Form 6-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 6-K

 

Report of Foreign Issuer

 

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the month of January, 2004

 

Commission File Number: 001-14475

 


 

TELESP HOLDING COMPANY

(Translation of registrant’s name into English)

 

Rua Martiniano de Carvalho, 851 – 21o andar

São Paulo, S.P.

Federative Republic of Brazil

(Address of principal executive office)

 


 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F  x                 Form 40-F  ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes  ¨                 No  x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes  ¨                 No  x

 

Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

 

Yes  ¨                 No  x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):  N/A

 



TELESP HOLDING COMPANY

 

TABLE OF CONTENTS

 

Item

    
1.    Press Release entitled “Telecomunicações de São Paulo S.A. – Telesp announces the Interim Financial Statements for the Quarter and Nine-month Period Ended September 30, 2003 and Independent Accountant’s Review Report (Convenience Translation into English from the Original Previously Issued in Portuguese)” dated on January 29, 2004.


   

(Convenience Translation into English from

the Original Previously Issued in Portuguese)

 

Telecomunicações de São Paulo S.A.—Telesp

 

Interim Financial Statements

for the Quarter and Nine-month Period

Ended September 30, 2003

and Independent Accountants’ Review Report

 

Deloitte Touche Tohmatsu Auditores Independentes

 


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

 

To the Shareholders and Management of

Telecomunicações de São Paulo S.A. - Telesp

São Paulo - SP - Brazil

 

1. We have made a special review of the accompanying quarterly information, Company and consolidated, of Telecomunicações de São Paulo S.A. - Telesp and subsidiaries, consisting of the balance sheets as of September 30, 2003, the statements of operations for the quarter and nine-month period then ended, management’s comments on consolidated performance and other relevant information, all expressed in Brazilian reais and prepared in conformity with Brazilian accounting practices under the responsibility of the Companies’ managements.

 

2. Our review was conducted in accordance with specific standards established by the IBRACON - Brazilian Institute of Independent Auditors, together with the Federal Accounting Council, and consisted principally of: (a) inquiries of and discussions with management personnel responsible for the accounting, financial and operating areas of the Companies as to the principal criteria adopted in the preparation of the quarterly information, and (b) review of the information and subsequent events that had or might have had significant effects on the financial position and operations of the Companies.

 

3. Based on our special review, we are not aware of any significant change that should be made to the quarterly information referred to in paragraph 1 for it to be in conformity with Brazilian accounting practices and with standards established by the Brazilian Securities Commission (CVM), specifically applicable to the preparation of such mandatory quarterly information.

 

4. The balance sheets, Company and consolidated, as of June 30, 2003, and the statements of operations, Company and consolidated, for the quarter and nine-month period ended September 30, 2002, presented for comparative purposes, were reviewed by us and our special review reports, dated July 18, 2003 and October 24, 2002, respectively, were issued without qualification.

 

5. These interim financial statements have been translated into English for the convenience of readers outside Brazil.

 

São Paulo, October 24, 2003

 

DELOITTE TOUCHE TOHMATSU

  

José Domingos do Prado

Auditores Independentes

  

Engagement Partner


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A.—TELESP

 

BALANCE SHEETS AS OF SEPTEMBER 30 AND JUNE 30, 2003

(In thousands of Brazilian reais - R$)

(Unaudited)

 

     Company

   Consolidated

ASSETS


   Sept./2003

   Jun./2003

   Sept./2003

   Jun./2003

CURRENT ASSETS

   4,737,109    3,919,900    4,800,032    4,002,431
    
  
  
  

Cash and cash equivalents

   832,489    324,880    849,942    356,734

Trade accounts receivable, net

   2,542,705    2,165,920    2,559,052    2,191,256

Loans and securities

   2,646    2,606    2,646    2,606

Deferred and recoverable taxes

   1,055,379    1,085,499    1,078,275    1,100,152

Other recoverable amounts

   96,617    94,372    97,557    95,029

Inventories

   135,953    147,691    143,647    160,025

Other

   71,320    98,932    68,913    96,629

NONCURRENT ASSETS

   830,703    899,958    836,604    903,402
    
  
  
  

Loans and securities

   9,946    9,820    9,946    9,820

Amounts for capitalization

   56,019    53,067    56,019    53,067

Deferred and recoverable taxes

   386,441    503,704    393,819    510,636

Escrow deposits

   225,113    221,995    225,176    222,050

Receivables from related parties

   129,401    83,676    127,849    80,120

Other

   23,783    27,696    23,795    27,709

PERMANENT ASSETS

   15,318,505    15,787,129    15,328,196    15,785,364
    
  
  
  

Investments

   228,704    242,828    169,686    168,817

Property, plant and equipment, net

   14,913,350    15,355,235    14,982,059    15,427,481

Deferred charges

   176,451    189,066    176,451    189,066
    
  
  
  

TOTAL ASSETS

   20,886,317    20,606,987    20,964,832    20,691,197
    
  
  
  

 

The notes are an integral part of the financial statements

 

2


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A.– TELESP

 

BALANCE SHEETS AS OF SEPTEMBER 30 AND JUNE 30, 2003

(In thousands of Brazilian reais - R$)

(Unaudited)


 

     Company

   Consolidated

     Sept./2003

   Jun./2003

   Sept./2003

   Jun./2003

LIABILITIES AND SHAREHOLDERS’ EQUITY

                   

CURRENT LIABILITIES

   4,841,518    3,904,391    4,919,230    3,956,272
    
  
  
  

Loans and financing

   1,981,881    1,135,873    1,981,881    1,135,873

Accounts payable and accrued expenses

   989,058    932,067    1,062,030    979,288

Taxes payable

   885,441    720,539    887,363    723,303

Payroll and related charges

   145,323    150,894    146,514    151,624

Profit participation

   263,188    264,504    263,188    264,504

Consignments for third parties

   145,265    135,039    145,573    135,252

Reserve for contingencies

   44,777    41,034    44,786    41,040

Unrealized losses on derivatives

   294,992    414,593    294,992    414,593

Payables to related parties

   14,310    26,558    14,310    26,558

Other

   77,283    83,290    78,593    84,237

LONG-TERM LIABILITIES

   1,556,216    2,662,406    1,557,019    2,694,735
    
  
  
  

Loans and financing

   814,070    1,959,526    814,070    1,959,526

Taxes payable

   32,605    33,930    32,632    33,957

Reserve for contingencies

   498,724    466,250    498,827    466,349

Payables to related parties

   32,081    27,456    32,754    59,659

Other

   178,736    175,244    178,736    175,244

SHAREHOLDERS’ EQUITY

   14,486,969    14,038,564    14,486,969    14,038,564
    
  
  
  

Capital

   5,978,074    5,978,074    5,978,074    5,978,074

Capital reserves

   2,743,710    2,743,412    2,743,710    2,743,412

Profit reserves

   471,098    471,098    471,098    471,098

Retained earnings

   5,294,087    4,845,980    5,294,087    4,845,980

FUNDS FOR CAPITALIZATION

   1,614    1,626    1,614    1,626
    
  
  
  

TOTAL LIABILITIES AND

                   

SHAREHOLDERS’ EQUITY

   20,886,317    20,606,987    20,964,832    20,691,197
    
  
  
  

 

The notes are an integral part of the financial statements.

 

 

3


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

 

STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED SEPTEMBER 30, 2003 AND 2002

(In thousands of Brazilian reais – R$, except for per share data)

(Unaudited)


 

     Company

    Consolidated

 
     Sept./2003

    Sept./2002

    Sept./2003

    Sept./2002

 

GROSS OPERATING REVENUE

   4,326,510     3,499,424     4,346,054     3,518,857  
    

 

 

 

Telecommunication services/sales revenue

   4,326,510     3,499,424     4,346,054     3,518,857  

Revenue deductions

   (1,191,333 )   (929,624 )   (1,192,970 )   (931,486 )
    

 

 

 

OPERATING REVENUE, NET

   3,135,177     2,569,800     3,153,084     2,587,371  

Cost of services provided and of sales

   (1,744,932 )   (1,480,679 )   (1,750,906 )   (1,488,180 )
    

 

 

 

GROSS PROFIT

   1,390,245     1,089,121     1,402,178     1,099,191  

OPERATING EXPENSES

   (568,850 )   (432,398 )   (591,279 )   (441,771 )
    

 

 

 

Selling

   (320,973 )   (269,018 )   (344,127 )   (274,717 )

General and administrative

   (193,468 )   (170,197 )   (197,047 )   (171,478 )

Results from investments accounted

   (17,242 )   17,468     909     15,181  

for under the equity method

                        

Other, net

   (37,167 )   (10,651 )   (51,014 )   (10,757 )
    

 

 

 

INCOME FROM OPERATIONS

                        

BEFORE FINANCIAL EXPENSES

   821,395     656,723     810,899     657,420  

Financial expenses, net

   (145,395 )   (160,948 )   (144,289 )   (160,590 )
    

 

 

 

INCOME FROM OPERATIONS

   676,000     495,775     666,610     496,830  

Nonoperating income, net

   9,486     10,852     9,503     10,852  
    

 

 

 

INCOME BEFORE TAXES

   685,486     506,627     676,113     507,682  

Income and social contribution taxes

   (237,380 )   (165,272 )   (228,007 )   (166,327 )
    

 

 

 

NET INCOME

   448,106     341,355     448,106     341,355  
    

 

 

 

NUMBER OF SHARES OUTSTANDING AT

                        

THE BALANCE SHEET DATE (IN THOUSANDS)

   493,592,279     493,665,346              
    

 

           

EARNINGS PER THOUSAND SHARES – R$

   0.91     0.69              
    

 

           

 

The notes are an integral part of the financial statements.

