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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of February, 2003
Commission File Number: 001-14485
TELE SUDESTE CELLULAR HOLDING COMPANY
(Translation of registrant's name into English)
Praia de Botafogo, 501, 7(degrees) andar
22250-040 Rio de Janeiro, RJ, 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 ___
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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
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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
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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
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If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): N/A
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TELE SUDESTE CELLULAR HOLDING COMPANY
TABLE OF CONTENTS
Item
1. Press Release entitled "Tele Sudeste Celular Participacoes S.A.
Announces Consolidated Financial Results for the 4/th/ Quarter 2002"
dated February 17, 2003.
[GRAPHIC]
TELE SUDESTE CELULAR PARTICIPACOES S.A.
Announces Consolidated Financial Results for the 4/th/ Quarter 2002
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Press Release, February 17, 2003 (52 pages)
For more information, please contact:
Charles E. Allen
TELE SUDESTE CELULAR PARTICIPACOES S.A., SP, Brazil
Tel. : (55-11) 3549-7200
Fax : (55-11) 3549-7202
E-mail: callen@telesp.com.br
URL: www.telefonica.net.br
(Sao Paulo - Brazil), (February 17, 2003) TELE SUDESTE CELULAR PARTICIPACOES
S.A. (NYSE: TSD; BOVESPA: TSEP) today announced its consolidated financial
results for the 4/th/ quarter ended December 31, 2002 stated in nominal reais
and in accordance with the Brazilian Corporate Law # 6,404 of December 15, 1976
and modified by Law # 9,457 of May 5, 1997 and Law 10.303 of October 31, 2001.
MAIN CONSOLIDATED FIGURES
Consolidado-Acumulado
Unadited Figures in R$ million Dec-02 Dec-01 Variacao
Net Operating Income 1,848 1,703 8.5%
EBITDA 602 588 2.4%
EBITDA Margin(%) 32.6 34.5 -1.9p.p
Operating income 198 171 15.7%
Results before taxes and participations 197 170 15.7%
Net result 140 163 -13.8%
Capital Stock (in billion shares) 414.0 396.0 4.5%
EPS (000) 0.34 0.41 -17.6%
Cellular lines in service (000) 3,455 3,028 14.1%
Number of clients - contract (000) 1,087 1,005 8.2%
Number of clients - per-paid (000) 2,368 2,023 17.1%
Digitalization (%) 95.1 91.5 3.6p.p
1 - Preliminary Considerations
Since its privatization, the cellular telephony sector has seen a sustained
growth in Brazil. Tele Sudeste stands out as the market leader operating in a
region where the estimated penetration levels have reached 32.7% in December
2002. This region represents 1% of the Brazilian territory and has 18.1 million
inhabitants. The Company covers 100% of the municipalities in the region and has
achieved the high digitalization level of 95.1% of its customer base, using the
CDMA technology.
Tele Sudeste has focused its efforts on expanding and modernizing its network
and in providing an increasingly wide range of services and high quality levels
thus preparing the Company, both administratively and commercially, to the new
competitive environment.
1
Within this framework, the Company launched during the year the services:
"Controle de Consumo" (Consumption Control) aimed at the clients of Top plans
(contract), providing information about the consumption of the client, either by
request, through previous programming, or when a fixed value is reached; Torpedo
News that sends information about the economy, sports, financial indicators,
horoscopes, and many others, by using SMS messages; and "Emocion Bip" service
that warns the client through a sound alert when the client receives an e-mail,
an e-card, or is invited to join a chat room. The Company will continue to
prioritize the development of value added services like WAP and SMS, constantly
adding more contents and thus the transit of messages. During the month of
April, the Company launched the service MoviStar Dados 2.5G, with the
implementation of its 2.5G network using the 1xRTT technology. The new
generation of the CDMA standard of mobile telephony increases the speed of
access to internet through the cellphone in up to ten times. The coverage of the
service that initially comprised the airports, downtown and the southern region
of the city of Rio de Janeiro, was expanded to the western part of the city,
Barra and Recreio, and to the metropolitan area of Vitoria, capital of the State
of Espirito Santo.
During the year 2002, the commercial management has implemented a growth model
prioritizing the profitability of the operations. The Company is centering its
efforts in the customer loyalty. In that sense and in order to complement the
program of points and advantages "Mundo de Vantagens MoviStar Top", the Company
launched the Favorites Program, aimed to clients enrolled in contract and
pre-paid plans, offering 50% off in the calls up to 5 cellphones of the Company,
previously registered.
A new service channel was created to make the life easier to the clients. It is
the TelefonicaOnLine, that corresponds to a web channel capable to provide
services that were previously provided only in stores or using the 1404.
The marketing strategy during the year guaranteed the leadership position in the
market. Tele Sudeste ended the year with 58.4% of estimated market share.
In December, the operating companies of Tele Sudeste migrated to the SMP -
Personal Mobile Service. During the same month, the shares owned by PT Movies -
Servicos de Telecomunicacoes, SGPS and Telefonica Moviles, S.A. were transferred
to Brasilcel N.V. This new company has now direct and indirect ownership in Tele
Leste Celular, Tele Sudeste Celular Participacoes S.A., Celular CRT
Participacoes S.A., Telesp Celular Participacoes and Global Telecom S.A.,
constituting a Joint Venture shared by Portugal Telecom and Telefonica Moviles.
Therefore, the Company becomes part of a group with more than 13.7 million of
subscribers operating in regions with a potential market of more than 94 million
inhabitants, representing more than 70% of the Brazilian GDP.
Taking into consideration the high volatility of the exchange rate in 2002 and
the fact that near to 100% of Tele Sudeste's debt is denominated in foreign
currency, the hedging policy resulted in net financial expenses below the
variation of the CDI within the period. This result testifies that the adopted
policy is correct and thus, the Company was not affected by the variation of the
exchange rate.
2 - Business Performance
Tele Sudeste registered an expansion of 14.1% in the subscriber base during the
year 2002.
2
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Operating Summary T O T A L
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2002 2001 Var. (%)
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Network digitalization (%) 95.1 91.5 3.6p.p
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Subscribers - Total (thousand) 3,455 3,028 14.1
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Subscribers - Contract (thousand) 1,087 1,005 8.2
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Subscribers - Pre-paid (thousand) 2,368 2,023 17.1
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Regional penetration (%) 32.7 27.7 5.0 pp
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Number of employees 1,972 1,793 10.0
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Sale's points 652 908 (28.2)
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In order to provide a better service to its 3.5 million of subscribers, of which
1.1 and 2.4 million belong to the contract and pre-paid systems, respectively,
the Company launched several new services. Among such services, the most
significant are:
MoviStar Dados 2,5G - With the implementation of its 2.5G network using the
1xRTT technology, the Company started to offer internet access through the
cellphone with a speed that is up to ten times faster. This new service allows
billing based on data volume and new possibilities of use that multiply its
applicability such as safe access to VPNs (Virtual Private Networks) of the
corporate clients. The coverage of the service that initially comprised the
airports, downtown and the southern region of the city of Rio de Janeiro, was
expanded to the western part of the city, Barra and Recreio, and to Vitoria,
capital of the State of Espirito Santo.
