billing system. Bad Debt Expense Bad debt expense in 2002 decreased 36% to R$18.2 million from R$28.4
million in 2001. As a percentage of net service revenues, bad debt expense
decreased to 2.0%, as compared to 3.4% in 2001. The decrease in bad debt
expense was directly related to the strengthening of credit controls and
collection policies we began implementing in 1999 and to increased prepaid
customers. Other Net Operating Income Other net operating income decreased to R$2.0 million in 2002 from R$9.3
million in 2001, mainly due to a tax amnesty we received in 2001 as a result of
a R$5.9 million prepayment of ICMS installments. Depreciation and Amortization Depreciation and amortization expense increased 17% to R$179.8 million in
2002 from R$153.9 million in 2001. The increase was primarily attributable to
the increase of investments in property and equipment in order to expand our
network capacity and improve the overall quality of our services, and the
accelerated depreciation of our billing system, which was replaced in August
2003. Operating Income Operating income remained fairly stable at R$202.2 million in 2002, as
compared to R$199.5 million in 2001, as a result of the factors described
above. Interest Income Interest income increased 130% to R$162.0 million in 2002 from R$70.5
million in 2001. The increase was directly related to the growth in the
average balance of our invested cash and to the positive results of our hedging
operations in 2002 due to the 52% devaluation of the realagainst the U.S.
dollar. At the end of 2002, 78% of our foreign currency denominated debt was
hedged, as compared to 65% in 2001. Interest Expense Interest expense increased 48% to R$88.1 million in 2002 from R$59.7
million in 2001. The increase was due to an increase in our average
consolidated indebtedness in 2002 related to the funding of our capital
expenditures. 32




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Foreign Exchange Loss As a result of the 52% devaluation of the realagainst the U.S. dollar in
2002, our foreign currency denominated or -indexed indebtedness increased. As
a result, our foreign exchange loss increased to R$249.2 million in 2002 from
R$60.3 million in 2001. The foreign exchange loss was partially offset by
hedging operations, dampening the currency devaluation effects in our financial
results. Income Taxes Income taxes, which include social contribution taxes, decreased
significantly to R$1.1 million in 2002 from R$49.3 million in 2001. The
effective tax rate in 2002 was 4%, as compared to 33% in 2001. The combined
statutory tax rate was 34%. The decrease in the effective rate in 2002 was
directly related to the social contribution rate adjustment recorded in 2002
and also a much higher relative amount of interest on capital declared by
Telemig Celular in 2002 as compared to the previous year. Under Brazilian law,
interest on capital is considered a tax-deductible dividend. Net Income Net income decreased 74% to R$22.2 million in 2002 from R$87.2 million in
2001 as a result of the factors described above. B. Liquidity and Capital Resources General We have funded our operations and capital expenditures principally from
operating cash flows and loans obtained from financial institutions. At
December 31, 2003, we had R$642.7 million in cash and cash equivalents, as
compared to R$586.0 million and R$417.3 million at December 31, 2002 and 2001,
respectively. We have a practice of maintaining substantial cash and cash
equivalents in order to be in a position to respond promptly to the changing
regulatory and competitive environment in which we operate. Our principal cash
requirements include:  
    
    capital expenditures, including those related to the GSM network migration,
    
    the servicing of our indebtedness,
    
    the payment of dividends and interest on capital, and
    
    handset subsidies. Our primary sources of liquidity have historically been cash flows from
operating activities and borrowings. Net cash generated from operating
activities was R$403.7 million in 2003, R$353.4 million in 2002 and R$239.3
million in 2001. Net cash used in financing activities was R$288.0 million in
2003 and R$112.6 million in 2002. Net cash provided by financing was R$122.1
million in 2001. In 2003, R$61.7 million was used for capital expenditures and
R$73.8 million and R$222.6 million was used for capital expenditures in 2002
and 2001, respectively. During 2003, R$30.4 million was paid in dividends and
interest on capital, and R$29.9 million and R$17.6 million was paid in 2002 and
2001, respectively. Indebtedness Our total debt was R$489.1 million at December 31, 2003, as compared to
R$850.0 million and R$680.4 million at December 31, 2002 and 2001,
respectively. At December 31, 2003, R$320.5 million (or U.S.$110.9 million) of
our total debt was denominated in U.S. dollars, with interest computed at
six-month LIBOR plus an annual rate ranging from 1.0% to 5.6%, and R$168.6
million was denominated in reais,with interest at an annual rate of 3.8% over
either (i) the average cost of the BNDES currency basket, or (ii) the long-term
interest rate disclosed by the Central Bank (which was 11.0% at December 31,
2003). At December 31, 2003 and December 31, 2002, 100% and 78%, respectively, of
our foreign currency indexed debt was hedged against exchange rate
fluctuations. Our hedging agreement exchanges fixed rates (9.3% to 16.6%) over
the U.S. dollar variation for an internal floating rate (interbank deposit
rate). At December 31, 2001, 33




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63% of our foreign currency indexed debt was hedged against exchange rate
fluctuation. We did not obtain any new financing in 2003. Telemig Celular
issued U.S.$80.0 million of debt securities in January 2004. In 2002, Telemig Celular breached certain financial covenants contained in
a credit agreement with the Brazilian National Economic and Social Development
Bank, or BNDES, and a consortium of three Brazilian banks. Waivers were
obtained in connection with the covenant breaches. During 2003, Telemig
Celular breached certain of its financial covenants contained in a credit
agreement with the Export Development Corporation of Canada and other parties. The following table shows our dollar and non-dollar-indexed loans for the
periods indicated (converted using the exchange rate at the end of the period): As of December 31,2001
    
    2002
    
    2003(in millions of
reais)Short-Term Indebtedness Plus Current
Portion of Long-Term IndebtednessNon-Dollar Indexed
    
    
    43.4
    
    
    
    58.5
    
    
    
    61.6Dollar-Indexed
    
    
    27.7
    
    
    
    227.4
    
    
    
    140.8Total
    
    
    71.1
    
    
    
    285.9
    
    
    
    202.4Long Term IndebtednessNon-Dollar Indexed
    
    
    164.5
    
    
    
    112.1
    
    
    
    56.4Dollar-Indexed
    
    
    444.8
    
    
    
    452.0
    
    
    
    230.3Total
    
    
    609.3
    
    
    
    564.1
    
    
    
    286.7Total Indebtedness
    
    
    680.4
    
    
    
    850.0
    
    
    
    489.1
 Capital Expenditures We spent R$61.7 million in capital expenditures in 2003, R$73.8 million in
2002, R$222.6 million in 2001. We currently anticipate that our capital
expenditures for 2004 will be between R$300 million and R$350 million,
primarily relating to the migration of our network to GSM technology. Capital
expenditure priorities in 2003, 2002 and 2001 included expanding network
capacity, improving the overall service quality and level of digitalization of
our network and upgrading of our billing system. We believe that our capital expenditure requirements, including those
relating to the GSM migration, can be met through a combination of the proceeds
of the issuance of debt securities completed by Telemig Celular in January
2004, cash flows from operations, equipment financing from vendors, and credit
facilities from export credit agencies and Brazilian and international
financial institutions. C. Research and Development, Patents and Licenses, etc. We do not conduct any independent research and primarily depend upon the
manufacturers of telecommunications products for the development of new
hardware. D. Trend Information We expect competition to remain strong. Telemar, the principal fixed-line
operator in our area, began wireless telecommunications operations in the first
half of 2002 through its wireless subsidiary in our area, using the brand name
Oi, joining Maxitel S.A., operating under the TIM brand name, as our direct
competitor. Vésper SMP S.A. acquired the license to operate the E Band in our
area; however, it has returned the license to Anatel. Anatel is expected to
schedule the E Band frequency re-auction in 2004. As a consequence, we may
face a new competitor in our market by year-end. The increase in competition
may negatively affect our business, results of operations, revenue and
financial condition. We also expect to continue to make capital expenditures necessary to
improve the quality of our network, launch new services, and finance the
migration of our network from TDMA to GSM technology. See Liquidity and
Capital ResourcesCapital Expenditures. 34




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E. Off-Balance Sheet Arrangements We have not engaged in any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors. F. Aggregate Contractual Obligations The following table sets forth the amount in millions of reaisof our
fixed contractual obligations at December 31, 2003: OverLess than
    
    
    
    
    
    Two
    
    
    
    
    
    FourTotal
    
    One year
    
    One year
    
    years
    
    Three years
    
    YearsLong-term Debt
    
    
    489.1
    
    
    
    202.4
    
    
    
    226.3
    
    
    
    60.3
    
    
    
    0.1
    
    
    
    Operating Leases
    
    
    26.0
    
    
    
    9.9
    
    
    
    5.9
    
    
    
    3.0
    
    
    
    2.1
    
    
    
    5.1Total Contractual
Cash Obligations
    
    
    525.1
    
    
    
    212.3
    
    
    
    232.2
    
    
    
    63.3
    
    
    
    2.2
    
    
    
    5.1
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management We are managed by our Conselho de Administração, or board of directors,
and our Diretoria, or executive officers. Board of Directors Our board of directors is currently comprised of eleven members serving
for a term of three years. Our bylaws provide for our board of directors to
convene a regular meeting once every three months and special meetings when
called by the chairman or by two members of the board of directors. The following are the current members of our board of directors, and their
respective positions and ages: Name
    
    Position
    
    AgeArthur Joaquim de Carvalho
    
    Chairman
    
    47Verônica Valente Dantas
    
    Vice Chairman
    
    48Rodrigo Bhering Andrade
    
    Director
    
    45Luciano Batista
    
    Director
    
    43José Leitão Viana
    
    Director
    
    64Maria Amalia Delfim de Melo Coutrim
    
    Director
    
    46Danielle Silbergleid Ninio
    
    Director
    
    29Marcos Nascimento Ferreira
    
    Director
    
    37Wagner Pinheiro de Oliveira
    
    Director
    
    42Petrônio Fernandes Gonçalves Júnior
    
    Director
    
    58Eleazar de Carvalho Filho
    
    Director
    
    46
 Set forth below are brief biographical descriptions of our directors. Arthur Joaquim de Carvalhois the chairman of the board of directors of
Telemig Celular Participações S.A. and Tele Norte Celular Participações S.A.
He has nine years of experience in private equity investments and is currently
a partner at CVC/Opportunity Equity Partners. Mr. Carvalho was in charge of
the investment area of Manoel Joaquim de Carvalho Ltda. from 1980 to 1993, and,
since the foundation of the Opportunity Group in 1993, he has been one of the
main officers of the group. In the past, he also worked with two companies
engaged in agribusiness and exports. Mr. Carvalho holds a business
administration degree from the Universidade Federal da Bahia, or the Federal
University of Bahia. Verônica Valente Dantasis a partner and managing director of Opportunity
Asset Management Ltda. Ms. Dantas is also a director of Tele Norte Celular
Participações S.A. Her past experience includes being the managing 35




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director of Icatu Empreendimentos e Participações Ltda., an investment
company established in Brazil. Ms. Dantas holds a degree in business
administration from the Universidade Federal da Bahia, or the Federal
University of Bahia. Rodrigo Bhering Andradehas been a partner of CVC/Opportunity Equity
Partners since 1997. He was a vice-president in the M&A department for Latin
America at J.P. Morgan from 1990 to 1995 and an investment officer at GP
Investimentos from 1995 to 1997. His past experience includes working as an
associate at two law firms, Pinheiro Neto Advogados and Bingham, Dana & Gould.
Mr. Andrade holds a graduate degree from the Universidade de Brasília, or the
University of Brasília, and a master degree from the Yale Law School. Luciano Batistaholds the following degrees: 1999-2000 Post-graduation
Lato Sensu in Controlling and Finances Candido Mendes University, RJ; 1997-1998
Post-graduation Lato Sensu in Competitive Intelligence Communication Faculty of
the Rio de Janeiro Federal University, RJ; 1992-1993 Post-graduation in Systems
Analysis Instituto Brasileiro de Pesquisa em Informática, RJ (Brazilian
Institute for Computer Research); 1987-1991 Bachelor degree in Industrial
Design Faculdade da Cidade Rio de Janeiro  RJ. Mr. Batistas professional
background includes: Caixa de Previdência dos Funcionários do Banco do Brasil
 PREVI: November 1999 Security Director  Manager of Insurance and Operations
with Participants Administrative Directorate  Controller Management Team
Manager Bank of Brasil S.A. 1997-1999 Finances Unit  Financial Operations
Management, RJ Senior Finance Analyst 1995  1997 Superintendência Estadual do
Rio de Janeiro, RJ (State Superintendency) Advisor 1986  1995 / 1997 Rio de
Janeiro Branch  downtown, RJ Control Manager 1982  1986 General Accountancy
Office. José Leitão Vianais a member of the board of directors of both Telemig
Celular and Tele Norte Celular S.A. and also works as an independent business
consultant. He was the chief financial officer of our predecessor,
Telecomunicações de Minas Gerais S.A.  Telemig, from 1972 to 1982 and its vice
chairman from 1982 to 1985. Mr. Viana worked as the chief investment officer of
Fundação de Seguridade Social SISTEL and the chief financial officer of
Telebrás from 1985 to 1989. His past experience also includes acting as chief
financial officer and member of the boards of directors of several subsidiaries
of Telebrás. Mr. Viana holds a degree in economic sciences from the University
of the State of Guanabara (currently the University of the State of Rio de
Janeiro) and a masters degree in economic engineering and industrial
administration from the Universidade Federal do Rio de Janeiro, or the Federal
University of Rio de Janeiro. Maria
Amalia Delfim de Melo Coutrimis also a director of Tele Norte Celular
Participações S.A., Telemig Celular and Amazônia Celular S.A and has been a
director at CVC/Opportunity Equity Partners since 1997. Before that, she was a
director and partner of Opportunity Asset Management and had previously worked as a
director and partner of Banco Icatu from 1986 to 1994. She has a degree in
economics from Universidade Federal Rural do Rio de Janeiro, or the Rural
Federal University of Rio de Janeiro. Petrônio Fernandes Gonçalves Júniorwas a member of the board of auditors
of Banco do Brasil S.A. from April 2002 to April 2003, From 1996 to 1998, Mr. Gonçalves rendered consulting
services to the Interamerican Institute of Cooperation for Agriculture. From
1964 to 1994, he held several different technical positions at Banco do Brasil
S.A., including chief of the financial department, and in 1979 he acted as a
representative of that bank before Caja de Ahorros de Madrid, Spain, in order
to study problems faced by small companies in that country. Mr. Gonçalves holds
a degree in economic sciences from the Centro de Ensino Unificado de Brasília 
CEUB, the Unified Learning Center of Brasília. Danielle Silbergleid Niniohas worked as a corporate legal advisor at CVC
Equity Partners Administração de Recursos Ltda. CVC/Opportunity Equity Partners
since 1999, and is also a member of the board of directors of Tele Norte
Celular Participações S.A. She holds a law degree from the Catholic University
of Rio de Janeiro. Marcos Nascimento Ferreirais also a member of the board of directors of
Tele Norte Celular Participações S.A., Telemig Celular and Amazônia Celular
S.A. From 1987 to 1994, Mr. Ferreira worked in several positions for different
companies of the OAS Group, including Vega Sopave and Ultratec Engenharia.
From 1995 to 1998, he was a director of Pantanal Linhas Aéreas, and, in recent
years, he has been an active member of the boards of directors of major
telecommunication companies in Brazil, including Telet S.A. and Americel S.A.
(1999-2000) and Pegasus S.A. (2000). Mr. Ferreira holds a degree in civil
engineering from the Federal University of Bahia, or Universidade Federal da
Bahia, as well as a post-graduate degree in business administration from the
University of California, Berkeley. 36




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Wagner Pinheiro de Oliveirais an economist and the president of Petros
- Fundação Petrobrás de Seguridade Social. In the past, he has worked with
Banespa as an investment analyst; was a financial and budget advisor of the
Labor Party in the House of Representatives of São Paulo, and was elected the
representative of the participants of the Banesprev, a retirement fund
administered by Banespa. Mr. Oliveirais was a member of the government
transition team of President Luiz Inácio Lula da Silva. Eleazar de Carvalho Filhois an economist and partner of Iposeira Gestão
de Ativos and is a member of the boards of directors of São Paulo Alpargatas
and Santista Têxtil. He is also a member of the advisory board of ABN AMRO
Brasil Participações Financeira, vice president of the board of trustees of the
Brazilian Symphony Orchestra and of the decision-making council of the
Association of Friends of the Paço Imperial. In the past, he has been a
director and the president of BNDES, president of the UBS Bank in Brazil and
worked in the Garantia bank, Alcoa and Crefisul-Citibank. Mr. Caravlho
graduated with a Masters Degree in International Relations from Johns Hopkins
University. Executive Officers The Executive Committee of the Registrant currently consists of three
executive officers. Name
    
    Position
    
    Age
    
    Date ElectedAntônio José Ribeiro dos Santos
    
    Chief Executive Officer
    
    
    59
    
    
    
    08/30/2002João Cox Neto
    
    Chief Financial Officer and
responsible for Investor
Relations
    
    
    41
    
    

    08/30/2002Aloysio José Mendes Galvão
    
    Chief Human Resources Officer
    
    
    56
    
    

    08/16/2001
 Set forth below are brief biographical descriptions of the executive
officers of the Registrant. Antônio José Ribeiro dos Santoswas appointed as our chief executive
officer in August 2002. He is also the chief executive officer of Tele Norte
Celular Participações S.A. and works as a part-time professor at the Electrical
Engineering Department of the University of Brasília. He was an engineer and
manager at Telecomunicações de Brasília S.A.  Telebrasília from 1970 to 1983,
and held the position of chief engineering officer of the same company from
1983 to 1995. In 1996 and 1997, Mr. Santos served as a senior advisor and
steering committee member for certain Brazilian pension funds that were members
of a consortium participating in the public bidding for cellular B Band in
Brazil. In 1997-1998 Mr. Santos was the chief strategic planning officer of
Americel S.A. and in 1998-1999 he served as the executive vice president of
Telet S.A. In 1999-2001, he was the vice president for business development of
Telemig and Tele Norte Celular Participações S.A. and in 2001-2002 he served as
the chief executive officer of Telemig Celular and Amazônia Celular S.A. Mr.
Santos past experience includes working as an advisor for the Brazilian
Secretary of Information Technology. He holds a degree in Electric Engineering
by the University of Brasília, or Universidade de Brasília. João Cox Netohas been our chief financial officer since April 1, 1999. He
was reelected in August 2002 and is currently the chief executive officer of
Telemig Celular S.A. and Amazônia Celular S.A. Prior to joining us, Mr. Cox was
chief financial officer at Odebrecht Serviços de Infraestrutura S.A., the
infrastructure and public service arm of the Odebrecht Group. Previously, he
held various financial management positions within the Odebrecht Group,
including finance director for the holding company and CFO for OPP Petroquímica
S.A. Mr. Cox holds a B.Sc. degree in economics from the Federal University of
Bahia in Brazil and has attended post-graduate studies in economics at the
University of Québec in Montreal and at Oxford Universitys CPS program. Since
1991, Mr. Cox has been a member of the boards of directors of several companies
in Brazil and Argentina, and is currently a member of the board of ABRASCA (the
Brazilian Association of Public Companies) and IBRI (the Brazilian Institute
for Investor Relations). Aloysio José Mendes Galvãohas been our chief human resources officer
since August 2001. From 1998 to 2001, Mr. Galvão acted as a human resources
consultant to major corporations in Brazil, including Petrobrás, Embraer,
Unimed and Nestlé. Mr. Galvão was director of human resources for the
Odebrecht Group from 1973 to 1998. During this period, he was involved in
several local and international projects. He also worked at Banco do Estado da
Bahia, or the Bank of the State of Bahia, where he was responsible for the
human development area from 1970 to 1973. Mr. Galvão holds a degree in
business administration from the Escola de Administração de Empresas da Bahia
(Business Administration School of Bahia). 37




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The Executive Committee of Telemig Celular currently consists of four
executive officers. Name
    
    Position
    
    Age
    
    Date ElectedJoão Cox Neto
    
    Chief Executive Officer
    
    
    41
    
    
    
    08/29/2002Ricardo Del Guerra Perpetuo
    
    Chief Financial Officer
and responsible for
  Investor Relations
    
    
    40
    
    
    
    08/14/2003Marcos Pacheco
    
    Chief Technical Officer
    
    
    46
    
    
    
    01/24/2003Ricardo Grau
    
    Chief Operations Officer
    
    
    36
    
    
    
    12/30/2003
 Set forth below are brief biographical descriptions of the executive
officers of Telemig Celular who are not also officers of the Registrant. Ricardo Del Guerra Perpetuohas been the chief financial officer of
Telemig Celular and our affiliate, Amazônia Celular, since July 2003. Before
joining Telemig, he was the chief financial officer of several companies in
Brazil, including Sanepar  Cia. de Saneamento do Paraná, Método Engenharia
S.A. and Civilcorp Engenharia, Construção e Incorporação Ltda. Mr. Perpetuo
holds a degree in civil engineering from the Mackenzie University in Brazil
and has attended post-graduate studies in business administration at Fundação
Getúlio Vargas, or the Getúlio Vargas Foundation. Marcos Pachecohas worked for seven years with wireless
telecommunications. In 1993, when wireless telecommunications were implemented
in the state of Minas Gerais, he was responsible for the establishment of the
network operation and maintenance structure and also for the activation and
operation of the call center project. Mr. Pacheco also worked for 12 years at
our predecessor company, Telecomunicações de Minas Gerais S.A.  Telemig, where
he was responsible for management of the network, the call center and the
operation support system development. Mr. Pacheco holds an electric engineering
degree and a masters degree in nuclear engineering from the Universidade
Federal de Minas Gerais, or the Federal University of Minas Gerais. Ricardo Grauwas appointed as Telemig Celulars chief operations officer
in December 2003 and oversees operations in Minas Gerais. Prior to this
appointment, Mr. Grau had been the director of marketing of Telemig Celular
since June 2000. Mr. Grau has 12 years of experience in the management of
product marketing and has also held management positions in this capacity for
BCP Participações, Gessy Lever and Johnson & Johnson. Mr. Grau graduated with
a Business Administration degree from Fundação Getúlio Vargasin São Paulo. B. Compensation For the year ended December 31, 2003, the aggregate amount of compensation
paid by us to all directors and executive officers was approximately R$2.9
million. This amount includes salaries of approximately R$2.0 million and
bonuses to executive officers of approximately R$0.9 million. We also paid
R$1.0 million on behalf of Tele Norte Celular Participações S.A. relating to
the compensation of the executive officers who share our management and the
management of our affiliates, Tele Norte Celular Participações S.A and Amazônia
Celular S.A. We are not required under Brazilian law to disclose on an
individual basis the compensation of our directors and executive officers. We have a yearly bonus program that provides variable compensation to our
executive officers upon the achievement of previously stipulated financial and
operating performance results. On October 5, 2000, our board of directors
approved two executive stock incentive plans, which apply to our executive
officers. On December 29, 2003, our board of directors modified one of the stock
incentive plans for key executive officers. See Share Ownership for a
description of these plans. We do not have a compensation committee. C. Board Practices Our board of directors is responsible for, among other things:  
    
    establishing our general business policies;
    
    electing and removing the members of our board of executive officers;
    
    supervising our management and examining our corporate records; 38




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
    
    calling shareholders meetings;
    
    expressing an opinion on the annual report and managements financial statements;
    
    appointing external auditors;
    
    determining the payment of interest on net worth; and
    
    authorizing the purchase of our shares, to the extent permitted by law. Our board of directors may be composed of a minimum of three and a maximum
of 11 directors elected by our shareholders at the annual shareholders
meeting. Our board of directors has one chairman and one vice-chairman. Our board of executive officers is responsible for our day-to-day
management. It is composed of three members, one president and two executive
officers. We have service contracts with executive officers that provide
benefits upon termination of employment. Our conselho fiscal, or fiscal counsel, was established pursuant to our
bylaws, which require us to maintain a fiscal counsel on a permanent basis.
Our fiscal counsel is a supervisory committee independent from our board of
directors and from our independent accountants, and its members are elected by
our shareholders on a yearly basis. The responsibilities of the fiscal counsel
are established by Brazilian Corporation Law and include overseeing the
activities of management with respect to compliance with the law and our
bylaws, reviewing the annual report submitted for the approval of our
shareholders, calling shareholders meetings under certain circumstances and
reporting at those meetings. Our fiscal counsel is made up of the following
individuals, each of whom is serving as a member for a one-year term: Name
    
