Form 6-K
Table of Contents

 

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 July, 2005

 

Commission File Number: 001-14475

 


 

TELESP HOLDING COMPANY

(Translation of registrant’s name into English)

 

Rua Martiniano de Carvalho, 851 – 21° 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

 



Table of Contents

TELESP HOLDING COMPANY

 

TABLE OF CONTENTS

 

Item

         
1.    Press Release entitled “Telecomunicações de São Paulo S.A. – Telesp: Interim Financial Statements for the Quarter Ended March 31, 2005 and Independent Accountants’ Review Report (Convenience Translation into English from the Original Previously Issued in Portuguese)” dated on July 15, 2005.    1

 


Table of Contents
    (Convenience Translation into English from the Original Previously Issued in Portuguese)
    Telecomunicações de São Paulo S.A. - Telesp
    Interim Financial Statements for the Quarter Ended March 31, 2005 and Independent Accountants’ Review Report
    Deloitte Touche Tohmatsu Auditores Independentes

 

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Table of Contents

(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

 

1. We have performed a special review of the accompanying interim financial statements of Telecomunicações de São Paulo S.A. - Telesp and subsidiaries (Company and consolidated), consisting of the balance sheets as of March 31, 2005, and the related statements of income for the quarter then ended and the performance report, all expressed in Brazilian reais and prepared in accordance with Brazilian accounting practices under the responsibility of the Company’s management.

 

2. We conducted our review in accordance with specific standards established by the Brazilian Institute of Independent Auditors (IBRACON), together with the Federal Accounting Council, which consisted principally of: (a) inquiries of and discussions with persons responsible for the accounting, financial and operating areas as to the criteria adopted in preparing the interim financial statements, and (b) review of the information and subsequent events that had or might have had material effects on the financial position and results of operations of the Company and its subsidiaries.

 

3. Based on our special review, we are not aware of any material modifications that should be made to the financial statements referred to in paragraph 1 for them to be in conformity with Brazilian accounting practices and standards established by the Brazilian Securities Commission (CVM), specifically applicable to the preparation of mandatory interim financial statements.

 

4. We had previously audited the Company and consolidated balance sheets as of December 31, 2004, and reviewed the Company and consolidated statements of income for the quarter ended March 31, 2004, presented for comparative purposes, and issued an unqualified opinion thereon and unqualified special review report thereon, dated February 2, 2005 and April 30, 2004, respectively.

 

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

 

São Paulo, May 2, 2005

 

DELOITTE TOUCHE TOHMATSU

  

Maurício Pires de Andrade Resende

Auditores Independentes

  

Engagement Partner

 

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Table of Contents

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

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

 

BALANCE SHEETS AS OF MARCH 31, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais - R$)

 

     Company

   Consolidated

     03/31/05

   12/31/04

   03/31/05

   12/31/04

ASSETS

                   

CURRENT ASSETS

   4,670,215    4,098,160    4,725,698    4,161,865
    
  
  
  

Cash and cash equivalents

   690,911    172,293    743,971    238,577

Trade accounts receivable, net

   2,846,822    2,681,644    2,857,437    2,696,000

Deferred and recoverable taxes

   739,677    897,546    759,921    907,819

Inventories

   88,965    91,462    90,336    93,002

Other recoverable amounts

   114,278    91,212    115,851    92,830

Other

   189,562    164,003    158,182    133,637

LONG-TERM ASSETS

   767,937    703,092    868,338    805,119
    
  
  
  

Deferred and recoverable taxes

   381,738    325,560    410,068    354,382

Escrow deposits

   348,725    333,407    349,222    333,893

Other

   37,474    44,125    109,048    116,844

PERMANENT ASSETS

   13,399,644    13,884,589    13,306,416    13,784,783
    
  
  
  

Investments

   492,736    509,745    278,445    284,574

Property, plant and equipment, net

   12,806,141    13,261,463    12,912,518    13,369,391

Deferred charges

   100,767    113,381    115,453    130,818
    
  
  
  

TOTAL ASSETS

   18,837,796    18,685,841    18,900,452    18,751,767
    
  
  
  

 

The accompanying notes are an integral part of these interim financial statements.

 

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Table of Contents

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

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

 

BALANCE SHEETS AS OF MARCH 31, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais - R$)

 

     Company

   Consolidated

     03/31/05

   12/31/04

   03/31/05

   12/31/04

LIABILITIES AND SHAREHOLDERS’ EQUITY

                   

CURRENT LIABILITIES

   3,877,928    4,138,548    3,900,089    4,163,806
    
  
  
  

Loans and financing

   392,272    526,132    396,446    529,930

Trade accounts payable

   1,269,823    1,172,604    1,296,172    1,194,781

Taxes payable

   958,415    1,155,720    972,515    1,165,734

Dividends and interest on capital

   502,596    506,116    502,596    506,116

Reserve for contingencies

   54,918    52,806    54,967    52,847

Payroll and related charges

   121,392    138,628    125,605    143,312

Temporary losses on derivatives

   229,797    235,918    230,737    235,918

Other

   348,715    350,624    321,051    335,168

LONG-TERM LIABILITIES

   3,069,606    3,147,047    3,092,631    3,170,245
    
  
  
  

Loans and financing

   2,121,627    2,205,762    2,142,160    2,226,313

Taxes payable

   25,171    26,007    25,171    26,007

Reserve for contingencies

   827,054    800,244    827,235    800,382

Other

   95,754    115,034    98,065    117,543
    
  
  
  

DEFERRED INCOME

   —      —      17,470    17,470
    
  
  
  

SHAREHOLDERS’ EQUITY

   11,888,648    11,398,632    11,888,648    11,398,632
    
  
  
  

Capital

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

Capital reserves

   2,745,386    2,745,272    2,745,386    2,745,272

Profit reserves

   659,556    659,556    659,556    659,556

Retained earnings

   2,505,632    2,015,730    2,505,632    2,015,730
    
  
  
  

FUNDS FOR CAPITALIZATION

   1,614    1,614    1,614    1,614
    
  
  
  
                     
    
  
  
  

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   18,837,796    18,685,841    18,900,452    18,751,767
    
  
  
  

 

The accompanying notes are an integral part of these interim financial statements.

 

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Table of Contents

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

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

 

STATEMENTS OF INCOME

FOR THE QUARTERS ENDED MARCH 31, 2005 AND 2004

(In thousands of Brazilian reais - R$, except earnings per share)

 

     Company

    Consolidated

 
     03/31/05

    03/31/04

    03/31/05

    03/31/04

 

Telecommunications services

   4,723,199     4,497,420     4,781,135     4,520,419  

Revenue deductions

   (1,374,241 )   (1,250,242 )   (1,396,170 )   (1,254,256 )
    

 

 

 

NET OPERATING REVENUE

   3,348,958     3,247,178     3,384,965     3,266,163  

Cost of services provided

   (1,857,320 )   (1,837,564 )   (1,864,313 )   (1,842,945 )
    

 

 

 

GROSS PROFIT

   1,491,638     1,409,614     1,520,652     1,423,218  

OPERATING EXPENSES

   (645,895 )   (692,536 )   (676,432 )   (709,485 )
    

 

 

 

Selling

   (384,235 )   (386,000 )   (413,251 )   (409,795 )

General and administrative

   (197,863 )   (236,252 )   (211,512 )   (239,330 )

Equity in subsidiaries

   (17,681 )   (11,571 )   (3,329 )   (1,208 )

Other, net

   (46,116 )   (58,713 )   (48,340 )   (59,152 )
    

 

 

 

INCOME FROM OPERATIONS BEFORE FINANCIAL EXPENSES, NET

   845,743     717,078     844,220     713,733  

Financial expenses, net

   (101,465 )   (81,542 )   (104,448 )   (82,434 )
    

 

 

 

INCOME FROM OPERATIONS

   744,278     635,536     739,772     631,299  

Nonoperating income, net

   8,357     9,189     8,680     9,221  
    

 

 

 

INCOME BEFORE TAXES

   752,635     644,725     748,452     640,520  

Income and social contribution taxes

   (262,733 )   (226,144 )   (258,550 )   (221,939 )

Reversal of interest on capital

   —       —       —       —    
    

 

 

 

NET INCOME

   489,902     418,581     489,902     418,581  
    

 

 

 

     —       —       —       —    

NUMBER OF SHARES OUTSTANDING AT BALANCE SHEET DATE (IN THOUSANDS)

   493,592,279     493,592,279              

EARNINGS PER SHARE - R$

   0.00099     0.00085              
    

 

           

 

The accompanying notes are an integral part of these interim financial statements.

 

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Table of Contents

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

 

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

 

NOTES TO THE INTERIM FINANCIAL STATEMENTS

FOR THE QUARTER ENDED MARCH 31, 2005

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

 

1. OPERATIONS

 

a. Ownership control and operations

 

Telecomunicações de São Paulo S.A. - Telesp, hereinafter referred to as the “Company” or “Telesp”, is controlled by Telefónica S.A. that, as of March 31, 2005, 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 São Paulo Stock Exchange (BOVESPA). The Company is also registered with the US Securities and Exchange Commission (SEC) and its American Depository Shares (ADSs - level II) are traded on the New York Stock Exchange (NYSE).

 

The Company’s activities are regulated by the Brazil’s telecommunications regulator (ANATEL), in accordance with the terms of the concession granted by the Brazilian Government.

 

The Company is a concessionaire of the fixed switch telephone service (STFC) in Region 3, which comprises the State of São Paulo, in Sectors 31, 32 and 34 established in the General Concession Plan (PGO).

 

The STFC Concession Agreement in effect until December 31, 2005 may be renewed, upon the Concessionaire’s request, on a chargeable basis, only once for another 20 years, provided that the Concessionaire meets the requirements of the agreement. The new agreement can contain new requirements and establish new universalization and quality targets, based on the conditions in force at the time of the renewal.

 

b. Telecommunications service providers and subsidiaries

 

Assist Telefônica S.A.: this wholly-owned subsidiary is a closely-held company engaged primarily in providing the following services: technical assistance for installation, operation and maintenance of internal telephone, data and IT networks; value-added services, including those related to internet content, connection and access, as well as technology services and internet support; installation, operation and maintenance of internet, intranet and extranet solutions; sale, rent and maintenance of general telecommunications and IT equipment and devices.

 

Aliança Atlântica Holding B.V.: this company headquartered in Amsterdam, Netherlands, is a 50-50 joint venture formed in 1997 between Telebrás and Portugal Telecom. With the spin-off of Telebrás in February 1998, Telebrás’ equity interest in Aliança Atlântica was transferred to the Company. Currently, Aliança Atlântica is owned 50% by the Company and 50% by Telefónica S.A

 

Companhia AIX de Participações: this company is engaged in both direct and indirect development of activities related to the construction, conclusion and operation of underground fiber optic networks. Currently, Telesp holds a 50% interest in this company.