Emocion Bip: This service warns the client through a sound alert when the client
receives an e-mail in his IG inbox, an e-card, or was invited to join a chat
room in Selig.
Torpedo News: The Company sends information as selected by the client about the
economy, sports, financial indicators and horoscopes, through SMS messages.
*444: Consumption limit on request, enabling the client to receive information
about consumption, by using SMS. The consumption involves total calls, access to
voice mail, access to e-mocion, and Torpedo messages sent within the concession
area of the Company.
*445: Programmed consumption limit. The client receives Torpedo messages
informing him about consumption with a programmed periodicity. Messages can be
programmed to be sent on a daily, weekly or billing date basis. This service is
also available for corporate plans that do not have MoviStar Gestao.
*446: Consumption limits for contracted amount, that is valid for the contract
plans without monthly fee. The client receives Torpedo messages informing him
about his consumption when 50%, 80% and 100% of his contracted amount is
reached. Besides, the client can decide the blockage of his line for outgoing
calls when the contracted amount is reached.
Instant Messager: Available with the package campaign "Coisa", during Christmas.
This service provides access to ICQ using the cellphone.
Additionally, the Company started to offer roaming to Korea and Japan before the
World Cup. In Korea, the client used the same handset, only requiring the
programming of the international ID number. In Japan, the client needed a new
handset.
3
[GRAPH]
Through several partnerships, the Company offered interactivity between cellular
telephony and television, by a matched media with the reality shows. The client
is able to vote and receive news about the shows on its cellphone. The service
opened a new horizon of partnerships with the participation in "Big Brother
Brasil" 1 and 2 and "Casa dos Artistas" 2 and 3.
The Company's clients won another option of contract plan with the launch of
Movi Star Top 35. This package offered 40 minutes of calls to telephones within
the operator's region for a monthly payment of R$ 35.00. The plan can be changed
from the pre-paid service to the contract service without needing a number
change. Furthermore, it allows to send SMS message to the cellphones of the
other operators.
In order to complement the program of points and advantages "Mundo de Vantagens
MoviStar Top", the Company launched the Favorites Program that establishes a
network of calls. The client registers up to 5 cellphones of the Company,
receiving 50% off in the calls to those numbers, either at peak or off-peak
hours.
The Company created TelefonicaOnLine, a web channel to improve the customer
service. Inputting the line number and a password, the client is able to receive
services and get information about its line and his last bills, which were
previously available only in stores or using the 1404. Accessing
TelefonicaOnLine, the client can also send SMS messages to friends, update
contact lists and agenda of E-mocion and use other exclusive services any time
of the day.
In order to guarantee the expansion of services in accordance with the standards
required by our customers, the Company took an active quality policy. In 1999,
the Call Center had already received ISSO 9002 certification. In 2000, ISO 9001
certification was extended to other areas of the operating companies such as:
Product and Service Development; Customer Service; Company Store Sales; Sales
via Indirect Channels; Corporate Sales; Logistics; Collections; Network
Operation, Optimization and Network Maintenance; Maintenance of Systems;
Customer Billing and Procurement. The Company is continuously working to be
certified in the rest of its areas.
The Company currently owns 43 stores and kiosks. In addition, it has an
efficient network of exclusive accredited representatives with 609 sales points
that offer the Company services as well as handsets. Pre-paid magnetic calling
cards can be found not only in the Company's own stores and accredited
representatives but also in more than 11,520 sales points which are not
necessarily exclusive. These include such outlets as gasoline stations and post
offices. The pre-
4
paid magnetic cards may also be replenished at 1,929 offices of the following
banks: Banco Itau, Bradesco, Banco do Brasil, Banerj, Unibanco and Caixa
Economica Federal (including lottery stands).
3 - Regulatory Aspects
The two operating companies, Telerj Celular S.A. and Telest Celular S.A., are in
accordance to all the performance targets that they are currently required to
achieve as in the plan established by Anatel - Agencia Nacional de
Telecomunicacoes - the telecommunication regulator in Brazil.
Meanwhile, according to the migration to the SMP, signed in December 2002, the
companies will have to comply with the new rules regarding Quality Standards.
The deadline to adjust the systems to include the multi-carrier system for
inter-regional, inter-state and international calls expires on May 31, 2003.
In 2002, within the area of operation of the Company, two operators have started
to operate in the band D and the band E.
4 - Comment on the Economic Environment
The year 2002 was affected by a large volatility in the markets, caused by
adverse international conditions and uncertainties regarding the internal
political scenario. This negative environment began to fade away just in the
last quarter of the year.
In the international front, a group of factors led the investors and the
financial community to adopt a more conservative stand, which negatively
affected the influx of hard currency to Brazil. Such factors were: 1) slowdown
of the global economic growth, started in 2001; 2) falls of the stock exchanges;
3) confidence crisis in Corporate America; and 4) economic crisis in Argentina,
which served as a basis to wrong analogies with Brazil.
In the internal front, 1) the increase of the public debt; 2) the low commercial
surpluses registered until the beginning of the year; and 3) the uncertainties
about the results of the elections and the policies that would be adopted by the
future Lula administration, reinforced the negative movement of lack of
confidence.
These external and internal events caused the availability of international
credit for Brazil to sharply fall in the 2/nd/ semester of 2002, and put
pressure on the exchange rate, that reached levels of around R$3.96 per US$1,
even though it dropped to R$ 3.53 by December 31, 2002. The exchange rate
continued to improve reaching levels of about R$3.30 per US$1 in the first weeks
of January 2003.
The strong exchange rate variation resulted in an increase of the inflation
registered by the IPCA (Consumer Price Index), that reached 12.5% in 2002,
compared with the 7.7% in 2001.
This increase of the inflation encouraged the Central Bank to raise the interest
rates along the year, from the 19% in place in January, to 25% by year's end.
In this adverse scenario, the Company estimates a GDP growth of about 1.5% for
2002, keeping the low growth rate of 2001.