    Position
    
    AgeLuiz Otávio Nunes West
   
    
    Chairman
    
    
    45Gilberto Braga
    
    
    Member
    
    
    43Augusto Cesar Calazans Lopes
    
    
    Member
    
    
    29Aldo Bastos Alfano
    
    
    Member
    
    
    67
 D. Employees At December 31, 2003, we had 1,982 employees, as compared to 1,846
employees at December 31, 2002 and 2,014 employees at December 31, 2001. At
December 31, 2003, 55% of our employees were employed in customer service, 19%
in sales and marketing, 10% in engineering, 12% in administration and 4% in
information technology. The increase in the number of our employees in 2003
was primarily due to the expansion of our customer care center. Our employees are represented by Sinttel-MG (Sindicato de Trabalhadores
de Telecomunicações de Minas Gerais), the labor union for telecommunications
companies in the state of Minas Gerais. We negotiate a new collective labor
agreement every year with each local chapter of Sinttel-MG. We have not
experienced any labor strikes since the privatization. We have implemented a yearly bonus program, designed to stimulate an
increase in our operating productivity, which provides variable compensation to
employees according to previously specified financial and operating performance
goals. The total amount paid in 2003 in connection with this bonus program was
R$11.1 million and the total amount paid in 2002 was R$9.1 million.
Competition has created, and we believe that it will continue to create,
pressure on salaries and our ability to hire and retain qualified upper- and
mid-level management personnel. We participate in a pension fund, the Fundação Sistel de Seguridade
Social, or Sistel, which supplements government-provided retirement benefits.
Currently, we make monthly contributions to Sistel equal to 13.5% of the salary
of each employee who is a Sistel member. Each member employee also makes a
monthly contribution to Sistel based on his or her age and salary. Members of
Sistel qualify for full pension benefits after reaching age 57, provided that
they have been members of Sistel for at least ten uninterrupted years and have
been affiliated with the social security system for at least 35 years. Sistel
operates independently from us. Our employees, at the time of the
privatization, had the right to maintain their rights and benefits in Sistel.
See Note 10 to our consolidated financial 39




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statements. In May 2004, we introduced a defined contribution plan for
all of our employees. Sistel participants will be invited to switch their
defined benefits plan to the new defined contribution plan. We anticipate this
change will reduce our pension liability. E. Share Ownership The members of our board of directors and our executive officers, on an
individual basis and as a group, beneficially own less than 1% of any class of
our stock. See Item 7AMajor Shareholders and Related Party
TransactionsMajor Shareholders for more information. On October 5, 2000, our board of directors approved two executive stock
incentive plans. The first plan covers certain key executives who may be
granted target awards of our shares of common or preferred stock. The awards
are earned and shares will be issued only to the extent that we achieve
performance goals determined by our board of directors during a five-year
performance period. At December 31, 2003, no shares had been granted in
connection with this incentive plan. The second plan covers key executives, who also participate in the first
plan, and other employees. Options granted under this plan relate to
preferred stock and are exercisable at the market price at the date of grant.
The vesting period is 20% during the second year, 60% during the third year and 100% during the fourth year. As of December 31, 2003, 162,892 options had been granted and none had been exercised under the second plan. The exercise price for the granted options is R$4.76 per thousand of our preferred shares. The price is updated by the IGP-M inflation index until vesting of the option. The second stock incentive plan for key employees was modified by our board of
directors on December 29, 2003. The plan covers 17 executives. Options
granted under this plan relate to preferred stock and are exercisable at the
market price at the date of the grant, discounted by 20%. The vesting period
is 40% during 2004, 30% during 2005 and 30% during 2006. As of December 31,
2003, 597,496 options had been granted under this plan. The exercise price of
the granted options is R$3.84 per thousand of our preferred shares. The price
is updated by the IGP-M inflation index until vesting of the option. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders In accordance with our bylaws, we have two classes of capital stock
authorized and outstanding: common shares (ações ordinárias) and preferred
shares (ações preferenciais). Each common share entitles its holder to full
voting rights at meetings of our shareholders. Our preferred shares have
voting rights under limited circumstances. See Item 10BAdditional
InformationMemorandum and Articles of AssociationPreferred Shares and Common
Shares for more information regarding our capital stock and our two classes of
shares. The following table presents information concerning the ownership of
common shares by our major shareholders at March 31, 2004. We are not aware of
any other shareholder owning more than 5% of our common shares. Number of Common
    
    Percentage of OutstandingName of Owner
    
    Shares Owned
    
    Common SharesTelpart Participações S.A.
    
    
    67,376,897,541
    
    
    
    52.2Latinvest Holdings Delaware LLC
    
    
    9,357,394,538
    
    
    
    7.3Utilitivest II Delaware LLC
    
    
    8,045,236,002
    
    
    
    6.2Caixa de Previdência dos
Funcionários do Banco do Brasil
    
    
    6,803,198,007
    
    
    
    5.3
 The Registrants controlling shareholder is Telpart Participações S.A.,
which owns 52.2% of the Registrants outstanding common shares. As a result of
its controlling interest, Telpart has the ability to control the election of
the majority of our board of directors, and to direct our operations. Until March 26, 2003, Telpart was a corporation owned by Newtel
Participações S.A. (Newtel), which owned approximately 51% of Telpart, and
TIW do Brasil Ltda., later renamed TPSA do Brasil, which owned approximately
49%. On March 26, 2003, Highlake International Business Company Ltd.
(Highlake), which is indirectly controlled by investment and mutual funds
managed by Banco Opportunity, acquired TPSA do Brasils total share ownership
in Telpart. Newtel Participações S.A. is a holding company. Fifty-three percent of
Newtel is owned by Opportunity MEM S.A., which is indirectly held by investment
and mutual funds managed by Banco Opportunity. Forty-seven percent of Newtel
is owned by four Brazilian pension funds: SISTEL  Fundação Sistel Seguridade
Social, TELOS  Fundação Embratel de Seguridade Social, PETROS  Fundação
Petrobrás de Seguridade Social and PREVI  Caixa 40




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de Previdência dos Funcionários do Banco do Brasil. The relationship
among the shareholders of Newtel is governed by a shareholders agreement to
which Telpart has consented. Telpart also owns a controlling interest in our affiliate, Tele Norte
Celular Participações S.A., the A Band service provider in the cellular region
that includes the states of Pará, Amazonas, Maranhão, Amapá and Roraima. Globalvest Management Company L.P., a fund administrator, is the proxy to
a group of private equity investment fund shareholders, including Latinvest
Holdings Delaware LLC and Utilitivest II, which together held approximately 23%
of our outstanding voting stock, as of April 12, 2004. On December 28, 1999, our shareholders approved a legal reorganization
whereby Telpart contributed assets to us, resulting in future tax benefits. We
recorded a deferred tax asset of R$212.0 million, which will be realized over a
period of up to ten years. In accordance with Brazilian Corporation Law, we
may issue shares (pro rataboth common and preferred) to Telpart for the amount
of the tax benefits recognized by us. In addition, minority shareholders are
granted preemptive rights. If the minority shareholders do not elect to
exercise these rights, the shares will be issued to and subscribed for by
Telpart. See Note 6 to the consolidated financial statements for a more
detailed description of this transaction. From 2000 until March 2003, the direct and indirect shareholders of
Telpart, as well as a group of private equity investment fund shareholders
holding an aggregate of approximately 23% of our outstanding voting stock, were
involved in a dispute over the right to appoint the members of our board of
directors. The dispute involved numerous injunctions and legal proceedings.
On March 26, 2003, disputes within the shareholding group of Telpart involving
TIW and Opportunity were settled through the acquisition of TPSA do Brasils
total share holdings in Telpart by Highlake. B. Related Party Transactions We have entered into transactions with some of our shareholders and other
related parties for the provision of certain services. Transactions with
related parties are carried out on an arms-length basis, conducted on the same
prices, terms and rates that apply to third parties. Our by-laws and
applicable Anatel regulations require that any long-term agreement we enter
into with related parties must be previously approved by the majority of our
voting and non-voting shareholders, with the exclusion of the conflicted party.
In order to increase efficiency in the allocation of resources, capitalize on
synergies, avoid unnecessary duplication of activities and improve operating
efficiencies, we are a party to a shared service agreement with Tele Norte
Participações S.A. pursuant to which certain costs incurred for the benefit of
both companies and their subsidiaries are allocated to each company based on
criteria designed to reflect the actual amount of use by each company. The
costs allocated under this shared service agreement relate primarily to
personnel, marketing and outside consulting fees. C. Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated Financial Statements and Other Financial Information The information included in Item 18 of this annual report is referred to
and incorporated by reference into this Item 8A. Legal Proceedings Litigation Relating to the Breakup of Telebrás The breakup of Telebrás is the subject of several lawsuits in which the
plaintiffs have requested, and in certain cases obtained, preliminary
injunctions against the breakup. All of these preliminary injunctions have
been subsequently quashed by decisions of the relevant federal court, but
several of these decisions are currently on appeal. 41




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These lawsuits are based on a number of legal theories, the principal among
them being:  
    
    Brazils federal constitution requires that the creation of the 12
holding companies spun-off from Telebrás be specifically authorized by
the Telecommunications Law;
    
    the Telebrás shareholders meeting held on May 22, 1998, which
approved the breakup, was not properly convened;
    
    national sovereignty will be threatened if the countrys
telecommunications companies are controlled by foreign entities; and
    
    the telecommunications law requires that some matters, such as the
entry of new competitors and the administration of development and
technology funds, be regulated prior to the breakup and privatization
either by an executive order of the President or by an act of Congress. If any of the plaintiffs in the above-described lawsuits ultimately
prevails, the Telebrás breakup might have to be unwound. This could require
any combination of the following:  
    
    amending the Telecommunications Law;
    
    reconvening the May 22, 1998 Telebrás shareholders meeting; and
    
    the passing of additional laws by Congress or the issuance of executive orders by the President. Litigation Arising Out of Events Prior to the Telebrás Breakup Telebrás, our predecessor company, Telecomunicações de Minas Gerais S.A.,
and we are defendants in a number of legal proceedings, including tax- and
labor-related matters, and are subject to certain other claims and
contingencies. Liability for any claims arising out of acts committed by our predecessor
company prior to the effective date of the spin-off of the predecessor
companys cellular assets and liabilities to us remains with the predecessor
company except for:  
    
    labor and tax claims, for which the predecessor company and we are
jointly and severally liable by operation of law, and
    
    liabilities with respect to which our predecessor company made a
specific accounting provision prior to the breakup and assigned them to
us. Any claims against our predecessor company that are not satisfied by it
could result in claims against us to the extent that our received assets at the
time of the spin-off might have been used to settle those claims. Under the
shareholders resolution pursuant to which the spin-off was effected, we have
contribution rights against our predecessor company with respect to the entire
amount of any payments made by us in connection with any labor or tax claims
brought against us that relate to events prior to the effective date of the
spin-off. Under the terms of the Telebrás breakup, liability for any claims arising
out of acts committed by Telebrás prior to the effective date of the breakup
remains with Telebrás except for:  
    
    labor and tax claims, for which Telebrás and the 12 holding
companies are jointly and severally liable by operation of law, and
    
    any liability with respect to which Telebrás made a specific
accounting provision prior to the breakup, to the extent that such
provision has been assigned to Telemig or one of the 12 holding
companies. 42




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Civil Legal Proceedings As of December 31, 2003, we had provisions of approximately R$2.4 million
for contingent liabilities in connection with civil lawsuits classified as
probable risks. Most of the civil suits filed against us, would not, if
decided against us, have a material adverse effect on our operating results or
financial condition. The most significant civil suits involving us are
described below. Litigation Related to the Ownership of the Invention Known as Caller ID
and the Trademark BINA Lune Projetos Especiais Telecomunicação Comércio Ind. Ltda., or Lune, has
brought a lawsuit against Telemig and other Brazilian mobile telecommunication
operators in which Lune claims to be the owner of patents relating to
Equipamento Controlador de Chamadas Entrantes e do Terminal Telefonico,or
Caller ID, and of the trademark ''BINA (''B Identifies the Number of A),
and alleges that the mobile telecommunication operators are copying the patent
and using the trademark without proper authorization. Lune has requested that
the operators be ordered to cease providing Caller ID services and using the
trademark ''BINA and that Lune be indemnified for the unauthorized use of the
Caller ID system in an amount equal to the fees paid to the operators by
customers for use of the Caller ID system. The dispute involves not only the operators, but also network component
manufacturers (such as Nortel) that supply the Caller ID to the operators.The
amount of the indemnification alleged to be owed by the mobile
telecommunication operators has not yet been calculated and we believe we have
the right to indemnity from the component manufacturers. Nortel has
indemnified us against any obligation arising out of allegations of
unauthorized use of patents. Accordingly, we have not made any provisions with
respect to this lawsuit. Litigation Relating to the Conveyance of PIS and COFINS to Users We and other telecommunications companies are defendants in a civil class
action filed by the Federal Public Prosecutor (Ministério Público Federal) to
(i) prevent the passing on to customers of the amounts of the social
contributions referred to as PIS, or the Contribution to the Social Integration
Program, and COFINS, or the Contribution for Social Security Financing and (ii)
to require the return to customers of two times the amount of PIS- and
COFINS-related charges passed along to them. These social contributions are
based on gross telecommunications services revenues from final users located
within the jurisdiction of Uberlândia in Minas Gerais. On August 17, 2001, a preliminary injunction was issued ordering us to no
longer pass the PIS and the COFINS to our customers, but the injunction was
later revoked on October 7, 2002. The maximum liability for this action is
approximately R$125 million. Tax Legal Proceedings As of December 31, 2003, we had provisions of approximately R$294.5
million for contingent liabilities relating to tax matters, the most
significant of which are described below. Litigation Related to the Imposition of ICMS on Certain Telecommunications
Services, such as Cellular Activations, Monthly Subscriptions and Additional
Accessory Services We are involved in judicial and administrative proceedings with regard to
the extension by state governments of ICMS taxable events to services that are
complementary to telecommunications services. According to Agreement No. 69/98
approved by the Brazilian state governments, after June 1998, the ICMS would be
imposed on monthly subscriptions, additional services and cellular activations.
Before the Agreements approval, most companies did not subject these services
to ICMS because they were not considered to be typical telecommunications
services. We believe that the governments attempt to impose the ICMS upon certain
of our services is unlawful and unconstitutional. However, we can give no
assurance that the Brazilian superior courts will arrive at this same
conclusion. Our external attorneys believe that there is a probable
liability outcome in this matter and we have made provisions with regard to
contingent liabilities. The provisions include not only the tax allegedly due,
but also interest that could be eventually imposed in the event that we fail to
succeed in court. 43




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We have made provisions of approximately R$0.9 million for the application
of the ICMS to cellular activations from June 1998, the effective date of the
Agreement, to December 31, 2003. Since the end of 1998, activation fee
revenues have been insignificant, but the provision is still recorded. The
application of the ICMS to cellular activations for the year ended December 31,
1998 would have had a maximum adverse effect estimated at R$2.9 million on our
results of operations for 1998. The application of ICMS on cellular
activations would not materially adversely affect our results of operations for
2001, 2002 and 2003 because we eliminated the activation fee for all but one of
our plans. For the remaining plan, cellular activation has been significantly
reduced. We do not believe that the application of the ICMS on cellular
activation applied on a prospective basis will have a material adverse effect
on our results of operations. In December 1998, we filed an injunction with the Treasury Court of the
State of Minas Gerais and suspended the remittance of the ICMS on monthly
subscriptions and additional services and deposited such amounts in a
court-administered trust account. We cannot assure that we will prevail in
this matter. Accordingly, we have recorded an aggregate provision of R$249
million for 1998 through 2003 in our consolidated financial statements. Litigation Related to Social Security Contribution The Social Security National Institute, or INSS, has issued a tax
assessment against us for approximately R$17.1 million. The proceedings were
the result of an alleged failure by us to comply with our obligation to
withhold and collect 11% of every payment made to service providers, as
required under Law No. 9.711/98. We believe that a significant portion of the
assessment is legally unfounded, and a provision was made of approximately
R$3.5 million. Litigation Related to the Fund of Telecommunication FiscalizationFISTEL We are subject to the payment of the FISTEL contribution. FISTEL is a
fund supported by revenues resulting from a tax imposed on telecommunication
operators. We have adopted the position that the FISTEL tax is not due in
respect of telecommunications stations that are not owned by us. As a result,
we are involved in legal proceedings to obtain a judicial authorization for us
to pay the FISTEL tax solely in respect of telecommunication stations owned by
us. The amount involved in these proceedings is approximately R$32.1 million,
for which we have made contingency provisions. Anatel Proceedings On January 10, 2002, Anatel commenced administrative proceedings against
us regarding (i) possible irregularities in respect of the election of four
members to our board of directors appointed by a non-controlling shareholder,
and (ii) possible non-compliance with investment obligations relating to the
maintenance and enhancement of the services provided by us. We filed a timely
defense and are awaiting a response from Anatel. In the event that we are
found to have breached any of our obligations, we may be subject to a penalty
ranging from a warning to the loss of our concession. There can be no
assurance of the outcome of the proceeding, but we do not believe that the loss
of our concession is a likely outcome. On June 25, 2002, the Superintendent of Private Services of Anatel issued
a provisional remedy in connection with the proceeding, preventing the exercise
of voting powers and veto powers of the directors elected by the
non-controlling shareholder. Service Providers We currently use the services of 604 outsourced ''service providers who
are engaged in activities such as sales promotions, information technologies,
security and maintenance. Under Brazilian labor legislation, the legality of
contracting-out services is closely related to the nature of the services
involved. Where the outsourced contracted services are related to the primary
activities of the contracting company, there is, in effect, a strong
presumption that the contracting-out is not legal. Thus, if the relationship
between the outsourced service provider and the company contains any indicia of
the essential elements of employment, such as subordination of the outsourced
individual worker within the management hierarchy of the company, the
contracting-out of services is likely to be found illegal. 44




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We believe there is a risk that part of the contracting-out of services
could be considered illegal. For this reason, we are exposed to the risk of
(i) infraction notices issued by labor and social security authorities, (ii) a
civil public action by the Government Labor Attorneys Office and (iii) labor
claims filed by outsourced ''service providers claiming the existence of an
employment relationship. In an investigatory proceeding filed by the Government Labor Attorneys
Office, we signed a Term of Commitment undertaking not to retain services
providers in primary activities, under penalty of paying a fine in case of
non-compliance with this obligation. Dividend Policy and Dividends General Brazilian Corporation Law generally requires that the bylaws of each
Brazilian corporation specify a minimum percentage of the distributable profits
comprising dividends and/or notional interest attributable to shareholders
equity, or distributable amount, of the corporation for each fiscal year that
must be distributed to shareholders as dividends. See Item 10B  Additional
Information  Memorandum and Articles of Association  Allocation of Net Income
and Distribution of Dividends. Moreover, Brazilian Corporation Law provides
that each Brazilian company may only issue new preferred shares for public
distribution if one of the following terms applies to the preferred shares: (i)
priority in the receipt of dividends corresponding to at least 3% of the book
value per share; (ii) dividends 10% higher than those paid for common shares;
or (iii) tag along rights at 80% of the price paid to the controlling
shareholder in case of a transfer of control. Our bylaws provide that preferred
shares will be entitled to receive, on a priority basis, minimum,
non-cumulative dividends according to the greater of the following criteria:
(i) 6% per annum of the amount resulting from the division of the amount of the
outstanding capital stock by the number of our outstanding shares; or (ii) the
right to a share of the mandatory dividend (see the next following paragraph)
based on (a) a priority to receive a minimum, non-cumulative dividend
corresponding to 3% of the net asset value of each share; and (b) a right to a
share of the profits to be distributed on the same basis as common shares,
after common shares have been paid a dividend equal to the minimum preferred
dividend mentioned in (a) above. Under our by-laws, we are required to distribute to our shareholders as
dividends in respect to each fiscal year ending on December 31 an amount equal
to not less than 25% of our net profit in any particular year, adjusted in
accordance with the Brazilian Corporation Law. In addition to the mandatory
dividend, our board of directors may recommend to our shareholders the payment
of dividends from retained earnings, profit reserves, and, under certain
conditions, capital reserves. Any payment of interim dividends or the payment
of interest on shareholders equity will be netted against the amount of the
mandatory dividend for that fiscal year. Under the Brazilian Corporation Law, if our board of directors determines
prior to the annual shareholders meeting that payment of the mandatory
dividend for the preceding fiscal year would be inadvisable in view of our
financial condition, we need not pay the mandatory dividend. This
determination must be reviewed by our fiscal counsel and reported to our
shareholders and to the CVM. If a mandatory dividend is not so paid, these
earnings must be allocated to a special reserve account. If we do not incur
the expected losses that cause us to withhold the mandatory dividend, we will
be obligated to pay the mandatory dividend. Payment of Dividends We are required to hold an annual shareholders meeting, at which an
annual dividend may be declared, by no later than four months after the end of
our fiscal year. Our bylaws permit payment of interim dividends out of net
income for a six-month or shorter period in the current year based on a balance
sheet prepared by our management, or out of preexisting and accumulated profits
as set forth in the preceding fiscal years balance sheet or in the preceding
six-month periods balance sheet. According to the Brazilian Corporation Law,
dividends must be paid to the holder of record on a dividend declaration date
that must occur prior to the end of the fiscal year in which the dividend was
declared. A shareholder has a three-year period from the date the dividend
payment was made available to claim dividends in respect of its shares, after
which such claim is barred by statutory limitations. Payments of cash dividends and distributions, if any, will be made in
reaisto the custodian on behalf of the depositary, and the custodian will then
convert such proceeds into U.S. dollars and will cause such U.S. dollars to be
delivered to the depositary for distribution to holders of ADSs. Under current
Brazilian law, dividends paid to 45