 

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Companhia ACT de Participações: on June 30, 2001, Telesp paid up an equity interest of 32% in this company. In November and December 2003, this company underwent a corporate restructuring that increased Telesp’s equity interest to 50%.

 

Santo Genovese Participações Ltda.: on December 24, 2004, the Company acquired all the sharequotas of Santo Genovese Participações Ltda., a limited liability company, which holds an equity interest in Atrium Telecomunicações Ltda. Atrium that provides telecommunications management services for corporate clients in Brazil (industries, companies and condominiums), internet and intranet services, and sale, rent and representation of telecommunication systems and equipment.

 

2. PRESENTATION OF INTERIM FINANCIAL STATEMENTS

 

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

 

The consolidated interim financial statements include the accounts of the subsidiaries Assist Telefônica S.A. and Santo Genovese Participações Ltda. and of the jointly-owned subsidiaries Aliança Atlântica Holding B.V., Companhia AIX de Participações and Companhia ACT de Participações, which were fully or proportionally consolidated in accordance with CVM Instruction No. 247/96.

 

In consolidation, all intercompany accounts and transactions have been eliminated.

 

The interim financial statements have been reclassified when applicable for comparability purposes, as shown in Note 22.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

 

The interim financial statements as of March 31, 2005 have been prepared in accordance with the principles, practices and criteria consistently applied to the financial statements for the prior year and should be analyzed together with those financial statements.

 

4. CASH AND CASH EQUIVALENTS

 

     Company

   Consolidated

     Mar/2005

   Dec/2004

   Mar/2005

   Dec/2004

Cash and banks

   8,489    9,478    21,484    25,323

Temporary cash investments

   682,422    162,815    722,487    213,254
    
  
  
  

Total

   690,911    172,293    743,971    238,577
    
  
  
  

 

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5. TRADE ACCOUNTS RECEIVABLE, NET

 

     Company

    Consolidated

 
     Mar/2005

    Dec/2004

    Mar/2005

    Dec/2004

 

Billed amounts

   2,398,410     2,212,569     2,407,337     2,225,833  

Unbilled amounts

   1,005,204     1,033,315     1,011,778     1,038,304  
    

 

 

 

Gross accounts receivable

   3,403,614     3,245,884     3,419,115     3,264,137  

Allowance for doubtful accounts

   (556,792 )   (564,240 )   (561,678 )   (568,137 )
    

 

 

 

Total

   2,846,822     2,681,644     2,857,437     2,696,000  
    

 

 

 

Current

   2,249,726     2,145,167     2,246,687     2,148,190  

Past-due – 1 to 30 days

   461,554     433,423     470,643     440,352  

Past-due – 31 to 60 days

   129,905     114,127     132,466     116,478  

Past-due – 61 to 90 days

   65,101     48,938     66,099     50,098  

Past-due – 91 to 120 days

   34,659     34,086     35,766     34,963  

Past-due – more than 120 days

   462,669     470,143     467,454     474,056  
    

 

 

 

Total

   3,403,614     3,245,884     3,419,115     3,264,137  
    

 

 

 

 

The Company has accounts receivable and payable under negotiation with Embratel – Empresa Brasileira de Telecomunicações S.A. (long-distance operator). Amounts receivable and payable are recorded based on estimates prepared by the Company; significant changes to such amounts are not expected. Amounts receivable under discussion with Embratel, in the amount of R$68,258 as of March 31, 2005, are shown as current in the table above.

 

6. DEFERRED AND RECOVERABLE TAXES

 

     Company

   Consolidated

     Mar/2005

   Dec/2004

   Mar/2005

   Dec/2004

Withholding taxes

   32,317    46,070    33,254    46,980

Prepaid income tax

   160,216    220,924    161,154    221,407

Prepaid social contribution tax

   56,006    85,586    56,031    85,603

Deferred taxes

   643,042    619,279    683,576    654,103
    
  
  
  

Tax loss carryforwards – Income tax

   —      —      20,762    21,136

Tax loss carryforwards – Social contribution tax

   —      —      7,475    7,610

Reserve for contingencies

   286,435    276,602    286,513    276,662

Postretirement benefit plans

   15,218    15,182    15,251    15,211

Income tax on other temporary differences

   251,021    240,805    259,982    245,209

Social contribution tax on other temporary differences

   90,368    86,690    93,593    88,275

ICMS (state VAT) (*)

   229,404    251,054    234,931    253,360

Other

   430    193    1,043    748
    
  
  
  

Total

   1,121,415    1,223,106    1,169,989    1,262,201
    
  
  
  

Current

   739,677    897,546    759,921    907,819

Long-term

   381,738    325,560    410,068    354,382
    
  
  
  

 

(*) Refers to tax credits derived from the purchase of fixed assets, available for offset in 48 months.

 

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Deferred income and social contribution taxes

 

Considering the existence of taxable income in the last five fiscal years and the expected generation of future 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 the deferred taxes as of March 31, 2005 as follows:

 

Year


   Company

   Consolidated

2005

   287,231    298,999

2006

   108,500    110,197

2007

   63,129    69,181

2008

   63,129    71,958

2009 and thereafter

   121,053    133,241
    
  

Total

   643,042    683,576
    
  

 

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

 

7. OTHER RECOVERABLE AMOUNTS

 

     Company

   Consolidated

     Mar/2005

   Dec/2004

   Mar/2005

   Dec/2004

Advances to employees

   5,914    5,710    6,069    6,085

Advances to suppliers

   42,470    29,344    43,065    29,881

Other advances

   601    342    604    342

Other recoverable amounts

   65,293    55,816    66,113    56,522
    
  
  
  

Total current

   114,278    91,212    115,851    92,830
    
  
  
  

 

8. INVENTORIES

 

     Company

    Consolidated

 
     Mar/2005

    Dec/2004

    Mar/2005

    Dec/2004

 

Consumption materials

   102,089     104,550     102,138     104,599  

Resale items

   122,963     129,995     129,360     140,850  

Public telephone prepaid cards

   8,362     8,510     8,362     8,510  

Scraps

   543     641     543     641  

Allowance for reduction to market value and obsolescence

   (144,992 )   (152,234 )   (150,067 )   (161,598 )
    

 

 

 

Total current

   88,965     91,462     90,336     93,002  
    

 

 

 

 

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9. OTHER ASSETS

 

     Company

   Consolidated

     Mar/2005

   Dec/2004

   Mar/2005

   Dec/2004

Prepaid expenses

   85,540    56,163    82,395    52,587

Receivables from Barramar S.A. (*)

   —      —      75,138    76,503

Intercompany receivables - current

   105,836    99,801    75,327    70,283

Onlending of foreign currency loans

   4,098    4,184    4,098    4,184

Tax incentives, net of allowance

   411    411    411    411

Amounts linked to National Treasury securities

   8,449    8,284    8,449    8,284

Receivables from sale of properties/scraps

   4,720    16,234    4,720    16,234

Other assets

   8,419    6,931    7,628    6,053
    
  
  
  

Total

   217,473    192,008    258,166    234,539
    
  
  
  

Current

   189,562    164,003    158,182    133,637

Long-term

   27,911    28,005    99,984    100,902
    
  
  
  

 

(*) Refer to receivables from Barramar S.A., recorded by Companhia AIX de Participações, net of allowance for doubtful accounts.

 

10. ESCROW DEPOSITS

 

     Company

   Consolidated

     Mar/2005

   Dec/2004

   Mar/2005

   Dec/2004

Civil litigation

   37,416    36,509    37,452    36,546

Tax litigation

   232,483    225,651    232,841    226,008

Labor claims

   78,826    71,247    78,929    71,339
    
  
  
  

Total long-term

   348,725    333,407    349,222    333,893
    
  
  
  

 

11. INVESTMENTS

 

     Company

    Consolidated

 
     Mar/2005

    Dec/2004

    Mar/2005

    Dec/2004

 

Investments carried under the equity method

   398,962     415,957     116,825     119,820  
    

 

 

 

Aliança Atlântica Holding B.V.

   72,381     75,704     —       —    

Assist Telefônica S.A.

   157,412     166,195     —       —    

Companhia AIX de Participações

   69,789     71,683     —       —    

Negative goodwill on acquisition of shares – Companhia Aix de Participações

   (17,470 )   (17,470 )   —       —    

Allowance for losses – Companhia AIX de Participações (i)

   25     25     —       —    

Companhia ACT de Participações

   119,820     119,820     119,820     119,820  

Goodwill on acquisition – Santo Genovese Participações Ltda.

   (2,995 )   —       (2,995 )   —    

Investments carried at cost

   93,774     93,788     161,620     164,754  
    

 

 

 

Portugal Telecom

   75,362     75,362     143,209     146,329  

Other companies

   29,136     29,149     29,135     29,148  

Other investments

   3,359     3,360     3,359     3,360  

Tax incentives

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

Allowance for losses

   (29,247 )   (29,247 )   (29,247 )   (29,247 )
    

 

 

 

Total

   492,736     509,745     278,445     284,574  
    

 

 

 

 

The negative goodwill on the acquisition of shares of Companhia AIX de Participações recorded by the Company was allocated to Deferred Income in the consolidated balance sheet, according to Art. 26 of CVM Instruction No. 247/96.

 

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    Investment acquisition - Santo Genovese Participações Ltda.

 

On December 24, 2004, the Company acquired control of Santo Genovese Participações Ltda., parent company of Atrium Telecomunicações Ltda. (“Atrium”), which is engaged in the telecommunications services management.

 

Santo Genovese Participações Ltda. (“Santo Genovese”) is a holding company which holds 99.99% of Atrium. The acquisition price was R$113,440.

 

Such operation will allow to increase the supply of higher value-added services on the domestic market, through the management of telecommunications services.