5
Within this deteriorated environment however, some important advances were made,
signaling the possibility that the economic performance in 2003 is going to be
better than in 2002.
The surplus in the trade balance jumped from US$ 2.6 billion in 2001 to US$ 13.1
billion in 2002 and the trend indicates that it will be higher in 2003.
The monthly inflation indicators, which reached the highest values in November
2002, started to fall in December and in the first probes of 2003.
The public debt fell, from the record level of 63.6% of the GDP reached in
September 2002 (due to the excessive levels of devaluation within that period),
to 57.5% of the GDP in November 2002, while the exchange rate was retreating.
Finally, the first signs given by the new government about the adoption of the
monetary policy contributed for a progressive dismissal of the uncertainties,
since the fiscal austerity policy was reaffirmed as well as the continuity of
the inflation goals and the floating exchange rate regime.
This group of positive factors creates the possibility for the Brazilian economy
to get back to gradually accelerate its growth rate and that leads to a scenario
with more financial stability in 2003.
In October 2002, Mr. Lula, candidate of the opposition, was elected as President
of Brazil. In the months that followed and in the beginning of 2003,
contradicting the environment of uncertainties that ruled prior to the
presidential elections, Brazil completed a well-succeeded transition, from the
institutional point of view, from the government that ruled the country during
eight years and the politic opposition party that had never attained the Federal
ruling power.
The institutional stability was shown by the country through the transition
procedures as well as the smooth and efficiency of the democratic process. That
process was materialized by the teamwork of two the technical teams of the old
and the new government who worked together during the two months before the
transfer of the positions. That is certainly a positive sign. It contributed to
restore the confidence of the markets and to appreciate the exchange rate in the
end of 2002.
5 - Economic and Financial Aspects
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In R$ millions 2002 2001 Change (%)
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Net operating revenues 1,847.6 1,703.3 8.5
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EBITDA 601.8 587.8 2.4
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Net profit 140.4 162.9 (13.8)
--------------------------------------------------------------------------------
Interest on capital / dividends 101.9* 42.8 138.1
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Total Assets 2,812.1 2,690.6 4.5
--------------------------------------------------------------------------------
Net Equity 1,779.7 1,735.7 2.5
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Debt 460.5 484.7 (5.0)
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(*) Subject to approval by the General Shareholders' Meeting
Operating Revenues
Accumulated net operating revenues in 2002 (R$ 1,847.6 million) showed an
increase of 8.5% over the previous year (R$ 1,703.3 million), because of the
increase of the client base that
6
resulted in traffic growth and data transmission, partially offset by lower
ARPUs. Furthermore, there was an increase of the interconnection tariffs in
February.
[GRAPH]
EBITDA
EBITDA reached R$ 601.8 million, equivalent to a 33.6% EBITDA margin, including
the sale of handsets.
[GRAPH]
Net Profit
Net profit increased from R$ 162.9 million in 2001 to R$ 140.4 million in 2002.
[GRAPH]
7
Invested in Subsidiaries
Telerj Celular S.A. Telest Celular S.A. Total
------------------ ------------------- ----------
Balance as of December 31, 2001 1,391,681 253,784 1,645,465
Result of equity method 134,052 (7,159) 126,893
Adjustments of previous fiscal years - 94 94
Dividends and IONW (expired) 2,503 643 3,146
Dividends and interests on net worth (31,838) - (31,838)
--------- ------- ---------
Balance as of December 31, 2002 1,496,398 247,362 1,743,760
========= ======= =========
Ownership of Subsidiaries
2002 2001
-------------------------- --------------------------
Telerj Telest Telerj Telest
Celular Celular Celular Celular
S.A. S.A. S.A. S.A.
---------- ----------- ------------ ----------
Net Equity 1,496,398 247,362 1,391,681 253,784
Book Value of shares (lot of 1.000) - R$ 49.14 121.32 45.71 124.47
Net profit of the fiscal year 134,052 (7,159) 126,553 21,656
Percentage of ownership 100% 100% 100% 100%
Result of equity method 136,555 (6,422) 126,553 22.150
Book Value of investments 1,496,398 247,362 1,391,681 253,784
Summary of the Financial Statements of Subsidiaries
Telerj Celular S.A. Telest Celular S.A.
(figures in R$ million) 2002 2001 2002 2001
Net Operating Revenues 1,614.1 1,496.5 240.2 211.6
Gross Income 728.8 730.9 95.5 87.0
Operating Result 217.7 159.2 (8.1) 23.0
Net Income 134.1 126.6 (7.2) 21.7
-------------- -------------- ----------- -----------
Total Assets 2,422.8 2,252.5 337,6 340.5
============== ============== =========== ===========
8
6 - Loans and Financing
Comparing 2002 with 2001, there was a reduction in the negative financial
results in the amount of R$107.3 million. In 2002 the Company established a
provision for Interest on Net Worth in the amount of R$13.5 million while in the
previous year the amount was R$50.3 million. Netting out these amounts, the
financial expenses are reduced by R$70.5 million due to the reduction in the
average indebtedness of the Company, net of coverage, which fell from R$493.7
million in 2001 to R$336.6 million in 2002. It is woth mentioning that also
contributed to this effect the positive results of the hedging operations and
the increase of financial revenues. The protection against the effects of the
exchange rate devaluations was obtained through operations with derivatives. The
Company is 100% hedged.
The debt registered by the Company at the end of the year 2002 amounted to
R$460.5 million or 25.88% of Shareholders Equity while at the end of the year
2001 the debt amounted to R$484.7 million or 27.92% of Shareholders Equity. The
all funding is 100% nominated in foreign currency.
The R$460.5 million debt recorded on December 31, 2002 corresponds to R$336.6
million when the R$123.9 million, corresponding to temporary gains in hedging,
is subtracted. The R$213.4 million net debt is obtained after subtracting the
R$123.2 million of cash and cash equivalents.
The Company develops constant and timely efforts, according to the market
situation, to shield the liabilities against the effects of the exchange rate
variation.
7 - Capital Expenditure
The Company continued its program of expansion, optimization and modernization
during the year with investments totaling R$ 370.9 million.
Investments for 2003, will be mainly directed to further network expansion,
introduction of new products and services which will provide added value to the
customers and, at the same time, will maximize the use of the cellular
telephony. In addition, investments will be directed towards improvement in the
quality of existing services.
8 - Capital Markets
The shares of TELE SUDESTE CELULAR PARTICIPACOES S/A began trading at the Sao
Paulo Stock Exchange - BOVESPA on September 21, 1998. ADRs have been negotiated
on the New York Stock Exchange - NYSE since November 16, 1998.