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shareholders who are not Brazilian residents, including holders of ADSs,
will not be subject to Brazilian withholding income tax. Dividend Policy and History of Dividend Payments Due to our significant capital expenditure requirements, our policy is to
pay only the mandatory dividend on our outstanding common and preferred shares,
subject to any determination by our board of directors that such distribution
would be inadvisable in view of our financial condition. According to the
Brazilian Corporation Law, Brazilian corporations cannot retain profits without
justification. Therefore, except if retained under any of the reserves
provided for in Articles 193 to 197 of the Brazilian Corporation Law, all net
profits will have to be distributed to shareholders. The only significant asset the Registrant has, other than cash, is its
shares of Telemig Celular. The Registrant relies almost exclusively on
dividends from Telemig Celular to meet cash needs, including the payment of
dividends to its shareholders. The Registrant controls the payment of
dividends by Telemig Celular, subject to limitations under Brazilian
Corporation Law. The following table sets forth the dividends paid to holders of our common
shares and preferred shares since 2001 in reais. Year
    
    Common Shares
    
    Preferred Shares(per 1,000 shares/in R$)2003
    
    
    0.06934
    
    
    
    0.069342002
    
    
    0.07331
    
    
    
    0.073312001
    
    
    0.03766
    
    
    
    0.03766
 Shareholders who are not residents of Brazil must generally register with
the Central Bank to have dividends and/or notional interest attributable to
shareholders equity, sales proceeds or other amounts with respect to their
shares eligible to be remitted in foreign currency outside of Brazil. See
Item 10DAdditional InformationExchange Controls. The preferred shares
underlying the ADSs are held in Brazil by Banco Itaú S.A., our custodian, as
agent for the depositary, which will be the registered owner on the records of
the registrar for our preferred shares. The registrar is Banco ABN-AMRO Real
S.A. Payments of cash dividends and distributions, if any, will be made in
reaisto the custodian on behalf of the depositary, which will then convert
those proceeds into U.S. dollars and will cause those U.S. dollars to be
delivered to the depositary for distribution to holders of ADSs as described
above. In the event that the custodian is unable to convert immediately the
Brazilian currency received as dividends and/or notional interest attributable
to shareholders equity into U.S. dollars, the amount of U.S. dollars payable
to holders of ADSs may be adversely affected by devaluations of the realthat
occurs before those distributions are converted and remitted. See Item 3A 
Key Information  Selected Financial Data  Exchange Rates. Dividends and
notional interest attributable to shareholders equity in respect of the
preferred shares paid to shareholders who are not Brazilian residents,
including holders of ADSs, are exempt from Brazilian withholding tax in respect
of profits accrued as of January 1, 1996. See Item 10E  Additional
Information  Taxation  Brazilian Tax Considerations. B. Significant Changes We are not aware of any significant changes bearing upon our financial
condition since the date of the consolidated financial statements included in
this annual report. 
 ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details Ours preferred shares trade on the New York Stock Exchange under the
symbol TMB in the form of American Depositary Shares, or ADSs. Each ADS
represents 20,000 preferred shares, without par value. The ADSs are evidenced
by American Depositary Receipts, or ADRs, issued by The Bank of New York as
depositary, under a deposit agreement among us, the depositary and the owners
and beneficial owners of ADRs from time to time. We became a U.S. registered
company listed on the New York Stock Exchange on November 16, 1998. 46




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The principal trading market for our preferred shares and for our common
shares is the São Paulo Stock Exchange (Bolsa de Valores de São Paulo
BOVESPA). Our preferred shares commenced trading on the BOVESPA on September
21, 1998. Our preferred shares trade on the BOVESPA under the symbol TMCP4
and our common shares trade under the symbol TMCP3. At December 31, 2003, there were:  
    
    an aggregate of 217,788,636,948 preferred shares issued and
outstanding and 128,963,300,563 common shares issued and outstanding,
and
    
    5,877,034 ADSs, representing 117,540,680,000 preferred shares, held
by foreign investors (to our knowledge based in each case on their
addresses only as indicated in our records for the shares in our
custody), representing 53.97% of the total preferred shares
outstanding. We have registered one class of ADSs under a registration statement on
Form F-6 pursuant to the Securities Act. At the end of December 2003, there
were approximately 5.9 million ADSs outstanding. All of the ADSs were
registered in the name of The Depository Trust Company. At the end of December
2003, there were 100 holders of record of the ADSs. The following table presents the reported high and low closing sale prices
for our preferred shares as reported on the São Paulo Stock Exchange in reais. R$ per 1,000preferred sharesCalendar Period
    
    High
    
    Low1998 (beginning September 21, 1998)
    
    
    2.28
    
    
    
    0.711999
    
    
    4.22
    
    
    
    1.202000
    
    
    9.30
    
    
    
    3.612001
    
    
    7.01
    
    
    
    2.612002
    
    
    4.65
    
    
    
    2.302003
    
    
    5.40
    
    
    
    2.352000:1st quarter
    
    
    9.30
    
    
    
    3.612nd quarter
    
    
    7.40
    
    
    
    3.853rd quarter
    
    
    6.57
    
    
    
    4.614th quarter
    
    
    6.29
    
    
    
    3.902001:1st quarter
    
    
    7.01
    
    
    
    4.052nd quarter
    
    
    5.59
    
    
    
    3.823rd quarter
    
    
    4.75
    
    
    
    2.614th quarter
    
    
    4.72
    
    
    
    2.912002:1st quarter
    
    
    4.65
    
    
    
    3.142nd quarter
    
    
    3.27
    
    
    
    2.373rd quarter
    
    
    3.33
    
    
    
    2.534th quarter
    
    
    3.13
    
    
    
    2.322003:1st quarter
    
    
    3.29
    
    
    
    2.352nd quarter
    
    
    3.10
    
    
    
    2.643rd quarter
    
    
    4.36
    
    
    
    2.754th quarter
    
    
    5.40
    
    
    
    4.01Share prices for the most
recent six months are as
follows:December 2003
    
    
    5.21
    
    
    
    4.78January 2004
    
    
    6.69
    
    
    
    4.72February 2004
    
    
    6.58
    
    
    
    5.60March 2004
    
    
    6.06
    
    
    
    5.22April 2004
    
    
    5.90
    
    
    
    4.60May 2004
    
    
    4.60
    
    
    
    3.74
 47




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The following table presents the reported high and low closing sales
prices for the ADSs in U.S. dollars on the New York Stock Exchange for the
periods indicated. U.S. dollars per ADSCalendar Period
    
    High
    
    Low1998 (beginning November 16, 1998)
    
    
    37.50
    
    
    
    19.751999
    
    
    46.75
    
    
    
    14.752000
    
    
    101.00
    
    
    
    42.002001
    
    
    71.13
    
    
    
    20.622002
    
    
    40.30
    
    
    
    11.992003
    
    
    37.59
    
    
    
    12.952000:1st quarter
    
    
    101.00
    
    
    
    42.002nd quarter
    
    
    82.06
    
    
    
    18.513rd quarter
    
    
    71.44
    
    
    
    51.504th quarter
    
    
    64.00
    
    
    
    43.752001:1st quarter
    
    
    71.13
    
    
    
    37.002nd quarter
    
    
    47.15
    
    
    
    34.003rd quarter
    
    
    40.05
    
    
    
    20.624th quarter
    
    
    38.51
    
    
    
    21.502002:1st quarter
    
    
    40.30
    
    
    
    26.552nd quarter
    
    
    28.30
    
    
    
    18.513rd quarter
    
    
    23.10
    
    
    
    13.394th quarter
    
    
    17.89
    
    
    
    11.992003:1st quarter
    
    
    19.80
    
    
    
    12.952nd quarter
    
    
    21.85
    
    
    
    16.503rd quarter
    
    
    30.30
    
    
    
    17.784th quarter
    
    
    37.59
    
    
    
    28.12Share prices for the most
recent six months are as
follows:December 2003
    
    
    35.15
    
    
    
    32.10January 2004
    
    
    47.20
    
    
    
    32.65February 2004
    
    
    45.30
    
    
    
    38.41March 2004
    
    
    42.15
    
    
    
    35.46April 2004
    
    
    41.59
    
    
    
    30.60May 2004
    
    
    30.25
    
    
    
    24.78
 B. Plan of Distribution Not applicable. C. Markets Trading on the Brazilian Stock Exchanges General All equity and corporate debt securities in Brazil are traded on the São
Paulo Stock Exchange and all government securities are traded on the Rio de
Janeiro Stock Exchange. The São Paulo Stock Exchange is a 48




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nonprofit entity owned by its member brokerage firms. Trading on the
exchange is limited to member brokerage firms and a limited number of
authorized nonmembers. The São Paulo Stock Exchange has two open trading
sessions each day from 11:00 a.m. to 1:30 p.m. and from 2:30 p.m. to 5:45 p.m.
Trading is also conducted from 10:00 a.m. to 6:00 p.m. on an automated system.
There are no specialists or market makers for our shares on the São Paulo Stock
Exchange. Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for
shares is made through the facilities of the separate clearinghouses or the
Companhia Brasileira de Liquidação e Custódia  CBLC, the clearinghouse for the
São Paulo Stock Exchange, which maintains accounts for member brokerage firms.
The seller is ordinarily required to deliver the shares to the exchange on the
second business day following the trade date. At December 31, 2003, the aggregate market capitalization of the 366
companies listed on the São Paulo Stock Exchange was approximately US$201.8
billion. The Brazilian equity market is relatively small and illiquid compared
to major world markets. In 2003, the ten largest companies represented
approximately 56.3% of the total market capitalization of all listed companies
on the São Paulo Stock Exchange. In 2003, the average monthly trading volume
on the São Paulo Stock Exchange was approximately US$4.6 billion. By
comparison, as of December 31, 2003, the aggregate market capitalization of the
2,755 listed companies on the New York Stock Exchange was approximately US$12.3
trillion and the ten largest companies listed on the New York Stock Exchange
represented approximately 19.0% of the total market capitalization of all
listed companies. In December 2000, the São Paulo Stock Exchange implemented new listing
segments: the Novo Mercadoand the Differentiated Levels of Corporate
Governance. The Novo Mercadois a listing segment under the São Paulo Stock
Exchange designed for the trading of shares issued by companies that
voluntarily undertake to abide by further corporate governance practices and
disclosure requirements in addition to those already imposed by Brazilian law.
A company in the Novo Mercadolisting segment must follow a series of corporate
rules known as good practices of corporate governance. These rules generally
increase shareholders rights and enhance the quality of information provided
to shareholders. The São Paulo Stock Exchange Differentiated Levels of Corporate Governance
imposes obligations meant to improve a companys methods of disclosure to the
market and dispersing its shares among the largest number of shareholders
possible. The corporate governance practices and disclosure requirements
applicable to these segments are not as extensive as those applicable to the
Novo Mercadosegment. Trading on Brazilian stock exchanges by nonresidents of Brazil is subject
to certain limitations under Brazilian foreign investment and tax legislation.
See Item 10DAdditional InformationExchange Controls. Regulation of Brazilian Securities Markets The Brazilian securities market is governed by Law No. 6,385 of December
7, 1976, as amended, and Law No. 6,404 of December 15, 1976, as amended, known
as the Brazilian Corporation Law, and by regulations issued by the CVM, which
has authority over stock exchanges and the securities markets generally, and by
the Central Bank, which has licensing authority over brokerage firms and
regulates foreign investment and foreign exchange transactions. Under the Brazilian Corporation Law, a company is either public (companhia
aberta), such as we are, or closely-held (companhia fechada). All public
companies are registered with the CVM and are subject to reporting
requirements. A company registered with the CVM may have its securities traded
either on the São Paulo Stock Exchange or in the Brazilian over-the-counter
market. The shares of a public company may also be traded privately, subject
to some limitations. To be listed, a company must apply for registration with
the CVM and the São Paulo Stock Exchange. Trading in securities on the São Paulo Stock Exchange may be suspended at
the request of a company in anticipation of a material announcement. Trading
may also be suspended at the initiative of the São Paulo Stock Exchange or the
CVM, among other reasons, based on or due to a belief that a company has
provided inadequate information regarding a material event or has provided
inadequate responses to inquiries by the CVM or the São Paulo Stock Exchange. The Brazilian securities laws and regulations provide for, among other
things, disclosure requirements applicable to issuers of traded securities,
protection of minority shareholders and criminal penalties for insider 49




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trading and price manipulation. On January 3, 2002, the CVM issued
Instruction No. 358, which amended the rules applicable to the disclosure of
relevant facts and became effective on April 28, 2002. In accordance with this
regulation, companies must establish internal policies applicable to the
disclosure of relevant facts and the confidentiality of non-public information.
We have filed our disclosure and confidentiality policy with the CVM. However,
the Brazilian securities markets are still not as regulated and supervised as
the United States securities markets or markets in certain other jurisdictions. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not applicable. B. Memorandum and Articles of Association Set forth below is certain information concerning our capital stock and a
summary of certain significant provisions of our bylaws and Brazilian
Corporation Law. A copy of our bylaws has been filed as an exhibit to this
annual report. Corporate Purposes We are a publicly held corporation and our principal place of business is
in the city of Brasília, Brazil. We are governed mainly by our bylaws and by
the Brazilian Corporation Law. Our corporate purposes are found under Article
2 of our bylaws, which establishes that our objectives are:  
    
    to control companies that perform activities related to the mobile
telephone sector in the areas of concessions or authorizations;
    
    to promote, through our controlled or affiliated companies, the
expansion and implementation of mobile telephone services in the areas
of concessions or authorizations;
    
    to promote, to perform or to assist in domestic and foreign
investments to be made by us or our controlled companies;
    
    to promote and stimulate studies and research on the development of
the mobile telephone sector;
    
    to perform, directly or through our controlled or affiliated
companies, technical services related to the mobile telephone sector;
    
    to perform or promote the import of goods and services for or
through controlled or affiliated companies;
    
    to promote, to stimulate and to coordinate, directly or through our
controlled or affiliated companies, the formation and training of
professionals in the mobile telephone sector;
    
    to perform other mobile telephone related activities; and
    
    to hold equity interests in other companies. 50




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Shareholders Meeting Our annual shareholders meeting must occur within four months following
the close of our fiscal year and other shareholders meetings must be held
whenever so required by corporate interests. The Brazilian Corporation Law and
our bylaws require that all our shareholders meetings be called by publication
of a notice in newspapers of general circulation in our principal place of
business, currently the city of Brasília, at least fifteen days prior to the
meeting and for three consecutive business days. In addition, the CVM may also
require the first call for a shareholders meeting to be made up to 30 days
before such shareholders meeting. The quorum to hold shareholders meetings
on first call is generally 25% of the shares entitled to vote and on second
call the meetings can be held with the presence of any number of the shares
entitled to vote. Resolutions are generally passed by the majority of the voting
shareholders present at the meeting. Nevertheless, the Brazilian Corporation
Law requires the approval of shareholders representing at least half of the
voting shares outstanding:  
    
    to create preferred shares or to increase the shares of existing
classes without maintaining the proportion with the remaining classes
of preferred shares, except if provided for and authorized in the
bylaws;
    
    to modify the privileges, advantages and amortization or redemption
conditions of one or more classes of preferred shares or to create a
new class with greater privileges;
    
    to decrease the mandatory dividend;
    
    to modify the corporate purposes of the company;
    
    to incorporate a company into another company or to merge it or to spin it off;
    
    to liquidate the company;
    
    to become a member of a group of companies; or
    
    to issue founders shares. Our bylaws establish that general shareholders meetings addressed to
deliberate subjects requiring special approval must be called at least 30 days
in advance. Preferred Shares and Common Shares The following is a summary of the material terms of the our common and
preferred shares, including related provisions of our bylaws and the Brazilian
Corporation Law. General On April 14, 2004, our capital was R$336,500,000 and share capital
consisted of a total of 130,198,132,862 outstanding common shares and
219,873,977,832 preferred shares, without par value. All our outstanding
shares are fully paid. Under our bylaws, the number of preferred shares may not
exceed two-thirds of the total number of outstanding shares. We may issue
preferred shares without maintaining a fixed proportion to common shares
provided we observe the limit prescribed by law. Under Brazilian Corporation
Law, the number of preferred non-voting or restricted voting shares
outstanding, such as the preferred shares, may not exceed one-half of the total
number of outstanding shares. According to Law No. 10,303, this new limit on
the issuance of preferred shares does not apply to existing listed companies,
including us. Currently, our common share and preferred share ratio with
respect to our total share capital is 0.3719 and 0.6281, respectively. Under our bylaws, our board of directors may increase our share capital up
to 700,000,000,000 shares. Our shareholders must approve at a shareholders
meeting any capital increase that exceeds this limit. Under the Brazilian
Corporation Law, if we issue additional shares in a private transaction, the
existing shareholders have preemptive rights to subscribe for shares on a pro
ratabasis according to their current holdings. 51




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Common Shares Each common share entitles the holder thereof to one vote at our annual
and special shareholders meetings. Under the Brazilian Corporation Law, our
common shares are entitled to dividends or other distributions made in respect
of the common shares in proportion to their share of the amount available for
the dividend or distribution. See Distribution of Dividends for a more
complete description of payment of dividends and other distributions on our
common shares. In addition, upon any liquidation, our common shares are
entitled to return of capital in proportion to their share of our net worth. Preferred Shares Holders of preferred shares are generally entitled to priority in the
receipt of dividends and return of capital, with no premium. Our bylaws also
establish the payment of a minimum amount of non-cumulative dividends
equivalent to 6% per year of the value resulting from the division of
subscribed capital by the total number of shares, or the right to receive a
share in the mandatory dividend to be distributed based on the greater of the
following criteria: (a) priority to receive a minimum, non-cumulative dividend
corresponding to 3% of the net asset value of each share; and (b) a right to
receive a share in the profits to be distributed on the same basis as common
shareholders, after common shares have been paid a dividend equal to the
minimum preferred dividend mentioned in letter (a) above. The Brazilian Corporation Law provides that non-voting or
restricted-voting shares (such as the preferred shares) entitled to fixed or
minimum dividends acquire unrestricted voting rights beginning when a company
has failed for three consecutive fiscal years (or for any shorter period, set
forth in a companys constituent documents) to pay any fixed or minimum
dividend to which such shares are entitled and to continue to hold such voting
rights until payment thereof is made. Our bylaws do not provide for any
shorter period. Any change in the preferences or advantages of the preferred shares, or
the creating of a class of shares having priority over the preferred shares,
would require the approval of holders of a majority of the outstanding
preferred shares, voting as a class at a special meeting of holders of
preferred shares. In any circumstance in which holders of preferred shares are
entitled to vote, each preferred share will entitle the holder thereof to one
vote. Moreover, the preferred shareholders are entitled to vote at general
shareholders meetings in respect of any of the following matters:  
    
    to amend or delete the article in our bylaws that provides that a
shareholders meeting will be required for approving the execution of
long-term agreements between us or controlled companies, on one side,
and the controlling shareholder, controlled or affiliated companies,
those subject to common control, or that in any other way can be
considered to be related to us, on the other side, except for
standard-form agreements, as well as to approve the execution of any
such agreements;
    
    to amend or delete the article in our bylaws that provides that
extraordinary general shareholders meetings called to decide on
special quorum subjects will be valid if the first call is made at
least 30 days in advance of the date on which the general shareholders
meeting will take place, and a second call is made at least 10 days in
advance therewith; and
    
    to amend or delete the article in our bylaws that provides that our
approval of a merger, spin-off, consolidation or dissolution of
controlled companies must be guided by the equal treatment to all the
companies involved. Change in Shareholders Rights In principle, a change in shareholders rights, such as the reduction of
the mandatory minimum dividend, requires the vote of shareholders holding at
least one half of our voting shares. Under certain circumstances, which may
result in a change in the rights of shareholders, the Brazilian Corporation Law
requires the approval of a majority of the shareholders who would be adversely
affected by the change and who are present at a special meeting called for such
purpose. 52




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Allocation of Net Income and Distribution of Dividends Allocation of Net Income The allocation of our net income is proposed by our management and is
subject to approval by our shareholders at a general shareholders meeting.
However, the discretion of our management and our shareholders to determine the
allocation of our net income is limited by certain rules that determine whether
such net income should be distributed as dividends or allocated to certain
profit reserves or carried forward to future fiscal years, as described below: Mandatory dividends.Our shareholders are generally entitled to receive
mandatory dividends each year in an amount equivalent to 25% of our adjusted
net income. Adjusted net income is net income following the addition or
subtraction of:  
    
    amounts allocated to the formation of a statutory reserve account,
and
    
    amounts allocated to the formation of a contingency reserve account
and the return of any amounts in any contingency reserve accounts
deposited in previous years. The payment of our mandatory dividends may be limited to the profits
actually realized in the fiscal year if the portion of the profits not realized
is allocated to the unrealized income reserve account (as described below). If, prior to a general shareholders meeting, our board of directors
recommends that payment of mandatory dividends with respect to the preceding
fiscal year would not be advisable in view of our financial condition, our
shareholders would decide at the shareholders meeting whether or not to make
that distribution. The recommendation of the board of directors must be
reviewed by our fiscal counsel, and reported to our shareholders and to the
CVM. Legal reserve account.We are required to maintain a legal reserve
account to which we must allocate 5% of our net income for each fiscal year
until the amount of the reserve equals 20% of our share capital. The
allocation of a portion of the net income to the legal reserve account is
mandatory, even though it must be submitted to the approval by the shareholders
voting at the general shareholders meeting and may be transferred to our
capital account or used to offset accumulated losses. However, we are not
required to make any allocations to our legal reserve in respect of any fiscal
year in which it, when added to our other established capital reserves, exceeds
30% of our capital. Net losses, if any, may be charged against the legal
reserve account. The legal reserve account is not available for the payment of
dividends. At December 31, 2003, the balance of our legal reserve was R$26.4
million, which was equal to 10% of our share capital. Statutory reserve account.Our bylaws provide that our shareholders may
allocate up to 10% of our net income (adjusted pursuant to the Brazilian
Corporation Law) to a working capital backup reserve account. This reserve,
however may not exceed 10% of our net book value. At December 31, 2003, we had
no working capital back-up reserve. Statutory reserve for investments.Our bylaws establish a statutory
reserve for investments, to be created with the remaining balance of net income
for the preceding fiscal year, provided that it complies with the capital
budget previously approved by a shareholders meeting and provided that it is
used to support costs with the expansion of our activities and those of our
subsidiaries, including through capital increases or the development of new
businesses. It may not be approved at the expense of retaining mandatory
dividends, as provided in article 41 of our bylaws. The balance of this
reserve, as well as all profit reserves, except those for contingencies and
realizable profits, may not exceed our share capital. Should this limit be
reached, a general shareholders meeting would have to decide whether the
excess should be applied to pay in or increase the capital or to distribute
dividends. Discretionary reserve accounts.The Brazilian Corporation Law also
provides for two discretionary allocations of net profits that are subject to
approval by the shareholders at the annual meeting. First, a percentage of net
profits may be allocated to a contingency reserve account for anticipated
losses that are deemed probable in future years. Second, if the mandatory
distributable amount exceeds the sum of realized net profits in a given year,
such excess may be allocated to an unrealized income reserve account. Our
bylaws, which authorize the allocation of a percentage of our net income to the
discretionary reserve account, require that the purpose, criteria for
allocation and maximum amount of the reserve be specified. 53