 

The goodwill, based on Atrium’s future profitability, is calculated as follows:

 

     Amounts

 

Acquisition price

   113,440  

Acquisition costs

   2,435  

( - ) Book value of investment

   (3,945 )
    

Goodwill

   119,820  

 

The principal financial information on the subsidiaries as of March 31, 2005 and December 31, 2004 is as follows:

 

     March 2005

 
     Aliança
Atlântica


    Assist
Telefônica


    Companhia
AIX


    Companhia
ACT


    Santo
Genovese (a)


 

Paid-up capital

   138,413     254,000     460,929     1     51,850  

Capital reserves

   —       —       —       —       450  

Retained earnings (accumulated deficit)

   6,349     (96,588 )   (321,351 )   50     (59,926 )
    

 

 

 

 

Shareholders’ equity

   144,762     157,412     139,578     51     (7,626 )
    

 

 

 

 

Shares (million)

                              

Number of subscribed and paid-up shares

   88     367,977     298,562     1,000     51,850  

Number of common shares owned

   44     367,977     149,281     500     51,850  

Ownership percentage

   50 %   100 %   50 %   50 %   100 %

 

11


Table of Contents
     December 2004

 
     Aliança
Atlântica


    Assist
Telefônica


    Companhia
AIX


    Companhia
ACT


    Santo
Genovese (a)


 

Paid-up capital

   144,779     254,000     460,929     1     51,850  

Capital reserves

   —       —       —       —       450  

Retained earnings (accumulated deficit)

   6,630     (87,805 )   (317,563 )   50     (56,245 )
    

 

 

 

 

Shareholders’ equity

   151,409     166,195     143,366     51     (3,945 )
    

 

 

 

 

Shares (million)

                              

Number of subscribed and paid-up shares

   88     367,977     298,562     1,000     51,850  

Number of common shares owned

   44     367,977     149,281     500     51,850  

Ownership percentage

   50 %   100 %   50 %   50 %   100 %

 

(a) The Company recorded a provision for shareholders’ deficit in the amount of R$7,626 (R$3,945 as of December 31, 2004), under the caption “Other liabilities”.

 

     March 2005

    March 2004

 
     Aliança
Atlântica


   Assist
Telefônica


    Cia
AIX


    Cia
ACT
(c)


   Santo
Genovese
(b) (c)


    Aliança
Atlântica


   Assist
Telefônica


    Companhia
AIX


 

Net income (loss)

   11    (8,783 )   (3,788 )   —      (3,680 )   —      (8,165 )   (4,395 )

 

(b) Santo Genovese’s loss includes the result of December 2004, because the consolidated balance sheet for 2004 was prepared based on Santo Genovese’s balance sheet as of November 2004. The current consolidated balance sheet has been prepared on the same monthly basis.

 

(c) Companhia ACT de Participações and Santo Genovese Participações Ltda were consolidated from December 2004.

 

The Company’s equity in subsidiaries is as follows:

 

     March 2005

    March 2004

 

Aliança Atlântica

   (3,324 )   (1,208 )

Assist Telefônica

   (8,783 )   (8,165 )

Companhia AIX de Participações

   (1,894 )   (2,198 )

Companhia ACT de Participações

   —       —    

Santo Genovese Participações Ltda.

   (3,680 )   —    
    

 

     (17,681 )   (11,571 )
    

 

 

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Table of Contents
12. PROPERTY, PLANT AND EQUIPMENT, NET

 

     Company

     Annual
depreciation
rates %


   March 2005

   December 2004

        Cost

   Accumulated
depreciation


    Net book
value


   Cost

   Accumulated
depreciation


    Net book
value


Property, plant and equipment in service

        38,002,562    (25,518,186 )   12,484,376    37,962,793    (25,004,091 )   12,958,702
         
  

 
  
  

 

Switching and transmission equipment

   12.50    15,503,214    (11,598,591 )   3,904,623    15,589,724    (11,434,121 )   4,155,603

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

   10.00    11,316,598    (7,945,177 )   3,371,421    11,299,344    (7,786,228 )   3,513,116

Transmission equipment - modems

   20.00    559,093    (404,516 )   154,577    540,040    (375,265 )   164,775

Underground and undersea cables, poles and towers

   5.00 a 6.67    388,883    (203,112 )   185,771    387,765    (199,272 )   188,493

Subscriber, public and booth equipment

   12.50    1,840,791    (1,041,904 )   798,887    1,804,641    (994,303 )   810,338

IT equipment

   20.00    465,948    (392,326 )   73,622    466,266    (386,296 )   79,970

Buildings and underground cables

   4.00    6,322,154    (3,232,555 )   3,089,770    6,313,571    (3,178,563 )   3,135,008

Vehicles

   20.00    47,406    (35,738 )   11,497    49,465    (36,623 )   12,842

Land

   —      258,185    —       258,185    257,530    —       257,530

Other

   10.00 a 20.00    1,300,290    (664,267 )   636,023    1,254,447    (613,420 )   641,027

Property, plant and equipment in progress

   —      321,765    —       321,765    302,761    —       302,761
         
  

 
  
  

 

Total

        38,324,327    (25,518,186 )   12,806,141    38,265,554    (25,004,091 )   13,261,463
         
  

 
  
  

 

Average annual depreciation rates - %

        10.55               10.49           
         
             
          

Assets fully depreciated

        12,698,535               12,223,036           
         
             
          

 

     Consolidated

     Annual
depreciation
rates %


   March 2005

   December 2004

        Cost

   Accumulated
depreciation


    Net book
value


   Cost

   Accumulated
depreciation


    Net book
value


Property, plant and equipment in service

        38,150,646    (25,567,923 )   12.582.723    38,106,747    (25,047,625 )   13,059,122
         
  

 
  
  

 

Switching and transmission equipment

   12.50    15,503,264    (11,598,592 )   3.904.672    15,589,724    (11,434,120 )   4,155,604

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

   10.00    11,327,731    (7,946,378 )   3.381.353    11,329,039    (7,795,144 )   3,533,895

Transmission equipment – modems

   20.00    578,025    (413,312 )   164.713    540,040    (375,265 )   164,775

Underground and undersea cables, poles and towers

   5.00 a 6.67    401,915    (203,810 )   198.105    400,797    (199,737 )   201,060

Subscriber, public and booth equipment

   12.50    1,840,797    (1,041,907 )   798.890    1,804,647    (994,305 )   810,342

IT equipment

   20.00    469,348    (394,466 )   74.882    469,549    (388,256 )   81,293

Buildings and underground cables

   4.00    6,322,205    (3,232,571 )   3.089.634    6,313,622    (3,178,578 )   3,135,044

Vehicles

   20.00    47,745    (35,846 )   11.899    49,731    (36,716 )   13,015

Land

   —      258,225    —       258.225    257,530    —       257,530

Other

   10.00 a 20.00    1,401,391    (701,041 )   700.350    1,352,068    (645,504 )   706,564

Property, plant and equipment in progress

   —      329,795    —       329.795    310,269    —       310,269
         
  

 
  
  

 

Total

        38,480,441    (25,567,923 )   12.912.518    38,417,016    (25,047,625 )   13,369,391
         
  

 
  
  

 

Average annual depreciation rates - %

        10.58               10.57           
         
             
          

Assets fully depreciated

        12,699,731               12,223,036           
         
             
          

 

13


Table of Contents

Returnable assets

 

Pursuant to the Concession Agreement, all assets pertaining to the Company’s equity and indispensable to the provision of the services described in said agreement are considered returnable and are part of the concession assets. These assets will be automatically returned to ANATEL upon expiration of the Concession Agreement. As of March 31, 2005, the net book value of such returnable assets is estimated at R$9,953,474 (R$10,295,779 as of December 31, 2004), comprised of switching and transmission equipment, public use terminals, external network equipment, energy equipment, and system and operation support equipment.

 

13. DEFERRED CHARGES

 

Deferred charges as of March 31, 2005 and December 31, 2004 are as follows:

 

     Company

    Consolidated

 
     Mar/05

    Dec/04

    Mar/05

    Dec/04

 

Preoperating expenses

   23,245     26,034     29,499     32,527  
    

 

 

 

Cost

   55,788     55,788     65,279     65,279  

Accumulated amortization

   (32,543 )   (29,754 )   (35,780 )   (32,752 )

Merged goodwill – Ceterp S.A.

   21,287     29,298     21,287     29,298  
    

 

 

 

Cost

   187,951     187,951     187,951     187,951  

Accumulated amortization

   (166,664 )   (158,653 )   (166,664 )   (158,653 )

Goodwill on the acquisition of the IP network

   56,235     58,049     56,235     58,049  
    

 

 

 

Cost

   72,561     72,561     72,561     72,561  

Accumulated amortization

   (16,326 )   (14,512 )   (16,326 )   (14,512 )

Other

   —       —       8,432     10,944  
    

 

 

 

Cost

   —       —       12,059     14,243  

Accumulated amortization

   —       —       (3,627 )   (3,299 )
    

 

 

 

Total

   100,767     113,381     115,453     130,818  
    

 

 

 

 

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Table of Contents

Preoperating expenses refer to costs incurred in the preoperating stage of long-distance services; amortization began in May 2002, 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 merger on November 30, 2000. This goodwill, based on the expectation of future profitability, is being amortized over 60 months.

 

The goodwill on acquisition of the IP network in December 2002 refers to the acquisition of the assets for the Switched IP and Speedy Link services of Telefônica Empresas S.A. The portion considered as goodwill and recorded in deferred charges corresponds to the customer portfolio of the business. According to an appraisal report, the economic fundamental of the goodwill is the expected future profitability, for an amortization period of 120 months.

 

14. LOANS, FINANCING AND DEBENTURES

 

     Consolidated

   Balance as of March 2005

     Currency

   Annual
interest rate%


  Maturity

   Current

   Long-
term


   Total

Mediocrédito

   US$    1.75%   2014    8,218    64,154    72,372

CIDA

   CAN$    3.00%   2005    1,566    —      1,566

Loans in local currency (a)

   R$    6% + 3.75%
spread and CDI
+ 0.40% per
month
  through
2006
   3,486    1,339    4,825

Loans in foreign currency (a)

            through
2009
   360,641    576,667    937,308

Debentures

   R$    103.50% of CDI   through
2007
   22,535    1,500,000    1,522,535
                  
  
  

Total

                 396,446    2,142,160    2,538,606
                  
  
  

 

     Consolidated

   Balance as of December 2004

     Currency

   Annual interest
rate %


  Maturity

   Current

   Long-
term


   Total

Mediocrédito

   US$    1.75%   2014    8,528    67,862    76,390

CIDA

   CAN$    3.00%   2005    1,565    —      1,565

Loans in local currency

   R$    6% + 3.75%
spread and CDI
+ 0.40% per
month
  through
2006
   3,599    2,119    5,718

Loans in foreign currency

            through
2009
   494,279    656,332    1,150,611

Debentures

   R$    103.50% of CDI   through
2007
   21,959    1,500,000    1,521,959
                  
  
  

Total

                 529,930    2,226,313    2,756,243
                  
  
  

 

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Table of Contents

Loans in foreign currency are as follows:

 

     Currency

   Interest rate

  Principal

   Interest

   Consolidated
Mar/2005


Resolution 2770

   USD    2.00% to 6.90%   312,021    13,739    325,760

Resolution 2770

   JPY    1.40%   22,126    —      22,126

Debt assumption

   USD    18.4% to 27.50%   8,611    4,356    12,967

Untied Loan – JBIC

   JPY    Libor + 1.25%   555,257    1,316    556,573

DEG – Deutsche Investitions

   USD    Libor + 6%   17,997    1,885    19,882
             
  
  
              916,012    21,296    937,308
             
  
  
     Currency

   Interest rate

  Principal

   Interest

   Consolidated
Dec/2004


Resolution 2770

   USD    2.00% to 6.90%   310,640    10,415    321,055

Resolution 2770

   JPY    1.40%   79,736    34    79,770

Debt assumption

   USD    8.62% to 27.50%   61,119    23,081    84,200

Untied Loan – JBIC

   JPY    Libor + 1.25%   643,242    3,713    646,955

DEG – Deutsche Investitions

   USD    Libor + 6%   18,432    199    18,631
             
  
  
              1,113,169    37,442    1,150,611
             
  
  

 

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

 

Long-term debt maturities

 

Year


   Total

2006

   192,652

2007

   1,650,603

2008

   131,409

2009

   131,409

Thereafter

   36,087
    
     2,142,160
    

 

Debentures

 

On September 3, 2004, the Company announced a Securities Distribution Program (“Program”) and, under the Program, the first issue of debentures (“Offering”).