In 2000, Telefonica S.A. made public offerings for swapping TELE SUDESTE CELULAR
PARTICIPACOES S/A shares trading in the Brazilian and the US markets, leading to
a reduced market liquidity of the shares. In October, the Company began a
corporate restructuring whereby Tele Sudeste Celular incorporated the stakes of
minority shareholders in its operating company subsidiaries.
In 2002, the shares of TELE SUDESTE CELULAR PARTICIPACOES S/A, in terms of daily
average, traded amounts of R$ 31.5 thousand for its common shares and R$ 224.4
thousand for its preferred shares at the Sao Paulo Stock Exchange, and US$ 9.41
thousand for its ADR at the New York Stock Exchange, showing a 253,400 ADR
volume.
9
The common nominative ON shares and the preferred nominative PN shares were
trading at the BOVESPA at R$ 5.05 and R$ 6.70, respectively, per lot of a
thousand shares, as of December 30, 2002.
-----------------------------------------------------------------------
Per thousand shares 2002 2001
-----------------------------------------------------------------------
Profit 0.36 0.41
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Book Value 4.33 4.38
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ADR price (1:5,000 PN) 9.41 12.60
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Preferred share price* 6.70 6.06
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Common share price* 5.05 5.02
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(*) BOVESPA price on the last trading day of the year.
On September 27, 2002, the Company, following a resolution of the Board of
Directors, paid interim dividends in a total amount of R$ 84.37 million, based
on the financial statements as of June 30, 2002.
The Board of Directors proposed the payment of interest on Company's net worth,
net of income tax in the amount of R$ 11.475 million to the common and preferred
shareholders registered as such, on December 26, 2002. The payment of interest
on company's net worth net of income tax will be considered an integral part of
the dividend in accordance with the by-laws and Law # 9,249/95.
On December 30, 2002, the Extraordinary General Shareholders' Meeting and the
Preferred Shareholders Meeting approved the substitution of the priority in the
distribution of the minimum dividend of 6% of their participation in the capital
stock to the preferred shareholders by a dividend payout in an amount that is
10% higher than the one paid to the common shares, modifying the Company's
by-laws in accordance to Law # 10303/01.
In order to comply with the mandate of the by-laws regarding the dividend of the
preferred shares 10% higher than the one paid to the common shares, the Board of
Directors proposed the payment of an additional dividend for the preferred
shares, totaling R$ 6.01 million.
9 - Human Resources
The Company continued its efforts to keep its payroll at optimal levels in order
to control costs and at the same time maintain its high level of productivity.
At the end of the year, Tele Sudeste had 1,972 employees, increasing 10.0% in
relation to 1,793 in 2001, representing about 1,752 lines per employee at the
end of the year.
The quantitative and qualitative gains obtained during 2002 were possible only
through the total commitment and dedication of the employees in the various
areas of the Company. It was due to these efforts that the growth and
productivity targets were reached.
The Company offers to its employees a Private Pension Plan, "Plano Visao
Celular", based on defined contribution principles, in which the contributions
are made by the members of the plan (the employees) and by the sponsor (the
operating companies). These contributions are credited to the individual
accounts of the plan members. At the end of 2000, the employees that had the
previous "Plano de Beneficios Previdenciarios" - PBS had the option to migrate
to the new "Plano de Beneficios Visao Celular". On December 31, 2002, of the
82.7% of the employees who had corporate pension plan, 99.1% were members of the
"Plano Visao Celular".
10
Training
An investment of R$ 2.41 million was accounted for the various training programs
which were designed to attract, retain and develop new talents.
10 - Research and Development
Tele Sudeste has a cooperation agreement with the Telebras Research and
Development Center - (Centro de Pesquisa e Desenvolvimento da Telebras - CPqD),
which, since the privatization of the Telebras System, has been managed as a
non-profit entity. Within the scope of its Technical Assistance Agreement with
Telefonica, the Company also has access to the products and services developed
by the Telefonica I+D (Investigacion y Desarrollo / Research and Development).
11 - Environment
At the environmental front, the Company has established a program for the
collection of used batteries. Delivery is centered at the Company's own retail
outlets from where the batteries are dispatched to the manufacturers for
recycling. From July 2000 on, according to the Resolution of the National
Council for the Environment (Conselho Nacional do Meio Ambiente - Conama), it is
obligatory that used batteries be collected and returned to the manufacturers or
importers.
Based on an in-house decision in association with the Committee for Citizenship
and Community Action (Comite de Cidadania e Acao), the Company has set up a
scheme for the collection of printing cartridges for recycling, the proceeds of
which are then converted into tuitions.
12 - Social Campaigns
The Company sponsors social projects carried by Telefonica Foundation (Fundacao
Telefonica). Moreover, Tele Sudeste has been continuing its sponsoring policy
for culture, sports, philanthropy and education, such as the Saint Sebastian
Marathon, Telefonica Open Air, Vital, donation campaigns and others, in an
effort to place the Company closer to the various public segments and to the
community.
13 - Prospects and Plans
Based on its philosophy of continually satisfying consumer expectations and
requirements, the Company is intensifying its degree of market segmentation.
This will permit the offer of tailor-made services to large corporate, small and
midsize companies, families, teenagers, independent professionals, etc. Among
the Company's priorities for 2003 are the consolidation of the Joint Venture
structure, the maintenance of market leadership and the development of even
closer relationships with suppliers and retailers and the promotion of value
added services.
The year 2003 will be characterized by new challenges, with a new competitive
environment, new consolidation trends within the sector and a new
politic-regulatory scenario.
14 - Explanatory Notes
11
Institutional Background
Established under Brazilian law, TELE SUDESTE CELULAR PARTICIPACOES S.A. was
spun off from the corporate split up of Telecomunicacoes Brasileiras S.A. -
Telebras, which took place on 22 May 1998. Each of its operators - Telerj
Celular S.A. in Rio de Janeiro and Telest Celular S.A. in Espirito Santo - was
incorporated from 5 January 1998 through the split up of the State operators, as
determined at the General Meetings held on 30 January 1998. Expiring on 30
November 2005 for Telerj Celular and on 30 November 2008 for Telest Celular, the
concessions are open to renewal for successive fifteen-year periods. With the
introduction of new telecommunications regulations in Brazil, a regulatory
agency was also set up - ANATEL - which supervises the businesses, services and
tariffs of Brazil's telecommunications companies after the privatization.
At a public auction held on July 29/th/, 1998, on the Rio de Janeiro Stock
Exchange, the Federal Government disposed of its stock control in TELE SUDESTE
CELULAR PARTICIPACOES S.A. to the Sudestecel Consortium.