 

4


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

 

STATEMENTS OF OPERATIONS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002

(In thousands of Brazilian reais – R$, except for per share data)

(Unaudited)

 

     Company

    Consolidated

 
     Sept./2003

    Sept./2002

    Sept./2003

    Sept./2002

 

GROSS OPERATING REVENUE

   11,760,393     9,881,306     11,818,450     9,937,659  
    

 

 

 

Telecommunication services/sales revenue

   11,760,393     9,881,306     11,818,450     9,937,659  

Revenue deductions

   (3,205,305 )   (2,593,163 )   (3,209,824 )   (2,599,698 )
    

 

 

 

OPERATING REVENUE, NET

   8,555,088     7,288,143     8,608,626     7,337,961  

Cost of services provided and of sales

   (4,930,885 )   (4,220,022 )   (4,950,375 )   (4,241,970 )
    

 

 

 

GROSS PROFIT

   3,624,203     3,068,121     3,658,251     3,095,991  

OPERATING EXPENSES

   (1,757,149 )   (1,411,607 )   (1,804,743 )   (1,434,715 )
    

 

 

 

Selling

   (892,540 )   (736,590 )   (930,411 )   (747,493 )

General and administrative

   (675,063 )   (595,951 )   (681,454 )   (602,359 )

Results from investments accounted

   (21,270 )   26,819     (3,420 )   22,545  

for under the equity method

                        

Other, net

   (168,276 )   (105,885 )   (189,458 )   (107,408 )
    

 

 

 

INCOME FROM OPERATIONS

                        

BEFORE FINANCIAL EXPENSES

   1,867,054     1,656,514     1,853,508     1,661,276  

Financial expenses, net

   (492,499 )   (564,368 )   (488,888 )   (563,967 )
    

 

 

 

INCOME FROM OPERATIONS

   1,374,555     1,092,146     1,364,620     1,097,309  

Nonoperating income, net

   30,714     15,502     30,821     15,502  
    

 

 

 

INCOME BEFORE TAXES

   1,405,269     1,107,648     1,395,441     1,112,811  

Income and social contribution taxes

   (477,306 )   (371,029 )   (467,478 )   (376,192 )
    

 

 

 

NET INCOME

   927,963     736,619     927,963     736,619  
    

 

 

 

NUMBER OF SHARES OUTSTANDING AT

                        

THE BALANCE SHEET DATE (IN THOUSANDS)

   493,592,279     493,665,346              
    

 

           

EARNINGS PER THOUSAND SHARES – R$

   1.88     1.49              
    

 

           

 

The notes are an integral part of the financial statements.

 

5


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

 

NOTES TO THE FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003

(Amounts in thousands of Brazilian reais – R$, unless otherwise indicated)


 

1. OPERATIONS AND BACKGROUND

 

  a) Formation of the Company, its controlling shareholders and corporate restructuring

 

Telecomunicações de São Paulo S.A. – Telesp (formerly Telesp Participações S.A. – “TelespPar”), hereafter denominated as the “Company” or “Telesp”, was formed pursuant to article 189 of Law No. 9,472/97 of the General Telecommunications Law based on Decree No. 2,546 of April 14, 1998, as part of the spin-off of Telebrás.

 

On July 29, 1998, the Federal Government sold, in a public auction held at the Rio de Janeiro Stock Exchange (BOVERJ), the TelespPar (holding company of Telecomunicações de São Paulo S.A. – Telesp and Companhia Telefônica da Borda do Campo – CTBC) controlling shares which were purchased by Tele Brasil Sul Participações S.A. – TBS, a consortium controlled by Telefónica Internacional S.A. – TISA (controlled by Telefônica S.A.). As a result of subsequent mergers in this consortium, on January 10, 1999, SPT Participações S.A. now holds TelespPar’s controlling shares. On November 30, 1999, as previously approved by the National Telecommunications Agency (ANATEL), the Brazilian telecommunication regulatory authority, TelespPar’s restructuring was completed, through successive mergers, as follows: (i) merger of CTBC into Telesp, (ii) merger of Telesp into TelespPar, and (iii) merger of SPT into TelespPar. After these mergers, SP Telecomunicações Holding S.A. (controlled by TISA) became the controlling shareholder of TelespPar. The name of TelespPar was changed to Telecomunicações de São Paulo S.A. – Telesp.

 

On June 30, 2000, the public offering for the exchange of all outstanding shares of the Company for Brazilian Depositary Receipts – BDRs, representing shares of Telefónica S.A., was concluded. As a result of this public offering and subsequent changes, as of September 30, 2003, Telefónica S.A. holds, directly and indirectly, 84.71% of the common shares and 88.90% of the preferred shares of the Company.

 

The Company is registered with the Brazilian Securities Commission (CVM) as a publicly-held company and its shares are traded on the principal stock exchanges in Brazil. The Company is also registered with the Securities and Exchange Commission – SEC, in the United States of America, and its American Depositary Shares – ADSs, level II, are traded on the New York Stock Exchange – NYSE.

 

  b) The telecommunications services subsidiaries

 

Up to November 30, 1999, the subsidiaries Telesp and CTBC were the principal providers of local fixed line telecommunications services in the State of São Paulo, under a Federal Government concession which will expire on December 31, 2005, renewable for another period of 20 years.

 

6


Due to the corporate restructuring mentioned above and the extinction of Telesp and CTBC, after November 30, 1999, their operations were assumed by the Company from that date.

 

On October 29, 1999, the subsidiary Assist Telefônica S.A. was formed as a closely-held corporation; it is principally engaged in providing technical assistance services for the installation, operation, and maintenance of telephone, data and IT networks, value-added services, including content services, internet connection and access services, as well as web-based technological services and related support, and the installation, operation and maintenance of internet, intranet and extranet solutions, and the sale, rental and maintenance of IT and telecommunications equipment.

 

On December 22, 1999, the Company acquired from the municipality of Ribeirão Preto, in a public auction, the controlling shares of Ceterp – Centrais Telefônicas de Ribeirão Preto S.A. (“Ceterp”), and its subsidiary Ceterp Celular S.A. On October 4, 2000, in accordance with the rules established in the privatization process, the Company concluded the acquisition, through a public offering, of the common and preferred shares from minority shareholders. After these acquisitions, the Company then held 96.97% of the preferred shares and 99.85% of the common shares of Ceterp. On November 27, 2000, in accordance with the rules applicable to the Brazilian telecommunications market, Ceterp sold its subsidiary Ceterp Celular S.A. Additionally, on November 30, 2000, Ceterp was merged into the Company.

 

On August 3, 2000, the wholly-owned subsidiary Telefônica Empresas S.A. was formed, with operations related to packet-switched data network service. On November 24, 2000, the Company increased the capital of the subsidiary with cash and through property items related to the packet-switched data network service, including the transfer of the authorization to explore this service.

 

On January 30, 2001, Telefônica Data Brasil Holding S.A. was formed, resulting from a partial spin-off of the Company’s net assets. These assets were represented by the investment in the wholly-owned subsidiary Telefônica Empresas S.A. and accounts receivable. The objective of the formation of Telefônica Data Brasil Holding S.A. is to segregate operating activities related to packet-switched data network services, due to the operating and administrative restructuring in 2000.

 

On July 6, 2003, the wireless operators implemented the Carrier Selection Code (CSP) on national (VP2 and VP3) and international long distance calls, under Personal Mobile Service (SMP) rules. The Company began to recognize revenues from this service and pay wireless operators for the use of their networks on these calls.

 

2. PRESENTATION OF THE INTERIM FINANCIAL STATEMENTS

 

The individual (Company) and consolidated interim financial statements were prepared in accordance with Brazilian accounting practices, rules applicable to concessionaires of public telecommunications services, and standards and accounting procedures established by the CVM.

 

7


The consolidated statements include the balances and transactions of the subsidiaries Assist Telefônica S.A. and Aliança Atlântica Holding B.V.

 

All assets, liabilities, revenues and expenses from transactions between the consolidated companies were eliminated in consolidation.

 

The financial statements as of September 30, 2002 were reclassified, when applicable, for comparative purposes.

 

3. SUMMARY OF PRINCIPAL ACCOUNTING PRACTICES

 

The accounting practices applied in the preparation of the financial statements as of September 30, 2003 of the Company and its subsidiaries are consistent with those described in the notes to the financial statements for the year ended December 31, 2002.

 

4. OPERATING REVENUE, NET

 

     Company

    Consolidated

 
     Sep./2003

    Sep./2002

    Sep./2003

    Sep./2002

 

Monthly charges

   3,114,864     2,794,138     3,115,297     2,793,969  

Installation

   81,589     82,850     81,589     82,850  

Local service

   2,203,474     1,945,732     2,203,474     1,945,732  

Domestic long distance

   1,745,941     1,061,857     1,745,941     1,061,857  
    

 

 

 

Intraregional

   1,291,714     995,648     1,291,714     995,648  

Interregional

   454,227     66,209     454,227     66,209  

Network

   2,611,930     2,120,099     2,611,930     2,120,099  

International long distance

   73,977     17,675     73,977     17,675  

Use of network

   829,954     942,992     829,954     942,992  

Public telephones

   178,846     137,168     178,846     137,168  

Business communication

   419,366     321,060     418,469     321,060  

Other

   500,452     457,735     558,973     514,257  
    

 

 

 

Gross operating revenue

   11,760,393     9,881,306     11,818,450     9,937,659  

Taxes on gross revenue

   (3,139,892 )   (2,582,917 )   (3,144,411 )   (2,589,452 )
    

 

 

 

State VAT (ICMS)

   (2,704,688 )   (2,214,555 )   (2,704,992 )   (2,217,493 )

PIS and COFINS (taxes on revenue)

   (428,199 )   (361,091 )   (430,963 )   (363,130 )

Municipal Services Tax (ISS)

   (7,005 )   (7,271 )   (8,441 )   (8,145 )

Other

   —       —       (15 )   (684 )

Discounts

   (65,413 )   (10,246 )   (65,413 )   (10,246 )
    

 

 

 

Net operating revenue

   8,555,088     7,288,143     8,608,626     7,337,961  
    

 

 

 

 

8


On June 26, 2003, through Notices No. 37,166 and No. 37,167, ANATEL approved tariff adjustments for fixed-switch telephone service (STFC), based on criteria established in the local and domestic long-distance concession contracts, effective June 30, 2003, except for the former Ceterp’s region which is July 3, 2003. The local basic plan had an average increase of 28.75%, including a productivity gain of 1%, while the maximum net tariffs for the long-distance services basic plan had an average increase of 24.84%, including a productivity gain of 4%, as established in the concession contract. The net charges for other STFC services and products were increased by 30.05% on average. However, a preliminary court order annulled ANATEL’s resolutions and stipulated the IPC-A (Extended Consumer Price Index) in lieu of the IGP-DI (General Price Index—Internal Availability) for the calculation set forth in clauses 11.1 and 11.2 of the public telephone service concession contracts. This decision is still pending appeal and final judgment, when the adjustment index to be definitively applied will be known.