 

The Program amounts to R$3.0 billion for a period of two years from the filing with the CVM on October 15, 2004 and contemplates the issuance of simple nonconvertible debentures, unsecured or subordinated, and/or promissory notes.

 

The Offering consisted of the issue of 150,000 simple nonconvertible unsecured debentures, with a face value of R$10, in the total amount of R$1,500,000, of a single series, maturing on September 1, 2010 (six years). The debentures bear interest with quarterly payments, equivalent to 103.5% of the DI (interbank deposit) average daily rate calculated and published by the CETIP (Clearinghouse for the Custody and Financial Settlement of Securities). The adjustment to the interest rate of debentures is estimated for September 1, 2007. On a conservative basis, the Company included, in the consolidated schedule of long-term debt maturities shown above, the principal of the debentures in the year 2007, date of adjustment of interest rates.

 

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Table of Contents
15. TAXES PAYABLE

 

     Company

   Consolidated

     Mar/05

   Dec/04

   Mar/05

   Dec/04

Taxes on income

                   

Income tax

   211,252    330,756    212,436    330,886

Social contribution tax

   76,119    120,685    76,549    120,738

Deferred taxes

                   

Income tax

   20,260    20,875    20,260    20,875

Social contribution tax

   7,292    7,513    7,292    7,513

Indirect taxes

                   

ICMS (state VAT)

   586,560    612,047    593,228    616,786

PIS and COFINS (taxes on revenue)

   65,464    72,910    69,383    76,277

Other

   16,639    16,941    18,538    18,666
    
  
  
  

Total

   983,586    1,181,727    997,686    1,191,741
    
  
  
  

Current

   958,415    1,155,720    972,515    1,165,734

Long-term

   25,171    26,007    25,171    26,007
    
  
  
  

 

16. PAYROLL AND RELATED CHARGES

 

     Company

   Consolidated

     Mar/05

   Dec/04

   Mar/05

   Dec/04

Salaries and fees

   22,374    16,247    23,259    16,836

Payroll charges

   66,276    58,681    68,845    61,605

Accrued benefits

   3,452    4,853    3,736    5,277

Employee profit sharing

   29,290    58,847    29,765    59,594
    
  
  
  

Total

   121,392    138,628    125,605    143,312
    
  
  
  

 

17. CONSIGNMENTS ON BEHALF OF THIRD PARTIES

 

     Company

   Consolidated

     Mar/05

   Dec/04

   Mar/05

   Dec/04

Collateral for deposits

   1,899    6,296    1,899    6,296

Amounts charged to users

   91,287    101,833    81,369    92,117

Retentions

   79,214    67,987    80,121    68,651

Other consignments

   1,601    1,574    1,601    1,573
    
  
  
  

Total

   174,001    177,690    164,990    168,637
    
  
  
  

 

18. DIVIDENDS AND INTEREST ON CAPITAL PAYABLE

 

     Company/Consolidated

     Mar/05

   Dec/04

Interest on capital

   198,954    200,300
    
  

Minority shareholders

   198,954    200,300

Dividends

   303,642    305,816
    
  

Minority shareholders

   303,642    305,816
    
  

Total

   502,596    506,116
    
  

 

The interest on capital and dividends payable to minority shareholders refer to declared but unclaimed amounts.

 

17


Table of Contents
19. RESERVE FOR CONTINGENCIES

 

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

 

Consolidated


   Nature

    Total

 
   Labor

    Tax

    Civil

   

Balances as of December 31, 2004

   271,839     539,594     41,796     853,229  

Additions

   20,277     2,581     3,050     25,908  

Write-offs

   (10,794 )   (973 )   (5,266 )   (17,033 )

Monetary restatement

   9,231     10,140     727     20,098  
    

 

 

 

Balances as of March 31, 2005

   290,553     551,342     40,307     882,202  
    

 

 

 

Current

   32,440     16,766     5,761     54,967  

Long-term

   258,113     534,576     34,546     827,235  
    

 

 

 

 

19.1 Labor contingencies

 

The Company has various labor contingencies and recorded a reserve of R$290,553, consolidated, to cover probable losses. The amounts involved and respective degrees of risk are as follows:

 

     Amount Involved

Risk


   Telesp

   Assist

   Total

Remote

   1,736,667    3,995    1,740,662

Possible

   90,858    —      90,858

Probable

   290,352    201    290,553
    
  
  

Total

   2,117,877    4,196    2,122,073
    
  
  

 

These contingencies involve a number of lawsuits, mainly related to salary differences, salary equalization, overtime, employment relationship with employees of outsourced companies and hazardous duty premium, among others.

 

19.2 Tax Contingencies

 

     Amount Involved

Risk


   Telesp

   Assist

   Total

Remote

   1,120,487    —      1,120,487

Possible

   1,151,346    11,739    1,163,085

Probable

   551,342    —      551,342
    
  
  

Total

   2,823,175    11,739    2,834,914
    
  
  

 

18


Table of Contents

Based on the assessment of the Company’s legal counsel and management, a reserve amounting to R$551,342 was recorded as of March 31, 2005. The principal tax contingencies, assessed as remote, possible and probable risk, are as follows:

 

    Claims by the National Institute of Social Security (INSS), amounting to R$787,198, referring to:

 

  a. Several legal proceedings for the collection of Workers’ Compensation Insurance (SAT) and joint liability of the Company for payment of social security contributions allegedly not made by contractors, considered possible risk, in the amount of R$273,823. Based on a partially unfavorable court decision, management decided to provide for R$96,283 relating to the portion of the total amount for which the likelihood of loss is probable.

 

  b. Discussion regarding social security contribution on certain amounts paid for compensation of salary losses resulting from economic plans (“Plano Verão” and “Plano Bresser”), in the amount of R$126,970 for which an unfavourable outcome is considered possible. Based on higher court decisions and an unfavorable court decision in a similar case involving another company of the group, the Company’s management decided to provide for R$88,355 to cover potential losses, despite the legal counsel’s classification of possible risk.

 

  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 amount of approximately R$52,252, considered as possible risk. These lawsuits are in the 1st lower court and at the last administrative level, respectively. No provision was recorded based on the risk classification of this matter.

 

  d. Notification demanding social security contributions for joint liability in 1993, in the amount of approximately R$172,171, for which the risk is considered possible. This process is at the 2nd administrative level. No provision was made based on the risk classification of this matter.

 

  e. Legal proceedings imposing fines of R$161,982 for payment of dividends when the Company had allegedly a debt to the INSS. No provision was made for the balance, for which the likelihood of loss is deemed possible. This process is at the 1st administrative level.

 

    Claims by the Finance Secretary of the State of São Paulo, totaling R$705,549, referring to:

 

  f. Tax assessments on October 31 and December 13, 2001, related to ICMS (state VAT) allegedly due on international long-distance calls, amounting to approximately R$157,229 for November and December 1996 and from January 1997 to March 1998, at the first administrative level, assessed as possible risk, and R$169,211 for the period from April 1998 to December 1999, at the second administrative level, assessed as remote risk. No provision was recorded based on the risk classification of these matters.

 

  g.

Tax assessment on February 29, 2000 demanding payment of the ICMS allegedly due on cell phone activation tariff in the period from January 1995 to December 1997, plus fines and interest, amounting to approximately R$266,420, assessed as

 

19


Table of Contents
 

remote risk. The claim is at the 1st administrative level. No provision was recorded based on the risk classification of this matter.

 

  h. Tax assessment on July 2, 2001 demanding the difference in ICMS paid without late-payment fine, amounting to R$5,397, assessed as possible risk. The claim is in the lower court. No provision was recorded based on the risk classification of this matter.

 

  i. Tax assessment notice related to the untimely used credits in the period from January to April 2002, in the amount of R$28,329, for which the risk is considered remote. The claim is at the 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

  j. Tax assessment notice related to the use of ICMS credits on acquisition of consumption materials, in the amount of R$10,357, for which the risk is considered possible. The claim is at the 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

  k. Tax assessment notice related to the non-reversal of ICMS credits in proportion to tax-exempt and non-taxed sales and services in the period from January 1999 to June 2000, in addition to an ICMS credit unduly taken in March 1999. The total amount involved is R$56,917. The risk is considered possible by legal counsel. The claim is at the 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

  l. Notifications of around R$7,668 regarding the former Ceterp’s loss of the tax benefit established by State Decree No. 48,237/03, due to underpayment for an error in the calculation of the debt, assessed as possible risk. The claim is at the 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

  m. Tax collection lawsuits demanding about R$4,021 of ICMS differences for the period from May 1999 to June 2003. The Company is gathering the documents to prove that the amounts have been effectively paid. Guarantee is being provided and defense is being prepared for presentation in the lower court. The risk is assessed as possible. No provision was recorded based on the risk classification of this matter.

 

    Litigation at the Federal and Municipal levels in the amount of R$615,387:

 

  n. The Company filed a lawsuit challenging the increase of the COFINS and PIS (taxes on revenue) tax basis (COFINS until February 2004 tax basis and PIS until November 2002 tax basis), requiring the inclusion of financial and securitization income and exchange gains, instead of only operating revenues. Despite the injunction obtained suspending the change in the calculation method and the risk assessed as possible, the Company recognized a provision of R$240,075, in case it receives an unfavorable judgment.