The Tender Exchange Offering held by Telefonica S.A. during July 2000 was
jointed by holders representing 68.41% of the capital stock at the time,
allowing Telefonica Group to increase its control of the Company Capital. This
position was lately transferred to Telefonica Moviles S.A.
During the Corporate Restructuring that took place during the last quarter of
2000, Tele Sudeste Celular incorporated in its capital the minority shareholders
of its two subsidiaries. Once transformed into wholly subsidiaries, both
operating companies were delisted in March 2001.
Sudestecel Participacoes S.A. controls 47.15% of Tele Sudeste's voting capital,
corresponding to 16.25% of the total capital and is formed by Telefonica Moviles
S.A., Iberdrola Investimentos S.U.L., NTT DoCoMo, Inc, and Itochu Corporation.
On December 14, 2001, through an operation announced in April 19, 2001,
Telefonica acquired the 7% participation that Iberdrola Investimentos S.U.L had
on Sudestecel's capital stock.
In addition, Telefonica Moviles S.A. and Tagilo Participacoes Ltda (controlled
by Telefonica Group) have 68.61% of the total capital stock.
Tables Attached:
Table 1 - Plans and Promotions
Table 2 - Balance Sheet of TELE SUDESTE PARTICIPACOES S.A.
Table 3 - Income Statement
Table 4 - Statement of Changes in Financial Position
Table 5 - Changes in Shareholders' Equity
Table 6 - Explanatory Notes
Plans and Services:
Basic Plan - Reference plan of the company, which is always available to its
subscribers, in both analog and digital systems. The services included in the
digital basic plan are: Mail Box and Caller ID.
12
Cellpop - Targeting the market of the state of Espirito Santo and upstate Rio de
Janeiro, this is an ideal option for analog technology users. It used to provide
service only in the clients registration area (024 or 027), and after July it
started providing automatic roaming services.
Movi Star Digital - Targeting the introduction of competitive tariffs to digital
clients, in addition to free value-added services, such as call waiting,
follow-me, caller ID and voice mail.
Movi Star Top 20 - Post-paid plan, without subscription fee. With a R$ 20.00
payment of franchise, it includes 40 minutes of VC1 and VC2 calls per month.
Movi Star Top 35 - Post-paid plan, without subscription fee. With a R$ 35.00
payment of franchise, it includes 40 minutes of VC1 and VC2 calls per month.
Movi Star Top 50 - Post-paid plan, without subscription fee. With a R$ 50.00
payment of franchise, it includes 65 minutes of VC1 and VC2 calls per month.
Movi Star Top 75 - Post-paid plan, without subscription fee. With a R$ 75.00
payment of franchise, it includes 150 minutes of VC1 and VC2 calls per month.
Movi Star Top 100 - Post-paid plan, without subscription fee. With a R$ 100.00
payment of franchise, it includes 250 minutes of VC1 and VC2 calls per month.
Movi Star Top 150 - Post-paid plan, without subscription fee. With a R$ 150.00
payment of franchise, it includes 450 minutes of VC1 and VC2 calls per month.
Movi Star Professional 75 - Post-paid plan for non-corporate clients that work
for our corporate clients, without subscription fee. With the payment of a
franchise, it includes 75 minutes of VC1 and VC2 calls per month, originated
within Rio de Janeiro and Espirito Santo States.
Movi Star Professional 150 - Post-paid plan for non-corporate clients that work
for our corporate clients, without subscription fee. With the payment of a
franchise, it includes 150 minutes of VC1 and VC2 calls per month, originated
within Rio de Janeiro and Espirito Santo States.
Movi Star Empresa 75 - Corporate post-paid plan, without subscription fee. A
franchise of 75 minutes of VC1 and VC2 calls per month is granted.
Movi Star Empresa 150 - Corporate post-paid plan, without subscription fee. A
franchise of 150 minutes of VC1 and VC2 calls per month is granted.
Movi Star Empresa Classico - Offered to corporate subscribers, it features a
gradual decreasing of subscription and service tariffs, according to the number
of requested lines and traffic, respectively.
MoviStar Amigo - Prepaid digital plan offered in the metropolitan area of Rio de
Janeiro and in some cities upstate Rio de Janeiro. It operates in all Area 3,
including the analog network, without additional costs as roaming.
MoviStar Amigo Dia - Prepaid digital plan, offering reduced tariffs from Monday
to Friday from 07:00 to 19:00. The client chooses his plan at the activation
time according to his profile.
13
MoviStar Amigo Noite - Prepaid digital plan, offering reduced tariffs from
Monday to Friday from 20:00 to 08:00 and all day Saturday, Sunday and national
holidays. The client chooses his plan at the activation time according to his
profile.
MoviStar Amigo Toda Hora - Prepaid digital plan that offers one tariff 24 hours
a day, seven days a week. The client chooses his plan at the activation time
according to his profile.
MoviStar Facil - Prepaid analog offered in upstate Rio de Janeiro and the state
of Espirito Santo. Pays an additional charge per minute when operating in the
metropolitan area of Rio de Janeiro.
MoviStar Torpedo - This service allows to send short messages up to 145
characters , if the handset offers this facility or through the Company's
website accessing the link "Torpedomania", or even through a callcenter
operator, dialing *3000 from the handset. The service is free of charges when
sent via Internet and it is not necessary to be a client of the Company to send
the message this way. The Company charges R$ 0.25 per message sent by a cellular
phone of the Company with destination in another cellular phone of the Company
and R$ 0.75 per message sent through an operator (*3000). The messages sent by
our customers using roaming in Sao Paulo state cost R$ 0.40. The messages
between Tele Sudeste cellulars and Telesp Celular and ATL, cost R$ 0.40 and R$
0.30, respectively. The messages for participation in the reality shows Big
Brother Brasil and Casa dos Artistas 2 cost R$ 0.60.
Torpedo Chat - This service creates a chat environment in the cellular. The
client can also create a chat room with its favorite topics. The service allows
the user to remain anonymous and the telephone number will not be revealed. All
chat rooms can handle up to ten users.
E-mocion - Clients who have a handset equipped with a "minibrowser" and are
within the digital coverage of the Company are able to send and to receive
e-mails, to access news and bank information, entertainments, to book flight
reservations and to buy CDs and other goods, through information and service
providers and banks which have a partnership with the Company. Since there is no
monthly fee for the service, the client only pays for the calls made. The
contract clients pay the VCMP tariff per minute and the prepaid clients pay
R$0.75 per minute. Through an agreement with Telesp Celular, Telebahia Celular,
Telergipe Celular and Global Telecom, the contract clients can use the WAP
services offered by these companies paying the normal roaming tariff.