 

5. COST OF SERVICES PROVIDED AND OF SALES

 

     Company

   Consolidated

     Sep./2003

   Sep./2002

   Sep./2003

   Sep./2002

Depreciation and amortization

   1,969,460    1,982,468    1,969,460    1,982,468

Personnel

   188,843    225,078    189,383    225,860

Materials

   33,050    28,057    33,278    28,112

Network interconnection

   2,021,475    1,408,616    2,021,475    1,408,616

Outside services

   576,023    443,138    593,854    454,091

Other

   142,034    132,665    142,925    142,823
    
  
  
  

Total

   4,930,885    4,220,022    4,950,375    4,241,970
    
  
  
  

 

6. SELLING EXPENSES

 

     Company

   Consolidated

     Sep./2003

   Sep./2002

   Sep./2003

   Sep./2002

Depreciation and amortization

   4,687    1,641    4,687    1,641

Personnel

   106,310    98,857    108,787    99,080

Materials

   33,769    32,817    33,821    32,847

Outside services

   393,439    310,935    424,787    318,448

Provision for doubtful accounts

   328,024    271,888    331,960    274,976

Other

   26,311    20,452    26,369    20,501
    
  
  
  

Total

   892,540    736,590    930,411    747,493
    
  
  
  

 

9


7. GENERAL AND ADMINISTRATIVE EXPENSES

 

     Company

   Consolidated

     Sep./2003

   Sep./2002

   Sep./2003

   Sep./2002

Depreciation and amortization

   143,485    117,187    148,188    117,643

Personnel

   153,393    118,652    153,995    119,679

Materials

   10,148    13,101    10,190    13,137

Outside services

   343,944    335,786    344,887    339,274

Other

   24,093    11,225    24,194    12,626
    
  
  
  

Net

   675,063    595,951    681,454    602,359
    
  
  
  

 

8. FINANCIAL EXPENSES, NET

 

     Company

    Consolidated

 
     Sep./2003

    Sep./2002

    Sep./2003

    Sep./2002

 

Financial income

   1,345,556     2,145,964     1,349,595     2,149,263  
    

 

 

 

Income from temporary cash investments

   135,481     21,721     138,910     22,108  

Gains on derivative operations

   325,734     2,018,324     325,734     2,020,843  

Interest

   67,046     68,066     67,374     68,359  

Other

   13,467     20,529     13,658     20,529  

Monetary/Exchange variations

   803,828     17,324     803,919     17,424  

Financial expenses

   (1,838,055 )   (2,710,332 )   (1,838,483 )   (2,713,230 )
    

 

 

 

Interest on liabilities

   (341,921 )   (261,155 )   (341,936 )   (261,482 )

Losses on derivative operations

   (1,436,102 )   (253,298 )   (1,436,102 )   (254,564 )

Expenses on financial transactions

   (58,887 )   (43,982 )   (59,299 )   (44,419 )

Monetary/Exchange variations

   (1,145 )   (2,151,897 )   (1,146 )   (2,152,765 )
    

 

 

 

Net

   (492,499 )   (564,368 )   (488,888 )   (563,967 )
    

 

 

 

 

10


9. OTHER OPERATING EXPENSES, NET

 

     Company

    Consolidated

 
     Sep./2003

    Sep./2002

    Sep./2003

    Sep./2002

 

Income

   259,655     214,295     259,426     213,144  
    

 

 

 

Technical and administrative services

   35,440     27,785     33,778     25,447  

Income from supplies

   20,667     17,337     20,677     17,360  

Dividends

   7,674     7,583     8,874     8,430  

Fines on telecommunication services

   67,259     54,596     67,359     54,671  

Recovered expenses

   19,067     20,340     19,126     20,357  

Reversal of reserve for contingencies

   23,036     44,973     23,100     44,973  

Other

   86,512     41,681     86,512     41,906  

Expenses

   (427,931 )   (320,180 )   (448,884 )   (320,552 )
    

 

 

 

Supplies, including write-offs and adjustments to realizable value

   (31,878 )   (31,448 )   (37,489 )   (31,453 )

Goodwill amortization—Ceterp

   (24,032 )   (24,032 )   (24,032 )   (24,032 )

Donations and sponsorships

   (7,018 )   (15,237 )   (7,031 )   (15,255 )

Taxes (other than on income)

   (149,456 )   (99,584 )   (149,647 )   (99,683 )

Provision for contingencies

   (115,254 )   (60,844 )   (115,280 )   (60,859 )

Commissions on voice and data communication services (*)

   (68,210 )   (77,494 )   (68,210 )   (77,494 )

Additional accrual for post- -retirement benefit plans

   (11,946 )   —       (11,946 )   —    

Other

   (20,137 )   (11,541 )   (35,249 )   (11,776 )
    

 

 

 

Net

   (168,276 )   (105,885 )   (189,458 )   (107,408 )
    

 

 

 

 

  (*) Commissions to Telefônica Empresas S.A.

 

10. NONOPERATING INCOME, NET

 

     Company

    Consolidated

 
     Sep./2003

    Sep./2002

    Sep./2003

    Sep./2002

 

Income

   36,493     89,560     36,661     89,560  
    

 

 

 

Proceeds from sale of property, plant and equipment

   8,776     41,724     8,857     41,724  

Proceeds from investments sold

   —       18,021     —       18,021  

Fines

   2,586     5,799     2,673     5,799  

Recovery of ICMS credits from 1997

   —       7,556     —       7,556  

Unidentified taxes collected

   25,131     16,378     25,131     16,378  

Other

   —       82     —       82  

Expenses

   (5,779 )   (74,058 )   (5,840 )   (74,058 )
    

 

 

 

Cost of property, plant and equipment disposals

   (5,427 )   (56,993 )   (5,488 )   (56,993 )

Cost of investments sold

   —       (16,190 )   —       (16,190 )

Other

   (352 )   (875 )   (352 )   (875 )
    

 

 

 

Net

   30,714     15,502     30,821     15,502  
    

 

 

 

 

11


11. INCOME AND SOCIAL CONTRIBUTION TAXES

 

The Company recognizes income and social contribution taxes monthly on the accrual basis and pays the taxes on an estimated basis. The taxes calculated on income as of the date of the interim statements are recorded in liabilities or assets, as applicable. Prepayments of income and social contribution taxes are recorded as recoverable taxes.

 

Income and social contribution tax expenses

 

     Company

   Consolidated

     Sep./2003

   Sep./2002

   Sep./2003

   Sep./2002

Social contribution tax expense

   122,561    98,194    119,965    99,565

Income tax expense

   354,745    272,835    347,513    276,627
    
  
  
  

Total

   477,306    371,029    467,478    376,192
    
  
  
  

 

The components of deferred tax assets and liabilities are shown in notes 14 and 24, respectively.

 

12. CASH AND CASH EQUIVALENTS

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Cash and banks

   84,504    66,276    92,690    75,180

Temporary cash investments

   747,985    258,604    757,252    281,554
    
  
  
  

Total

   832,489    324,880    849,942    356,734
    
  
  
  

 

13. TRADE ACCOUNTS RECEIVABLE, NET

 

     Company

    Consolidated

 
     Sep./2003

    Jun./2003

    Sep./2003

    Jun./2003

 

Unbilled

   925,441     796,414     924,544     796,414  

Billed

   2,125,386     1,827,100     2,173,015     1,872,990  
    

 

 

 

Gross accounts receivable

   3,050,827     2,623,514     3,097,559     2,669,404  

Allowance for doubtful accounts

   (508,122 )   (457,594 )   (538,507 )   (478,148 )
    

 

 

 

Total

   2,542,705     2,165,920     2,559,052     2,191,256  
    

 

 

 

Current

   1,794,676     1,450,600     1,802,425     1,477,800  

Past due - 1 to 30 days

   484,611     436,229     486,731     438,397  

Past due - 31 to 60 days

   142,535     148,405     143,193     149,111  

Past due - 61 to 90 days

   61,076     73,638     61,417     74,013  

Past due - 91 to 120 days

   35,785     23,881     36,081     24,169  

Past due - more than 120 days

   532,144     490,761     567,712     505,914  
    

 

 

 

Total

   3,050,827     2,623,514     3,097,559     2,669,404  
    

 

 

 

 

12


The Company has receivable and payable balances under negotiation with Empresa Brasileira de Telecomunicações S.A.—Embratel (long-distance operator). Amounts receivable and payable are recorded based on studies prepared by the Company; significant changes to such amounts are not expected. The related amounts receivable from Embratel are shown as current in the table above, amounting to R$68,258 as of September 30, 2003.

 

14. DEFERRED AND RECOVERABLE TAXES

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Income tax withheld at source

   101,473    174,036    102,408    174,713

Prepaid income tax

   95,737    68,953    98,437    71,589

Prepaid social contribution tax

   57,455    38,793    57,940    39,279

Deferred taxes

   892,892    993,899    915,815    1,008,491
    
  
  
  

Tax loss carryforward credits

   52,611    96,316    58,010    101,388

Social contribution tax loss credits

   18,854    34,573    20,798    36,400

Tax credit from corporate restructuring

   285,584    351,488    285,584    351,488

Reserve for contingencies

   168,439    156,125    168,477    156,161

Post-retirement benefit plans

   53,391    52,037    53,391    52,037

Income tax on other temporary differences

   230,620    222,787    242,048    228,417

Social contribution tax on other temporary differences

   83,393    80,573    87,507    82,600

State VAT (ICMS) (*)

   293,206    312,612    295,389    314,759

Other

   1,057    910    2,105    1,957
    
  
  
  

Total

   1,441,820    1,589,203    1,472,094    1,610,788
    
  
  
  

Current

   1,055,379    1,085,499    1,078,275    1,100,152

Noncurrent

   386,441    503,704    393,819    510,636
    
  
  
  

 

  (*) Refers to credits on the acquisition of property, plant and equipment items; recovery occurs in 48 months.

 

Deferred income and social contribution tax credits

 

The Company has assets of R$71,465, representing income and social contribution tax loss carryforwards of R$210,444 and R$209,489 (remaining balances from December 31, 1999), respectively. According to the tax legislation in force, tax losses can be offset against future taxable income, up to the annual limit of 30% of these future profits. Accordingly, to utilize the existing income and social contribution tax loss carryforwards, it will be necessary to generate taxable income of R$701,480 and R$698,297, respectively.

 

13


Considering the existence of taxable income in four out of the last five fiscal years and the expected generation of taxable income discounted to present value, based on a technical feasibility study, as provided for in CVM Instruction No. 371/2002, the Company estimates the realization of such deferred tax credits as of September 30, 2003 as follows:

 

Year


   Company

   Consolidated

2003 (*)

   300,645    316,187

2004

   393,761    401,142

2005

   96,440    96,440

2006

   96,129    96,129

2007

   5,917    5,917
    
  

Total

   892,892    915,815
    
  

 

  (*) Refers mainly to temporary differences expected to be realized during the year.

 

The recoverable amounts above are based on projections that are subject to future changes.

 

Merged tax credit

 

The corporate restructuring in 1999 was carried out so as to avoid that the amortization of the merged goodwill would adversely affect the Company’s future results and the payment of dividends to its shareholders, and to ensure the realization of the tax credit used to increase capital.