 

  o. FINSOCIAL, currently 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 resulted in tax credits from overpayments. These credits, were offset by CTBC (company merged into the Company in November 1999) against current amounts of COFINS due. Claiming that those offsets made by CTBC were improper, the Federal Government made an assessment in the amount of R$15,657, considered as a possible loss. The claim is at the higher court. No provision was recorded based on the risk classification of this matter.

 

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  p. Litigation contesting the levy of corporate income tax, social contribution tax, PASEP and COFINS on telecommunications services of Centrais Telefônicas de Ribeirão Preto S.A.—CETERP, merged in November 2000, based on paragraph 3 of Article 155 of the Federal Constitution, according to which, with the exception of ICMS (state VAT) and taxes on exports and imports, no other taxation applies to services. The Company assesses this case as probable loss and has recorded a reserve of R$70,146. The claim is in the higher court.

 

  q. Lawsuit seeking 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 Federal Economic Intervention Contribution (CIDE) on remittances to be made based on contracts with foreign residents, since the unconstitutionality of said tax is clear. The lawsuit also seeks offset against other taxes payable, in 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. Despite the risk is considered to be possible, the Company recognized a reserve for the unpaid amounts, in the amount of R$11,776. The claim is at the lower court.

 

  r. Tax collection claims demanding differences regarding income tax, based on DCTF’s (Declaration of Federal Tax Credits and Debits) for the first half of 1999, amounting to approximately R$263,095 and R$4,835, assessed, respectively, as remote and possible risk. These claims are at the 1st administrative level and no provision was recorded based on the risk classification.

 

  s. At the municipal level, the Company has contingencies related to the IPTU (municipal real estate tax) in the amount of R$1,001, which have all been accrued due to the existence of favorable and unfavorable decisions regarding this matter.

 

  t. The Municipal Government of São Paulo assessed the Company, alleging differences in the payment of the ISS (municipal service tax), a fine of 20% not paid in the amount of R$8,802. No reserve has been recorded for this contingency, since the attorneys responsible for this case believe that the risk is possible. The claim is at the first administrative level.

 

There are other contingencies that have also been accrued, in the amount of R$43,706, for which the risk is assessed by management as probable.

 

19.3 Civil Contingencies

 

     Amount Involved

Risk


   Telesp

   Assist

   Total

Remote

   998,271    1,663    999,934

Possible

   929,847    115    929,962

Probable

   40,277    30    40,307
    
  
  

Total

   1,968,395    1,808    1,970,203
    
  
  

 

The contingencies assessed as possible risk involve various matters: unacknowledged title to telephone line, indemnity for material and personal damages, and other, in the amount of approximately R$354,000. In addition, the Company is also involved in civil class actions related to the Community Telephone Plan (PCT), where the telephone expansion plan buyers who did not receive shares in return for their financial investments seek an indemnity, 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$576,161. The risks involved were assessed as possible by legal counsel. The claims are in the higher court.

 

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20. OTHER LIABILITIES

 

     Company

   Consolidado

     Mar/2005

   Dec/2004

   Mar/2005

   Dec/2004

Provision for post-retirement benefit plans (Note 31)

   44,759    44,651    44,855    44,738

Advances from customers

   48,051    55,403    48,051    55,403

Amounts to be refunded to subscribers

   35,586    39,294    30,951    37,904

Installments payable – acquisition of Santo Genovese Participações Ltda. (Atrium Telecomunicações Ltda.)

   5,594    20,772    5,594    20,772

Subsidiaries’ shareholders’ deficit (Santo Genovese Participações Ltda.)

   7,626    3,945    —      —  

Other

   40,071    28,281    50,562    38,065
    
  
  
  

Total

   181,687    192,346    180,013    196,882
    
  
  
  

Current

   117,441    127,851    113,343    129,821

Long-term

   64,246    64,495    66,670    67,061
    
  
  
  

 

21. SHAREHOLDERS’ EQUITY

 

a. Capital

 

Capital as of March 31, 2005 and December 31, 2004 is R$5,978,074. Subscribed and paid-up capital is represented by shares without par value, as follows:

 

Common shares

   165,320,206,602

Preferred shares

   328,272,072,739
    

Total shares

   493,592,279,341
    

Book value per thousand shares – R$

   24.09
    

 

Preferred shares are nonvoting but have priority in the reimbursement of capital and are entitled to dividends 10% higher than those paid on common shares, as per article 7 of the Company’s bylaws and clause II, article 17, of Law No. 6404/76, with wording of Law No. 10,303/01.

 

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Table of Contents
22. OPERATING REVENUE, NET

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Subscription (i)

   1,380,412     1,183,447     1,380,412     1,183,447  

Activation

   17,064     21,889     17,064     21,889  

Local service

   727,423     779,618     727,423     779,618  

Domestic long distance

   772,287     751,553     772,287     751,553  
    

 

 

 

Intraregional

   570,621     566,401     570,621     566,401  

Interregional

   201,666     185,152     201,666     185,152  

International long distance

   29,866     28,185     29,866     28,185  

Network

   987,655     1,023,818     987,655     1,023,818  

Use of network (i)

   180,910     194,179     180,910     194,179  

Public telephones

   105,576     76,890     105,576     76,890  

Business communication

   301,065     221,232     302,898     221,232  

Assignment of means (i)

   95,781     84,124     95,781     84,124  

Other (i)

   125,160     132,485     181,263     155,484  
    

 

 

 

Gross operating revenue

   4,723,199     4,497,420     4,781,135     4,520,419  

Taxes on gross revenue

   (1,246,070 )   (1,220,179 )   (1,265,865 )   (1,224,193 )
    

 

 

 

ICMS (state VAT)

   (1,069,605 )   (1,053,602 )   (1,082,339 )   (1,053,908 )

PIS and COFINS (taxes on revenue)

   (176,026 )   (165,432 )   (182,015 )   (168,205 )

Municipal service tax (ISS)

   (439 )   (1,145 )   (1,511 )   (2,080 )

Discounts

   (128,171 )   (30,063 )   (130,305 )   (30,063 )
    

 

 

 

Net operating revenue

   3,348,958     3,247,178     3,384,965     3,266,163  
    

 

 

 

 

(i) For the better presentation of Operating Revenue to the market and ANATEL, the Company made reclassifications in the amounts of March 2004. The main reclassifications were made in the captions “subscription”, “use of network”,”assignment of means” and “other”

 

On June 29, 2004, through Acts No. 45,011 and No. 45,012, ANATEL approved tariff adjustments for fixed-switch telephone service (STFC), based on the criteria established in the local and domestic long-distance concession contracts, effective July 2, 2004, except for the former CETERP’s Region 32, effective July 3, 2004. On July 2, 2004, the approved percentage was applied on tariff bases established by a court injunction. Average increases were as follows:

 

Local: 6.89%

Long distance: 3.20%

Network usage fee for local interconnection (TU-RL): (-10.47%)

Network usage fee for long distance interconnection (TU-RIU): 3.20%

 

On June 26, 2003, through Acts No. 37,166 and No. 37,167, ANATEL approved tariff adjustments for fixed-switch telephone service (STFC), based on the criteria established in the local and domestic long-distance concession contracts, effective June 30, 2003 and for the former CETERP’s Region 33, July 3, 2003. The local basic plan had an average increase of 28.75%, including a productivity gain of 1%, while the 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), of approximately 17%, 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.

 

After the judgment of the injunction by the Superior Court of Justice and reestablishment of IGP-DI as the index to be used in the calculation, the approved percentages, according to ANATEL’s published acts, were applied to the tariff bases approved in June 2003, without retroactive effects, divided in two amounts, with the first of which becoming effective September 1, 2004. On September 1, 2004, the following tariff adjustment percentages were applied:

 

Pulse: on average 3.22%;

Domestic Long-distance service: on average 5.22%;

Non-residential subscription and branch exchange: on average 7.75%;

Residential subscription charges: 3.14%;

Activation: on average 14.14%;

 

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The second amount was applied from November 1, 2004, with the following tariff adjustment percentages:

 

Pulse: on average 3.13%;

Domestic long-distance service: on average 4.97%;

Non-residential subscription and branch exchange: on average 7.20%;

Residential subscription: 3.05%;

Activation: on average 12.40%;

 

23. COSTS OF SERVICES PROVIDED

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Depreciation and amortization

   (603,905 )   (631,661 )   (607,809 )   (634,032 )

Personnel

   (48,624 )   (42,962 )   (50,172 )   (43,525 )

Materials

   (13,426 )   (9,433 )   (13,437 )   (9,475 )

Network interconnection

   (854,987 )   (895,710 )   (852,634 )   (895,710 )

Outside services

   (279,750 )   (208,120 )   (281,810 )   (210,453 )

Other

   (56,628 )   (49,678 )   (58,451 )   (49,750 )
    

 

 

 

Total

   (1,857,320 )   (1,837,564 )   (1,864,313 )   (1,842,945 )
    

 

 

 

 

24. SELLING EXPENSES

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Depreciation and amortization

   (1,885 )   (1,873 )   (1,885 )   (1,873 )

Personnel

   (54,347 )   (39,996 )   (55,890 )   (40,951 )

Materials

   (13,628 )   (13,295 )   (13,651 )   (13,348 )

Outside services

   (215,470 )   (189,930 )   (240,813 )   (211,475 )

Allowance for doubtful accounts

   (90,259 )   (133,715 )   (92,279 )   (134,864 )

Other

   (8,646 )   (7,191 )   (8,733 )   (7,284 )
    

 

 

 

Total

   (384,235 )   (386,000 )   (413,251 )   (409,795 )
    

 

 

 

 

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25. GENERAL AND ADMINISTRATIVE EXPENSES

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Depreciation and amortization

   (62,196 )   (55,649 )   (65,778 )   (57,756 )

Personnel

   (31,152 )   (33,439 )   (35,599 )   (34,476 )

Materials

   (2,999 )   (3,701 )   (3,101 )   (3,722 )

Outside services

   (97,156 )   (135,848 )   (102,236 )   (135,588 )

Other

   (4,360 )   (7,615 )   (4,798 )   (7,788 )
    

 

 

 

Total

   (197,863 )   (236,252 )   (211,512 )   (239,330 )
    

 

 

 

 

26. FINANCIAL EXPENSES, NET

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Financial income

   102,249     105,800     104,702     106,166  
    

 

 

 