Meu E-mocion - The service offers an automatic e-mail address which is: the long
distance code + the phone number @emocion.com.br. The e-mocion mail box can
handle up to 50 messages in each box (inbox, recycle bin and save). The service
also offers an address book with personal information such as full name,
company, telephone number, cellular telephone number, e-mail and others, a
timetable and other tools.
MoviStar Dados 2,5G - Grants the user with total mobility to surf on the
internet up to ten times faster than the WAP service. The maximum transmission
rate is now 144 kbps, compared to the average achieved by fixed telephony of 56
kbps. The client only needs to plug its notebook or palmtop to a modem card or a
2.5G cellular phone and connect himself with an ISP. Besides, the service offers
other advantages that will contribute to increase the usage, such as the "always
on" connection, data package billing, secure access to corporate VPNs.
*365: Launched on June 01, the service *365 is the result of a partnership
between the Company and Brasil Assistencia S.A. Some of the available services
are: automotive assistance, home assistance, medical indication, dentistry and
hospital facilities, flowers
14
delivery, book and information about flights, tickets to shows, restaurants and
hotels reservation, delivery of medicines, and others.
*444: Consumption limit by request. The client knows the consumption of his
calls, service available all day.
*445: Programmed consumption limit. The client receives Torpedo messages
informing him about his consumption with a programmed periodicity.
*446: Consumption limit for contracted amount. The client receives Torpedo
messages informing him about his consumption when it reaches 50%, 80% and 100%
of his contracted amount. Besides, the client can decide the blocking of his
line for outgoing calls when the contracted amount is reached.
MoviStar Amigo "+" - Allows prepaid clients to have free balance check in
digital plans through a short message and in the analog one through a call once
a day. It also allows credit recharge through the subscriber's bank account,
30-day free mailbox access after the subscriber recharges his credits, valid
until July 30, 2001 and roaming services, if a contract subscriber previously
allows the debit of the roaming fees in the assigned account.
MoviStar Gestao - The service allows the corporate clients to control their
usage, the period of usage and services available in their employees' cellular
lines. With an Internet password, the corporate clients can have different
service options for each of the individually owned lines and also control their
costs.
International Roaming - Temporary Service that offers to contract clients
(individual or corporate) total access to phone calls when in the United States,
Canada, Mexico, Caribbean, Uruguay, Argentina, Chile and Peru. Roaming within
Europe and parts of Asia, Africa and Oceania is made through the GSM technology
and includes the rental of a handset.
Promotions during the quarter:
.. Promotion "Torpedo Messages on Weekends" - Starting on September 28, 2002,
prepaid and contract clients sending SMS messages during weekends pay R$
0.10 per message when sending messages to other clients of the Company
(areas 21, 22, 24, 27 and 28) and Torpedo Chat.
.. Promotion "Card R$ 15.00 + 5 Torpedo SMSs": Taking place in period between
October 10, 2002 and December 30, 2002, with the purchase of a card and
after recharging the credits, pre-paid clients were able to send up to 5
free Torpedo SMSs within 30 days of activation of the card.
.. Promotion "Card R$ 20.00 + R$ 2.00 bonus + 5 Torpedo messages": Taking
place in the period between November 11, 2002 and December 31, 2002. With
the purchase of a card, pre-paid clients won a R$ 2.00 bonus and after
recharging the credits, they were able to send up to 5 free Torpedo
messages to phones of the Company or the competitors within the validity
period of the credits.
.. Promotion "Coisa Boa": Taking place in period between November 22, 2002 and
December 04, 2002, pre-paid clients of the plans "Amigo Dia", "Noite" and
"Toda Hora" that make an activation or a change of serial (except
simultaneous change) will be able to send up to 100 free Torpedo messages,
for a period of 30 days, to any digital cellphone, including those of
15
other operators whom the Company has signed agreements with, and they will
also be able to join the Torpedo Chat rooms.
.. Promotion "Coisa do Montao": Taking place in period between November 20,
2002 and December 04, 2002, with the purchase of a R$ 20.00 card, pre-paid
clients won a R$ 2.00 bonus, 5 free Torpedo messages and five minutes of
access to e-mocion.
.. Promotion "Coisa Louca": Taking place in period between November 20, 2002
and December 04, 2002, contract clients of the plans Top 35, 50, 75, 150,
MOVD and "Top Basico Digital" that make an activation or a change of serial
(except simultaneous change) will be able to send up to 100 free Torpedo
messages, for a period of 30 days, to any digital cellphone, including
those of other operators whom the Company has signed agreements with, and
they will also be able to join the Torpedo Chat rooms.
.. Promotion "Christmas Top 35 for R$ 20.00": Taking place in period between
November 20, 2002 and December 31, 2002 and aimed to new contract clients
that sign up for the service until the end date of the promotion in the
plan "Top 35 Promotion", where the client will have a R$10.00 bonus for
three accounts. Current clients of the Top 35 plan, or any other contract
plan, can take advantage of the promotion if they change their handset
before the promotion is over. Pre-paid clients can take advantage of the
promotion if they migrate to the "Top 35 Promotion" plan.
.. Promotion "MoviStar Dados 2.5G": Taking place in period between November
25, 2002 and December 31, 2002, it is a promotion for contract clients,
granting them free access to the service "MoviStar Dados 2.5G" for 30 days
counted since the activation of one o the new packages available (except
the retail package).
.. Promotion "Coisa Boa para Caramba": Taking place in period between December
05, 2002 and January 15, 2003, valid for contract and pre-paid clients, it
offered a bonus of R$ 500.00 to make calls to cellphones of the Company
within the same state (VCMP), send Torpedo messages (including other
operators), *3000, Chat, access to e-mocion, and access to the voice mail,
when the client did an activation or a change of handset.