 

The accounting records maintained by the Company for corporate and tax purposes include specific accounts related to merged goodwill and the related reserve, as well as the corresponding amortization, reversal of reserve and tax credit. The balances are as follows:

 

     Company/Consolidated

 
     Sep./2003

    Jun./2003

 

Goodwill

   865,408     1,065,117  

Reserve

   (579,824 )   (713,629 )
    

 

Net

   285,584     351,488  
    

 

Goodwill amortization

   (599,128 )   (399,419 )

Reversal of reserve

   401,416     267,611  

Tax credit

   203,703     135,802  
    

 

Effect on income

   5,991     3,994  
    

 

 

For purposes of calculation of the tax credit arising from the merger, the tax rates applied were 25% for income tax and 8% for social contribution tax, in accordance with the tax legislation in force on the merger date. Due to the change introduced by Law No. 10,637/02, effective in 2003, the social contribution tax rate is 9%.

 

14


Due to this change, as shown above, the amortization of goodwill, net of reversal of the related reserve and the corresponding tax credit, in 2003, resulted in an increase in net income and, consequently, in the calculation basis for mandatory minimum dividends.

 

For a better presentation of the Company’s financial position and results of operations in the interim statements, the net amount of R$285,584 (R$351,488 as of June 30, 2003) which, in essence, represents the merged tax credit, was recorded in the balance sheet as current assets (R$263,616 as of September 30 and June 30, 2003) and noncurrent assets (R$21,968 as of September 30, 2003 and R$87,872 as of June 30, 2003), under the caption “Deferred and recoverable taxes”. Amortization of goodwill, reversal of the reserve and the corresponding tax credit are included as operating income and expense in the statements of income.

 

15. LOANS AND SECURITIES

 

     Company/Consolidated

     Sep./2003

   Jun./2003

Repassed foreign currency loans

   4,686    4,716

Tax incentives, net of allowance

   411    411

Amounts linked to National Treasury securities

   7,491    7,295

Other

   4    4
    
  

Total

   12,592    12,426
    
  

Current

   2,646    2,606

Noncurrent

   9,946    9,820
    
  

 

16. OTHER RECOVERABLE AMOUNTS

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Advances to employees

   15,058    15,914    15,292    15,996

Advances to suppliers

   54,624    50,824    55,063    51,264

Other advances

   25,128    25,147    25,128    25,147

Other

   1,807    2,487    2,074    2,622
    
  
  
  

Total current

   96,617    94,372    97,557    95,029
    
  
  
  

 

15


17. INVENTORIES

 

     Company

    Consolidated

 
     Sep./2003

    Jun./2003

    Sep./2003

    Jun./2003

 

Consumable supplies

   139,930     149,293     139,997     149,393  

Resale items

   193,039     217,043     205,958     229,277  

Scrap

   349     416     349     416  

Prepaid public telephone cards

   6,804     6,816     6,804     6,816  

Allowance for reduction to market value

   (204,169 )   (225,877 )   (209,461 )   (225,877 )
    

 

 

 

Total

   135,953     147,691     143,647     160,025  
    

 

 

 

 

18. OTHER ASSETS

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Prepaid expenses

   62,345    82,297    62,383    82,324

Receivables from related companies

   3,076    5,307    3,076    5,307

Other

   29,682    39,024    27,249    36,707
    
  
  
  

Total

   95,103    126,628    92,708    124,338
    
  
  
  

Current

   71,320    98,932    68,913    96,629

Noncurrent

   23,783    27,696    23,795    27,709
    
  
  
  

 

19. ESCROW DEPOSITS

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Civil litigation

   31,482    34,217    31,506    34,241

Tax litigation

   153,625    151,540    153,625    151,540

Labor claims

   40,006    36,238    40,045    36,269
    
  
  
  

Total noncurrent

   225,113    221,995    225,176    222,050
    
  
  
  

 

16


20. INVESTMENTS

 

     Company

    Consolidated

 
     Sep./2003

    Jun./2003

    Sep./2003

    Jun./2003

 

In subsidiaries/affiliates carried under the equity method

   134,918     149,042     8,976     10,111  
    

 

 

 

Aliança Atlântica Holding B.V.

   69,463     67,386     —       —    

Assist Telefônica S.A.

   56,479     71,545     —       —    

Companhia AIX de Participações

   8,976     10,111     8,976     10,111  

Investments carried at cost

   93,786     93,786     160,710     158,706  
    

 

 

 

Portugal Telecom

   75,362     75,362     142,286     140,282  

Other companies

   29,627     29,627     29,627     29,627  

Other investments

   3,360     3,360     3,360     3,360  

Tax incentives

   15,164     15,164     15,164     15,164  

Allowance for losses

   (29,727 )   (29,727 )   (29,727 )   (29,727 )
    

 

 

 

Total

   228,704     242,828     169,686     168,817  
    

 

 

 

 

The principal financial information on the subsidiaries/affiliates, as of September 30 and June 30, 2003, is as follows:

 

     Sep./2003

    Jun./2003

 
     Aliança
Atlântica


    Assist
Telefônica


    Companhia
AIX (*)


    Aliança
Atlântica


    Assist
Telefônica


    Companhia
AIX


 

Paid-up capital

   136,532     97,119     74,000     132,442     94,000     73,980  
    

 

 

 

 

 

Subscribed capital

   136,532     184,000     74,000     132,442     94,000     74,000  

Unpaid capital

   —       (86,881 )   —       —       —       (20 )

Retained earnings (deficit)

   2,394     (40,640 )   (45,951 )   2,330     (22,455 )   (42,403 )
    

 

 

 

 

 

Shareholders’ equity

   138,926     56,479     28,049     134,772     71,545     31,577  
    

 

 

 

 

 

Shares (million)

                                    

Number of subscribed shares

   88     212,421     74,000     88     94,000     74,000  

Number of unpaid shares

   —       (114,318 )   —       —       —       (20 )
    

 

 

 

 

 

Number of paid-up shares

   88     98,103     74,000     88     94,000     73,980  

Number of common shares owned

   44     98,103     23,680     44     94,000     23,680  

Ownership

   50 %   100 %   32 %   50 %   100 %   32 %

 

  (*) Balance as of August 31, 2003.

 

17


Aliança Atlântica Holding B.V., a company headquartered in Amsterdam, Netherlands, is a joint venture formed in 1997 by Telebrás and Portugal Telecom, where each company had a 50% interest. As a result of the spin-off of Telebrás in February 1998, its interest in Aliança Atlântica was transferred to the Company. Currently, the Company has a 50% interest in Aliança Atlântica and Telefónica S.A. the other 50%. This company is proportionally consolidated by the Company.

 

Companhia AIX de Participações was formed in 2001 to explore, directly and indirectly, activities related to the execution, conclusion and commercial exploration of underground fiber optic cables. As of September 30, 2003, the Company holds a 32% in the capital of Companhia AIX. This investment is carried under the equity method.

 

The equity method pick-up for the Company is as follows:

 

     Sep./2003

    Sep./2002

 

Aliança Atlântica (exchange variation)

   (4,561 )   36,674  

Assist Telefônica

   (19,047 )   3,399  

Companhia AIX de Participações

   2,338     (13,254 )
    

 

Total

   (21,270 )   26,819  
    

 

 

Additionally, the Company has an advance for future capital increase under the caption “Amounts for capitalization” in noncurrent assets, subject to the TJLP (Brazilian long-term interest rate), totaling R$104,819 as of September 30, 2003, and an allowance for losses of R$48,800, with a net balance of R$56,019.

 

Pursuant to the minutes of the 12th Extraordinary Shareholders’ Meeting of Assist Telefônica S.A., a capital increase was approved in the amount of R$90,000, equivalent to 118,421,053 registered common shares without par value. These shares were subscribed by the Company at a net book value of R$0.76 per share as of June 30, 2003. The amount of R$3,119, equivalent to 4,103,482 shares, was paid by offsetting amounts owed to the Company by the subsidiary, and R$86,881, equivalent to 114,317,571 shares, remains to be paid by December 31, 2003.

 

 

 

18


21. PROPERTY, PLANT AND EQUIPMENT, NET

 

     Company

    

Annual

depreciation
rates—%


   Sep./2003

   Jun./2003

        Cost

   Depreciation

    Net book
value


   Cost

   Depreciation

    Net book
value


Property, plant and equipment in service

        36,585,421    (22,019,947 )   14,565,474    36,342,965    (21,389,386 )   14,953,579
         
  

 
  
  

 

Switching and transmission equipment

   12.50    15,148,731    (10,051,615 )   5,097,116    15,047,541    (9,728,144 )   5,319,397

Transmission equipment, aerial, underground and building cables, teleprinters, PABX, energy equipment and furniture

   10.00    10,981,140    (6,997,238 )   3,983,902    10,976,783    (6,867,959 )   4,108,824

Transmission equipment—modems

   20.00    517,029    (339,100 )   177,929    494,398    (308,578 )   185,820

Underground and marine cables, poles and towers

   5.00 to 6.67    383,248    (180,168 )   203,080    382,650    (176,307 )   206,343

Subscriber, public and booth equipment

   12.50    1,628,097    (764,832 )   863,265    1,581,835    (719,984 )   861,851

Electronic data processing equipment

   20.00    436,018    (331,251 )   104,767    438,006    (323,907 )   114,099

Buildings and underground cables

   4.00    6,249,378    (2,933,794 )   3,315,584    6,240,323    (2,878,870 )   3,361,453

Vehicles

   20.00    58,773    (47,832 )   10,941    61,696    (49,595 )   12,101

Land

   —      260,022    —       260,022    260,652    —       260,652

Other

   10 to 20    922,985    (374,117 )   548,868    859,081    (336,042 )   523,039

Construction in progress

   —      347,876    —       347,876    401,656    —       401,656
         
  

 
  
  

 

Total

        36,933,297    (22,019,947 )   14,913,350    36,744,621    (21,389,386 )   15,355,235
         
  

 
  
  

 

Average depreciation rates—%

        10.52               10.52           

Assets fully depreciated

        10,077,406               9,457,828           
         
             
          

 

19


     Consolidated

    

Annual

depreciation
rates—%


   Sep./2003

   Jun./2003

        Cost

   Depreciation

    Net book
value


   Cost

   Depreciation

    Net book
value


Property, plant and equipment in service

        36,659,983    (22,025,840 )   14,634,143    36,386,425    (21,391,600 )   14,994,825
         
  

 
  
  

 

Switching and transmission equipment

   12.50    15,148,731    (10,051,615 )   5,097,116    15,047,541    (9,728,144 )   5,319,397

Transmission equipment, aerial, underground and building cables, teleprinters, PABX, energy equipment and furniture

   10.00    10,983,081    (6,997,732 )   3,985,349    10,978,694    (6,868,405 )   4,110,289

Transmission equipment—modems

   20.00    517,029    (339,100 )   177,929    494,398    (308,578 )   185,820

Underground and marine cables, poles and towers

   5.00 to 6.67    383,248    (180,168 )   203,080    382,650    (176,307 )   206,343

Subscriber, public and booth equipment

   12.50    1,628,103    (764,833 )   863,270    1,581,840    (719,985 )   861,855

Electronic data processing equipment

   20.00    437,029    (331,811 )   105,218    439,017    (324,417 )   114,600

Buildings and underground cables

   4.00    6,249,378    (2,933,794 )   3,315,584    6,240,323    (2,878,870 )   3,361,453

Vehicles

   20.00    59,029    (47,854 )   11,175    61,882    (49,604 )   12,278

Land

   —      260,022    —       260,022    260,652    —       260,652

Other

   10 to 20    994,333    (378,933 )   615,400    899,428    (337,290 )   562,138

Construction in progress

   —      347,916    —       347,916    432,656    —       432,656
         
  

 
  
  

 

Total

        37,007,899    (22,025,840 )   14,982,059    36,819,081    (21,391,600 )   15,427,481
         
  

 
  
  

 

Average depreciation rates—%

        10.53               10.52           

Assets fully depreciated

        10,077,406               9,457,828           
         
             
          

 

20


22. DEFERRED CHARGES

 

Deferred charges as of September 30 and June 30, 2003 are comprised as follows:

 

     Company/Consolidated

 
     Sep./2003

    Jun./2003

 

Preoperating expenses

   39,981     42,771  
    

 

Cost

   55,788     55,788  

Accumulated amortization

   (15,807 )   (13,017 )

Merged goodwill – Ceterp S.A.