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Retention of our net income based on a capital expenditure budget. A
portion of our net income may be retained for capital expenditure projects, the
amount of which is based on a capital expenditure budget previously presented
by our management and approved by our shareholders. If a project relating to
this approved capital expenditure budget has a term exceeding one year, the
budget relating to the project must be submitted to the general shareholders
meeting each fiscal year until the relevant investment is completed. Distribution of Dividends Under the Brazilian Corporation Law, we may pay dividends only from:  
    
    our net income earned in a given fiscal year, i.e., our after-tax
income reduced by (i) our losses carried forward from prior fiscal
years, and (ii) distributions to holders of founders shares and to
managers pursuant to profit-sharing arrangements. Our by-laws
authorize a profit sharing plan for management and employees as well as
a stock option plan. The amount to be paid is set by our board of
directors. Under the Brazilian Corporation Law, this profit sharing
may only be paid to management with respect to a fiscal year in which
the mandatory dividend has been declared to the shareholders;
    
    our net income accrued in previous fiscal years or in any six-month
and/or quarterly interim periods of a fiscal year; or
    
    our profit reserves set aside in previous fiscal years or in the
first six months of a fiscal year. In this case, profit reserves
means any discretionary reserve account, contingency reserve account,
amounts allocated to our capital expenditure budget approved by a
shareholders resolution or unrealized income reserve account. We are required to pay a non-cumulative preferred dividend on our
preferred shares in an amount equal to 6% per year over the value resulting
from the division of subscribed capital by the total number of shares, or,
alternatively, minimum non-cumulative dividends corresponding to 3% of the net
asset value of each share. We must choose the alternative representing the
higher value. As of December 31, 2003, the calculated preferred dividend
requirement amounted to approximately R$17.21 million. For the fiscal year
ended December 31, 2003, management proposed the distribution of dividends for
both common and preferred shares in the amount of R$38.5 million. This
proposal was approved at our annual shareholders meeting held on April 14,
2004. For purposes of the mandatory distribution requirement, we included in
adjusted net income part of the unrealized income reserve transferred upon the
breakup of Telebrás, which amounted to R$132 million and is included in
distributable capital and other reserves in our shareholders equity. We
decided to include the unrealized reserve in the calculation of the mandatory
distribution requirements over a ten-year period, ending in 2007. We cannot
assure you that the mandatory distribution of the unrealized income reserve
will not result in substantial additional dividend requirements. Distributions of interest on our net worth may constitute an alternative
form of payment to shareholders. These payments may qualify as part of the
mandatory dividend at their net value. Please see  Taxation Brazilian Tax
Considerations. Dividends are generally required to be paid within 60 days after the date
the dividends were declared to the holder of record, unless a shareholders
resolution sets forth another date of payment. This date must, in either case,
be prior to the end of the fiscal year in which the dividend is declared. A
shareholder has a three-year period following the date on which the dividend
payment is made available to claim the dividend in respect of its shares, after
which we have no liability for such payment. We are not required to adjust the
amount of the dividend for inflation for the period from the date of
declaration to the payment date. Our calculation of net profits and allocations to reserves for any
fiscal year are determined on the basis of financial statements prepared in
accordance with Brazilian GAAP and adjusted in accordance with Brazilian
Corporation Law. The financial statements included herein have been prepared
in accordance with U.S. GAAP and, although our allocations to reserves and
dividends will be reflected in those financial statements, investors will not
be able to calculate these allocations or required dividend amounts from the
U.S. GAAP financial statements. 54




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Interest on Shareholders Equity Law No. 9,249, of December 26, 1995, as amended, provides for the
distribution of interest on our capital as an alternative form of payment to
shareholders. Such interest is limited to the daily pro ratavariation of the
federal governments long-term interest rate as determined by the Central Bank
from time to time. We may treat these payments as a deductible expense for
corporate income tax and social contribution purposes, but the deduction cannot
exceed the greater of:  
    
    50% of net income (before taking into account such contribution and
any deductions for income taxes and after taking into account any
deductions for social contribution on net profits) for the period in
respect of which the payment is made; or
    
    50% of retained earnings. Any payment of interest on capital to holders of ADSs or preferred shares,
whether or not they are Brazilian residents, is subject to Brazilian
withholding tax at the rate of 15% (or 25% if the beneficiary is resident in a
tax haven jurisdiction). The amount paid to shareholders as interest on
capital, net of any withholding tax, may be included as part of any mandatory
distributable amount. Under Brazilian law, we are obligated to distribute to
shareholders an amount sufficient to ensure that the net amount received by
them, after payment by us of applicable Brazilian withholding taxes in respect
of the distribution of interest on capital, is at least equal to the mandatory
distributable amount. When we distribute interest on capital, and that
distribution is not accounted for as part of the mandatory distribution,
Brazilian withholding tax will apply. Specific Shareholders Rights According to the Brazilian Corporation Law, neither a companys bylaws nor
actions taken at a general meeting of shareholders may deprive a shareholder of
certain specific rights, such as:  
    
    the right to participate in the distribution of profits;
    
    the right to participate equally and ratably in any remaining
residual assets in the event of the companys liquidation;
    
    the right to supervise the management of the corporate business as
specified in the Brazilian Corporation Law;
    
    preemptive rights in the event of a subscription of shares,
debentures convertible into shares or subscription bonuses (other than
with respect to a public offering of such securities, as may be
provided in the bylaws); and
    
    the right to withdraw from the company in the cases specified in the Brazilian Corporation Law. Other Provisions Neither the Brazilian Corporation Law nor our bylaws expressly addresses:  
    
    staggered terms for directors;
    
    cumulative voting, except as described below; or
    
    measures that could prevent a takeover attempt. Nevertheless, the General Telecommunications Law requires Anatels prior
approval for any spin off, merger, incorporation, decrease of capital,
transformation or transfer of control involving corporations holding any
telecommunications concession or authorization. According to the Brazilian Corporation Law, shareholders representing at
least one-tenth of the voting capital may request that a multiple voting
procedure be adopted to entitle each share to as many votes as there are board
members and to give each shareholder the right to vote cumulatively for only
one candidate or to distribute 55




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his/her votes among several candidates. Pursuant to the Brazilian
Corporation Law, shareholders actions must be taken at a shareholders meeting
duly convened, and not by written consent. Preemptive Rights Each of our shareholders has a general preemptive right to subscribe for
shares or securities convertible into shares in any capital increase, in
proportion to its holding, except in the event of the grant and exercise of any
option to acquire shares of our share capital. A period of at least 30 days
following the publication of notice of the issuance of shares or securities
convertible into shares is allowed for exercise of the right. Under the
Brazilian Corporation Law, we may amend our bylaws to eliminate preemptive
rights or to reduce the exercise period in connection with a public offering of
shares or an exchange offer made to acquire another company. Currently, our
bylaws provide for such elimination of the preemptive rights in those
circumstances upon approval of the shareholders or the board of directors. In the event of a capital increase which would maintain or increase the
proportion of capital represented by preferred shares, holders of ADSs, except
as described above, would have preemptive rights to subscribe only for newly
issued preferred shares. In the event of a capital increase which would reduce
the proportion of capital represented by preferred shares, holders of ADSs,
except as described above, would have preemptive rights to subscribe for
preferred shares in proportion to their shareholdings and for common shares
only to the extent necessary to prevent dilution of their interest in us. Redemption and Rights of Withdrawal The Brazilian Corporation Law provides that, under limited circumstances,
a shareholder has the right to withdraw his or her equity interest from the
company and to receive payment for the portion of shareholders equity
attributable to his or her equity interest. This right of withdrawal may be
exercised by our dissenting shareholders in the event that at least half of all
voting shares outstanding authorize us:  
    
    to create preferred shares or to increase the existing classes of
preferred shares, without maintaining the proportion with the remaining
classes of preferred shares, except if provided for and authorized in
the bylaws;
    
    changes in the preferences, advantages and conditions of redemption
or amortization of one or more classes of preferred shares, or the
creation of a new class with greater privileges;
    
    to reduce the mandatory distribution of dividends;
    
    to merge into another company or to consolidate with another
company, subject to the conditions set forth in the Brazilian
Corporation Law;
    
    to participate in a centralized group of companies as defined under
the Brazilian Corporation Law and subject to the conditions set forth
therein;
    
    to change our corporate purpose;
    
    to split up, subject to the conditions set forth in the Brazilian Corporation Law;
    
    to transform into another type of company;
    
    to transfer all of our shares to another company or to receive shares of another company in order to make the company whose shares are
transferred a wholly owned subsidiary, a procedure known as
incorporação de ações; or
    
    to acquire control of another company at a price which exceeds the
limits set forth in the Brazilian Corporation Law. The right of withdrawal lapses 30 days after publication of the minutes of
the shareholders meeting that approved the corporate actions described above.
We would be entitled to reconsider any action giving rise to withdrawal rights
within 10 days following the expiration of such rights if the withdrawal of
shares of dissenting shareholders would jeopardize our financial stability. 56




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In addition, the rights of withdrawal in the fourth, fifth and ninth
bullet points above may not be exercised by holders of shares if such shares
(i) are liquid, which definition entails being part of the São Paulo Stock
Exchange Index or other stock exchange index (as defined by the CVM), and (ii)
are widely held, such that the controlling shareholder or companies it controls
have less than 50% of the shares. This right of withdrawal may also be exercised in the event that the
entity resulting from a merger, incorporação de ações, as described above,
consolidation or spin-off of a listed company fails to become a listed company
within 120 days of the shareholders meeting at which such decision was taken. The Brazilian Corporation Law allows companies to redeem their shares at
their economic value, subject to the provisions of their bylaws and certain
other requirements. Our bylaws currently do not provide that our capital stock
will be redeemable at its economic value and, consequently, any redemption
pursuant to the Brazilian Corporation Law would be made based on the book value
per share, determined on the basis of the last balance sheet approved by the
shareholders. However, if a shareholders meeting giving rise to redemption
rights occurred more than 60 days after the date of the last approved balance
sheet, a shareholder would be entitled to demand that his or her shares be
valued on the basis of a new balance sheet dated within 60 days of such
shareholders meeting. Form and Transfer According to the Brazilian Corporation Law, all shares issued by Brazilian
companies must be nominative and either registered within the companies
registry books (the Registro de Ações Nominativas) or placed under the custody
of a financial institution specifically designated to perform custodial
services by each company. Because preferred shares are in registered
book-entry only form, the transfer of shares is effected by either an entry
made by us in our books by debiting the share account of the transferor and
crediting the share account of the transferee or by a book entry by the
custodian in case the board of directors authorizes the maintenance of our
shares under the custody of a financial institution specifically designated by
the shareholders to perform book-entry services. Under our bylaws, our shares
are in the form of book-entry shares and the transfer of those shares is
effected through an order to the financial institution which controls the
registration of those shares. Transfers of preferred shares by a foreign investor are made in the same
way and executed by that investors local agent on the investors behalf except
that, if the original investment was registered with the Central Bank pursuant
to the Annex IV Regulations, the foreign investor also should seek amendment,
if necessary, through its local agent, of the certificate of registration to
reflect the new ownership. The São Paulo Stock Exchange operates a central clearing system. A holder
of our shares may choose, at its discretion, to participate in this system and
all shares elected to be put into the system will be deposited in custody with
the stock exchange through a Brazilian institution that is duly authorized to
operate by the Central Bank having a clearing account with the stock exchange.
The fact that these shares are subject to custody with the stock exchange will
be reflected in our registry of shareholders. Each participating shareholder
will, in turn, be registered in our register of beneficial shareholders
maintained by the stock exchange and will be treated in the same way as
registered shareholders. Significant Differences between our Corporate Governance Practices and NYSE
Corporate Governance Standards We are subject to the NYSE corporate governance
listing standards. As a foreign private issuer, the standards applicable to us
are considerably different than the standards applied to U.S. listed companies.
Under the NYSE rules, we are required only to: (i) have an audit committee or
audit board, pursuant to an applicable exemption available to foreign private
issuers, that meets certain requirements, as discussed below, (ii) provide
prompt certification by our chief executive officer of any material
non-compliance with any corporate governance rules, and (iii) provide a brief
description of the significant differences between our corporate governance
practices and the NYSE corporate governance practice required to be followed by
U.S. listed companies. The discussion of the significant differences between
our corporate governance practices and those required of U.S. listed companies
follows below. Majority of Independent Directors 57




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The NYSE rules require that a majority of the board must consist of
independent directors. Independence is defined by various criteria, including
the absence of a material relationship between the director and the listed
company. Brazilian law does not have a similar requirement. Under Brazilian
law, neither our board of directors nor our management is required to test the
independence of directors before their election to the board. However, both
Brazilian Corporate Law and the CVM have established rules that require
directors to meet certain qualification requirements and that address the
compensation and duties and responsibilities of, as well as the restrictions
applicable to, a companys executive officers and directors. While our
directors meet the qualification requirements of Brazilian Corporate Law and
the CVM, we do not believe that our directors would be considered independent
under the NYSE test for director independence. Brazilian Corporate Law and our
bylaws require that our directors be elected by our shareholders at a general
shareholders meeting. Executive Sessions NYSE rules require that the non-management directors must meet at
regularly scheduled executive sessions without management. Brazilian Corporate
Law does not have a similar provision. According to Brazilian Corporate Law,
up to one-third of the members of the board of directors can be elected from
management. 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. As a result, the non-management
directors on our board do not typically meet in executive session. Nominating/Corporate Governance Committee NYSE rules require that listed companies have a Nominating/Corporate
Governance Committee composed entirely of independent directors and governed by
a written charter addressing the committees required purpose and detailing its
required responsibilities, which include, among other things, identifying and
selecting qualified board member nominees and developing a set of corporate
governance principles applicable to the company. We are not required under
applicable Brazilian law to have a Nominating Committee/Corporate Governance
Committee, and accordingly, to date, have not established such a committee.
Pursuant to our bylaws, our directors are elected by our shareholders at a
general shareholders meeting. Our corporate governance practices are adopted
by the entire board. Compensation Committee NYSE rules require that listed companies have a Compensation Committee
composed entirely of independent directors and governed by a written charter
addressing the committees required purpose and detailing its required
responsibilities, which include, among other things, reviewing corporate goals
relevant to CEO compensation, evaluating CEO performance and approving CEO
compensation levels and recommending to the board non-CEO compensation,
incentive-compensation and equity-based plans. We are not required under
applicable Brazilian law to have a Compensation Committee. Under Brazilian
Corporate Law, the total amount available for compensation of our directors and
executive officers and for profit-sharing payments to our executive officers is
established by our shareholders at the annual general meeting. The board of
directors is then responsible for determining the individual compensation and
profit-sharing of each executive officer, as well as the compensation of our
board members. In making such determinations, the board reviews the
performance of the executive officers, including the performance of our CEO. Audit Committee NYSE rules require that listed companies have an audit committee that (i)
is composed of a minimum of three independent directors who are all financially
literate, (ii) meets the SEC rules regarding audit committees for listed
companies, (iii) has at least one member who has accounting or financial
management expertise and (iv) is governed by a written charter addressing the
committees required purpose and detailing its required responsibilities.
However, as a foreign private issuer, we need only to comply with the
requirement that the audit committee, or conselho fiscal in our case, meet the
SEC rules regarding audit committees for listed companies. Brazilian Corporate
Law requires companies to have a non-permanent conselho fiscalcomposed of
three to five members who are elected at the general shareholders meeting.
The conselho fiscaloperates independently from management and from a companys
external auditors. Its main function is to monitor the activities of
management, examine the financial statements of each fiscal year and provide a
formal report to our shareholders. 58




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We have a permanent conselho fiscalthat consists of three to five members
and which has regularly scheduled meetings every three months. The members of our
conselho fiscalare all financially literate and we have
determined that two members have accounting
expertise that qualifies them as audit committee financial experts. Shareholder Approval of Equity Compensation Plans NYSE rules require that shareholders be given the opportunity to vote on
all equity compensation plans and material revisions thereto, with limited
exceptions. Under Brazilian Corporate Law, shareholders must approve all stock
option plans. In addition, any issuance of new shares that exceeds our
authorized share capital is subject to shareholder approval. Corporate Governance Guidelines NYSE
rules require  listed companies to adopt and disclose corporate
governance guidelines. We have not adopted any formal corporate governance
guidelines beyond those required by applicable Brazilian law. We have adopted
and observe a disclosure policy which requires the public disclosure of all
relevant information pursuant to guidelines set forth by the CVM, as well as an
insider trading policy, which, among other things, establishes black-out
periods and requires insiders to inform management of all transactions
involving our securities. Code of Business Conduct and Ethics NYSE rules require that listed companies adopt and disclose a code of
business conduct and ethics for directors, officers and employees, and promptly
disclose any waivers of the code for directors or executive officers.
Applicable Brazilian law does not have a similar requirement. However, in
December 2003, we adopted a code of ethics and conduct applicable to our
officers, directors and employees, including at the subsidiary level. We
believe this code substantially addresses the matters required to be addressed
pursuant to the NYSE rules. A copy of our code of ethics and conduct has been
filed as Exhibit 11.1 to this annual report. Internal Audit Function NYSE rules require that listed companies maintain an internal audit
function to provide management and the audit committee with ongoing assessments
of the companys risk management processes and system of internal control. Our
internal audit function is the responsibility of our financial department under
the supervision of our chief financial officer. Our financial department is
supported in its internal audit function by our quality control department,
which is responsible for the evaluation and effectiveness of our internal
procedures and reporting systems. C. Material Contracts Personal Mobile Service Authorization We obtained a mobile cellular service concession from the Brazilian
Ministry of Communications on November 4, 1997. On February 19, 2004, we
signed an authorization contract with Anatel to migrate to the SMP regime. We
also acquired from Anatel additional spectrum on the 1,800 Mhz frequency range.
The terms of our authorization are described in Item 4Information on the
CompanyRegulation of the Brazilian Telecommunications Industry. Interconnection Agreements Incumbent wireline providers are obliged to provide interconnection
services to wireless operators with the incumbents own installations. Telemig
Celular has entered into interconnection agreements with TIM, our B Band
competitor; Oi, our D Band competitor; Embratel, Telefonica and Intelig, the
three long-distance carriers; and Telemar and Vésper S.A., the two local
fixed-line carriers operating in our area. The terms of these interconnection
agreements include provisions for the number of connection points, the method
by which signals must be received and transmitted and the interconnection fees.
See Item 4Information on the CompanyRegulation of the Brazilian
Telecommunications IndustryObligations of Telecommunications Companies and
Item 4Information on the CompanyRegulation of the Brazilian
Telecommunications IndustryInterconnection. 59




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Roaming Agreements Roaming services must be made available to other wireless operators upon
the request of such operators. Within the state of Minas Gerais, we entered
into an operating agreement with CTBC Telecom in 2000 that allows our
subscribers to use CTBC Telecoms network and pay as a regular customer of CTBC
Telecom, without being charged for any roaming fees. This agreement extends
our coverage to 79% of the population of Minas Gerais, including 434 locations.
We have entered into agreements for automatic roaming with all other A and B
Band service providers outside our area. These roaming agreements permit our
subscribers to have access to the networks of other cellular service providers
while traveling or roaming outside our area. Conversely, we are required to
provide roaming services to subscribers of those wireless operators from
outside its area when they are within our area. The agreements require the
parties to provide service to roaming subscribers on the same basis as they
provide service to their own subscribers and to carry out a monthly
reconciliation of roaming subscriber usage charges. The roaming agreements
have a three-year term, which is automatically renewable for further one-year
terms. We have also entered into international roaming agreements with foreign
carriers that permit our subscribers to use roaming services in Argentina,
Uruguay and the United States and that enable subscribers of those carriers to
use roaming services in our area. Service Agreement On June 30, 2001, we entered into a service agreement with Amazônia
Celular S.A. and LHS do Brasil Ltda under which Sema, a subsidiary of LHS do
Brasil Ltda., licensed a limited right to use certain of its software, together
with software produced by third parties, to Telemig Celular and Amazônia
Celular S.A. and further agreed to perform specified services in connection
with its proprietary software and the third party software. The provision of
these services ended in February 2004. Financing Agreements Export Development Corporation of Canada On July 8, 1999, Telemig Celular entered into a US$91 million credit
agreement with the Export Development Corporation of Canada, which was restated
and amended on April 3, 2001 and April 23, 2001, with an additional US$50
million of credit, relating to the purchase of cellular telecommunications
equipment and services from Northern Telecom companies. ABN Amro Bank NV is
acting as administrative agent. The annual interest rate under this agreement
is six month LIBOR plus 4.875%. Principal payments (which began on April 30,
2003) and interest are payable semi-annually. The maturity date is April 28,
2006. At December 31, 2003, there was R$291 million outstanding under this
credit agreement. BNDES On November 9, 2000, Telemig Celular obtained a R$260 million, five-year
facility from the Brazilian National Economic and Social Development Bank
(Banco Nacional de Desenvolvimento Econômico e Social (BNDES)) and a consortium
of three Brazilian banks: Banco Itaú S.A., Banco Bradesco S.A. and Banco Alfa
de Investimento S.A. The proceeds of this facility, which has an annual
interest rate of 3.8% over either (i) the average cost of BNDES currency
basket or (ii) the long-term interest rate disclosed by the Central Bank, were
invested in the expansion of our coverage area and the introduction of new
services. Principal is payable monthly with a final maturity on January 15,
2006. At December 31, 2003, there was R$169 million outstanding under this
facility. Notes Units On January 20, 2004, Telemig Celular issued US$80 million of 8.75%
unsecured senior notes due 2009. The Telemig Celular notes issuance was
combined with an issuance by Amazônia Celular of US$40 million of 8.75% notes
due 2009. The Telemig Celular notes and the Amazônia Celular notes may only be
transferred together as part of notes units and will not trade separately. The
notes units were offered and sold in offshore transactions in accordance with
Regulation S under the Securities Act and to qualified institutional buyers
(QIBs) in the United States under Rule 144A of the Securities Act. Interest
payments on the Telemig Celular notes will be made semi-annually. 60