Income from temporary cash investments

   10,091     15,694     11,975     16,478  

Gains on derivative transactions

   26,951     50,971     26,951     50,971  

Interest

   17,604     22,251     17,663     21,734  

Monetary/exchange variations

   45,925     16,253     46,339     730  

Other

   1,678     631     1,774     16,253  

Financial expenses

   (203,714 )   (187,342 )   (209,150 )   (188,600 )
    

 

 

 

Interest

   (91,052 )   (59,630 )   (95,082 )   (60,613 )

Losses on derivative transactions

   (80,833 )   (73,715 )   (81,680 )   (73,715 )

Expenses on financial transactions

   (17,810 )   (17,431 )   (18,317 )   (17,706 )

Monetary/exchange variations

   (14,019 )   (36,566 )   (14,071 )   (36,566 )
    

 

 

 

Total

   (101,465 )   (81,542 )   (104,448 )   (82,434 )
    

 

 

 

 

27. OTHER OPERATING EXPENSES, NET

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Income

   78,200     84,613     77,735     84,032  
    

 

 

 

Technical and administrative services

   5,714     14,977     5,031     14,266  

Income from supplies

   407     5,305     407     5,305  

Dividends

   2     446     2     446  

Fines on telecommunication services

   28,321     24,906     28,321     24,906  

Recovered expenses

   14,333     14,125     14,336     14,187  

Reversal of reserve for contingencies

   13,526     8,236     13,679     8,303  

Reversal of provision for post-retirement benefit plan

   478     —       478     —    

Other

   15,419     16,618     15,481     16,619  

Expenses

   (124,316 )   (143,326 )   (126,075 )   (143,184 )
    

 

 

 

Write-offs and adjustments to realizable value of supplies

   (1,644 )   (8,248 )   (1,794 )   (8,248 )

Goodwill amortization – Ceterp and Santo Genovese

   (11,006 )   (8,011 )   (11,006 )   (8,011 )

Donations and sponsorships

   (440 )   (4,290 )   (447 )   (4,290 )

Taxes (except for income and social contribution taxes)

   (56,061 )   (57,819 )   (56,523 )   (57,666 )

Reserve for contingencies

   (25,577 )   (21,743 )   (25,623 )   (21,754 )

Commissions on voice and data communication services(a)

   (25,153 )   (27,701 )   (25,153 )   (27,701 )

Other

   (4,435 )   (15,514 )   (5,529 )   (15,514 )
    

 

 

 

Total

   (46,116 )   (58,713 )   (48,340 )   (59,152 )
    

 

 

 

 

(a) This balance refers mainly to commissions to Telefônica Empresas S.A.

 

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28. NONOPERATING INCOME, NET

 

     Company

    Consolidated

 
     Mar/
2005


    Mar/
2004


    Mar/
2005


    Mar/
2004


 

Income

   13,181     12,877     13,512     12,916  
    

 

 

 

Proceeds from sale of property, plant and equipment and investments

   2,438     3,283     2,578     3,283  

Unidentified revenue

   8,190     8,502     8,208     8,502  

Other

   2,553     1,092     2,726     1,131  

Expenses

   (4,824 )   (3,688 )   (4,832 )   (3,695 )
    

 

 

 

Cost of sale of property, plant and equipment and investments

   (4,806 )   (3,675 )   (4,814 )   (3,682 )

Other

   (18 )   (13 )   (18 )   (13 )
    

 

 

 

Total

   8,357     9,189     8,680     9,221  
    

 

 

 

 

29. 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, in accordance with the trial balance for suspension or reduction. The taxes calculated on income as of the date of the financial statements are recorded in liabilities or assets, as applicable. Prepayments of income and social contribution taxes are recorded as deferred and recoverable taxes.

 

Reconciliation of tax charges to statutory tax rates

 

Reconciliation of the reported tax charges and the amounts calculated by applying 34% (income tax of 25% and social contribution tax of 9%) in March 2005 and 2004.

 

     Company

    Consolidated

 
     Mar/2005

    Mar/2004

    Mar/2005

    Mar/2004

 

Income before taxes

   752,635     644,725     748,452     640,520  
    

 

 

 

Social contribution tax

                        

Social contribution tax expense

   (67,737 )   (58,025 )   (67,361 )   (57,647 )

Permanent differences:

                        

Equity pick-up

   (1,591 )   (1,041 )   (630 )   (109 )

Tax rate difference in transferred tax credit (i)

   —       1,997     —       1,997  

Tax credit on tax loss carryforwards not recorded by subsidiaries

   —       —       —       —    

Nondeductible expenses, gifts, incentives and dividends received

   (279 )   (1,469 )   (512 )   (1,667 )
    

 

 

 

Social contribution tax expense in the statement of income

   (69,607 )   (58,538 )   (68,503 )   (57,426 )
    

 

 

 

Income tax

                        

Income tax expense

   (188,159 )   (161,181 )   (187,113 )   (160,130 )

Permanent differences:

                        

Equity pick-up

   (4,420 )   (2,893 )   (1,751 )   (302 )

Nondeductible expenses, gifts, incentives and dividends received

   (814 )   (3,824 )   (1,450 )   (4,373 )

Other

                        

Incentives (cultural, food and transportation)

   267     292     267     292  
    

 

 

 

Corporate income tax expense in the statement of income

   (193,126 )   (167,606 )   (190,047 )   (164,513 )
    

 

 

 

Total (corporate income tax + social contribution tax)

   (262,733 )   (226,144 )   (258,550 )   (221,939 )
    

 

 

 

 

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For purposes of calculation of the tax credit arising from the merger, the income tax and social contribution tax rates used were 25% and 8%, respectively, in accordance with the legislation in effect at the date of the merger. As per changes introduced by Law No. 10,637/02, beginning 2003, social contribution tax rate is 9%. The amortization of goodwill, net of reversal of accrual and the corresponding tax credit in the first quarter of 2004, increased the net income for the period, and consequently, generated a gain on mandatory minimum dividends.

 

The components of deferred tax assets and liabilities on temporary differences are shown in Notes 6 and 15, respectively.

 

30. RELATED-PARTY TRANSACTIONS

 

The principal balances with related parties are as follows:

 

     Consolidated

 
     Mar/2005

    Dec/2004

 

ASSETS

            

Current assets

   529,740     363,993  
    

 

Trade accounts receivable

   443,804     283,101  

Other recoverable amounts

   10,609     10,609  

Other assets

            

Intercompany receivables

   75,327     70,283  

Long-term assets

   9,064     15,942  
    

 

Intercompany receivables

   9,064     15,942  
    

 

Total assets

   538,804     379,935  
    

 

LIABILITIES

            

Current liabilities

   436,913     277,056  
    

 

Trade accounts payable

   393,202     239,326  

Other

            

Consignments on behalf of third parties

   993     1,020  

Intercompany payables

   42,718     36,710  

Long-term liabilities

   34,896     54,042  
    

 

Intercompany payables

   31,395     50,482  

Other

            

Other liabilities

   3,501     3,560  
    

 

Total liabilities

   471,809     331,098  
    

 

     Consolidated

 
     Mar/2005

    Mar/2004

 

STATEMENT OF INCOME

            

Revenue

   105,377     111,043  
    

 

Telecommunications services

   95,507     106,286  

Financial income

   354     74  

Other operating revenue

   9,516     4,683  

Costs and expenses

   (585,446 )   (637,503 )
    

 

Cost of services provided

   (458,678 )   (522,106 )

Selling

   (80,861 )   (66,307 )

General and administrative

   (23,952 )   (22,797 )

Financial expenses

         (103 )

Other operating expenses

   (21,955 )   (26,190 )

 

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Table of Contents

Trade accounts receivable include receivables for telecommunications services, principally from Telerj Celular S.A., Celular CRT S.A., Telefônica Empresas S.A., Atento Brasil S.A., Global Telecom S.A., Tele Centro Oeste Celular Participações S.A. and their subsidiaries, and Telesp Celular S.A., principally for long-distance services, with some amounts under negotiation for which a solution will be achieved in the short term, and also for international long-distance services, principally from Compañia de Telecomunicaciones de Chile Transmissiones Regionales S.A., Telefónica de Argentina S.A. and Telefônica de España S.A.

 

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

 

Intercompany receivables in current and long-term assets are comprised of receivables from Telefônica Empresas S.A., Telefónica Internacional S.A., Telefônica 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., Telefônica Data do Brasil Ltda., Terra Networks Brasil S.A. and other Group companies for services provided, consulting fees, salary and other expenses paid by the Company to be reimbursed by the respective companies.

 

Trade accounts payable include services provided primarily by Atento Brasil S.A., Telerj Celular S.A., TeleBahia Celular S.A., Telefônica Empresas S.A., Telergipe Celular S.A., Terra Networks Brasil S.A., Telefônica Pesquisa e Desenvolvimento Ltda., Telefônica Gestão de Serviços Compartilhados do Brasil Ltda., Global Telecom S.A., Celular CRT S.A., Telesp Celular S.A., Telefónica Processos y Tecnologia de la Infomación S.A., and international long-distance services provided by Compañia de Telecomunicaciones de Chile Transmisiones Regionales S.A., Telefónica de Argentina S.A. and Telefónica de España S.A.

 

Intercompany payables in current and long-term liabilities are comprised mainly of consulting fees and management fee payable to Telefónica Internacional S.A., administrative services in the accounting, financial, human resources, equity, 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.

 

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

 

Other operating revenues include mainly revenue from network infrastructure leased to Telesp Celular S.A.

 

Cost of services provided refers mainly to expenses of interconnection services provided by Telesp Celular S.A., Tele-sudeste S.A., CRT Celular S.A., Teleleste Celular S.A., Tele Centro Oeste Celular Participações S.A. and their subsidiaries, and call center management services provided by Atento Brasil S.A., and traffic services (mobile terminal) provided by Telesp Celular S.A.

 

Selling expenses refer mainly to data transmission services provided by Telefônica Empresas S.A., marketing services by Atento Brasil S.A., Internet services by Terra Networks Brasil S.A. and commissions paid to cellular telephone operators, mainly to Telesp Celular S.A., Celular CRT S.A., Tele Centro Oeste Celular Participações S.A. and Tele Sudeste Celular Participações S.A.

 

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Table of Contents

General and administrative expenses refer to administrative services provided by Telefônica Gestão de Serviços Compartilhados do Brasil Ltda., management fee payable to Telefónica Internacional S.A., data circuit leases payable to Telefônica Empresas S.A.

 

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

 

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, the plans managed by Sistel were multiemployer benefit plans. 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 multiemployer 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 Secretariat for Pension Plans on January 13, 2000.