   69,351     77,362  
    

 

Cost

   187,951     187,951  

Accumulated amortization

   (118,600 )   (110,589 )

Goodwill on acquisition of IP network

   67,119     68,933  
    

 

Cost

   72,561     72,561  

Accumulated amortization

   (5,442 )   (3,628 )
    

 

Total

   176,451     189,066  
    

 

 

Preoperating expenses refer to costs incurred during the preoperating stage for long-distance services; amortization began in May 2002, being recognized over a period of 60 months.

 

The goodwill paid on the acquisition of Ceterp S.A. is presented in deferred charges due to that company’s subsequent merger. The period for amortization of the goodwill, based on the expectation of future profitability, is 60 months.

 

The goodwill on acquisition of the IP network refers to the acquisition of the assets and customer portfolio for the “IP Comutado” and “Speedy Link” services of Telefônica Empresas S.A. The portion of the acquired business which refers to the customer portfolio was treated as goodwill and recorded in deferred charges. According to the appraisal report, this goodwill, the economic basis of which is the expected future profitability, is amortizable over 120 months.

 

23. LOANS AND FINANCING

 

Composition

 

         

Annual

interest

rate -%


       

Company/Consolidated

September 30, 2003


     Currency

      Maturity

   Current

   Long term

   Total

Mediocrédito

   US$    1.75    2014    9,238    83,532    92,770

CIDA

   CAN$    3.00    2005    1,082    461    1,543

Comtel

   US$    10.75    2004    909,742    —      909,742

Other loans in foreign currency

             To 2009    1,061,819    730,077    1,791,896
                   
  
  

Total

                  1,981,881    814,070    2,795,951
                   
  
  

 

21


         

Annual

interest

rate -%


       

Company/Consolidated

June, 2003


     Currency

      Maturity

   Current

   Long term

   Total

Mediocrédito

   US$    1.75    2014    9,430    86,383    95,813

CIDA

   CAN$    3.00    2005    896    617    1,513

Comtel

   US$    10.75    2004    27,342    890,320    917,662

Other loans in foreign currency

             To 2009    1,098,205    982,206    2,080,411
                   
  
  

Total

                  1,135,873    1,959,526    3,095,399
                   
  
  

 

The composition of other loans in foreign currency is as follows:

 

     Currency

  

Annual interest

rate - %


   Principal

   Interest

   Company/
Consolidated
Sep./2003


Resolution No. 2,770

   US$    1.80 to 23.00    453,136    29,194    482,330

Resolution No. 4,131

   US$    7.80    58,468    2,707    61,175

Resolution No. 4,131

   US$    Libor + 1.00 to 3.13    116,936    4,323    121,259

Import financing

   US$    7.11 to 9.17    19,851    2,577    22,428

Import financing

   US$    Libor + 0.25 to 3.00    63,339    1,809    65,148

Debt assumption

   US$    8.45 to 27.50    208,951    47,898    256,849

“Untied Loan”

   Yen    Libor + 1.25    780,789    1,918    782,707
              
  
  

Total

             1,701,470    90,426    1,791,896
              
  
  

 

     Currency

  

Annual interest

rate - %


   Principal

   Interest

   Company/
Consolidated
Jun./2003


Resolution No. 2,770

   US$    8.00 to 25.70    495,115    57,719    552,834

Resolution No. 2,770

   Yen    1.05    272,169    596    272,765

Resolution No. 4,131

   US$    7.80    57,440    1,351    58,791

Resolution No. 4,131

   US$    Libor + 1.00 to 3.13    114,880    2,339    117,219

Import financing

   US$    4.00 to 9.17    38,880    3,307    42,187

Import financing

   US$    Libor + 0.25 to 3.00    68,092    1,749    69,841

Debt assumption

   US$    8.45 to 27.50    208,249    40,496    248,745

“Untied Loan”

   Yen    Libor + 1.25    713,973    4,056    718,029
              
  
  

Total

             1,968,798    111,613    2,080,411
              
  
  

 

Loans and financing with Comtel are guaranteed by Telebrás and those with Mediocrédito are guaranteed by the Federal Government.

 

22


As of September 30, 2003, the Company had loan and financing agreements with four financial institutions, containing restrictive covenants, typically applied to such agreements, relating to cash generation, debt ratios and other. These restrictive clauses have been fully complied with by the Company and do not restrict its capacity to conduct its regular business.

 

Long-term debt maturities

 

Year


   Amount

2005

   218,804

2006

   138,924

2007

   138,924

Starting 2008

   317,418
    

Total

   814,070
    

 

24. TAXES PAYABLE

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Taxes on income:

                   

Income tax payable

   214,988    160,487    215,448    161,715

Social contribution tax payable

   78,174    58,919    78,345    59,364

Indirect taxes:

                   

Value-added taxes (State taxes)

   553,914    473,583    554,338    473,814

Taxes on revenue

   55,685    48,555    56,015    48,876

Other

   15,285    12,925    15,849    13,491
    
  
  
  

Total

   918,046    754,469    919,995    757,260
    
  
  
  

Current

   885,441    720,539    887,363    723,303

Long term

   32,605    33,930    32,632    33,957
    
  
  
  

 

25. PROFIT PARTICIPATION

 

     Company/Consolidated

     Sep./2003

   Jun./2003

Interest on capital

   179,758    180,412
    
  

Minority shareholders

   179,758    180,412

Dividends

   83,430    84,092
    
  

Minority shareholders

   83,430    84,092
    
  

Total

   263,188    264,504
    
  

 

23


26. RESERVE FOR CONTINGENCIES

 

The Company, as an entity and also as the successor to the companies merged, and its subsidiaries are involved in labor, tax and civil proceedings filed with different courts. Company management, based on the opinion of its legal counsel, has recognized reserves for those cases in which an unfavorable outcome is considered probable, as follows:

 

     Company

   Consolidated

Nature


   Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Labor

   160,071    142,565    160,174    142,663

Tax

   322,019    309,541    322,019    309,541

Civil

   61,411    55,178    61,420    55,185
    
  
  
  

Total

   543,501    507,284    543,613    507,389
    
  
  
  

Current

   44,777    41,034    44,786    41,040

Long term

   498,724    466,250    498,827    466,349
    
  
  
  

 

  26.1. Labor contingencies

 

The Company has various labor contingencies, with R$160,071 (R$160,174 – consolidated) reserved to cover probable losses. The amounts involved and respective degree of risk are as follows:

 

Risk


   Amount

Telesp:

    

Remote

   1,354,749

Possible

   73,687

Probable

   160,071

Assist Telefônica:

    

Remote

   2,881

Probable

   103
    

Total

   1,591,491
    

 

These contingencies involve various actions, principally related to wage differences, wage equivalence, overtime, employment relationship of employees of an outsourced company and job hazard premium, among others.

 

  26.2 Tax contingencies

 

Regarding tax issues, the following aspects should be considered:

 

  (i) The possible existence of differences as regards the interpretation of the application of taxes to certain types of revenue.

 

24


  (ii) Recognition of the principal taxes, pending future approval by the tax authorities, is subject to the full extinguishment of the tax obligation after the five-year expiration period from the date of such recognition.

 

  (iii) The lack of agreement in the interpretation of tax legislation may lead to litigation which, if concluded by the judiciary in favor of the taxpayer, may result in amounts receivable for the Company.

 

Risk


   Amount

Telesp:

    

Remote

   836,863

Possible

   1,685,754

Probable (*)

   322,019

Assist Telefônica:

    

Remote

   1,881

Possible

   10,684
    

Total

   2,857,201
    

 

  (*) The Company, in spite of the opinion of its legal counsel, elected to reserve on a conservative basis certain contingencies for which the degree of risk was considered, by the attorneys, as remote and possible. See items h), k) and n).

 

The Company has reserved R$322,019 to cover probable losses. The principal legal proceedings for which the risk is considered as remote, possible or probable by Company management and its legal counsel are:

 

  Claims by the National Social Security Agency (INSS), amounting to R$668,387, referring to:

 

  a) Collection of Work Accident Insurance (SAT) and the assessment of joint liability for social security contributions allegedly not paid by contracted third parties, for which the risk is considered possible but not probable, amounting to approximately R$344,265.

 

  b) Social security contributions on the payment of compensation arising from the replacement of salary losses originating from the government’s economic stabilization plans, “Plano Verão” and “Plano Bresser”, amounting to approximately R$120,196, for which the risk is considered possible but not probable.

 

25


  c) Notification demanding social security contributions, SAT and amounts for third parties (National Institute for Agrarian Reform and Colonization (INCRA) and Brazilian Mini and Small Business Support Agency (SEBRAE)) on the payment of various salary amounts for the period from January 1999 to December 2000, in the amounts of approximately R$43,385 and R$1,256, for which the risk is considered possible and probable, respectively.

 

  d) Notification demanding social security contributions for joint liability in 1993, in the amount of approximately R$159,285, for which the risk is considered possible but not probable.

 

  Claims by the Finance Secretary of the State of São Paulo, totaling R$612,052, referring to:

 

  e) Assessments on October 31 and December 13, 2001, related to ICMS (State VAT) allegedly due on international long-distance calls amounting to approximately R$143,779 for the period from November to December 1996 and from January 1997 to March 1998, considered as a possible but not probable risk, and to R$153,419 for the period from April 1998 to December 1999, considered as a remote risk.