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D. Exchange Controls The system of foreign investment in financial and capital markets in
Brazil was modified by Resolution No. 2,689 of the National Monetary Council on
January 26, 2000, which substitutes the rules of Annex IV to Resolution No.
1,289 of the National Monetary Council. According to Resolution No. 2,689, the entry of foreign capital through
the free-rate exchange market, as an investment in the Brazilian financial and
capital markets, will be subject to electronic registration with the Central
Bank. Qualified foreign investors registered with the CVM and acting through
authorized custody accounts managed by local agents may buy and sell shares on
Brazilian stock exchanges without obtaining separate certificates of
registration for each transaction. However, institutions that provide custody
services must submit monthly information to the Central Bank regarding each
foreign investor as well as submit to the Central Bank or the CVM records of
transactions made by foreign investors. The term qualified foreign investors includes any individual or
financial or non-financial institution, resident or domiciled abroad, which:  
    
    has a legal representative in Brazil;
    
    fills out a form to be kept on hand by the legal representative;
    
    obtains registration with the CVM as a foreign investor; and
    
    registers the foreign investment with the Central Bank. The issuance of depositary receipts in foreign markets in respect of
shares of Brazilian issuers, such as our ADRs, is permitted by Resolution No.
1,927 of the National Monetary Council, which is the restated and amended Annex
V to Resolution No. 1,289 of the National Monetary Council. Our ADS program
was approved under the Annex V regime by the Central Bank and the CVM prior to
the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by
ADR holders outside Brazil are free of Brazilian foreign investment controls
and holders of the ADSs will be entitled to the favorable tax treatment. An electronic registration has been generated in the name of the
depositary with respect to the ADSs and is maintained by the custodian on
behalf of the depositary. Pursuant to the registration, the custodian and the
depositary are able to convert dividends and other distributions with respect
to the preferred shares represented by ADSs into foreign currency and remit the
proceeds outside Brazil. In the event that a holder of ADSs exchanges such
ADSs for preferred shares, such holder will be entitled to continue to rely on
the depositarys certificate of registration for five business days after such
exchange following which such holder must seek to obtain its own certificate of
registration with the Central Bank. A holder of preferred shares may not be
able to convert into foreign currency and remit outside Brazil the proceeds
from the disposition of, or distribution with respect to, the preferred shares,
unless such holder qualifies under Resolution No. 2,689 regulations or obtains
its own certificate of registration. A holder of preferred shares that obtains
a certificate of registration will be subject to less favorable Brazilian tax
treatment than a holder of ADSs. See TaxationBrazilian Tax Considerations
for a description of this tax treatment. In addition, if the holder resides in
a tax haven jurisdiction, this holder will also be subject to less favorable
tax treatment. The right to convert dividend payments and proceeds from the sale of
shares into foreign currency and to remit such amounts outside Brazil is
subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investments be registered with
the Central Bank. The restrictions on the remittance of foreign capital abroad may hinder or
prevent Banco Itaú S.A., which is acting as custodian for the preferred shares
represented by ADSs, or holders who have exchanged ADRs for preferred shares,
from converting dividends, distributions or the proceeds from any sale of such
preferred shares, as the case may be, into U.S. dollars and remitting such U.S.
dollars abroad. Holders of ADSs could be adversely affected by delays in, or
refusal to grant any, required government approval for conversions of Brazilian
currency payments and remittances abroad of the proceeds from dividends or
sales of Preferred Shares underlying the ADSs. Under current Brazilian legislation, the federal government may impose
temporary restrictions on remittances of foreign capital abroad in the event of
a serious imbalance or an anticipated serious imbalance in Brazils balance of
payments. For approximately six months in 1989 and early 1990, the federal
government froze 61




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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 assurances that the federal government
will not impose similar restrictions on foreign repatriations in the future. E. Taxation The following summary contains a description of the material Brazilian and
U.S. federal income tax consequences of the acquisition, ownership and
disposition of preferred shares or ADSs. This summary does not purport to be a
comprehensive description of all the tax considerations that may be relevant to
a decision to purchase preferred shares or ADSs. This summary is based upon
the tax laws of Brazil and related regulations and on the tax laws of the
United States and related regulations as in effect on the date of this annual
report. These laws and regulations may change in the future. Although there is at present no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. We cannot assure you, however, as to
whether or when a treaty will enter into force or how it will affect the U.S.
holders of preferred shares or ADSs. Prospective holders of preferred shares
or ADSs should consult their own tax advisors as to the tax consequences of the
acquisition, ownership and disposition of preferred shares or ADSs in their
particular circumstances. Brazilian Tax Considerations The following discussion summarizes material Brazilian tax consequences
relating to the acquisition, ownership and disposition of preferred shares or
ADSs by a holder not deemed to be domiciled in Brazil for Brazilian tax
purposes. This discussion does not address all the Brazilian tax
considerations that may be applicable to any such particular non-Brazilian
holder, and each non-Brazilian holder should consult his or her own tax advisor
about the Brazilian tax consequences of investing in preferred shares or ADSs. Taxation of Dividends Dividends paid by us in cash or in kind from profits for periods beginning
on or after January 1, 1996 (i) to the depositary in respect of preferred
shares, underlying ADSs or (ii) to a non-Brazilian holder in respect of
preferred shares, will generally not be subject to Brazilian withholding tax. Dividends paid from profits generated before January 1, 1996 may be
subject to Brazilian withholding tax at 15% if the profits were generated in
1994 or 1995, and at 25% if the profits were generated before 1994. Stock
dividends are not subject to Brazilian tax. The only Brazilian tax treaty now in effect that would, if specified
conditions are met, reduce the rate of the withholding tax on dividends paid
from profits generated before January 1, 1996 is the treaty with Japan, which
would reduce the rate to 12.5%. Taxation of Capital Gains Capital gain or loss is defined as the difference between the amount
realized on the sale or exchange and the acquisition cost of the shares sold,
measured in Brazilian currency without any correction for inflation. The
acquisition cost of shares registered as an investment with the Central Bank is
calculated on the basis of the foreign currency amount registered with the
Central Bank. Capital gains realized outside Brazil by a non-Brazilian holder on the
disposition of ADSs or preferred shares to another non-Brazilian holder are not
subject to Brazilian tax. The deposit of preferred shares in exchange for ADSs
and the withdrawal of preferred shares upon cancellation of ADSs are also not
subject to Brazilian tax. Capital gains realized by non-Brazilian holders on dispositions of
preferred shares in Brazil or in transactions with Brazilian residents may be
free of Brazilian tax or may be taxed at one of the following rates, depending
on the circumstances described below:  
    
    Gains realized through off-exchange transactions in Brazil or with
Brazilian residents are generally subject to tax at a rate of 15%. 62




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
    
    Gains realized through transactions on Brazilian stock exchanges
are generally subject to tax at a rate of 20%.
    
    Gains on the sale or exchange of duly-registered investments made
in accordance with Resolution No. 2,689 of the Monetary Council are not
subject to Brazilian tax if such sale or exchange occurs on a Brazilian
stock exchange, except for investments originating from countries where
income is not taxed or is taxed at a rate lower than 20%, which are
taxed in accordance with the same tax rules applicable to Brazilian
residents.
    
    Gains on the disposition of preferred shares obtained upon
cancellation of ADSs are not taxed in Brazil if such disposition is
made, and the proceeds are remitted abroad, within five business days
after cancellation.
    
    If the sales value of the preferred shares contains a component of
interest on capital, the amount of this interest will be taxed at a
rate of 15%. See Distributions of Interest on Capital below. Any gains realized by a non-Brazilian holder upon the redemption of
preferred shares will be treated as gains from the disposition of such
preferred shares to a Brazilian resident occurring off of a stock exchange and
will accordingly be subject to tax at a rate of 15%. We cannot assure you that the current preferential treatment for holders
of ADSs and non-Brazilian holders of preferred shares under the Resolution No.
2,689 regime will be maintained. Any exercise of preemptive rights relating to the preferred shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the preferred shares underlying ADSs, complying
with the rules set forth by the National Monetary Council will be treated
differently for Brazilian tax purposes depending on whether the transaction
takes place on a Brazilian stock exchange or not. Gains on sales or assignments made on a Brazilian stock exchange are not
taxed in Brazil, but gains on other sales or assignments may be subject to tax
at rates up to 15%. Distributions of Interest on Capital Brazilian corporations may make payments to shareholders characterized as
interest on the capital of the company as an alternative form of making
dividend distributions. The rate of interest is calculated on the companys
equity and it may not be higher than the federal governments long-term
interest rate as determined by the Central Bank from time to time (11% per
annum for the three-month period starting on January, 2003). The deduction of
the total amount distributed as interest on capital may not exceed the greater
of:  
    
    50% of net income for the year in respect of which the payment is
made before taking such distribution into account, or
    
    50% of retained earnings for years prior to the year in respect of
which the payment is made, plus profit reserves. Payments of interest on capital are decided by the shareholders on the
basis of the recommendations of a companys board of directors. Distributions of interest on capital paid to Brazilian and non-Brazilian
holders of preferred shares, including payments to the depositary in respect of
preferred shares underlying ADSs, are deductible by us for Brazilian corporate
income tax purposes. These payments are subject to Brazilian withholding tax
at the rate of 15%, except for payments to persons who are constitutionally
exempt from tax in Brazil. Payments to persons situated in jurisdictions
deemed to be tax havens will be subject to tax at a 25% rate. Tax havens are
defined as countries that either have no income tax or in which the income tax
rate is less than 20%. We cannot assure you that our board of directors will not recommend that
future distributions of profits should be made by means of interest on capital
instead of by means of dividends. Amounts paid as interest on capital, net of applicable withholding tax,
may be treated as payments in respect of the dividends we are obligated to
distribute to our shareholders in accordance with our bylaws and the Brazilian
Corporation Law. Distributions of interest on capital in respect of the
preferred shares, including 63




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distributions to the depositary in respect of preferred shares underlying
ADSs, may be converted into U.S. dollars and remitted outside of Brazil,
subject to applicable exchange controls. Other Brazilian Taxes There are no Brazilian taxes applicable to the ownership, transfer or
disposition of preferred shares or ADSs by a non-Brazilian holder except for
gift and inheritance taxes levied by some states in Brazil on gifts made or
inheritances bestowed by individuals or entities not resident or domiciled in
Brazil or in the relevant state to individuals or entities that are resident or
domiciled within such state in Brazil. There are no Brazilian stamp, issue,
registration, or similar taxes or duties payable by holders of preferred shares
or ADSs, except for a 0.64% tax on the secondary sale or distribution of the
preferred shares through a public offering registered with the Brazilian
Securities and Exchange Commission, limited to R$82,870 and payable by the
seller. A financial transaction tax (Imposto sobre Operações Financeiras) may be
imposed on the conversion of Brazilian currency into foreign currency, such as
for purposes of paying dividends and interest. The tax rate on such
conversions is currently 0%, but the Minister of Finance has the legal power to
increase the rate to a maximum of 25%. Any such increase will be applicable
only prospectively. Another tax, which applies to the removal of funds from accounts at banks
and other financial institutions, will be imposed through to December 2004 on
distributions by us in respect of ADSs at the time such distributions are
converted into U.S. dollars and remitted abroad by the custodian. This tax is
currently levied at a rate of 0.38%. Financial institutions performing
transactions to which the tax applies are responsible for the collection of the
tax. U.S. Federal Income Tax Considerations The following discussion is a general summary of the principal U.S.
federal income tax consequences of the ownership and disposition of our
preferred shares or ADSs that may be relevant to you if you are a U.S. holder
(as defined below) of such shares or ADSs. This discussion is based on
provisions of the U.S. Internal Revenue Code of 1986, as amended (the Code),
existing and proposed Treasury regulations, administrative pronouncements of
the U.S. Internal Revenue Service (IRS) and judicial decisions, all as now in
effect, and all of which are subject to change, possibly with retroactive
effect, and to different interpretations. This discussion does not address all
of the U.S. federal income tax considerations that may be relevant to you in
light of your particular circumstances, and does not discuss any application of
state, local or non-U.S. tax law or any aspect of U.S. federal tax law other
than income taxation. Moreover, this discussion deals only with our preferred
shares or ADSs that you will hold as capital assets (generally, property held
for investment), and it does not apply to U.S. holders subject to special U.S.
federal income tax rules, such as banks, insurance companies, securities
dealers, partnerships or other entities classified as partnerships for U.S.
federal income tax purposes, tax-exempt organizations, persons that hold our
preferred shares or ADSs as a hedge or as part of an integrated investment
(including a straddle), persons owning directly, indirectly or constructively,
10% or more of our voting stock and persons whose functional currency is not
the U.S. dollar. For purposes of this discussion, a U.S. holder is a
beneficial owner of our preferred shares or ADSs that is, for U.S. federal
income tax purposes:  
    
    a citizen or resident alien individual of the United States,
    
    a corporation (or other entity treated as a corporation for U.S.
federal income tax purposes) created or organized in or under the laws
of the United States or any political subdivision thereof,
    
    an estate the income of which is subject to U.S. federal income tax
regardless of its source, or
    
    a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust, and one or
more U.S. persons have the authority to control all substantial
decisions of the trust or (B) the trust has a valid election in effect
under applicable Treasury regulations to be treated as a U.S. person. If a partnership holds preferred shares or ADSs, the U.S. federal income
tax treatment of a partner generally will depend upon the status of the partner
and the activities of the partnership. Partners of partnerships holding
preferred shares or ADSs should consult their own tax advisers. In general,
for U.S. federal income tax purposes, holders of American Depositary Receipts
evidencing ADSs will be treated as the beneficial owners of the preferred
shares represented by those ADSs. Accordingly, deposits and withdrawals of our
preferred shares by U.S. holders in exchange for ADSs will not result in the
realization of gain or loss for U.S. federal income tax purposes. 64




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Taxation of Distributions In general, distributions with respect to our preferred shares or the ADSs
(which likely would include distributions of notional interest charges
attributed to shareholders equity, as described above under  Brazilian Tax
Considerations  Distributions of Interest on Capital) will constitute
dividends for U.S. federal income tax purposes, to the extent made from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. If a distribution exceeds the amount of our current and
accumulated earnings and profits, the excess will be treated as a non-taxable
return of capital to the extent of your tax basis in our preferred shares or
ADSs, and thereafter as capital gain. As used below, the term dividend means
a distribution that constitutes a dividend for U.S. federal income tax
purposes. The gross amount of any taxable dividend (including amounts withheld in
respect of Brazilian taxes) paid with respect to our preferred shares or ADSs
generally will be subject to U.S. federal income taxation as ordinary dividend
income and will not be eligible for the dividends received deduction allowed to
corporations. Taxable dividends paid in Brazilian currency will be included in
your gross income in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date you receive the dividends, or, in the case
of dividends you receive in respect of ADSs, on the date the dividends are
received by the depositary, whether or not converted into U.S. dollars. You
will have a tax basis in any distributed Brazilian currency equal to the amount
included in gross income, and any gain or loss recognized upon a subsequent
disposition of such Brazilian currency generally will be ordinary income or
loss. If dividends paid in Brazilian currency are converted into U.S. dollars
on the day you or the depositary, as the case may be, receive such dividends,
you generally should not be required to recognize foreign currency gain or loss
in respect of the dividend income. We urge you to consult your own tax
advisers regarding the treatment of any foreign currency gain or loss if any
Brazilian currency received by you or the depositary is not converted into U.S.
dollars on the date of receipt. 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, financial projections, relevant
market and shareholder data, and current estimates regarding the value and
nature of our assets, 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. However, 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. See Passive
Foreign Investment Company Rules below. 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 U.S.
exchange. In addition, the U.S. 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 U.S. federal income tax rates for qualified
dividend income in the light of their own particular circumstances. For foreign tax credit purposes, dividends paid with respect to our
preferred shares or ADSs generally will be treated as income from sources
outside the United States. The limitation on foreign taxes eligible for the
credit is calculated separately with respect to specific classes of income.
For this purpose, dividends paid by us generally will constitute passive (or
possibly, in the case of certain U.S. holders, financial services) income.
Subject to generally applicable limitations under U.S. federal income tax law,
Brazilian withholding tax imposed on such dividends, if any, will be eligible
for credit against a U.S. holders U.S. federal income tax liability (or at a
U.S. holders election, all foreign income taxes paid may instead be deducted
in computing such holders taxable income). In general, special rules will
apply to the calculation of foreign tax credits in respect of dividend income
that is subject to preferential rates of U.S. federal income tax. U.S. holders
should be aware that the IRS has 65




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expressed concern that parties to whom ADSs are released may be taking
actions that are inconsistent with the claiming of foreign tax credits by U.S.
holders of ADSs. Accordingly, the discussion above regarding the creditability
of Brazilian withholding tax on dividends could be affected by future actions
that may be taken by the IRS. The rules with respect to foreign tax credits
are complex and U.S. holders should consult their own tax advisers regarding
the availability of foreign tax credits in light of their particular
circumstances. Taxation of Capital Gains In general, gain or loss, if any, realized upon a sale or other taxable
disposition of our preferred shares or ADSs will be subject to U.S. federal
income taxation as capital gain or loss in an amount equal to the difference
between the amount realized on the sale or other taxable disposition and your
adjusted tax basis in our preferred shares or ADSs. Such capital gain or loss
will be long-term capital gain or loss if at the time of sale or other taxable
disposition you held our preferred shares or ADSs for more than one year.
Certain non-corporate U.S. holders (including individuals) are eligible for
preferential rates of U.S. federal income taxation in respect of long-term
capital gains. The deduction for capital losses is subject to certain
limitations under the Code. Gain (or loss), if any, recognized by a U.S.
holder on the sale or other taxable disposition of our preferred shares or ADSs
generally will be treated as U.S. source income (or loss) for U.S. foreign tax
credit purposes. Consequently, if a Brazilian withholding tax is imposed on
the sale or other taxable disposition of our preferred shares or ADSs, a U.S.
holder that does not receive sufficient foreign source income from other
sources may not be able to derive effective U.S. foreign tax credit benefits in
respect of such Brazilian withholding tax. U.S. holders of our preferred
shares or ADSs should consult their own tax advisers regarding the application
of the foreign tax credit rules to their investment in, and disposition of,
such shares or ADSs. Passive Foreign Investment Company Rules Special U.S. federal income tax rules apply to U.S. persons owning shares
of a PFIC. A non-U.S. corporation generally will be classified as a PFIC for
U.S. federal income tax purposes in any taxable year in which, after applying
relevant look-through rules with respect to the income and assets of
subsidiaries, either:  
    
    at least 75% of its gross income is passive income; or
    
    on average at least 50% of the gross value of its assets is
attributable to assets that produce passive income or are held for the
production of passive income. For this purpose, passive income generally includes, among other things,
dividends, interest, rents, royalties, gains from the disposition of passive
assets and gains from commodities transactions. Based on certain estimates of our current and projected gross income and
gross assets, we do not expect our preferred shares or ADSs to be considered
shares of a PFIC for our current fiscal year or for foreseeable future fiscal
years. However, because the determination of whether our preferred shares or
ADSs constitute shares of a PFIC will be made by us on an annual basis, is
based upon the composition of our income and assets (including, among others,
entities in which we hold at least a 25% interest), and the nature of our
activities, from time to time, and because there are uncertainties in the
application of the relevant rules, we cannot assure you that our preferred
shares or ADSs will not be considered shares of a PFIC for any fiscal year.
Moreover, we will not obtain an opinion of counsel, and no ruling will be
sought from the IRS, regarding our annual PFIC determination. If our preferred
shares or ADSs were shares of a PFIC for any fiscal year, U.S. holders
(including certain indirect U.S. holders) may be subject to adverse U.S.
federal income tax consequences upon a sale or other disposition of such
preferred shares or ADSs, or upon the receipt of certain distributions from us
(including imposition of an interest charge on gains or excess distributions
attributable to prior years in the U.S. holders holding period during which we
were determined to be a PFIC), unless such U.S. holders made certain available
elections, generally for the first taxable year for which shares of a PFIC were
considered to be held. If you are a U.S. holder of marketable stock in a PFIC, you may make a
mark-to-market election, provided the PFIC stock is regularly traded on a
qualified exchange. Under applicable Treasury regulations, a qualified
exchange includes a national securities exchange that is registered with the
SEC or the national market system established under the Securities Exchange Act
of 1934. Also, under applicable Treasury Regulations, PFIC stock traded on a
qualified exchange is regularly traded on such exchange for any calendar year
during which such stock is traded, other than in de minimisquantities, on at
least 15 days during each calendar quarter. We cannot assure you that our
stock will be treated as regularly traded for this purpose. 66




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If the mark-to-market election is made, you, as the electing U.S. holder,
generally would (i) include in gross income, entirely as ordinary income, an
amount equal to the difference between the fair market value of the PFIC stock
as of the close of such taxable year and its adjusted tax basis, and (ii)
deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the
PFIC stock over its fair market value at the end of the taxable year, but only
to the extent of the amount previously included in gross income as a result of
the mark-to-market election. The mark-to-market election is made with respect to marketable stock in a
PFIC on a shareholder-by-shareholder basis and, once made, can only be revoked
with the consent of the IRS. Special rules would apply if the mark-to-market
election is not made for the first taxable year in which a U.S. person owns
stock of a PFIC. You should consult with your tax advisor regarding the
application of the PFIC rules to our preferred shares or ADSs and the
availability and advisability of making an election to avoid the adverse U.S.
federal income tax consequences of the PFIC rules should we be considered a
PFIC for any taxable year. U.S. Backup Withholding and Information Reporting If you are a U.S. holder of our preferred shares or ADSs, you may, under
certain circumstances, be subject to backup withholding (currently at the
rate of 28%), with respect to certain payments to U.S. holders, such as
dividends we pay or the proceeds of a sale of our preferred shares or ADSs,
unless you (i) are a corporation or come within certain other exempt
categories, and demonstrate this fact when so required, or (ii) provide a
correct taxpayer identification number, certifying that you are not subject to
backup withholding, and otherwise comply with applicable requirements of the
backup withholding rules. Backup withholding is not an additional tax. Any
amount withheld under these rules will be creditable against your U.S. federal
income tax liability, provided the requisite information is timely furnished to
the IRS. F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended, pursuant to which we file reports and other
information with the U.S. Securities and Exchange Commission, or the
Commission. Reports and other information filed by us with the Commission may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commissions Regional Offices at 233 Broadway, New York, New York 10279 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. You may obtain copies of this material by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may also inspect these reports and other
information at the offices of the New York Stock Exchange, 11 Wall Street, New
York, New York 10005, on which our ADSs are listed. We also file financial
statements and other periodic reports with the CVM. Copies of our annual report on Form 20-F and documents referred to in this
annual report and our bylaws will be available for inspection upon request at
our offices at SCN Quadra 4, Bloco B, Edifício Centro Empresarial Varig, Torre
Oeste, sala 702-A, 70714-000 Brasilia  DF, Brazil. I. Subsidiary Information Not applicable. 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are primarily exposed to market risk from changes in both foreign
currency exchange rates and interest rates. We are exposed to foreign exchange
rate risk because certain of our costs and debt are denominated in currencies,
primarily the U.S. dollar, other than the real, which is the currency in which
we earn our revenues. 67