 

In December 2004, the entity Visão Prev Sociedade de Previdência Complementar was formed to manage the Visão and PBS Telesp plans, which were transferred from Sistel to new entity. The process of transfer was approved by the Secretariat for Pension Plans (currently Previc) through Official Letter No. 123, of October 7, 2004. The transfer of assets and liabilities of the plans was made on February 18, 2005.

 

The transfer of the plans did not result in any charge to the plan participants, because the wording of the regulations and all rights of the participants were maintained. Sistel will continue to manage the PBS-A and PAMA plans, and Telesp will continue to sponsor these plans jointly with other Sistel’s sponsors.

 

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 to the PBS Telesp Plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The funding method is the capitalization method and the sponsor’s contribution is 6.83% (March 2005) of payroll of employees covered by the plan, of which 5.33% (March 2005) is allocated to fund the PBS Telesp Plan and 1.5% to the PAMA Plan. In addition of this actuarially calculated contribution, the sponsor is making a contribution in Brazilian reais to amortize the past service cost, adjusted monthly based on accumulated INPC (national consumer price index), which amounted to R$ 62 in the period from January to March 2005.

 

For the other Telesp employees, there is an individual defined contribution plan—Visão Telesp Benefit Plan, established by Sistel in August 2000. The Visão Telesp Plan is funded by contributions made by the participants (employees) and by the sponsor which are credited to participants’ individual accounts. Telesp is responsible for bearing all plan administrative and maintenance expenses, 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 the contribution 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.

 

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In the period from January to March 2005, the Company made contributions to the PBS Telesp Plan in the amount of R$97 (R$77 in the same period in 2004) and to the Visão Telesp Plan in the amount of R$5,252 (R$4,455 in the same period in 2004).

 

Assist individually sponsors a defined contribution plan similar to that of Telesp, the Visão Assist Benefit Plan, which covers about 46% of its employees. Assist’s contributions to that plan totaled R$60 (R$45 in the same period in 2004).

 

The actuarial valuation of the plans was made in December 2004 based on the employees’ data as of September 2004 and the projected unit credit method was adopted. Actuarial gains or losses for each year were immediately recognized. The plans assets relate to November 30, 2004. For multiemployer plans (PAMA and PSB-A), the apportionment of the plan assets was made based on the sponsoring entity’s actuarial liabilities in relation to the plans’ total actuarial liabilities.

 

The status of the plans as of March 31, 2005 and December 31, 2004, whose liabilities are recorded in the caption “Other” (Note 20), is as follows:

 

Plan


   Mar/2005

   Dec/2004

PBS / CTB

   25,996    25,734

PAMA

   18,763    18,917
    
  

Total - Company

   44,759    44,651

Visão Assist liability

   96    87
    
  

Total consolidated

   44,855    44,738
    
  

 

Shown below are expenses estimated for 2005 as per actuaries’ report:

 

     PBS/Visão
Telesp/CTB


    PAMA

    Visão – Assist

 

Current service cost

   120     41     32  

Interest cost

   8,875     8,321     26  

Expected return on plan assets

   (7,718 )   (8,979 )   (22 )

Employees’ contributions

   (229 )   —       —    
    

 

 

Total expenses (reversals) for 2005

   1,048     (617 )   36  
    

 

 

 

32. 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. In this context, Telecomunicações de São Paulo S.A – Telesp complies with the Brazilian legislation for contracting insurance coverage.

 

Type


   Insurance Coverage

Operating risks (loss of profits)

   US$ 6,743,393,000

Optional third-party liability - vehicles

   R$ 1,000

ANATEL guarantee insurance

   R$ 30,759

 

Note: The “Operating risks (with loss of profits)” insurance policy expired on March 31, 2005, and the Company renewed the insurance, increasing the insurance coverage to US$7,262,620,000.

 

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33. FINANCIAL INSTRUMENTS

 

In compliance with the terms of CVM Instruction No. 235/95, the Company and its subsidiaries made a valuation of their assets and liabilities based on fair 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 realizable 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.

 

Carrying and fair values of financial instruments as of March 31, 2005 and December 31, 2004 are as follows:

 

     Consolidated

 
     Mar/2005

    Dec/2004

 
     Carrying
Value


    Fair Value

    Carrying
Value


    Fair Value

 

Loans and financing

   (2,538,606 )   (2,554,733 )   (2,756,243 )   (2,783,035 )

Derivatives

   (230,737 )   (137,284 )   (235,918 )   (124,457 )

Cash and cash equivalents

   743,971     743,971     238,577     238,577  
    

 

 

 

     (2,025,372 )   (1,948,046 )   (2,753,584 )   (2,668,915 )
    

 

 

 

 

The Company has a direct interest of 0.69% and, through the subsidiary Aliança Atlântica, an indirect interest of 0.23% in Portugal Telecom (same percentage as of December 31, 2004), carried at cost. The investment, at market value, is based on the last quotation of March 2005 on the Lisbon Stock Exchange for Portugal Telecom, equivalent to 9.04 euros (9.10 euros in December 2004):

 

     Consolidated

     Mar/2005

   Dec/2004

     Carrying
Value


   Fair
Value


   Carrying
Value


   Fair
Value


Portugal Telecom – direct investment

   75,362    250,071    75,362    263,309

Portugal Telecom – indirect investment through Aliança Atlântica

   67,847    83,357    70,967    87,770
    
  
  
  
     143,209    333,428    146,329    351,079
    
  
  
  

 

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

 

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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 March 31, 2005, 39.83% of the debt was denominated in foreign currency (U.S. dollar, Canadian dollar and yen); 99.97% 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. As of March 31, 2005, these transactions generated a net loss of R$54,729 (consolidated). As of March 31, 2005, the Company has recorded a liability of R$230,737 to reflect the unrealized temporary loss.

 

The carrying value and fair value of the Company’s net excess (exposure) to the exchange rate risk as of March 31, 2005 and December 31, 2004 are as follows:

 

     Consolidated

 
     Mar/2005

   Dec/2004

 
     Carrying
Value


    Fair
Value


   Carrying
Value


    Fair
Value


 

Liabilities

                       

Loans and financing

   1,011,246     1,010,062    1,228,566     1,237,400  

Purchase commitments

   56,634     56,634    42,986     42,986  

Asset position on swaps

   1,067,582     1,075,800    1,253,415     1,270,788  
    

 
  

 

Net excess (exposure) (a)

   (297 )   9,104    (18,137 )   (9,598 )
    

 
  

 

 

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

 

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 March 31, 2005, the Company had R$1,011,246 (R$1,228,566 as of December 31, 2004) of loans and financing in foreign currency, of which R$434,790 (R$562,980 as of December 31, 2004) was at fixed interest rates and R$576,455 (R$665,586 as of December 31, 2004) was at variable interest rates (Libor). To hedge against the exchange risk on these foreign currency debts, the Company has hedge transactions in order to peg these debts to local currency, at floating rates indexed to the CDI (interbank deposit rate), in a way that the Company’s financial result is affected by the CDI. The balance of loans and financing also includes debentures issued in 2004 with interest based on the variation of the CDI (R$1,522,535), as described in Note 14. On the other hand, the Company invests its excess cash (temporary cash investments) of R$743,971 (R$238,577 as of December 31, 2004) mainly in short-term instruments, based on the CDI variation, which reduces this risk. The carrying values of these instruments approximate fair values, since they may be redeemed in the short term.

 

The Company has a hedge against external variable interest rate risks on the financing obtained from JBIC - Japan Bank for International Cooperation. The Company continues monitoring market rates in order to evaluate the need to contract other derivatives to hedge against the volatility risk of external variable rates on the remaining balance.

 

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 match increases in local interest rates which affect the Company’s debt.

 

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c. Debt Acceleration Risk

 

As of March 31, 2005, the Company’s loan and financing agreements contain restrictive covenants, typically applicable to such agreements, relating to cash generation, indebtedness ratios and other. These restrictive covenants have been complied with by the Company and did not restrict the Company’s 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 bill has been overdue for more than 30 days. Exceptions are made for telecommunication services that must be maintained for security or national defense reasons.

 

As of March 31, 2005, the Company’s customer portfolio had no subscribers whose receivables were individually higher than 1% of the total trade accounts receivable.

 

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 creditworthy financial institutions.

 

34. SUBSEQUENT EVENTS

 

On April 2 and 4, 2005, the Company published the notice of interim dividends and interest on capital for fiscal year 2005, in accordance with the resolutions of the Board of Directors’ Meeting held on April 1, 2005, subject to approval of the General Shareholders’ Meeting.

 

    Interim dividends – fiscal year 2005

 

Telesp has declared interim dividends in the total amount of R$1,500,000, based on the retained earnings as of December 31, 2004, according to article 28 of the Company’s bylaws and articles 204 and 205 of Law No. 6404/76.

 

Type of share


   Common

   Preferred (*)

Value per lot of 1,000 shares: R$

   2,849438    3,134382

 

(*) 10% higher than the amount paid on each common share, in accordance with article 7 of the Company’s bylaws.

 

In accordance with the sole paragraph of article 28 of the Company’s bylaws, interim dividends will be charged to the mandatory minimum dividend for fiscal year 2005, subject to approval of the General Shareholders’ Meeting.

 

The payment of said dividends began on April 20, 2005 to the holders of common and preferred shares who were included in the Company’s records on April 1, 2005.

 

    Interest on capital – fiscal year 2005

 

Telesp declared interest on capital in the amount of R$359,000, with withholding income tax at the rate of 15%, resulting in a net amount of R$305,150, in accordance with article 9 of Law No. 9249/95 and CVM Resolution No. 207/96.

 

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Amount per lot of 1,000 shares (R$)


   Immune or Exempt
Legal Entities
(gross value)


   Withholding
income tax (15%)


   Legal Entities and
Individuals
(net value)


Common shares

   0.681965    0.102294    0.579670

Preferred shares (*)

   0.750162    0.112524    0.637637

 

(*) 10% higher than the amount paid on each common share, in accordance with article 7 of the Company’s bylaws.

 

The credits to the shareholders were recorded in the Company’s accounting records as of April 30, 2005, individually for each shareholder, based on the shareholding position at the end of April 29, 2005, and the payment of the interest will be made by the end of fiscal year 2005.

 

In accordance with article 29 of the Company’s bylaws, interest on capital can be charged to the mandatory minimum dividend for fiscal year 2005. Shareholders who are immune or exempt from income tax will receive their credits at the gross value, according to current legislation, upon presentation of proof of tax immunity or exemption, based on the notice to shareholders published on April 2 and 4, 2005.