16
TELE SUDESTE CELULAR PARTICIPACOES S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
(In thousands of Brazilian reais)
(Convenience Translation into English from the Original
Previously Issued in Portuguese)
A S S E T S
Company Consolidated
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 14,062 64,406 123,170 85,761
Accounts receivable, net - - 272,908 307,780
Interest on capital and dividends 12,837 40,764 - -
Inventories - - 59,260 65,754
Recoverable and deferred taxes 38,633 30,387 261,639 213,100
Hedge operations - - 43,956 4,205
Prepaid expenses - - 44,865 25,176
Other assets 1,140 3,808 42,747 26,541
---------- ---------- ---------- ----------
66,672 139,365 848,545 728,317
---------- ---------- ---------- ----------
NONCURRENT ASSETS:
Tax incentives 3,589 3,577 9,184 9,161
Recoverable and deferred taxes - - 273,918 350,619
Hedge operations - - 79,945 -
Prepaid expenses - - 14,912 7,576
Other assets - - 211 2,324
---------- ---------- ---------- ----------
3,589 3,577 378,170 369,680
---------- ---------- ---------- ----------
PERMANENT ASSETS:
Investments 1,743,759 1,645,465 333 250
Property, plant and equipment 1,291 1,722 1,585,057 1,592,391
---------- ---------- ---------- ----------
1,745,050 1,647,187 1,585,390 1,592,641
---------- ---------- ---------- ----------
Total assets 1,815,311 1,790,129 2,812,105 2,690,638
========== ========== ========== ==========
The accompanying notes are an integral
part of these balance sheets.
TELE SUDESTE CELULAR PARTICIPACOES S.A.
BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
(In thousands of Brazilian reais)
(Convenience Translation into English from the Original
Previously Issued in Portuguese)
LIABILITIES AND SHAREHOLDERS' EQUITY
Company Consolidated
----------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
CURRENT LIABILITIES:
Payroll and related charges - 17 10,286 10,665
Suppliers and accounts payable 4,387 2,862 378,575 284,568
Taxes, other than taxes on income 34 1,359 26,239 57,207
Loans and financing - - 200,922 189,726
Employee profit sharing and dividends 29,522 48,666 43,325 63,051
Reserve for contingencies - - 26,519 14,900
Other liabilities 1,552 1,345 64,211 13,031
--------- --------- --------- ---------
35,495 54,249 750,077 633,148
--------- --------- --------- ---------
LONG-TERM LIABILITIES:
Loans and financing - - 259,597 294,939
Reserve for contingencies - - 21,483 4,626
Hedge operations - - - 13,204
Other liabilities 131 131 1,263 8,972
--------- --------- --------- ---------
131 131 282,343 321,741
--------- --------- --------- ---------
SHAREHOLDERS' EQUITY:
Capital stock 685,321 595,722 685,321 595,722
Treasury shares - (764) - (764)
Capital reserves 378,069 468,420 378,069 468,420
Income reserves 79,163 35,239 79,163 35,239
Retained earnings 637,132 637,132 637,132 637,132
--------- --------- --------- ---------
1,779,685 1,735,749 1,779,685 1,735,749
--------- --------- --------- ---------
Total liabilities and shareholders' equity 1,815,311 1,790,129 2,812,105 2,690,638
========= ========= ========= =========
The accompanying notes are an integral
part of these balance sheets.
TELE SUDESTE CELULAR PARTICIPACOES S.A.
STATEMENTS OF INCOME
FOR THE YEARS ENDEND DECEMBER 31, 2002 AND 2001
(In thousands of Brazilian reais, except earnings per thousand shares)
(Convenience Translation into English from the Original
Previously Issued in Portuguese)
Company Consolidated
-------------------------- -----------------------
2002 2001 2002 2001
----------- ----------- ---------- ---------
GROSS OPERATING REVENUE - - 2,382,641 2,186,638
----------- ----------- ---------- ---------
Deductions from gross revenue - - (535,010) (483,339)
----------- ----------- ---------- ---------
NET OPERATING REVENUE - - 1,847,631 1,703,299
----------- ----------- ---------- ---------
Cost of services and sales - - (1,025,180) (886,925)
----------- ----------- ---------- ---------
Gross profit - - 822,451 816,374
----------- ----------- ---------- ---------
OPERATING INCOME (EXPENSES):
Selling - - (356,755) (283,777)
General and administrative (12,889) (10,804) (231,547) (233,479)
Equity pick-up 130,133 148,703 - -
Other, net (1,026) (2,365) (10,037) 5,413
----------- ----------- ---------- ---------
INCOME FROM OPERATIONS BEFORE FINANCIAL
INCOME (EXPENSES), NET 116,218 135,534 224,112 304,531
----------- ----------- ---------- ---------
Financial income (expenses), net 13,907 13,600 (26,217) (133,519)
----------- ----------- ---------- ---------
INCOME FROM OPERATIONS 130,125 149,134 197,895 171,012
----------- ----------- ---------- ---------
Nonoperating expenses, net - - (1,202) (991)
----------- ----------- ---------- ---------
INCOME BEFORE INCOME TAXES 130,125 149,134 196,693 170,021
----------- ----------- ---------- ---------
Income tax and social contribution (9) (123) (69,817) (57,404)
Interest on capital reversal 13,500 14,397 13,500 50,297
----------- ----------- ---------- ---------
NET INCOME 143,616 163,408 140,376 162,914
=========== =========== ========== =========
SHARES OUTSTANDING AT PERIOD END - IN THOUSANDS 414,006,458 396,041,635
=========== ===========
EARNINGS PER THOUSAND SHARES OUTSTANDING
AT PERIOD END - R$ 0.34689 0.41260
=========== ===========
The accompanying notes are an integral part of
these statements.
TELE SUDESTE CELULAR PARTICIPACOES S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - INDIVIDUAL
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(In thousands of Brazilian reais)
(Convenience Translation into English from the Original
Previously Issued in Portuguese)
Capital reserves Income reserves
----------------------- -----------------------
Capital Goodwill Tax incentive Treasury Legal Reserve Retained
stock reserve reserve shares reserve for expansion earnings Total
------- -------- ------------- -------- ------- ------------- -------- -----
BALANCES DECEMBER 31, 2000 595,722 464,843 3,487 - 27,069 - 531,352 1,622,473
Adjustments from prior years -
pension plans and post-retirement
benefits - - - - - - 839 839
Tax incentives - - 90 - - - - 90
Treasury shares - - - (764) - - - (764)
Net income - - - - - - 163,408 163,408
Net income allocation-
Legal reserve - - - - 8,170 - (8,170) -
Interest on capital - - - - - - (50,297) (50,297)
------- ------- ----- ---- ------ ------ ------- ---------
BALANCES DECEMBER 31, 2001 595,722 464,843 3,577 (764) 35,239 - 637,132 1,735,749
Treasury shares cancellation in
accordance with Ordinary
Shareholders' Meeting 4/a/
Extraordinary Shareholders'
Meeting 12/a/ - April 02, 2002 (764) - - 764 - - - -
Capital increase - Ordinary
Shareholders' Meeting 51/a/ -
April 29, 2002 90,363 (90,363) - - - - - -
Tax incentives - - 12 - - - - 12
Prescribed dividends 1998 - - - 4,187 4,187
Net income - - - - - - 143,616 143,616
Net income allocation-
Legal reserve - - - - 7,181 - (7,181) -
Expansion reserve - - - - - 36,743 (36,743) -
Dividends - - - - - - (90,379) (90,379)
Interest on capital - - - - - - (13,500) (13,500)
------- ------- ----- ---- ------ ------ ------- ---------
BALANCES DECEMBER 31, 2002 685,321 374,480 3,589 - 42,420 36,743 637,132 1,779,685
======= ======= ===== ==== ====== ====== ======= =========
The accompanying notes are an integral part of these statements.