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Similarly, we are subject to market risk resulting from changes in
interest rates, which may affect the cost of our financing. Except for hedging
instruments relating to foreign currency denominated debt, as described below,
we do not use derivative instruments, such as foreign exchange forward
contracts, foreign currency options, interest rate swaps and forward rate
agreements, to manage these market risks, nor do we hold or issue derivative or
other financial instruments for trading purposes. Exchange Rate Risk We have exchange rate exposure with respect to the U.S. dollar and other
foreign currencies. At December 31, 2003, R$371.1 million of our indebtedness
was indexed to foreign currencies (of which R$320.5 million was denominated in
U.S. dollars and R$50.6 million was indexed to the average cost of BNDESs
currency basket). As of December 31, 2003, all of our total foreign currency
indexed debt was hedged. Interest Rate Risk At December 31, 2003, we had R$489.1 million in loans and financing
outstanding and bearing interest at floating rates. We invest our excess
liquidity (which was R$642.7 million at December 31, 2003) mainly in short-term
instruments. At December 31, 2003, we had hedging instruments in place in a

notional amount of R$375.5 million to manage our interest rate risk. The
potential loss in earnings to us over one year that would result from a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rates applicable to financial assets and liabilities on December 31,
2003 would be approximately R$13.9 million. The above sensitivity analysis is based on the assumption of an
unfavorable 100 basis point movement of the interest rates applicable to each
homogeneous category of financial assets and liabilities and sustained over a
period of one year. A homogeneous category is defined according to the
currency in which financial assets and liabilities are denominated and assumes
the same interest rate movement within each homogeneous category (e.g., U.S.
dollars). As a result, our interest rate risk sensitivity model may overstate
the impact of interest rate fluctuations for such financial instruments as
consistently unfavorable movements of all interest rates are unlikely. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Currently, we are not in default under any of our obligations nor is any
payment of dividends in arrears. In 2002, we breached certain financial
covenants contained in a credit agreement with BNDES and a consortium of three Brazilian banks.
Waivers were obtained in connection with the covenant breaches. During 2003,
we breached certain of our financial covenants contained in a credit agreement
with the Export Development Corporation of Canada and other parties, in respect
of which a waiver was obtained. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable. 
 ITEM 15. DISCLOSURE CONTROLS AND PROCEDURES Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in the U.S. Securities Exchange Act of 1934 under Rules 13a-15(e)) as
of the end of the period covered by this annual report, have concluded that, as
of that date, our disclosure controls 68




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and procedures were effective to ensure that material information relating
to us was made known to them by others within our company particularly during
the period in which this annual report and accounts was being prepared. There were no significant changes in our internal controls or in other
factors that could significantly affect these controls and procedures
subsequent to the date our chief executive officer and our chief financial
officer completed their evaluation, nor were there any significant deficiencies
or material weaknesses in our internal controls requiring corrective actions. 
 ITEM 16. A. Audit Committee Financial Expert We have determined that Luiz Otávio Nunes West and Gilberto Braga, two
members of our fiscal counsel (conselho fiscal), which is a board of statutory
auditors, are audit committee financial experts as defined by the United
States Securities and Exchange Commission. B. Code of Ethics Our board of directors has adopted a code of ethics applicable to our
directors, officers and employees, including our principal executive officer,
principal financial officer and controller. A copy of our code of ethics has
been filed as Exhibit 11.1 to this Form 20-F. There were no waivers of
compliance with our code of ethics in 2003. C. Principal Accountants Fees and Services The following table sets forth by category of service the total fees for
services performed by Ernst & Young Auditores Independentes S/S during the
fiscal years ended December 31, 2003 and December 31, 2002: 2003
    
    2002(in thousands of R$)Audit Fees
    
    $
    531
    
    
    $
    311Audit-Related Fees
    
    $
    
    
    
    $
    Tax Fees
    
    $
    2
    
    
    
    All Other Fees
    
    $
    226
    
    
    $
    110Total
    
    $
    759
    
    
    $
    421
 Audit Fees Audit fees in 2003 and 2002 consisted of the aggregate fees, including
expenses, billed by Ernst & Young Auditores Independentes S/S in connection
with the audit of our annual financial statements and for the review of the
financial information included in our annual report on Form 20-F and reviews of
our quarterly financial statements. Audit-Related Fees Audit-related fees in 2003 and 2002 consisted of the aggregate fees,
including expenses, billed by Ernst & Young Auditores Independentes S/S in
connection with assurances and related services reasonably related to audits
and reviews. Tax Fees Tax fees in 2003 and 2002 consisted of the aggregate fees, including
expenses, billed by Ernst & Young Auditores Independentes S/S in connection
with services for tax compliance, tax planning and tax advice. All Other Fees The aggregate of all other fees, other than those described above,
including expenses, billed by Ernst & Young Auditores Independentes S/S in 2003
and 2002 related to a review of processes and procedures for data
services (R$207,000 in 2003) actuarial review of the mathematical model for a proposed subscriber loyalty
program (R$19,000 in 2003) and assisting 69




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in assessing the impact of unexpected server interruptions (R$110,000 in 2002). All non-audit services
carried out subsequent to May 6, 2003 were pre-approved by our board of
directors, as required by Rule 2-01 of Regulation S-X. D. Exemptions from the Listing Standards for Audit Committees Pursuant to the exemption under Rule 10A-3 (c)(3) of the U.S. Securities
Exchange Act of 1934, we have a fiscal counsel (conselho fiscal), which is a
board of statutory auditors, that follows the requirements of Rule 10A-3(c)(3).
Our current fiscal counsel does not yet meet the independence requirements of
Rule 10A-3(a)(5)(A), as we are exempt from the independence requirements until
July 31, 2005. 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of responding to this Item. 70




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ITEM 18. FINANCIAL STATEMENTS Telemig Celular Participações S.A. PageReport of Independent Auditors
    
    F-1Consolidated Balance SheetsDecember 31, 2003 and 2002
    
    F-2Consolidated Statements of Income and Comprehensive IncomeYears Ended December 31, 2003, 2002 and 2001
    
    F-3Consolidated Statements of Changes in Shareholders EquityYears Ended December 31, 2003, 2002 and 2001
    
    F-4Consolidated Statements of Cash FlowsYears Ended December 31, 2003, 2002 and 2001
    
    F-5Notes to the Consolidated Financial Statements
    
    F-6
 Financial Statement Schedules See Note 16 to the Consolidated Financial Statements See Note 17 to the Consolidated Financial Statements 71




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ITEM 19. EXHIBITS Exhibit Number
    
    Description1.
    
    Bylaws in English of Telemig Celular Participações S.A, as amended2(a).
    
    Amended and
Restated Deposit
Agreement dated as
of December 3, 2002
among Telemig
Celular
Participações S.A.,
The Bank of New
York, as
depositary, and
owners and
beneficial owners
of American
Depositary
Receipts.
    
    ****2(b).
    
    Not applicable2(c).
    
    Not applicable3.
    
    Not applicable4(a).
    
    Cellular System Purchase and Sale Agreement dated November 24,
1998 by and among Telemig Celular Participações S.A., Northern
Telecom do Brasil Indústria e Comércio Ltda., Northern Telecom do
Brasil Comércio e Serviços Ltda., and Northern Telecom Limited
    
    *4(b).
    
    Letter of Authorization for Operation of Personal Communications
Systems Services between Brazils National Telecommunications
AgencyAnatel and Telemig Celular S.A.4(c)
    
    Terms of Authorization for the Use of Radio Frequency
Blocks between Anatel and Telemig Celular S.A.4(d).
    
    U.S.$21.3 million Credit Agreement dated December 31, 1997 between Telecomunicações
de Minas Gerais S.A. and the Export Development Corporation of Canada
    
    **4(e).
    
    U.S.$141 million Amended and Restated Credit Agreement dated April 3, 2001
among Telemig Celular, the Export Development Corporation of Canada and
others (including amendment dated April 23, 2001)
    
    **4(f).
    
    R$260.3 million Credit Agreement dated November 9, 2000 among Telemig Celular, BNDES
and others
    
    **4(g).
    
    Service Agreement in English dated as of June 30, 2001 and among LHS do Brasil Ltda.,
Telemig Celular and Amazônia Celular Celular S.A.  Pará
    
    ***5.
    
    Not applicable6.
    
    Computation of earnings per share (See Note 8 to the consolidated
financial statements)7.
    
    Not applicable8.
    
    List of subsidiaries (See Item 4Organizational Structure)9.
    
    Not applicable10.
    
    None11.
    
    Code of Ethics
 72




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Exhibit Number
    
    Description12.1
    
    Chief Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200212.2
    
    Chief Financial Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200213.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350 as Enacted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200213.2
    
    Chief Financial Officer Certification pursuant to to 18 U.S.C.
Section 1350 as Enacted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Previously filed in Annual Report on Form 20-F on June 30, 1999.**
    
    Previously filed in Registration Statement on Form 20-F on June 29, 2001.***
    
    Previously filed in Registration Statement on Form 20-F on July 12, 2002.****
    
    Previously filed in Registration Statement on Form F-6 (333-101446) on November 25, 2002. 73




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GLOSSARY OF TELECOMMUNICATIONS TERMS AMPS (Advanced Mobile Phone System):
    
    The analogue mobile phone technology used in North and South
Americas and in approximately 35 countries. It operates in the
800MHz band using FDMA technology.analogue:
    
    The representation of information by continuously variable physical
quantity such as voltage.base station:
    
    A radio transmitter/receiver that maintains communications with the
cellular telephones within a given cell. Each base station is
interconnected with one MSO (Mobile Switch Office).CDMA (Code Division Multiple Access):
    
    Also known as spread spectrum, CDMA cellular systems use a single
frequency band for all traffic, differentiating individual
transmissions by assigning them unique codes before the
transmission. There are a number of CDMA variations.CDMA ONE:
    
    The first commercial CDMA cellular system, deployed in North America
and Korea and also known as IS-95.CDMA /1xRTT:
    
    The first generation of CDMA 2000. The standardization process
indicated that there would be CDMA 2x and CDMA 3x, however this is
no longer likely.CDMA 2000:
    
    A member of the IMT-2000 family, compatible with CDMA ONE.cell:
    
    The area covered by a cellular base station. A cell site may
allocate its antennas to service several cells from one location.cellular service:
    
    A mobile telecommunications service provided by means of a network
of interconnected base stations, each of which covers one small
geographic cell within the total cellular telecommunications system
service area.channel:
    
    One of a number of discrete frequency ranges utilized by base
stations and cellular phones.digital:
    
    A method for representing information as numbers with discrete
values; usually expressed as a sequence of bits.exchange:
    
    See switch.FDMA (Frequency Division Multiple Access):
    
    A transmission technique where the assigned frequency band for a
network is divided into sub-bands that are allocated to a subscriber
for the duration of their calls.GSM (Global System for Mobile):
    
    Global system for mobile communications, the second-generation
digital technology originally developed for Europe. Initially
developed for operation in the 900MHz band and subsequently modified
for the 850, 1800 and 1900MHz bands. GSM originally stood for Groupe
Speciale Mobile, the CEPT (Conference of European Post and
Telecommunications) committee that began the GSM standardization
process.GPRS (General Packet Radio Service):
    
    System that allows the transmission of data in packages in GSM.IMT 2000:
    
    The family of third-generation technologies approved by the ITU
(International Telecommunications Union).local loop:
    
    The system used to connect a fixed subscriber to the nearest local
switch. It generally consists of a pair of copper wires but may
also employ other
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technologies.network:
    
    An interconnected collection of elements. In a telephone network,
these consist of switches connected to each other and to customer
equipment. The transmission equipment may be based on fiber optic
or metallic cable or point-to-point radio connections.network usage charge:
    
    Amount paid per minute charged by network operators for the use of
their network by other network operators. Also known as
interconnection fee.optical fiber:
    
    A transmission medium which permits extremely high capacities. It
consists of a thin strand of glass that provides a pathway along
which waves of light can travel for telecommunications purposes.PCS (Personal Communication Services):
    
    The American standard for advanced digital cellular services,
usually provided at 1.9GHz frequency band.penetration:
    
    The percentage of a given total population which owns a mobile phone.repeater:
    
    A device that amplifies an input signal for retransmission.roaming:
    
    A function that enables subscribers to use their cellular telephones
on networks of service providers other than the one with which they
signed their initial contract.satellite services:
    
    Satellites are used, among other things, for links with countries
that cannot be reached by cable or to provide an alternative to
cable and to form closed user networks.SMP
(Serviço Móvel Pessoal)
    
    A specific Brazilian set of rules for advanced digital cellular
service, enacted by Anatel through Resolution no. 316, dated
September 27, 2002, to replace the former SMC (Serviço Móvel
Celular) cellular service rules. SMP is also an independent
technology definition of service to which was originally allocated
the 1.8GHz frequency band, almost equivalent to the North American
PCS.switch:
    
    A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is
the process of interconnecting circuits to form a transmission path
between users. Switches may also record information for billing and
control purposes.TDMA (Time Division Multiple Access):
    
    A technique for multiplexing multiple users onto a single channel on
a single carrier by splitting the carrier into time slots and
allocating these on an as-needed basis.UMTS
    
    Third-generation wireless telecommunications system designed by ETSI
(European Telecommunications Standard Institute) in accordance with
ITUs (Internatioal Telecommunication Union) standard. It is viewed
as the most likely upgrade of GSM systems.value added services:
    
    Value added services provide additional functionality to the basic
transmission services offered by a telecommunications network.
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SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act,
as amended, the registrant certifies that it meets all of the requirements for
filing this annual report on Form 20-F and has duly caused this annual report
to be signed on its behalf by the undersigned, thereunto duly authorized. TELEMIG CELULAR PARTICIPAÇÕES S.A.By:
    /s/ Antônio José Ribeiro dos SantosName:
    Antônio José Ribeiro dos SantosTitle:
    Chief Executive Officer By:
    /s/ João Cox NetoName:
    João Cox NetoTitle:
    Chief Financial Officer Dated: June 30, 2004 76




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Consolidated Financial StatementsTelemig Celular Participações S.A.December 31, 2003




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and ShareholdersTelemig Celular Participações S.A. We have audited the accompanying consolidated balance sheets of Telemig Celular
Participações S.A. as of December 31, 2003 and 2002, and the related
consolidated statements of income and comprehensive income, changes in
shareholders equity, and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telemig Celular
Participações S.A. at December 31, 2003 and 2002, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States. As discussed in Note 3.j to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative financial instruments. Brasília, Brazil
March 3, 2004 F-1




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TELEMIG CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED BALANCE SHEETS
Amounts are in thousands of Brazilian Reais  R$ December 31,2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents (includes deposits with a related party of R$85,935 in 2002)
    
    
    642,713
    
    
    
    585,999Trade receivables, net of allowance for doubtful accounts of R$16,312 and R$17,128
    
    
    150,271
    
    
    
    121,225Deferred income taxes
    
    
    39,163
    
    
    
    21,650Investments  swap agreements
    
    
    6,929
    
    
    
    8,423Recoverable taxes
    
    
    55,892
    
    
    
    32,782Other current assets (includes R$56 and R$4,244 receivable from related parties)
    
    
    21,244
    
    
    
    24,064916,212
    
    
    
    794,143Property and equipment, net
    
    
    560,487
    
    
    
    740,582Deferred income taxes
    
    
    177,012
    
    
    
    240,419Investments  swap agreements
    
    
    59,224
    
    
    
    71,088Other non current assets
    
    
    13,220
    
    
    
    12,2291,726,155
    
    
    
    1,858,461LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    
    61,848
    
    
    
    67,717Accrued liabilities (includes R$1,959 and R$10,695 payable to related parties)
    
    
    32,167
    
    
    
    36,457Value added and other taxes payable
    
    
    31,941
    
    
    
    26,630Interest on capital and dividends payable
    
    
    14,020
    
    
    
    10,964Current portion of long-term debt
    
    
    202,429
    
    
    
    285,932Other current liabilities
    
    
    17,732
    
    
    
    11,781360,137
    
    
    
    439,481Long-term debt
    
    
    286,665
    
    
    
    564,062Provision for contingencies
    
    
    30,049
    
    
    
    31,076Pension plan obligation
    
    
    846
    
    
    
    3,543Minority interest
    
    
    115,233
    
    
    
    81,224432,793
    
    
    
    679,905Shareholders equity:Capital stock, 700,000,000 thousand shares authorized in both 2003 and 2002:Preferred shares, no par value, 217,788,637 thousand shares and 213,818,805
thousand shares issued and outstanding in 2003 and 2002, respectively
    
    
    165,211
    
    
    
    144,601Common shares, no par value, 128,963,301 thousand shares and 126,612,569
thousand shares issued and outstanding in 2003 and 2002, respectively
    
    
    97,829
    
    
    
    85,626Other capital and reserves
    
    
    433,300
    
    
    
    451,310Retained earnings
    
    
    236,885
    
    
    
    57,538933,225
    
    
    
    739,0751,726,155
    
    
    
    1,858,461
 See the accompanying notes to the consolidated financial statements F-2




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME  Years ended December 31,2003
    
    2002
    
    2001Revenues:Services provided
    
    
    1,055,865
    
    
    
    930,610
    
    
    
    846,340Sale of handsets
    
    
    93,250
    
    
    
    77,593
    
    
    
    74,7931,149,115
    
    
    
    1,008,203
    
    
    
    921,133Cost of services
    
    
    326,390
    
    
    
    281,382
    
    
    
    251,522Cost of handsets
    
    
    106,739
    
    
    
    87,886
    
    
    
    81,606Selling, general and administrative expenses
    
    
    231,009
    
    
    
    257,057
    
    
    
    227,506Cost sharing agreement  related party
    
    
    (12,904
    )
    
    
    (16,345
    )
    
    
    (11,980
    )Bad debt expense
    
    
    13,376
    
    
    
    18,190
    
    
    
    28,403Depreciation and amortization
    
    
    248,779
    
    
    
    179,765
    
    
    
    153,934Other net operating income
    
    
    (968
    )
    
    
    (1,963
    )
    
    
    (9,306
    )Operating income
    
    
    236,694
    
    
    
    202,231
    
    
    
    199,448Financial income
    
    
    (136,391
    )
    
    
    (161,950
    )
    
    
    (70,533
    )Financial expense
    
    
    97,060
    
    
    
    88,137
    
    
    
    59,705Foreign exchange loss
    
    
    (112,764
    )
    
    
    249,195
    
    
    
    60,286Income before taxes, minority interest and
cumulative effect of accounting change
    
    
    388,789
    
    
    
    26,849
    
    
    
    149,990Income taxes
    
    
    128,786
    
    
    
    1,135
    
    
    
    49,317Minority interest
    
    
    44,420
    
    
    
    3,474
    
    
    
    18,784Income before cumulative effect of accounting change
    
    
    215,583
    
    
    
    22,240
    
    
    
    81,889Cumulative effect of accounting change, net
    
    
    
    
    
    
    
    
    
    
    (5,325
    )Net income and comprehensive income
    
    
    215,583
    
    
    
    22,240
    
    
    
    87,214Basic and diluted earnings, in Reais per thousand
common and preferred shares:Before cumulative effect of FAS 133
    
    
    0.62
    
    
    
    0.07
    
    
    
    0.24Cumulative effect of FAS 133
    
    
    
    
    
    
    
    
    
    
    0.02Net income
    
    
    0.62
    
    
    
    0.07
    
    
    
    0.26Weighted average number of shares outstandingBasic Preferred shares
    
    
    216,940,289
    
    
    
    213,025,642
    
    
    
    211,011,840Diluted Preferred shares
    
    
    217,537,785
    
    
    
    213,025,642
    
    
    
    211,011,840Basic and Diluted Common shares
    
    
    128,460,953
    
    
    
    126,142,898
    
    
    
    124,950,428
 See the accompanying notes to the consolidated financial statements F-3




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY  AdditionalPreferred shares
    
    Common shares
    
    Paid-in Capital
    
    Capital reserves
    
    Retained earnings
    
    TotalBalance at December 31, 2000
    
    
    98,933
    
    
    
    58,583
    
    
    
    13,578
    
    
    
    462,065
    
    
    
    33,455
    
    
    
    666,614Capital increase
    
    
    13,607
    
    
    
    9,570
    
    
    
    
    
    
    
    (9,280
    )
    
    
    (13,897
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,214
    
    
    
    87,214Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,608
    )
    
    
    (12,608
    )Balance at December 31, 2001
    
    
    112,540
    
    
    
    68,153
    
    
    
    13,578
    
    
    
    452,785
    
    
    
    94,164
    
    
    
    741,220Capital increase
    
    
    32,061
    
    
    
    17,473
    
    
    
    
    
    
    
    (15,053
    )
    
    
    (34,481
    )
    
    
    Lapsed dividends (Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    288Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,240
    
    
    
    22,240Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,673
    )
    
    
    (24,673
    )Balance at December 31, 2002
    
    
    144,601
    
    
    
    85,626
    
    
    
    13,578
    
    
    
    437,732
    
    
    
    57,538
    
    
    
    739,075Capital increase
    
    
    20,610
    
    
    
    12,203
    
    
    
    
    
    
    
    (19,586
    )
    
    
    (13,227
    )
    
    
    Forgivness of debt by related party
    
    
    
    
    
    
    
    
    
    
    1,576
    
    
    
    
    
    
    
    
    
    
    
    1,576Lapsed dividends (Note 6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    597
    
    
    
    597Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215,583
    
    
    
    215,583Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,606
    )
    
    
    (23,606
    )Balance at December 31, 2003
    
    
    165,211
    
    
    
    97,829
    
    
    
    15,154
    
    
    
    418,146
    
    
    
    236,885
    
    
    
    933,225
 See the accompanying notes to the consolidated financial statements. F-4




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  Year endedDecember 31,
    
    December 31,
    
    December 31,2003
    
    2002
    
    2001Operating activities:Net income
    
    
    215,583
    
    
    
    22,240
    
    
    
    87,214Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    248,779
    
    
    
    179,765
    
    
    
    153,934Gain (loss) on disposal of fixed assets
    
    
    776
    
    
    
    256
    
    
    
    (436
    )Cumulative effect of accounting change, net
    
    
    
    
    
    
    
    
    
    
    (5,325
    )Deferred income taxes
    
    
    45,886
    
    
    
    (31,610
    )
    
    
    7,073Minority interest
    
    
    44,420
    
    
    
    3,474
    
    
    
    18,784Unrealized foreign exchange losses (gains) and
monetary variation on long-term debt
    
    
    (103,230
    )
    
    
    252,369
    
    
    
    63,529Unrealized losses (gains) on swap agreements
    
    
    4,936
    
    
    
    (54,737
    )
    
    
    (19,706
    )Provision for contingencies
    
    
    (1,027
    )
    
    
    9,741
    
    
    
    8,669Changes in operating assets and liabilities:Trade receivables
    
    
    (29,046
    )
    
    
    (13,294
    )
    
    
    (3,034
    )Accounts payable and accrued liabilities
    
    
    (21,769
    )
    
    
    (8,405
    )
    
    
    (41,560
    )Value added and other taxes payable
    
    
    5,311
    
    
    
    4,529
    
    
    
    (14,769
    )Other
    
    
    (6,900
    )
    
    
    (10,939
    )
    
    
    (15,110
    )Net cash provided by operating activities
    
    
    403,719
    
    
    
    353,389
    
    
    
    239,263Investing activities:Additions to property and equipment
    
    
    (61,678
    )
    
    
    (73,800
    )
    
    
    (222,596
    )Cash proceeds from disposals of property and equipment
    
    
    2,707
    
    
    
    1,756
    
    
    
    193Net cash used in investing activities
    
    
    (58,971
    )
    
    
    (72,044
    )
    
    
    (222,403
    )Financing activities:Increases in long-term debt
    
    
    
    
    
    
    
    
    
    
    187,219Repayment of short-term debt
    
    
    
    
    
    
    
    
    
    
    (9,777
    )Repayment of long-term debt
    
    
    (257,670
    )
    
    
    (82,773
    )
    
    
    (37,790
    )Dividends paid
    
    
    (30,364
    )
    
    
    (29,875
    )
    
    
    (17,586
    )Net cash provided by (used in) financing activities
    
    
    (288,034
    )
    
    
    (112,648
    )
    
    
    122,066Increase in cash and cash equivalents for the year
    
    
    56,714
    
    
    
    168,697
    
    
    
    138,926Cash and cash equivalents, beginning of the year
    
    
    585,999
    
    
    
    417,302
    
    
    
    278,376Cash and cash equivalents, end of the year
    
    
    642,713
    
    
    
    585,999
    
    
    
    417,302Supplemental cash flow information:Income taxes paid
    
    
    100,758
    
    
    
    42,275
    
    
    
    32,395Interest paid
    
    
    51,555
    
    
    
    67,458
    
    
    
    60,999Disclosure of non-cash investing activityAccounts payable for additions to property and equipment
    
    
    10,489
    
    
    
    15,468
    
    
    
    5,361
 See the accompanying notes to the consolidated financial statements. F-5




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS   1.
    