 

  f) Assessment, on February 29, 2000, demanding payment of the ICMS allegedly due on cell phone activation in the period from January 1995 to December 1997, plus fines and interest, amounting to approximately R$244,034, considered as a remote risk.

 

  g) Assessment, on July 2, 2001, demanding the difference in ICMS paid without late-payment penalty, amounting to R$5,048, considered as a possible but not probable risk.

 

  h) Judicial proceeding, referring to the anticipated benefit of VAT credits related to the acquisition of merchandise for consumption and of permanent assets, in the amount of R$30,207, for which the risk is considered possible but not probable; however, the Company has maintained the reserve previously recognized by Ceterp.

 

  i) Assessment notice referring to the use of tax credits from January to April 2002, in the amount of R$25,996, for which the risk is considered remote.

 

  j) Assessment notice, referring to the use of ICMS credits related to the acquisition of materials and supplies in the amount of R$9,569, for which the risk is considered possible but not probable.

 

  Litigation at the Federal and Municipal levels in the amount of R$305,268:

 

  k) The Company filed an action challenging, through November 2002, the expansion of the calculation basis for taxes on revenue (COFINS) and (PIS – until November 2002) for the inclusion of financial income, securitization, and exchange variation, instead of only on operating

 

 

26


revenues. Although there is a preliminary injunction suspending the change in the calculation basis, the Company considers this issue as a probable loss and has recognized a reserve in the amount of R$199,476, in case the initial judicial interpretation does not prevail.

 

  l) FINSOCIAL, now COFINS, was a tax on gross operating revenues, originally established at a rate of 0.5% and gradually and subsequently raised to 2.0%. Such rate increases were judicially challenged with success by several companies which led to the creation of taxable credits, caused by higher payments, which were offset by CTBC (company merged into the Company in November 1999) against current payments of related taxes, the COFINS. Claiming that those offsets made by CTBC were improper, the Federal Government made an assessment in the amount of R$20,252, considered as a possible but not probable risk.

 

  m) Litigation contesting the incidence of taxation for corporate income tax, social contribution tax, PASEP and COFINS on telecommunication services of Ceterp, merged in November 2000, based on paragraph 3 of article 155 of the Federal Constitution, according to which, with the exception of VAT and taxes on exports and imports, no other taxation applies to services. The Company considers this case as a probable loss, and has reserved the amount of R$68,649.

 

  n) Lawsuit filed to obtain a court decision declaring the nonexistence of a legal tax relationship between Telesp and the Federal Government, the defendant, that would require the Company to pay the Economic Domain Intervention Contribution Tax (CIDE) on remittances to be made based on contracts with foreign residents, since the unconstitutionality of the referred tax is clear. The lawsuit also requests approval to offset, against other taxes payable, the amount of R$2,190, monetarily restated, related to the CIDE payment made in March 2002. The Company made an escrow deposit of R$2,178 related to the remittance made on October 18, 2002. Although the risk of loss is considered as remote, the Company recognized a reserve for the unpaid amounts, in the amount of R$7,658.

 

  o) In addition to the aforementioned contingencies, the Company has, at the municipal level, reserves related to the real estate tax (IPTU) in the amount of R$564.

 

  p) The City of São Paulo assessed the Company, alleging differences in the payment of the municipal tax on services (ISS), by the imputation of fines of 20% not paid by the Company, in the amount of R$8,669. The Company did not reserve for this contingency, since the lawyers responsible for this case believe that the risk is possible but not probable.

 

27


  26.3 Civil contingencies

 

Risk


   Amount

Telesp:

    

Remote

   394,848

Possible

   831,934

Probable

   61,411

Assist:

    

Remote

   1,487

Probable

   9
    

Total

   1,289,689
    

 

The Company is involved in public class action lawsuits related to the Community Telephony Plan (PCT), claiming the possible right for indemnity for purchasers of the expansion plans who did not receive shares for their financial investment, in the municipalities of Santo André, Diadema, São Caetano do Sul, São Bernardo do Campo, Ribeirão Pires and Mauá, involving a total amount of approximately R$526,183. The risks involved are considered possible but not probable by legal counsel.

 

27. PAYROLL AND RELATED CHARGES

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Wages, salaries and other compensation

   17,294    17,713    17,480    17,816

Payroll charges

   82,024    72,717    82,702    73,084

Accrued benefits

   4,172    3,673    4,189    3,678

Employee profit sharing

   41,833    56,791    42,143    57,046
    
  
  
  

Total

   145,323    150,894    146,514    151,624
    
  
  
  

 

28. CONSIGNMENTS FOR THIRD PARTIES

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Guarantees and deposits

   7,055    6,106    7,055    6,106

Amounts charged to users

   98,655    88,954    98,655    88,954

Retentions

   37,134    36,693    37,442    36,906

Agreements

   589    544    589    544

Other consignments

   1,832    2,742    1,832    2,742
    
  
  
  

Total

   145,265    135,039    145,573    135,252
    
  
  
  

 

28


29. OTHER LIABILITIES

 

     Company

   Consolidated

     Sep./2003

   Jun./2003

   Sep./2003

   Jun./2003

Post-retirement benefit plans

   157,031    153,049    157,031    153,049

Advances from customers (telephone cards)

   41,751    43,191    41,751    43,191

Amounts refundable to subscribers

   34,965    39,581    36,207    40,460

Other

   22,272    22,713    22,340    22,781
    
  
  
  

Total

   256,019    258,534    257,329    259,481
    
  
  
  

Current

   77,283    83,290    78,593    84,237

Long term

   178,736    175,244    178,736    175,244
    
  
  
  

 

30. SHAREHOLDERS’ EQUITY

 

Capital

 

Capital as of September 30 and June 30, 2003 is R$5,978,074. Subscribed and paid-up capital is represented by shares without par value, distributed as follows:

 

Outstanding shares:     

Common shares

   165,320,206,602

Preferred shares

   328,272,072,739
    

Total outstanding shares

   493,592,279,341
    

Book value per thousand shares outstanding – R$

   29.35
    

 

Preferred shares are nonvoting but have priority in the redemption of capital and are entitled to dividends 10% higher than those attributable to common shareholders, per article 7 of the Company’s bylaws and clause I, article 17, of Law No. 6,404/76, amended by Law No. 10,303/01.

 

Pursuant to the minutes of the 15th Extraordinary Shareholders’ Meeting on August 14, 2003, the shareholders approved the cancellation of 803,447,299 treasury shares, of which 721,629,917 were registered common shares and 81,817,382 registered preferred shares, all without par value. This cancellation did not result in a reduction in the Company’s capital, since repayment was made using the capital reserve.

 

29


31. POST-RETIREMENT BENEFIT PLANS

 

Telesp, together with other companies of the former Telebrás System, sponsors private pension benefit plans and health care plans for retirees, managed by Fundação Sistel de Seguridade Social (“Sistel”). Until December 1999, all sponsors of the plans managed by Sistel were unified as to all plans then existent. On December 28, 1999, the sponsors of the plans managed by Sistel negotiated the conditions for the creation of plans separated by sponsor (PBS Telesp Plan) and the continuation of participation in the unified plans only for participants who were already retired on January 31, 2000 (PBS-A), resulting in a proposal for restructuring the statutes and regulations of Sistel, which was approved by the Supplementary Pension Plan Secretariat on January 13, 2000.

 

Due to the end of unification in December 1999, Telesp individually sponsors a defined retirement benefit plan (PBS Telesp Plan) which covers approximately 1% of the Company’s employees. In addition to the supplemental pension benefit, health care (PAMA) is provided to retired employees and their dependents, at shared costs. Contributions for the PBS Telesp Plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The method used to determine costing is the capitalization method and the contribution by the sponsoring entity is 41.4% of payroll of employees covered by the plan, of which 39.9% is allocated to costing of the PBS Telesp Plan and 1.5% to costing of the PAMA Plan.

 

For the other Telesp employees, there is an individual defined contribution plan – Visão Telesp Benefit Plan, established by Sistel in August 2000, to which 87% of the employees have adhered. The Visão Telesp Plan is supported by contributions made by the participants (employees) and by the sponsor which are credited to participants’ individual accounts. Telesp is responsible for the costs of all administrative expenses and plan maintenance, including participant’s death and disability risks. The employees participating in the defined benefit plan (PBS Telesp Plan) were granted the option of migrating to the Visão Telesp Plan. The new Plan was also offered to the other employees who did not participate in the PBS Telesp Plan, as well as to new hires. The Company’s contributions to the Visão Telesp Plan are equal to those of the employees, varying from 2% to 9% of salary, based on the percentage chosen by the participant.

 

Additionally, the Company supplements the retirement benefits of certain employees of the former CTB – Companhia Telefônica Brasileira.

 

In the period from January to September 2003, the Company made contributions to the PBS Telesp Plan in the amount of R$170 (R$159 in the same period of 2002) and to the Visão Telesp Plan in the amount of R$15,288 (R$14,806 in the same period of 2002).

 

Assist individually sponsors a defined contribution plan similar to that of Telesp, the Visão Assist Benefit Plan, which covers about 43% of its employees. Assist’s contributions to that plan for the period totaled R$74 (R$20 in the same period of 2002).

 

30


As of December 31, 2001, the Company opted to recognize actuarial liabilities directly in shareholders’ equity, net of tax effects, as determined by CVM Resolution No. 371 of December 13, 2000. As of December 31, 2002, the Company opted to recognize all actuarial gains and losses directly in income for the year. The projected unit credit method was adopted for the plan’s actuarial valuation, based on plan assets as of November 30, 2002 and 2001. For multisponsored plans (PAMA and PBS-A), the plan assets were apportioned based on the Company’s actuarial liability in relation to the total actuarial liability of the plan.

 

Based on actuarial reports, the Company increased the liability by R$11,946 (see note 9), equivalent to 9/12 of the total estimated plan expenses for 2003.

 

The accrual for the plans as of September 30 and June 30, 2003 is as follows:

 

Plan


   Sep./2003

    Jun./2003

 

PBS/Visão Telesp/CTB

   54,266     52,446  

PAMA (i)

   102,765     100,603  
    

 

Total Company (note 29)

   157,031     153,049  

Visão Assist (ii)

   (13 )   (13 )
    

 

Total consolidated

   157,018     153,036  
    

 

 

  (i) Based on the opinion of legal counsel and its actuaries, the Company, on a conservative basis, elected to recognize this potential liability in other long-term liabilities.

 

  (ii) Actuarial asset.