 

35. SIGNIFICANT EVENT – PROPOSAL FOR GROUPING OF SHARES

 

On February 22, 2005, the Company, in accordance with CVM Instruction No. 358, of January 3, 2002, published a significant event notice communicating the resolutions of the Board of Directors’ Meeting held on February 21, 2005:

 

I – submit to the Extraordinary Shareholders’ Meeting that will take place on May 11, 2005 the proposal for the grouping of all shares of the Company, in accordance with article 12 of Law No. 6404/76, of December 15, 1976, under the following conditions:

 

(i) The current 493,592,279,341 shares, of which 165,320,206,602 are common shares and 328,272,072,739 are preferred shares, will be grouped in the proportion of 1,000 shares to 1 share of the same class.

 

(ii) The holders of shares, of any class, which do not have multiples of 1,000 shares will be able to adjust their shareholding positions over a period of 30 days to be announced through the Notice to the Shareholders. At the end of the adjustment period, any fractions of shares resulting from the grouping will be sold at an auction to be held on the São Paulo Stock Exchange (BOVESPA). The proceeds from such sale will be made available to the respective shareholders after the financial settlement of the shares sold at the auction. In case it is not possible to identify the account to make the deposit, said amounts will remain at the shareholders’ disposal.

 

(iii) after the adjustment period mentioned in item (ii), the Company’s shares will be traded grouped, solely by the unit quotation.

 

(iv) If the proposal is approved by the shareholders, article 5 of the Company’s Bylaws, concerning capital, will be modified to reflect the new capital structure.

 

(v) Each American Depositary Receipt – ADR, currently representing 1,000 preferred shares of the Company, will then represent 1 preferred share. Therefore, there will not be no fractions in the ADR program resulting from the grouping.

 

The grouping, which will not involve any change in the capital amount, is intended to standardize the quotation unit of the shares in the domestic and international markets (São Paulo Stock Exchange - Bovespa

 

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and New York Stock Exchange – NYSE), reduce administrative and operating costs for the maintenance and processing of the shareholder base, simplify share quotations by adopting trading per share, and improve quality of information and communication to the shareholders of the Company.

 

If the Extraordinary Shareholders’ Meeting approves the proposal for the grouping of shares, a notice to shareholders will be published with all necessary information so that shareholders, at their discretion, can adjust their shareholding positions in lots multiple of 1,000 shares.

 

II – Authorize the acquisition of shares issued by the Company to be held in treasury or subsequent cancellation, according to the terms of CVM Instruction No. 10/80 and clause XIII of article 17 of the bylaws, under the following conditions:

 

(i) Objective: to allow the participation of the Company in the auction of fractions, grouped into shares, which will result from the grouping process, in order to pay the shareholders, if required for the performance of the auction.

 

(ii) Quantity of shares to be purchased: up to the total number of shares made up of fractions resulting from the grouping, observing the limit of 10% of the outstanding shares of each class, in accordance with the current legislation.

 

(iii) Deadline for the purchase: all shares made up of the fractions resulting from the grouping will be purchased at the auction to be held on Bovespa.

 

(iv) Number of outstanding shares: according to CVM Instruction No. 10/80, the number of outstanding shares in the market is 25,279,346,129 common shares and 36,452,510,659 preferred shares.

 

(v) Brokerage firms: ABN AMRO Real corretora de Câmbio Valores Mobiliários S/A, and Bradesco S/A Corretora de Títulos e Valores Mobiliários.

 

III – Authorize the Company’s Executive Board to do all necessary acts to implement the grouping of shares and acquisition of shares for treasury or subsequent cancellation, including engaging companies to act as intermediaries.

 

* * * * * * * * * * * * * * * * *

William Cuenca Filho

Accountant

CRC - 1SP194341/O-7

* * * * * * * * * * * * * * * * *

 

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

 

Telecomunicações de São Paulo S.A. - Telesp

Management Comments on Consolidated Performance

March 31, 2005

(All figures in million of Brazilian reais - R$)

 

     Mar/05

    Mar/04

    Variation

 
         %

    R$

 

Gross operating revenue

   4,781.1     4,520.4     5.8     260.7  

Net operating revenue

   3,385.0     3,266.2     3.6     118.8  

Cost of services rendered

   (1,864.3 )   (1,842.9 )   1.2     (21.4 )

Financial expenses, net

   (104.4 )   (82.4 )   26.7     (22.0 )

Operating expenses, net

   (676.5 )   (709.5 )   (4.6 )   33.0  

Income from operations

   739.8     631.3     17.1     108.5  

Net income

   489.9     418.6     17.0     71.3  

 

1. The net operating revenue as of March 31, 2005 was R$3,385.0. When compared to the R$3,266.2 registered in the same period of the previous year, there was an increase of R$118.8, or 3.6%, due to the tariff readjustment based on the IGP-DI granted in July 2004, the launch of the “linha econômica” campaign (economy line), the growth of the Speedy Service, as well as the long-distance services.

 

2. The cost of services rendered grew R$21.4 or 1.2%, mainly due to the increase in costs of outsourcing, in light of the increase of operating services for productive plant, Internet IP Network traffic, legal fees and administrative technical services. In addition, there was an increase in personnel expenses due to the salary readjustment of 6% in September 2004 and the Career Plan that benefited an average of 3,000 employees in the first quarter of 2005. The aforementioned increases were offset by the decrease in interconnection expenses due to the reduction in fixed-to-mobile traffic.

 

3. The net financial result was R$104.4 for the period, an increase of R$22.0 when compared to the same period of 2004, mainly due to the reduction in the return over financial investments, as well as the decrease in the monetary variation on recoverable taxes, the past-due accounts receivable and the increase in interest on contingent liabilities.

 

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     Mar/05

    Mar/04

    Variation

 

Net financial result YTD - R$


       %

    R$

 

Results of financial operations

   13.2     16.8     21.4     (3.6 )

Results of hedge operations

   (55.1 )   (22.7 )   142.7     (32.4 )

CPMF (tax on financial transactions)

   (17.4 )   (17.3 )   0.6     (0.1 )

–Financial Revenues

   17.7     21.7     (18.4 )   (4.0 )

–Financial Expenses

   (95.1 )   (60.6 )   56.9     (34.5 )

Monetary/Exchange variations

   32.3     (20.3 )   259.1     52.6  
    

 

 

 

Net financial result

   (104.4 )   (82.4 )   26.7     (22.0 )
    

 

 

 

 

4. The operating income increased 17.1% when compared to the same period in the previous year, mainly as a result of the revenues increase and the tight expense control.

 

5. Operating data (*)

 

Evolution of the main operating data:

 

     Unit

   Mar./05

   Mar./04

   Variation%

 

Installed lines and lines in process of installation

   Line    14,200,030    14,288,188    (0.6 )

Lines in service

   Line    12,363,952    12,227,546    1.2  

Local traffic:

                     

Pulses – registered

   Thousand
pulses
   7,864,824    8,531,819    (7.8 )

Pulses – exceeding

   Thousand
pulses
   5,298,452    5,976,378    (11.3 )

Public telephones

   Sets    330,999    330,949    0.0  

 

(*) Not reviewed by independent auditors.

 

6. Expansion and investment projects

 

The Company submitted for the consideration of the Board of Directors the capital budget for 2005, in the amount of R$1,717,757 - consolidated, which was subsequently forwarded and approved by the Ordinary General Shareholders’ Meeting held on March 30, 2005. The funds will be provided by the operations.

 

As of March 31, 2005, the Company invested R$216,601 and the new commitments for the capital expenditure for the first quarter of 2005 are as follows:

 

Year


   Committed

   Forecasted

2005

   448,897    507,751

 

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6.1 Sales of telephone lines (*)

 

At the end of March 2005, the Company had a total of 12,363,952 lines in service, from which 75% are residential, 11% non-residential and 9% business customers, and the remaining ones are lines for the Company’s use and public telephones.

 

6.2 Public telephones (*)

 

The Company has a Public Telephone plant of 330,999 units to meet the needs of the population of the State of São Paulo and to achieve the requirements established by the regulatory agency.

 

(*) Not reviewed by independent auditors.

 

7. Anatel

 

7.1 Targets

 

The quality and universalization targets for Switched Fixed Telephony Service (STFC) are available at ANATEL’s website: www.anatel.gov.br.

 

7.2 Domestic and international long-distance licenses

 

ANATEL recognized that the Company had achieved the universalization targets two years in advance, which allowed the Company to receive the licenses to provide STFC services for local, domestic and international long-distance throughout Brazil, thus expanding its frontiers. Subsequently, ANATEL announced that the Company was authorized to provide STFC services throughout Brazil, for local and domestic long-distance in Regions I, II and Sector 33 of the Region III and international long-distance in all the three regions. A legal injunction was granted to Embratel suspending the domestic long-distance calls originated in its concession area to Regions I (Telemar) and II (Brasil Telecom); however, this legal injunction was later declared not valid by ANATEL, allowing the Company to provide services throughout Brazil.

 

In May 2003, the Company started to offer local call services in other six states, in addition to São Paulo, its original concession area. Afterwards, the Company’s operations were expanded to 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).

 

The operation in these cities starts of the progressive achievement of the targets established by ANATEL, as a result of the concession that was granted to provide 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.

 

On July 6, 2003, the wireless operators implemented the Carrier Selection Code - CSC on domestic (VP2 and VP3) and international long-distance calls, under the SMP (Serviço

 

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Móvel Pessoal) rules. The Company began to account the revenues from these services, and pay wireless operators for the usage of their networks on these calls.

 

8. iTelefônica

 

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

 

After several tests in cities in the State of São Paulo since September 29, 2002, on July 13, 2003, Telefônica officially launched the internet service provider iTelefonica to render the service for the whole State.

 

9. Economy and Super-economy Lines

 

As of July 14, 2004, Telesp announced to its customers and users, the launch of a promotion by means of alternative plans for the local service - the Economy Line and the Super-economy Line - and for Domestic Long-distance Service from fixed lines in its concession area - the Economy Line Card. For the Economy Line, the customer pays a subscription fee of R$22.30 and can make fixed-to-fixed local calls charged on the monthly bill. In order to make long distance calls or to call cellular phones, a prepaid card with calling credits must be purchased. For the Super-economy Line, the customer pays a subscription fee of R$11.15 and the telephone only receives calls. In order to make any kind of call, a prepaid card is required.

 

10. Additional information

 

For further details of the Company’s performance, please refer to the Press Release available in the website www.telefonica.com.br.

 

******************

 

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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:  

July 15, 2005

      By:  

/s/ Daniel de Andrade Gomes

               

Name:

 

Daniel de Andrade Gomes

               

Title:

 

Investor Relations Director