    Background and Description of Business  Telemig Celular Participações S.A. and its subsidiary, Telemig Celular S.A.
(together the Company), are the primary suppliers of cellular
telecommunications services in the state of Minas Gerais under the terms of a
concession granted by the Federal Government on November 4, 1997 (the
Concession). The Concession will expire on April 29, 2008 and may be
renewed at the discretion of Agência Nacional de Telecomunicações(Anatel),
the regulatory authority for the Brazilian telecommunications industry, for a
further term of 15 years. The Company is controlled by Telpart Participações
S.A. (Telpart).The Companys business, including the services it may provide and the rates
it charges, is regulated by Anatel and is fully dependent upon the cellular
telecommunications concession granted by the Federal Government.The Company has made and will be required to make significant capital and
operating expenditures on an ongoing basis in order to deploy its cellular
telecommunications network which will require the Company to seek additional
financing. Some of these investments may be financed through debt
denominated in foreign currencies. The countrys currency is subject to
devaluation. A significant devaluation and a return to high levels of
inflation could have an adverse effect on the Brazilian economy, and, as a
result, it could affect the Companys financial position, cash flows or
results of operations.  2.
    
    Presentation of the Financial Statements  These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and rules and
regulations adopted by the United States Securities and Exchange Commission.The Company has also published consolidated financial statements prepared in
accordance with accounting principles generally accepted in Brazil and rules
and regulations adopted by the Brazilian Securities Commission (CVM).The capital reserves and future retained earnings computed using Brazilian
GAAP will be the basis from which future dividends will be payable. F-6




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued   2.
    
    Presentation of the Financial Statements ContinuedThe preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the period reported. Actual results could differ from those estimates.3.
    
    Summary of significant accounting policiesThe summary of significant accounting policies is as follows:  a)
    
    ConsolidationThe consolidated financial statements include the accounts of Telemig
Celular Participações S.A. and its subsidiary. All significant
intercompany balances and transactions have been eliminated.b)
    
    Cash equivalentsCash equivalents consist of highly liquid investments with original
maturities of three months or less at the time of purchase.c)
    
    Foreign currency transactionsTransactions in foreign currency are recorded at the prevailing exchange
rate at the time of the related transactions. Foreign currency denominated
assets and liabilities are translated using the exchange rate at the
balance sheet date. Exchange differences are recognized in the statements
of operations as they occur.d)
    
    Property and equipmentProperty and equipment are stated at cost. Depreciation is provided using
the straight-line method based on the estimated useful lives of the
underlying assets as follows: F-7




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  3.
    
    Summary of significant accounting policies Continued  d)
    
    Property and equipment  Continued Yearsbeginning
    
    Years prior to2003
    
    2003Buildings
    
    
    20
    
    
    
    20Network equipment
    
    
    4 to 5
    
    
    
    8Other equipment
    
    
    5 to 10
    
    
    
    5 to 10
  See note 4 for information related to the change in useful lives for
network equipment.Interest incurred on borrowings is capitalized as part of property and
equipment until the asset is placed in service, to the extent that
borrowings do not exceed construction-in-progress.The Company reviews property and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable.The wireless telecommunications industry is rapidly evolving and therefore
it is reasonably possible that property and equipment could become impaired as a result of technological or other industry changes. For
assets the Company intends to hold for use, if the total of the expected
future undiscounted cash flows is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and
the carrying value of the assets. For assets the Company intends to
dispose of, a loss is recognized for the amount that the estimated fair
value, less costs to sell, is less than the carrying value of the assets.
The Company uses the discounted cash flow method to estimate fair value of
long-lived assets.  e)
    
    Revenue recognitionRevenues for services and equipment are recognized when the service is
provided or when the equipment is sold and delivered, respectively.
Revenues from cellular telephone services consist of subscription charges,
usage charges, network usage charges, long distance charges, and charges
for maintenance and other customer services. Unbilled revenues from the
billing date to the month-end are estimated and recognized as revenue
during the month in which the service was provided. Revenues from
equipment sales refer to sales of handsets. F-8




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  3.
    
    Summary of significant accounting policies Continued  e)
    
    Revenue recognition  ContinuedRevenues from the sales of prepaid cards are recognized according to the
minutes used for each card. Revenue from unused minutes is deferred until
used. Because amount deferred is immaterial it has been included in other
liabilities.f)
    
    Pension and other post-retirement benefitsThe Company participates in (i) a multi-employer pension plan that covers
employees who retired prior to 2000 and (ii) a multiple employer pension
plan that covers its active employees and employees who retired after
2000. The Company also participates in a multi-employer post-retirement
benefit plan for all of its employees. The Company accounts for such
benefit costs in accordance with Financial Accounting Standards Board
(FASB) SFAS 87, Employers Accounting for Pension. See Note 10.g)
    
    Advertising costsAdvertising costs are expensed as incurred and included in selling,
general and administrative expenses. They amounted to R$22,978, R$27,749
and R$30,563 for the years ended December 31, 2003, 2002 and 2001,
respectively.h)
    
    Stock-Based CompensationThe Company grants stock options for a fixed number of shares to
employees. The Company accounts for stock option grants in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related Interpretations. The Companys pro forma information in accordance
with SFAS 123 for the years ended December 31, 2003, 2002, and 2001
follows: 2003
    
    2002
    
    2001Net income as reported
    
    
    215,583
    
    
    
    22,240
    
    
    
    87,214Basic and diluted earnings, in Reais per thousand common
and preferred shares
    
    
    0.62
    
    
    
    0.07
    
    
    
    0.26Compensation expense under the fair value method, net of tax
    
    
    1,004
    
    
    
    238
    
    
    
    66Pro forma net income
    
    
    214,579
    
    
    
    22,002
    
    
    
    87,148Pro forma basic and diluted earnings per thousand common
and preferred shares
    
    
    0.59
    
    
    
    0.06
    
    
    
    0.26
 F-9




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  3.
    
    Summary of significant accounting policies Continued  i)
    
    SwapsThe Company entered into swap agreements as part of its program to manage
its dollar denominated debt portfolio and related costs of borrowing.j)
    
    Derivatives and Hedging ActivitiesAs of January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) which was issued
in June 1998 and its amendments SFAS 137, Accounting for Derivative
Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB
Statement No. 133 and SFAS 138, Accounting for Derivative Instruments
and Certain Hedging Activities issued in June 1999 and June 2000,
respectively (collectively referred to as SFAS 133).As a result of adoption of SFAS 133, the Company recognizes its foreign
currency and interest rate swap agreements on the balance sheet at fair
value and adjustments to fair value are recorded through income. Prior to
adoption of SFAS 133, the Company recognized its foreign currency and
interest rate swap contracts on the balance sheet at contract value and
adjustments to contract value were recorded through income. The Company
accounted for the accounting change as a cumulative effect of an
accounting principle. The adoption of SFAS 133 resulted in a cumulative
effect of accounting change of R$5,325, net of applicable tax expense of
R$2,743, which resulted in a gain in the consolidated statement of income
for the year ended December 31, 2001.k)
    
    New accounting pronouncementsIn August 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 143, Accounting for Asset Retirement Obligations.Statement
No. 143 addresses the financial accounting and reporting for obligations
and retirement costs related to the retirement of tangible long-lived
assets. The provisions of Statement No. 143 were effective for fiscal years
beginning January 1, 2003. The adoption of Statement 143 did not have a
significant impact on the Companys financial statements. F-10




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  3.
    
    Summary of significant accounting policies Continued  k)
    
    New accounting pronouncements  ContinuedIn August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting
model for long-lived assets to be disposed of. Among other provisions, the
new rules change the criteria for classifying an asset as held-for-sale.
The standard also broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations, and changes the timing
of recognizing losses on such operations. The provisions of SFAS 144 were
effective for the Companys fiscal year 2002. The adoption of SFAS 144 did
not have a significant impact on the Companys financial statements.Effective January 1, 2003, the Company adopted SFAS No. 145, Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS 145 rescinds SFAS 4, which required that
all gains and losses from extinguishment of debt be reported as an
extraordinary item. The adoption of SFAS 145 had no effect on the
companys consolidated financial position or results of operations.In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 provides guidance
related to accounting for costs associated with disposal activities
covered by SFAS 144 or with exit or restructuring activities previously
covered by Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS 146 supersedes EITF 94-3 in its entirety. SFAS 146 requires that
costs related to exiting an activity or to a restructuring not be
recognized until the liability is incurred. SFAS 146 will be applied
prospectively to exit or disposal activities that are initiated after
December 31, 2002. SFAS 146 had no effect on the Companys consolidated
financial position or results of operations. F-11




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  3.
    
    Summary of significant accounting policies Continued  k)
    
    New accounting pronouncements  ContinuedIn December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. The transition and annual disclosure
requirements of SFAS 148 were effective for the Companys fiscal ending
after December 15, 2002. The Companys adoption of SFAS 148 did not have a
material effect on its results of operations or financial condition.In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002 and did not have an effect on
the Companys financial statements.In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity 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 from other parties. FIN 46 is
effective immediately for all new variable interest entities created or
modified after January 31, 2003. For special purpose entities created prior
to February 1, 2003, the provisions of FIN 46 must be applied by foreign
private issuers, such as the Company, beginning on January 1, 2004. For all
other variable interest entities created prior to February 1, 2003, it is
effective December 31, 2004. Management does not expect adoption of FIN 46
to have a material impact on the Companys consolidated financial position,
consolidated results of operations, or liquidity. F-12




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  4.
    
    Property and equipment Accumulated
    
    CarryingCost
    
    depreciation
    
    ValueDecember 31, 2002Buildings
    
    
    38,222
    
    
    
    18,500
    
    
    
    19,722,786Network equipment
    
    
    1,096,106
    
    
    
    604,640
    
    
    
    491,466Other equipment
    
    
    319,577
    
    
    
    142,969
    
    
    
    176,608Construction-in-progress
    
    
    52,786
    
    
    
    
    
    
    
    52,7861,506,691
    
    
    
    766,109
    
    
    
    740,582December 31, 2003Buildings
    
    
    39,061
    
    
    
    21,497
    
    
    
    17,564Network equipment
    
    
    1,020,737
    
    
    
    709,916
    
    
    
    310,821Other equipment
    
    
    389,947
    
    
    
    189,148
    
    
    
    200,799Construction-in-progress
    
    
    31,303
    
    
    
    
    
    
    
    31,3031,481,048
    
    
    
    920,561
    
    
    
    560,487
  The Company incurred interest of R$100,068, R$92,796 and R$67,185 of which
R$3,008, R$4,659 and R$7,480 was capitalized as property and equipment for
the years ended December 31, 2003, 2002 and 2001, respectively.In 2003, due to the imminent changes in the wireless technology and the
Companys plans to migrate its TDMA subscribers to GSM technology, the
Company changed the useful lives of its TDMA network and related equipment.
The expected useful lives of these assets were reduced from eight to four
years, as of January 1, 2003.Due to the above, the 2003 consolidated results were impacted by an
additional R$80,210 of depreciation expense (R$43,860 net of taxes and
minority interest), representing R$0.23 per share (R$0.12 net of taxes and
minority interest). F-13




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  5.
    
    Long term debt Institution
    
    2003
    
    2002U.S. dollar denominated, unsecured,
interest and principal due semi-annually
through October 2003, interest at LIBOR
plus 1% (LIBOR was 1.24% at December 31,
2003).
    
    EDC*
    
    
    
    
    
    
    12,514U.S. dollar denominated, unsecured,
annual interest at Libor plus 5.4%. The
interest payments are due semi-annually
and the principal due in November 2005.
    
    Dresdner Bank
    
    
    28,892
    
    
    
    35,333Brazilian Reais facilities, adjusted by
the long-term interest rate (TJLP) (11%
at December 31, 2003), plus 3.8% per
year. The interest payments and
principal are due monthly, with final
installment due in November 2005.
    
    BNDES*
    
    
    118,005
    
    
    
    170,600Brazilian Reais facilities, adjusted by
the BNDES currency basket index (Cesta
de Moedas), plus 3.8% per year. The
interest payments and principal are due
monthly, with final installment due in
January 2006.
    
    BNDES*
    
    
    50,621
    
    
    
    88,862U.S. dollar denominated, unsecured,
interest at LIBOR plus 4.875%. The
interest is due on a semi annual basis.
Principal is due on a semi annual basis
beginning April 2003, with final
installment due in April 2006.
    
    EDC*
    
    
    290,984
    
    
    
    498,195U.S. dollar denominated, annual interest
at LIBOR plus 5.64%. The interest is due
on a semi annual basis, with the entire
principal due in January 2003.
    
    BCI*
    
    
    
    
    
    
    41,340Other
    
    
    
    
    
    
    592
    
    
    
    3,150Total
    
    
    
    
    
    
    489,094
    
    
    
    849,994Less current portion
    
    
    
    
    
    
    (202,429
    )
    
    
    (285,932
    )Long-term portion
    
    
    
    
    
    
    286,665
    
    
    
    564,062
  *
    
    BNDES  National Bank for Economic and Social Development

EDC  Export Development Canada

BCI  Banca Commerciale Italiana  Minimum annual principal repayments of all long-term debt during the next
four years as of December 31, 2003 are as follows: 2005
    
    
    226,2812006
    
    
    60,384Total
    
    
    286,665
  The financing contracts obtained by the subsidiary from the BNDES and the EDC
have covenants related to the use of funds as specified in the contracts and
the maintenance of principally balance sheet ratios. If an event of default
occurs, such long term financing may have their due dates accelerated. At
December 31, 2003, all covenants were met by the Company. F-14




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  5.
    
    Long term debt Continued  The contract with BNDES is secured by accounts receivable equivalent to 1.5
times the next principal payment.  6.
    
    Capital Stock  The capital stock of the Company is comprised of preferred shares and common
            shares, all without par value. The Company has 700,000,000 thousand shares
authorized (including both preferred and common shares). At December 31,
2003, there were 217,788,637 thousand outstanding preferred shares
(213,818,805 thousand at December 31, 2002) and 128,963,301 thousand
outstanding common shares (126,612,569 thousand at December 31, 2002). The
capital may be increased by a decision made at a shareholders meeting or by
the Board of Directors in connection with the capitalization of profits or
reserves, provided that the amounts are allocated for capital increases at a
previous shareholders meeting. During 2003, 2002 and 2001, R$13,227,
R$34,481 and R$13,897, of retained earnings, respectively, were capitalized
in accordance with Brazilian Corporate Law. Such capitalization does not
involve issuance of additional shares.The preferred shares are non-voting, except under limited circumstances, and
are entitled to receive, on a priority basis, a minimum, annual
non-cumulative dividends according to the greater of the following: (i) 6% of
the stated value of the Companys preferred shares; or (ii) (a) 3% of the
stated value of the Companys shareholders equity; and (b) a right to a
share of the profits, as defined, to be distributed on the same basis as
common shares, after common shares have been paid a dividend equal to the
minimum preferred dividend mentioned in (a) above.Under the Brazilian Corporate law, the number of non-voting shares or shares
with limited voting rights, such as the preferred shares, may not exceed
two-thirds of the total number of outstanding shares.At December 31, 2003 the Company has reserved 760,391 thousand shares of
preferred stock for issuance in connection with the stock option plans
(597,496 thousand for the 2003 plan and 162,895 thousand for the 2000 plan) 
see Note 15. F-15




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  6.
    
    Capital Stock ContinuedDividendsPursuant to its by-laws and Brazilian Corporate Law, the Company is required
to distribute as dividends in respect of each fiscal year ending on December
31, to the extent amounts are available for distribution, an aggregate amount
equal to at least 25% of Adjusted Net Income, as defined below, on such date.
The annual dividend distributed to holders of preferred shares, the
Preferred Dividend, has priority in the allocation of Adjusted Net Income.
Remaining amounts to be distributed are allocated first to the payment of a
dividend to holders of common shares in an amount per share equal to the
Preferred Dividend, and the remainder is distributed equally, on a per share
basis, among holders of preferred shares and common shares.For the purposes of the Brazilian Corporate Law, and in accordance with the
Companys by-laws, the Adjusted Net Income is an amount equal to the
Companys net profits under Brazilian GAAP adjusted to reflect allocations to
or from (i) the legal reserve, (ii) a contingency reserve for anticipated
losses, if any, and (iii) an unrealized revenue reserve, if any. Under
Brazilian Corporate law, the Company is required to appropriate 5% of its
annual earnings calculated using Brazilian GAAP, after absorbing accumulated
losses, to a legal reserve, which is restricted as to distribution. This
reserve may be used to increase capital or to absorb losses, but may not be
distributed as dividends. At December 31, 2003, the Companys financial
statements, prepared using Brazilian GAAP, presented an unconsolidated total
equity of R$873,512 (R$763,253 at December 31, 2002) including a legal
reserve of R$26,350 (R$18,943 at December 31, 2002), other reserves in the
amount of R$264,833 (R$260,115 at December 31,2002) and capital stock in the
amount of R$263,040 (R$203,227 at December 31,2002). The remaining amount,
R$319,289 (R$253,967 at December 31,2002), is available for distribution. F-16




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  6.
    
    Capital Stock ContinuedDividends  ContinuedBrazilian companies are permitted to attribute tax deductible interest
expense on shareholders equity. This notional interest distribution may be
treated for accounting purposes as a deduction from shareholders equity in a
manner similar to a dividend. A 15% tax is withheld and paid by the Company
upon credit of the interest. Interest attributed to shareholders equity is
treated as a dividend for purposes of the mandatory dividend payable by the
Company.Under the Companys bylaws and Brazilian Corporate Law, if dividends remain
unclaimed for a period of three years, a shareholders right to receive the
dividend lapses. During 2003 and 2002, dividends totaling R$597 and R$288,
respectively, lapsed and were recorded through equity by the Company.Dividends and interest on capital paid per thousand shares were: 2003
    
    2002
    
    2001Preferred shares
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04Common shares
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.04
  Capital ReservesOn December 28, 1999, the shareholders approved a legal reorganization
whereby a major shareholder contributed certain assets to the Company
resulting in future tax benefits. This asset will result in amortization
expense for income tax purposes resulting in a tax benefit. For US GAAP
purposes, in accordance with EITF 94-10, tax effects caused by transactions
with shareholders were not included in the Companys income statement but
rather in equity. Therefore, the Company recorded a deferred tax asset of
R$212,045 with an offsetting amount as Capital Reserves. The deferred tax
asset will be realized as the tax benefits are recognized for local tax
purposes over a period of up to 10 years.In accordance with Brazilian Corporate Law, the Company may issue shares (pro
rata both common and preferred) based on the different pricing criteria
permitted by such law to the contributing shareholder for the amount of the
tax benefits recognized by the Company. However, the minority shareholders
will be given the right to purchase their pro-rata share of this capital
stock increase in order to prevent dilution. In case they do not accept the
offer, these shares will be issued to the majority shareholders.
Additionally, the Company has to ensure that shareholders will receive the
minimum dividend required by law if the amortization expense results in
accumulated losses. F-17




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  6.
    
    Capital Stock ContinuedCapital Reserves  ContinuedThese potential shares are considered contingent shares and since it is not
possible to determine what pricing criteria the Company will use, these
 shares are not included in either basic or diluted earnings per share
calculation, in accordance with SFAS 128.During 2003, 2002 and 2001, the Company issued 3,969,832 thousand, 2,432,812
thousand, and 1,138,048 thousand preferred shares, respectively, and
2,350,732 thousand, 1,440,587 thousand, and 673,893 thousand common shares,
respectively, to the major shareholder that contributed the tax benefit,
reflected as a reduction in capital reserves in the Companys financial
statements.7.
    
    Earnings per shareIn these consolidated financial statements, information is disclosed per lot
of one thousand shares, because this is the minimum number of shares that can
be traded on the Brazilian stock exchanges.Since the preferred and common shareholders have different dividend, voting
and liquidation rights, basic earnings per share has been calculated using
the two-class method. The two-class method is an earnings allocation
formula that determines earnings per share for preferred and common shares
according to the dividends to be paid as required by the Companys by-laws
and participation rights in undistributed earnings.Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred
shareholders and dividing net income available to common shareholders by the
weighted-average number of common shares outstanding during the period. Net
income available to preferred shareholders is the sum of the preferred
dividends distributable net income and the preferred shareholders portion of
undistributed net income.Undistributed net income is computed by deducting preferred dividends and
common dividends from net income. Undistributed net income is shared equally
on a per share basis by the preferred and common shareholders. Options issued
under the Companys 2000 stock options plan are antidilutive for each of the
years presented. Options issued under the 2003 stock option plan are dilutive
and included in the diluted weighted average number of preferred shares. F-18




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  7.
    
    Earnings per share ContinuedUnder the Companys bylaws, if the Company is able to pay dividends in excess
of the minimum requirement for preferred shareholders and the remainder of
the net income is sufficient to provide equal dividends to both common and
preferred shareholders, then the earnings per share will be the same for both
common and preferred shareholders.The following table sets forth the computation of basic and diluted earnings
per thousand of common shares: 2003
    
    2002
    
    2001Numerator:Net income
    
    
    215,583
    
    
    
    22,240
    
    
    
    87,214Net income available to preferred stockholders  numerator for
basic and diluted earnings per thousand shares
    
    
    (135,404
    )
    
    
    (13,969
    )
    
    
    (54,778
    )Net income available to common stockholders  numerator for basic
and diluted earnings per thousand shares
    
    
    80,179
    
    
    
    8,271
    
    
    
    32,436Denominator:Basic and diluted weighted-average number common shares
(in thousands)
    
    
    128,460,953
    
    
    
    126,142,898
    
    
    
    124,950,428Basic and diluted earnings, in Reais per thousand common shares
    
    
    0.62
    
    
    
    0.07
    
    
    
    0.26Basic weighted-average number preferred shares
(in thousands)
    
    
    216,940,289
    
    
    
    213,025,642
    
    
    
    211,011,840Diluted weighted-average number of preferred shares (in thousands)
    
    
    217,537,785
    
    
    
    213,025,642
    
    
    
    211,011,840Basic and diluted earnings, in Reais per thousand preferred shares
    
    
    0.62
    
    
    
    0.07
    
    
    
    0.26
  8.
    
    Income TaxesBrazilian income taxes comprise federal income tax and the social
contribution tax. The statutory rates for federal income tax and for the
social contribution tax are 25% and 9% at December 31, 2003, 2002 and 2001
respectively.Following is the detail of income tax expense for the years ended December
31, 2003, 2002 and 2001, respectively: 2003
    
    2002
    
    2001Federal income tax
    
    
    65,262
    
    
    
    26,541
    
    
    
    35,413Social contribution tax
    
    
    17,638
    
    
    
    6,204
    
    
    
    6,831Deferred taxes
    
    
    45,886
    
    
    
    (31,610
    )
    
    
    7,073Income tax expense as reported in the
accompanying financial statements
    
    
    128,786
    
    
    
    1,135
    
    
    
    49,317
 F-19




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  8.
    