 

  Expenses  estimated for 2003, based on actuarial reports, are as follows:

 

Plan


   Amounts

 

PBS/Visão Telesp/CTB:

      

Cost of current service

   2,679  

Cost of interest

   11,505  

Expected return on plan assets

   (6,632 )

Employee contributions

   (272 )
    

Total PBS/Visão Telesp/CTB

   7,280  
    

PAMA:

      

Cost of current service

   99  

Interest on actuarial liabilities

   19,220  

Expected return on plan assets

   (10,671 )
    

Total PAMA

   8,648  
    

Total plans

   15,928  
    

 

31


32. TRANSACTIONS AND BALANCES WITH RELATED COMPANIES

 

The principal balances of assets and liabilities with related parties originate from transactions within the controlling group, made under usual market conditions for this type of operation:

 

     Consolidated

     Sep./2003

   Jun./2003

Assets:

         

Current assets

   37,998    55,468
    
  

Trade accounts receivable

   28,422    43,661

Other:

         

Other recoverable amounts

   6,500    6,500

Credits with related parties

   3,076    5,307

Noncurrent assets

   183,868    133,187
    
  

Amounts for capitalization

   56,019    53,067

Credits with related parties

   127,849    80,120
    
  

Total assets

   221,866    188,655
    
  
     Consolidated

     Sep./2003

   Jun./2003

Liabilities:

         

Current liabilities

   401,707    248,159
    
  

Accounts payable

   385,569    218,859

Other:

         

Consignments for third parties

   1,828    2,742

Payables to related parties

   14,310    26,558

Long-term liabilities

   36,610    63,454
    
  

Payables to related parties

   32,754    59,659

Other:

         

Other liabilities

   3,856    3,782

Funds to be capitalized

   —      13
    
  

Total liabilities

   438,317    311,613
    
  

 

32


     Consolidated

 
     Sep./2003

    Sep./2002

 

Statement of income:

            

Revenue

   150,629     109,133  
    

 

Telecommunications services

   89,044     91,329  

Financial income

   9,283     14,938  

Other operating income

   52,302     2,866  

Costs and expenses

   (262,319 )   (688,883 )
    

 

Cost of services provided

   (52,210 )   (34,246 )

Selling

   (88,799 )   (95,234 )

General and administrative

   (55,654 )   (67,302 )

Financial expenses

   (8 )   (414,607 )

Other operating expenses

   (65,648 )   (77,494 )

 

Accounts receivable refer to receivables for telecommunications services, principally from Telefônica Empresas S.A., Atento Brasil S.A. and Telesp Celular S.A., and to receivables for international long-distance services, principally from Telefónica de Argentina S.A.

 

Other recoverable amounts in current assets refer to advances to Telefônica Gestão de Serviços Compartilhados do Brasil Ltda.

 

Other current and noncurrent assets are composed of receivables from Telefônica Empresas S.A., Telefónica Internacional S.A., Tele Sudeste Celular Participações S.A., Telefônica Publicidade e Informação Ltda., Telefônica Gestão de Serviços Compartilhados do Brasil Ltda., Atento Brasil S.A., Telefónica Data do Brasil Ltda., Terra Networks Brasil S.A. and other companies of the Group, for services rendered, consulting fees, salaries, travel and other expenses paid by the Company, to be reimbursed by the respective companies.

 

Amounts for capitalization comprise an advance for a future capital increase in Companhia AIX de Participações, net of an allowance for losses.

 

Accounts payable comprise services rendered principally by Telefônica Procesos y Tecnologia de la Información, Atento Brasil S.A., Telerj Celular S.A., Terra Networks Brasil S.A., Telefônica Factoring do Brasil Ltda., Telefônica Gestão de Serviços Compartilhados do Brasil Ltda., Global Telecom S.A., Celular CRT S.A. and Telesp Celular S.A., and for international long-distance services, principally by Compañia de Telecomunicaciones de Chile Transmisiones Regionales S.A., Telefónica de Argentina S.A. and Telefónica de España S.A. In the third quarter of 2003, there was an increase in accounts payable to suppliers, principally wireless operators, due to the change in charges for long-distance service, with implementation of the Personal Mobile System (SMP).

 

Payables to related parties in current and long-term liabilities are composed principally of consulting fees and agency commissions payable to Telefónica Internacional S.A., management services related to the accounting, financial, human resources, asset protection, logistics and IT areas payable to Telefônica Gestão de Serviços Compartilhados do Brasil Ltda., and voice and data communication services payable to Telefônica Empresas S.A.

 

33


Revenue from telecommunication services comprises billings, principally to Telefônica Empresas S.A., Atento Brasil S.A., Telesp Celular S.A. and Terra Networks Brasil S.A.

 

Financial income is represented principally by the TJLP applied to amounts for capitalization with Companhia AIX de Participações.

 

In other operating income, the principal amount refers to income from Switched IP Network and Speedy Link equipment leased to Telefônica Empresas S.A.

 

The cost of services provided and selling expenses refer to customer service provided by Atento Brasil S.A., and administrative services rendered by Telefônica Gestão de Serviços Compartilhados do Brasil Ltda. Cost of services provided also comprises network interconnection, provided by Compañia de Telecomunicaciones de Chile Transmisiones Regionales S.A., Telefónica de Argentina S.A., Telefónica del Peru and Telefónica de España S.A.

 

Selling expenses refer to services provided by Atento Brasil S.A.

 

General and administrative expenses refer principally to administrative services rendered by Telefônica Gestão de Serviços Compartilhados do Brasil Ltda. and to management fees to Telefónica Internacional S.A.

 

Other operating expenses refer to commissions on voice product and data communication services provided by Telefônica Empresas S.A.

 

33. COMMITMENTS

 

  a) Capital expenditures

 

The Company submitted its capital expenditure budget for 2003 to the Board of Directors, in the amount of R$1,445,000, which was approved at the Annual Shareholders’ Meeting on March 27, 2003.

 

Through September 30, 2003, the Company had invested the consolidated amount of R$849,773; from January to September 2003, consolidated capital commitments were R$649,173.

 

  b) ANATEL commitments

 

Quality and universalization targets for fixed-switch telephone service are available to monitor the Company’s performance at ANATEL’s website: www.anatel.gov.br.

 

34. INSURANCE

 

TGP Brasil Corretora de Seguros e Resseguros Ltda., the Group’s in-house broker in Brazil, and a branch of Pleyade Peninsular Correduria de Seguros Y Reaseguros del Grupo Telefónica S.A., both directly responsible to Subdirección General de Riesgos y Seguros Corporativos, presently analyzes insurance coverage needs, performs research, contracts and manages all the insurance coverage for the Company, also performing risk and loss management.

 

34


The principal coverages are:

 

  Operating risks, covering physical damages and business interruption for the entire plant.

 

  General civil liability (RCG).

 

  Car fleet liability (RCF-V).

 

  ANATEL guarantee insurance.

 

  Other risks.

 

  Domestic and international freight.

 

  Group life insurance.

 

  Health insurance.

 

The policy of the Company and its subsidiaries, as well as that of the Telefónica Group, includes the maintenance of insurance coverage for all assets and liabilities involving significant amounts and high risks based on management’s judgment, following Telefónica S.A.’s corporate program guidelines.

 

35. FINANCIAL INSTRUMENTS

 

In compliance with the terms of CVM Instruction No. 235/95, the Company and its wholly- owned subsidiary made an evaluation of the book values of their assets and liabilities in relation to market values, based on available information and appropriate valuation methodologies. However, the interpretation of market information, as well as the selection of methodologies, requires considerable judgment and reasonable estimates in order to produce adequate realization values. As a result, the estimates presented do not necessarily indicate the amounts which might be realized in the current market. The use of different market approaches and/or methodologies for the estimates may have a significant effect on the estimated realizable values.

 

The Company has investments carried under both the cost and equity methods. The net assets of the subsidiary, Aliança Atlântica, are represented principally by an equity interest of 0.42% in Portugal Telecom.

 

The Company has a direct interest of 0.64% and an indirect interest of 0.21% in Portugal Telecom, carried at cost. The investment, at market value, is based on the last quotation of September 2003 on the Lisbon Stock Exchange for Portugal Telecom, equivalent to 6.79 euros (6.24 euros as of June 30, 2003):

 

35


     Consolidated

     Sep./2003

   Jun./2003

     Book
value


   Market
value


   Book
value


   Market
value


Portugal Telecom – direct interest

   75,362    185,277    75,362    165,170

Portugal Telecom – indirect interest through Aliança Atlântica

   66,924    61,759    64,920    55,057
    
  
  
  

Total

   142,286    247,036    140,282    220,227
    
  
  
  

 

The principal market risk factors that affect the Company’s business are detailed below:

 

  a) Exchange rate risk

 

This risk arises from the possibility that the Company may incur losses due to exchange rate fluctuations, which would increase the balances of loans and financing denominated in foreign currency and the related financial expenses. To reduce this risk, the Company enters into hedge contracts (swaps) with financial institutions.

 

The Company’s indebtedness and the results of operations are significantly affected by the foreign exchange rate risk. As of September 30, 2003, 100% of the debt was denominated in foreign currency (U.S. dollar, Canadian dollar and yen); 99.9% of this debt was covered by asset positions on currency hedge transactions (swaps for CDI). Gains or losses on these operations are recorded in income. Through September 2003, these transactions generated a net loss of R$1,110,368 (consolidated). The Company has recorded a liability of R$294,992 as of September 30, 2003 (R$414,593 as of June 30, 2003) to reflect the unrealized temporary loss.

 

The book value and market value of the Company’s net excess (exposure) to the exchange rate risk as of September 30 and June 30, 2003 are as follows:

 

     Consolidated

     Sep./2003

   Jun./2003

    

Book

value


    Market
value


  

Book

value


   Market
value


Liabilities:

                    

Loans and financing

   2,795,951     2,798,410    3,095,399    3,071,569

Purchase commitments

   106,807     106,807    15,629    15,629

Asset position on swaps

   2,900,135     2,912,415    3,121,290    3,106,643
    

 
  
  

Net excess (exposure)

   (2,623 )   7,198    10,262    19,445
    

 
  
  

 

The valuation method used to calculate the market value of loans, financing and hedge instruments (foreign exchange swaps) was the discounted cash flow method, considering settlement or realization expectations of liabilities and assets, at market rates prevailing on the balance sheet date.

 

36


  b) Interest rate risk

 

This risk arises from the possibility that the Company may incur losses due to internal and external interest rate fluctuations affecting the Company’s results. As of September 30, 2003, the Company did not have swap transactions to hedge against local interest rate fluctuations. In relation to variable external rates, these transactions were only made to hedge the financing from JBIC – Japan Bank for International Cooperation. The Company continues monitoring market interest rates in order to evaluate the need of contracting other derivatives to hedge against interest rate fluctuation.