    Income Taxes ContinuedFollowing is a reconciliation of the reported income tax expense and the
amount calculated by applying the combined statutory tax rate of 34% for the
years ended December 31, 2003 2002 and 2001, respectively: 2003
    
    2002
    
    2001Book income before income taxes and minority interest
calculated at the combined statutory rate
    
    
    132,188
    
    
    
    9,129
    
    
    
    50,997Non-taxable income (net of non-deductible expenses)
    
    
    28
    
    
    
    (29
    )
    
    
    730Social contribution enacted rate adjustment
    
    
    
    
    
    
    (5,190
    )
    
    
    Interest on capital paid to minority shareholders
    
    
    (3,430
    )
    
    
    (2,775
    )
    
    
    (2,410
    )Income tax expense as reported in the accompanying
financial statements
    
    
    128,786
    
    
    
    1,135
    
    
    
    49,317
  During 2002, the enacted social contribution rate was increased from 8% to 9%
beginning on January 1, 2003. 2003
    
    2002Following is an analysis of deferred income tax assets and liabilities:Deferred tax assets:Income taxes losses carry forwards
    
    
    19,730
    
    
    
    20,960Asset related to paid in capital
    
    
    128,087
    
    
    
    149,747Accelerated depreciation
    
    
    1,509
    
    
    
    5,016Accrued expenses and provision for contingencies
    
    
    64,511
    
    
    
    82,475Allowance for doubtful accounts
    
    
    5,565
    
    
    
    5,842Capitalized interest
    
    
    (993
    )
    
    
    3,359218,409
    
    
    
    267,399Deferred tax liabilities:Cumulative indexation differences
    
    
    (2,234
    )
    
    
    (5,330
    )Net deferred tax assets
    
    
    216,175
    
    
    
    262,069Current portion
    
    
    39,163
    
    
    
    21,650Long-term deferred income taxes
    
    
    177,012
    
    
    
    240,419Net deferred tax assets
    
    
    216,175
    
    
    
    262,069
 F-20




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  9.
    
    Transactions with related partiesThe Company has entered into transactions with some of its controlling
shareholders and other related parties for certain services. Transactions
with related parties are carried out based on amounts agreed upon by the
respective related parties.  a)
    
    Roaming AgreementsThe Companys subsidiary is a member of a national roaming committee of
cellular operators that includes Amazônia Celular S.A., the subsidiary of
the affiliate Tele Norte Celular Participações S.A. The purpose of the
committee is to oversee technical and system aspects to ensure the highest
quality of roaming service. As required by Brazilian regulation, Telemig
Celular S.A. and Amazônia Celular S.A. facilitate roaming to their
respective subscribers.b)
    
    TPSA do Brasil LtdaTPSA do Brasil (TPSA) (formerly Telesystem International Wireless  TIW)
was the parent company of the 49% owner of Telpart Participacoes S.A., the
Companys controlling shareholder. On March 26, 2003, Highlake
International Business Company Ltd. (Highlake), which is indirectly
controlled by investment and mutual funds managed by Banco Opportunity,
acquired TPSAs total share ownership in Telpart.From 2000 through March 2003, the direct and indirect shareholders of
Telpart, as well as a group of private equity investment fund shareholders
holding an aggregate of approximately 15% of the Companys outstanding
voting stock, were involved in a dispute over the right to appoint the
members of the Companys board of directors and that of its operating
company, Telemig Celular S.A. The dispute involved numerous injunctions and
legal proceedings. However, on March 26, 2003, this dispute was settled
with the acquisition of TPSAs total share interests in Telpart by
Highlake.At both December 31, 2002 and 2001, the Company had liabilities to TPSA of
approximately R$10,695, related to expenses (principally, salaries and
benefits) as claimed by TPSA against the Company. In March 2003, the
dispute involving the reimbursement of these expenses was settled for an
amount of R$9,119. The Company reversed a total of R$1,576 related to the
remaining portion of the liability recorded on its books after the
settlement as a credit to stockholders equity. F-21




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  9.
    
    Transactions with related parties Continued  c)
    
    Cost Sharing AgreementIn order to maximize efficiency in resource allocation between Tele Norte
Celular Participações S.A. and its subsidiary, and the Company and its
subsidiary, the Company entered into a cost sharing agreement pursuant to
which certain costs that are incurred for the benefit of both companies
and their subsidiaries are allocated to each company based on criteria
designed to reflect the actual amount of use by each company. The costs
that are allocated under this cost sharing agreement refer primarily to
personnel, marketing and outside consulting fees. During the years ended
December 31, 2003, 2002 and 2001 the Company charged Tele Norte Celular
Participações S.A. and its subsidiary the amounts of R$12,904, R$16,345
and R$11,980, respectively.d)
    
    Latinvest Asset ManagementAt December 31, 2002, the Company has cash equivalents of approximately
R$85,935 deposited in Latinvest Red, an investment fund managed by
Latinvest Asset Management (an exclusive fund for the Company and its
subsidiary  managed under the financial policy of the Company), a
shareholder of the Company. This cash investment earned net interest of
19.99% and net interest income related to this cash equivalent amounted to
R$13,671 during 2002. At December 31, 2003, the Company no longer held
such fund in its investment portfolio.  10.
    
    Pension plan and other post-retirement benefit plansThe Company participates in a multi-employer defined benefit pension plan and
other post-retirement benefit plans administered by the Fundação Sistel de
Seguridade Social(Sistel), a minority shareholder.Effective 2000, the plan was modified and changed into a multiple employer
pension plan with respect to active employees. The plan assets and
liabilities related to active employees were transferred into a new plan and
the benefits remained unchanged. The post-retirement benefit plans remained
unchanged as multi-employer plans. F-22




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  10.
    
    Pension plan and other post-retirement benefit plans ContinuedSubstantially all of the Companys employees are covered by these plans. The
Company contributed R$446, R$457 and R$215 in 2003, 2002 and 2001,
respectively, with respect to the multi-employer plans.In 1999, Sistel approved changes to the plan statutes resulting in the break
up of plan assets and liabilities related to the active participants of each
sponsor. Sistel did not break up plan assets and liabilities related to
inactive participants and, thus, the Company will continue to sponsor the
Sistel plan for such inactive participants.At December 31, 2003 and 2002, the Company recorded its estimated portion of
the unfunded pension liability of R$846 and R$3,543, respectively.The pension benefit is generally defined as the difference between (i) 90% of
the retirees average salary during the last 36 months indexed to the date of
retirement and (ii) the value of the retirement pension paid by the Brazilian
social security system. For retired employees the initial pension payment is
subsequently adjusted upwards to recognize cost of living increases and
productivity awards granted to active employees. In addition to the pension
supplements, post-retirement health care and life insurance benefits are
provided to eligible pensioners and their dependents.Contributions to the plans are based on actuarial studies prepared by
independent actuaries. The actuarial studies are revised periodically to
identify whether adjustments to the contributions are necessary.The Company uses a measurement date of December 31 for its pension and other
post-retirement benefit plans.The change in plans assets and benefit obligations, and the annual pension
cost of the multiple employer pension plan, for the active employees plan and
the related actuarial assumptions, for the years ended December 31, 2003 and
2002 are as follows: F-23




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  10.
    
    Pension plan and other post-retirement benefit plans ContinuedChange in plan assets  Continued 2003
    
    2002Fair value of plan assets at beginning of year
    
    
    46,899
    
    
    
    35,530Actual return on plan assets
    
    
    11,411
    
    
    
    9,647Sponsors and participants contributions
    
    
    2,788
    
    
    
    2,563Benefits paid and expenses
    
    
    (709
    )
    
    
    (841
    )Fair value of plan assets at end of year
    
    
    60,389
    
    
    
    46,899
  Change in benefit obligations 2003
    
    2002Benefit obligation at beginning of year
    
    
    43,375
    
    
    
    35,021Service cost
    
    
    3,239
    
    
    
    2,553Interest cost
    
    
    4,888
    
    
    
    3,949Actuarial losses (gains)
    
    
    (6,565
    )
    
    
    2,693Benefits paid
    
    
    (709
    )
    
    
    (841
    )Benefit obligation at end of year
    
    
    44,228
    
    
    
    43,375
  The accumulated benefit obligation for the pension plans was R$36,718 and
R$31,723 at December 31, 2003 and 2002, respectively. 2003
    
    2002Funded status
    
    
    16,161
    
    
    
    3,524Unrecognized net gains
    
    
    (17,007
    )
    
    
    (7,067
    )Accrued benefit cost
    
    
    (846
    )
    
    
    (3,543
    )
  Components of net periodic pension cost 2003
    
    2002
    
    2001Service cost
    
    
    3,239
    
    
    
    2,553
    
    
    
    2,290Interest cost
    
    
    4,888
    
    
    
    3,949
    
    
    
    3,335Expected return on assets
    
    
    (7,259
    )
    
    
    (5,297
    )
    
    
    (4,413
    )Gains and other
    
    
    (2,904
    )
    
    
    (2,313
    )
    
    
    (1,423
    )Net periodic pension (benefit) cost
    
    
    (2,036
    )
    
    
    (1,108
    )
    
    
    (211
    )
 F-24




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TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  10.
    
    Pension plan and other post-retirement benefit plans ContinuedThe weighted-average actuarial assumptions, as determined by actuaries, were
as follows: 2003
    
    2002Discount rate for determining projected benefit obligations
    
    
    11.30
    %
    
    
    11.30
    %Rate of increase in compensation levels
    
    
    7.10
    %
    
    
    8.15
    %Expected long-term rate of return on plan assets
    
    
    11.30
    %
    
    
    14.45
    %
  The expected long-term rate of return for the plan assets was set up based on
the pension portfolios past average rate or earnings, discussion with
portfolio managers and comparisons with similar companies. The expected
long-term rate of return is based on an asset allocation assumption of up to
20% to equities and a minimum of 80% fixed income securitiesPlan AssetsThe Company pension plan weighted-average asset allocations at December 31,
2002 and 2003, by asset category are as follows: 2002
    
    2003Equity securities
    
    
    15
    %
    
    
    13
    %Debt securities
    
    
    85
    %
    
    
    87
    %Total
    
    
    100
    %
    
    
    100
    %
  The Sistel PBS Telemig Celular and Cel Prev Telemig Celular Benefit Plan
Investment Policy is addressed in the Equity Application Master Plan (PDAP),
which sets forth the policy for application and management of funds
supporting the Plan, with a view to meeting the profitability and social
security goals in accordance with the related actuarial liability.Based on the short, medium and long-term macroeconomic scenarios prepared by
SISTEL, the PDAP sets out objectives, goals and restrictions as to the
investment of plan funds, and determines and designs the strategic assignment
of these funds in each segment and portfolio, as well as the assets that may
be selected and the strategy to be adopted to manage these assets. F-25




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  10.
    
    Pension plan and other post-retirement benefit plans ContinuedThe assignment addressed in the PDAP sets forth the ceiling and floor limits
to break down the asset portfolio into fixed-income and variable assets, as
well as loans and financings to the members of the plan, taking into
consideration the limits set forth in National Monetary Council Resolution
No. 3121, apart from the criteria for selection of these assets.The minimum actuarial rate forecast for the Plan consists of a profitability
at least equal to INPC (Broad National Consumer Price Index) + 6% p.a.The Company expects to contribute up to R$3,127 to the defined benefit
pension plan in 2004.11.
    
    CommitmentsAt December 31, 2003, the Company had capital expenditure commitments of
R$4,700 related to the continuing expansion and modernization of the network.The Company rents certain equipment and premises through a number of
operating lease agreements that expire at different dates. Total rent expense
under these agreements was R$16,829, R$16,872 and R$15,629 for the years
ended December 31, 2003, 2002 and 2001, respectively.Future minimum lease payments under non-cancelable operating leases with an
initial term of one year or more are as follows at December 31, 2003. Year ending December 31,2004
    
    
    9,8622005
    
    
    5,9212006
    
    
    3,0452007
    
    
    2,0602008 and after
    
    
    5,101Total minimum payments
    
    
    25,989
  The Companys concession requires that certain network coverage requirements
and service quality milestones be met to continue to be valid and permit the
Company to operate. F-26




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  12.
    
    ContingenciesICMS tax on monthly fees and additional servicesThe Company believes that the ICMS (Imposto sobre Circulação de Mercadorias e
Serviços), a state value-added tax, relates to telecommunications services
and therefore that the application of ICMS on monthly fees or rentals lacks
legal support, as these do not constitute telecommunications services. In
December 1998, the Company was granted an injunction by the Treasury Court
and therefore stopped remitting to the state government the ICMS on monthly
fees and additional services.The balance of the provision for monthly fees, activation fees and rentals
above mentioned is R$251,658 (R$207,181 in 2002), which is presented net of
escrow deposits of R$232,249 (R$186,164 in 2002) in the accompanying
financial statements.Other litigationThe Company is subject to legal proceedings, administrative proceedings and
claims of various types in the ordinary course of its business for which a
provision of R$10,640 and R$10,059, as of December 31, 2003 and 2002
respectively, has been recorded in these accompanying consolidated financial
statements. In managements opinion, the ultimate settlements, if any, will
not have any additional significantly adverse effect on the Companys
financial condition or results of operations.13.
    
    Financial instruments  a)
    
    Fair value of financial assets and liabilitiesEstimated fair values of the Companys financial assets and liabilities
have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimated fair values.
Accordingly, the amounts presented below are not necessarily indicative of
the amounts that could be realized in a current market exchange. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair values.The fair value information as of December 31, 2003 and 2002 presented
below is based on the Companys current borrowing rates for similar types
of borrowing arrangements. Financial assets or liabilities are not shown
when no significant difference in values is believed to exist. F-27




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##### Table of Contents



TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  13.
    
    Financial instruments Continued  a)
    
    Fair value of financial assets and liabilities  Continued 2003
    
    2002Book value
    
    Fair value
    
    Book value
    
    Fair valueLong-term debt
    
    
    489,094
    
    
    
    490,641
    
    
    
    849,994
    
    
    
    833,988
  The carrying value of cash, cash equivalents, trade accounts receivable,
other current assets, accounts payable and accrued liabilities are a
reasonable estimate of their fair value because of the short maturities of
such instruments. Interest rates that are currently available to the
Company for issuance of debt with similar terms and maturities were used
to estimate the fair value of loans and financing.b)
    
    Concentration of risksCredit risk with respect to trade accounts receivable is mitigated by the
diversity of the Companys client portfolio. The Company continually
monitors the level of trade accounts receivable and limits the exposure to
bad debts by cutting access to the telephone network if any invoice is
twenty days past due. Exceptions comprise telephone services that must be
maintained for reasons of safety or national security. The Company does
not require collateral for accounts receivable.There is no concentration of available sources of, services, concessions
or rights, other than those mentioned above, that could, if suddenly
eliminated, severely impact the Companys operations.All of the Companys employees participate in a collective bargaining
agreement which expires and is renewable on an annual basis.  14.
    
    SwapsThe Company uses derivative instruments for hedging purposes. At December 31,
2003 and 2002, the Company held foreign currency swap agreements related to
its U.S. dollar denominated debt agreements in an effort to protect against
variations in the exchange rate between the U.S. dollar and the Brazilian
real. F-28




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TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  14.
    
    Swaps ContinuedThrough the swap agreements, the Company earns the exchange variation between
the United States dollar and the Brazilian Real plus 11.50% to 15.90% and
pays an amount based on a short term inter bank rate. The annualized short
term inter bank rate was 23.17% and 19.11% at December 31, 2003 and 2002,
respectively. At December 31, 2003 and 2002, these agreements have total
notional amount of R$204,309 and R$282,755, and expire on various dates
through 2006.The fair values of the Companys foreign currency rate swap agreements were
estimated based on quoted market prices of comparable contracts and, at
December 31, 2003 and 2002, were approximately the following: 2003
    
    2002Gross assets
    
    
    404,749
    
    
    
    450,436Gross liabilities
    
    
    (338,596
    )
    
    
    (370,925
    )Net investments  swap agreements
    
    
    66,153
    
    
    
    79,511Less current portion
    
    
    6,929
    
    
    
    8,423Long term portion
    
    
    59,224
    
    
    
    71,088
  The fair value is reflected in investments  swap agreements in the
accompanying financial statements, net of the fair value of the Companys
commitment under the swap agreements. The income (expense) derived from the
swap agreements of approximately R$(28,203), R$62,030 and R$(41,187) for
2003, 2002 and 2001, respectively, is reflected in financial income in the
accompanying financial statements.15.
    
    Stock-Based CompensationOn October 5, 2000, the Companys Board of Directors approved two long-term
incentive plans as follows:  a)
    
    The first plan covers certain key executives who may receive shares
of the Companys common or preferred stock. The shares are earned and
 shares will be issued only to the extent that the Company achieves
performance goals determined by the Board of Directors during a
five-year performance period. Through December 31, 2003, no shares have
been granted as the performance goals have not been achieved and,
consequently, no compensation expense has been recognized. F-29




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TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  15.
    
    Stock-Based Compensation Continued  b)
    
    The second plan covers key executives (who also participate in the
first plan) and other employees. Options granted under this plan relate
to preferred stock and are exercisable at the market price at the date
of grant, adjusted by an inflation index. No compensation expense has
been recognized as the market price of the underlying stock is below the
exercise price. The vesting period is up to 20% during the second year,
60% during the third year and 100% during the fourth year. Information
related to these options is summarized below: Number of Options
    
    Exercise PriceOutstanding as of December 31, 2000
    
    
    327,607
    
    
    
    4.76Forfeited
    
    
    (129,902
    )
    
    
    4.76Outstanding as of December 31, 2001
    
    
    197,705
    
    
    
    4.76Forfeited
    
    
    (3,682
    )
    
    
    4.76Outstanding as of December 31, 2002
    
    
    194,023
    
    
    
    4.76Forfeited
    
    
    (31,128
    )
    
    
    4.76Outstanding as of December 31, 2003
    
    
    162,895
    
    
    $
    4.76117,691 options exercisable at $4.76 at December 31, 200362,415 options exercisable at $4.76 at December 31, 200211,805 options exercisable at $4.76 at December 31, 2001Weighted average fair value of options granted during 2000
    
    
    
    
    
    $
    1.74
  The Boards of Directors of the Company and of its subsidiary approved a
new long-term incentive plan on December 29, 2003.The new plan covers key executives of the Company (who also participate in
the two plans above). Options granted under this new plan relate to
preferred stock and are exercisable at the market price at the date of the
grant, discounted by 20%. Additionally, the exercise price is adjusted by
an inflation index. The vesting schedule is 40% beginning January 15, 2004, 70% on January 15, 2005 and 100% on January 15, 2006. Information
related to these options is summarized below: Number of
    
    ExerciseOptions
    
    PriceOutstanding as of December 31, 2002
    
    
    
    
    
    
    Granted
    
    
    597,496
    
    
    
    3.84Outstanding as of December 31, 2003
    
    
    597,496
    
    
    $
    3.84No options exercisable at December 31, 2003Weighted average fair value of options granted during 2003
    
    
    
    
    
    $
    1.86
 F-30




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TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  15.
    
    Stock-Based Compensation ContinuedPro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions for 2003, 2002 and 2001: 2003
    
    2002
    
    2001Risk-free interest rates
    
    
    6
    %
    
    
    6
    %
    
    
    6
    %Dividend yield
    
    
    6
    %
    
    
    6
    %
    
    
    6
    %Volatility factors of the expected market
price of the Companys preferred stock
    
    
    0.61
    
    
    
    0.66
    
    
    
    0.71Weighted-average expected life of the option
    
    
    4
    
    
    
    5
    
    
    
    6
  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in managements opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.  For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period.  16.
    
    Other Information  a)
    
    The changes in the allowance for doubtful accounts during the three
years ended December 31, 2003 were as follows: 2003
    
    2002
    
    2001Balance at beginning of period
    
    
    17,128
    
    
    
    19,216
    
    
    
    15,356Charged to cost and expenses
    
    
    13,376
    
    
    
    18,190
    
    
    
    28,403Write-off and recoveries
    
    
    (14,192
    )
    
    
    (20,278
    )
    
    
    (24,543
    )Balance at end of period
    
    
    16,312
    
    
    
    17,128
    
    
    
    19,216
 F-31




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TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  16.
    
    Other Information Continued  b)
    
    In 2001 the Company received a tax amnesty as a result of prepayment
of ICMS installments. The amnesty in the amount of R$5,900 was recorded
as other net operating income.  17.
    
    Subsequent Events a) On January 12, 2004, the subsidiary Telemig Celular S.A., together with
its affiliate Amazônia Celular S.A., completed a foreign debt offering,
through the issuance of unsecured senior notes, negotiated together as note
units. The total value of the financing transaction was US$120 million (R$337,956 at
January 12, 2004), being US$80 million (R$112,652 at January 12, 2004) to
Telemig Celular S.A. and US$ 40 million (R$225,304 at January 12, 2004) to
Amazônia Celular S.A. Issuance terms: Coupon: 8.750% a year
Issuance price: 99.504%
Yield to maturity: 8.875%
Period: 5 years b) (unaudited) On March 18, 2004, a new pension plan, also administered by
Sistel, was approved by the Secretaria de Previdência Complementar. All the
Companys employees may join the plan, and all participants of the PBS
Telemig Celular plan will be encouraged to migrate their benefits and
resources to the new plan. Employees will be able to join the new plan until
June 16, 2004. The new plan is a defined contribution plan, except for sickness benefits,
for which there is a defined benefit of up to 24 months. Participants and the
Company will each contribute 50% of the plans cost. The plan defines
retirement at age 60, with advanced retirement at age 50, and includes
disability retirement, sickness benefits and pension in case of casualty.
Contributions with Company parity will range from 0.5% to 2% and additional
contributions without Company parity may range from 0.5% to 6% of salary.
Benefit at retirement will depend on the time and amount of contributions, as
well as on the performance of the funds investments. F-32




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TELEMIG CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  Continued
Amounts are in thousands of Brazilian Reais  R$  17.
    
    Subsequent Events Continued c) In 2002, Anatel changed the Personal Mobile Service Contract (SMP or
Serviço Móvel Pessoal), first enacted in December 2000, thus encouraging
companies operating under the Cellular Mobile Service Contract (SMC or
Serviço Móvel Celular) to migrate to the SMP regime. SMP is an authorization
contract and it replaces the SMC (concession contract). New rules are
applicable to the migrating companies, as contemplated by Anatel Resolutions
Nos. 316/02 through 321/02 and 326/02. The Company has migrated to the SMP
regime as of February 19, 2004. Under the SMP regime, the Company will no
longer receive payment from its customers for outbound long-distance traffic,
but will receive payment for the use of its network, in accordance with the
network usage remuneration plan. However, the SMP regime establishes free
negotiation of the network usage fee among telecommunication service
providers starting as of June 30, 2004. According to Anatel, the current
interconnection fees will not change until February 9, 2005. F-33