 

On September 30, 2003, the Company had R$2,795,951 (R$3,095,399 as of June 30, 2003) in foreign currency loans and financing, of which R$1,826,837 (R$2,190,310 as of June 30, 2003) bore interest at fixed rates and R$969,114 (R$905,089 as of June 30, 2003) bore interest at floating rates (Libor). Although the majority of the debt was contracted at fixed rates, the entire debt was effectively converted to floating rates, as a result of swap contracts based on the CDI. Accordingly, the Company’s financial results are affected by CDI fluctuations. On the other hand, the Company invests its excess cash as temporary cash investments of R$849,942 (R$356,734 as of June 30, 2003), mainly in short-term instruments, based on the CDI. The book value of these instruments approximates market value, due to their short-term maturity.

 

Another risk to which the Company is exposed is the nonmatching of the monetary restatement indices for its debt and for accounts receivable. Telephone tariff adjustments do not necessarily follow increases in local interest rates which affect the Company’s debt.

 

  c) Debt acceleration risk

 

As of September 30, 2003, most of the Company’s loan and financing agreements contain restrictive clauses (covenants), typically applied to such agreements, relating to cash generation, debt ratios and other. These restrictive clauses have been complied with by the Company in full and do not restrict its capacity to conduct its regular business.

 

  d) Credit risk

 

This risk arises from the possibility that the Company may incur losses due to the difficulty of receiving amounts billed to its customers. The credit risk on accounts receivable is dispersed. The Company constantly monitors the level of accounts receivable and limits the risk of past-due accounts, interrupting access to telephone lines in case the customer does not pay the related bills in 30 days. Exceptions are made for telecommunications services that must be maintained for security or national defense reasons.

 

As of September 30, 2003, the Company’s customer portfolio had no subscribers whose receivables were individually higher than 1% of the total accounts receivable from services.

 

The Company is also subject to credit risk related to temporary cash investments and receivables from swap transactions. The Company reduces this exposure by dispersing it among first line financial institutions.

 

37


36. SUBSEQUENT EVENT

 

On October 3, 2003, the Company published a notice to shareholders informing the distribution of interim dividends for fiscal 2003.

 

The Board of Directors, on October 2, 2003, subject to approval at the annual shareholders’ meeting, approved management’s proposal to declare interim dividends in the amount of R$1,803,000 from retained earnings as of June 30, 2003, in conformity with article 28 of the bylaws and articles 204 and 205 of Law No. 6,404/76, to registered holders of common and preferred shares as of October 2, 2003. Dividend payments began on October 20, 2003.

 

It was also resolved that the declared interim dividends will be included in minimum mandatory dividends for fiscal 2003.

 

38


(Convenience Translation into English from the Original Previously Issued in Portuguese)

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

 

MANAGEMENT COMMENTS ON CONSOLIDATED PERFORMANCE

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003

(All amounts in millions of Brazilian reais)


 

                 Change

 
     Sep./2003

    Sep./2002

    R$

    %

 

Gross operating revenue

   11,818.5     9,937.7     1,880.8     18.9  

Net operating revenue

   8,608.6     7,338.0     1,270.6     17.3  

Cost of services provided

   (4,950.4 )   (4,242.0 )   (708.4 )   16.7  

Financial expense, net

   (488.9 )   (564.0 )   75.1     (13.3 )

Operating expenses, net

   (1,804.7 )   (1,434.7 )   (370.0 )   25.8  

Income from operations

   1,364.6     1,097.3     267.3     24.4  

Net income

   928.0     736.6     191.4     26.0  

 

1. Net operating revenue was R$8,608.6 through September 2003 against R$7,338.0, in the same period of the prior year, an increase of R$1,270.6 or 17.3%, due to the average tariff adjustment based on the IPC-A and principally the introduction of international and domestic services in mid-2002, as well as corporate communication due to growth of SPEEDY service. Revenue for the third quarter of 2003 increased R$564.7 or 21.9% compared to the same period of 2002, for the same reasons.

 

2. Cost of services provided increased R$708.4 or 16.7%, mainly due to the 43.5% increase in network interconnection expenses after the implementation of the Personal Mobile Service (SMP) and the 30.8% increase in costs for telecommunications equipment maintenance provided by third parties.

 

3. Net financial expense was R$488.9 for the period, a decrease of R$75.1 compared to the same period of 2002, mainly due to the reduction in the Company’s net indebtedness. Indebtedness and results of operations are substantially affected by the foreign exchange risk. As of September 30, 2003, the Company’s total debt was denominated in foreign currency (U.S. dollar, Canadian dollar and Yen), fully hedged under swap (exchange rate versus CDI (interbank deposit rate)) arrangements.

 

Swap operations have been made to cover the total debt denominated in foreign currency.

 

Net financial expense

YTD - R$


  

Sep./2003


   

Sep./2002


    Change

 
       %

    R$

 

Results of financial operations

   149.9     36.8     307.3     113.1  

Results of hedge operations

   (1,110.4 )   1,766.3     (162.9 )   (2,876.7 )

CPMF (tax on bank transactions)

   (56.7 )   (41.8 )   35.6     (14.9 )

Interest – assets

   67.4     68.4     (1.5 )   (1.0 )

Interest – liabilities

   (341.9 )   (261.5 )   30.7     (80.4 )

Monetary/exchange variations

   802.8     (2,132.2 )   (137.7 )   2,935.0  

Net financial expense

   (488.9 )   (564.0 )   (13.3 )   75.1  

 

39


4. Income from operations increased 24.4%, compared to the same period last year, due to the increase in gross operating revenue and after the cost increases, as previously mentioned.

 

5. Operating data (*)

 

Principal operating data:

 

    

Unit


   Sep./2003

   Sep./2002

   Change - %

 

Installed lines and lines in installation

   Lines    14,308,084    14,319,825    (0.1 )

Lines in service

   Lines    12,353,353    12,560,848    (1.7 )

Local traffic:

                     

Local call pulses

   Thousand pulses    26,805,474    26,639,030    0.6  

Local call pulses billed

   Thousand pulses    18,925,985    18,585,622    1.8  

Public telephones

   Lines    331,129    330,587    0.2  

 

(*) Not reviewed by independent accountants.

 

6. Amounts paid to the Federal, State and Municipal governments, as taxes, were R$3,902.0, representing 33% of gross operating revenue from telecommunications services.

 

     Sep./2003

   Sep./2002

     R$

   %

   R$

   %

State VAT (ICMS)

   2,705.0    69.3    2,217.5    69.9

PIS (Federal tax on revenue)

   78.3    2.0    64.7    2.0

COFINS (Federal tax on revenue)

   352.6    9.0    298.5    9.4

Municipal service tax (ISS)

   8.4    0.2    8.1    0.3

Federal VAT (IPI)

   —      —      0.7     

Social security contributions (INSS)

   74.2    1.9    79.6    2.5

Income tax

   347.5    8.9    276.6    8.7

Social contribution tax

   120.0    3.1    99.6    3.1

Other taxes and contributions

   216.0    5.6    130.7    4.1
    
  
  
  

Total

   3,902.0    100.0    3,176.0    100.0
    
  
  
  

 

7. Expansion plan and investments

 

Through September 30, 2003, the Company and its subsidiary have entered into agreements related to expansion and investment projects in the amount of R$649.2 (R$210.2 in the third quarter of 2003), from a total budget of R$731.9 for the period (R$231.4 in the third quarter of 2003).

 

  7.1. Sales of telephone lines (*)

 

At the end of September 2003, the Company had a total of 12,353,353 lines in service, of which 74% were residential, 12% non-residential and 11% business, with the remainder representing public telephones.

 

40


  7.2. Public telephones (*)

 

The Company maintains a public telephone system of 331,129 units to meet the needs of the population of the State of São Paulo, and to meet the requirements established by the regulatory agency.

 

  (*) Not reviewed by independent accountants.

 

8. ANATEL

 

  8.1. Goals

 

The quality and universalization goals for fixed-line service (STFC) are available at ANATEL’s website: www.anatel.gov.br.

 

  8.2. Domestic and international long-distance operating authority

 

ANATEL, on March 1, 2002, recognized that the Company had met the universalization goals by more than two years in advance, which permitted the Company to receive the licenses to explore STFC on a local, nationwide and international long-distance basis throughout Brazil.

 

On April 25, 2002, ANATEL announced the authorization mentioned above for the Company, which became the first fixed line telecommunications services operator permitted to provide STFC throughout Brazil.

 

On April 29, 2002, the authorization was suspended through a preliminary injunction against ANATEL, obtained by Empresa Brasileira de Telecomunicações S.A. – Embratel. As a result, the Company could not begin the commercial operation of national long-distance calls originating in its concession area to regions I (Telemar) and II (Brasil Telecom). However, local and domestic long-distance authorizations for regions I and II and Sector 33 of region III and international long-distance authorizations in all three regions were not subject to this lawsuit.

 

On June 28, 2002, ANATEL was able to reverse this preliminary injunction, permitting the Company to begin offering interregional national long-distance calls originating from its concession area.

 

In May 2003, the Company began offering local-call services in an additional six states, in addition to São Paulo, its original concession area.

 

The expansion of the Company’s operations covers the cities of Duque de Caxias, Nova Iguaçu and São Gonçalo (in the State of Rio de Janeiro), Aracajú (Sergipe), Vitória (Espírito Santo), Porto Alegre (Rio Grande do Sul), Curitiba (Paraná) and Florianópolis (Santa Catarina).

 

Operations in these cities mark the start of the progressive achievement of the targets established by ANATEL at the time the concession was granted for providing local services in regions outside the State of São Paulo, representing an advance in the accomplishment of universalization targets, based on which the Company has become the first concessionaire to offer local telephony services outside its original area of operation.

 

41


On July 6, 2003, the wireless operators implemented the Carrier Selection Code (CSP) on national (VP2 and VP3) and international long distance calls, under SMP rules. The Company began to recognize revenues from these services and pay wireless operators for the use of their networks on these calls.

 

9. iTelefonica

 

The Company, through its subsidiary Assist Telefônica S.A., started to provide internet access services in the State of São Paulo (the list with the cities is available on the web site “itelefonica.com.br”).

 

After several tests conducted in cities in the State of São Paulo since September 29, 2002, on July 13, 2003, Telefônica officially launched the provider iTelefonica in the entire State.

 

10. Additional information

 

For further details of the Company’s performance, refer to the Press Release on the site www.telefonica.com.br.

 

42


SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        TELESP HOLDING COMPANY

Date: January 29, 2004.

      By:  

/s/    Charles E. Allen        

             
               

Name:

  Charles E. Allen
               

Title:

  Investor Relations Director