TELE SUDESTE CELULAR PARTICIPACOES S.A.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
(In thousands of Brazilian reais)
(Convenience Translation into English from the Original
Previously Issued in Portuguese)
Company Consolidated
---------------------- ---------------------
2002 2001 2002 2001
--------- --------- --------- ---------
SOURCE OF FUNDS:
Net income 143,616 163,408 140,376 162,914
(Expenses) income not involving working capital-
Depreciation of property, plant and equipment 431 431 377,682 283,318
Monetary variation and other charges on long-term liabilities - - 111,043 59,990
Equity pick-up (130,133) (148,703)
Provision for contingencies - - 16,937 1,645
Loss on disposal of property, plant and equipment - - 535 643
--------- --------- --------- ---------
Total (129,702) (148,272) 506,197 345,596
--------- --------- --------- ---------
Total from operations 13,914 15,136 646,573 508,510
--------- --------- --------- ---------
Adjustments from prior years - pension plans and post-retirement benefits - 839 - 839
Tax incentives 12 90 106 584
Decrease in noncurrent assets - 302,339 -
Investments realization - Dividends/interest on capital 31,839 45,974 - -
Prescribed dividends 1998 4,187 - 7,333 -
--------- --------- --------- ---------
Total sources 49,952 364,378 654,012 509,933
--------- --------- --------- ---------
USE OF FUNDS:
Increase in noncurrent assets 12 - 8,490 957
Increase in investments, net - 440,283 83 67
Additions to property, plant and equipment - - 370,883 408,656
Decrease in long-term liabilities - - 167,378 8,339
Treasury shares - 764 - 764
Interest on capital 13,500 50,297 13,500 50,297
Dividends 90,379 - 90,379 -
--------- --------- --------- ---------
Total uses 103,891 491,344 650,713 469,080
--------- --------- --------- ---------
INCREASE (DECREASE) IN WORKING CAPITAL (53,939) (126,966) 3,299 40,853
========= ========= ========= =========
WORKING CAPITAL VARIATION:
CURRENT ASSETS:
At beginning of year 139,365 263,172 728,317 859,588
At end of year 66,672 139,365 848,545 728,317
--------- --------- --------- ---------
Variation (72,693) (123,807) 120,228 (131,271)
--------- --------- --------- ---------
CURRENT LIABILITIES:
At beginning of year 54,249 51,090 633,148 805,272
At end of year 35,495 54,249 750,077 633,148
--------- --------- --------- ---------
Variation (18,754) 3,159 116,929 (172,124)
--------- --------- --------- ---------
INCREASE (DECREASE) IN WORKING CAPITAL (53,939) (126,966) 3,299 40,853
========= ========= ========= =========
The accompanying notes are an integral part of
these statements.
Tele Sudeste Celular
Participacoes S.A. and Subsidiaries
Financial Statements as of
December 31, 2002 and 2001 Together with
Report of Independent Public Accountants
Deloitte Touche Tohmatsu Auditores Independentes
(Convenience Translation into English from the Original Previously Issued in
Portuguese See Note 31 to the Financial Statements.)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management and Shareholders of
Tele Sudeste Celular Participacoes S.A. and Subsidiaries:
Rio de Janeiro - RJ
1. We have audited the accompanying, individual and consolidated, balance
sheet of Tele Sudeste Celular Participacoes S.A. and subsidiaries as of
December 31, 2002, and the related statements of income, changes in
shareholders' equity (individual), and changes in financial position for
the year then ended, prepared under the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements.
2. Our audit was conducted in accordance with auditing standards in Brazil
and comprised: (a) planning of the work, taking into consideration the
significance of the balances, volume of transactions, and the accounting
and internal control systems of the Company and subsidiaries, (b)
checking, on a test basis, the evidence and records that support the
amounts and accounting information disclosed, and (c) evaluation of the
significant accounting practices adopted and estimates made by management,
as well as the presentation of the financial statements taken as a whole.
3. In our opinion, the financial statements referred to in paragraph (1)
present fairly, in all material respects, the individual and consolidated
financial positions of Tele Sudeste Celular Participacoes S.A. and
subsidiaries as of December 31, 2002, and the results of their operations,
the changes in shareholders' equity (individual), and the changes in their
financial positions for the year then ended in conformity with accounting
practices adopted in Brazil.
4. The financial statements, individual and consolidated, as of December 31,
2001, presented for comparative purposes, were audited by other
independent public accountants, who issued an unqualified opinion, dated
January 24, 2002.
5. The accompanying financial statements have been translated into English for
the convenience of readers outside Brazil.
Rio de Janeiro, January 27, 2003
DELOITTE TOUCHE TOHMATSU Jose Carlos Monteiro
Auditores Independentes Accountant
CRC n(degrees). 2 SP 011.609/O-8 CRC n(degrees). SP 100597/O-2-S-RJ
TELE SUDESTE CELULAR PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------
(Amounts in thousands of Brazilian reais, unless otherwise indicated)
(Convenience Translation into English form the Original Previously Issued in
Portuguese See Note 31 to the Financial Statements)
1. OPERATIONS
Tele Sudeste Celular Participacoes S.A ("Tele Sudeste" or the "Company")
holds 100% of the capital of Telerj Celular S.A. ("Telerj") and Telest
Celular S.A. ("Telest"), and both companies are providers of cellular
telecommunications services in the States of Rio de Janeiro and Espirito
Santo, respectively, and are also engaged in activities required or useful
for the performance of these services, in conformity with concessions and
authorizations granted to them.
The subsidiaries' activities, including services that they may provide,
are regulated by Agencia Nacional de Telecomunicacoes - ANATEL, the
regulatory authority for the Brazilian telecommunications industry,
pursuant to Law No. 9,472, of July 16, 1997, and related regulations,
decrees, decisions and plans.
Migration from SMC to SMP
On December 10, 2002 was signed the Authorization Term for Personal Mobile
System between ANATEL and the affiliated companies Telerj and Telest,
which became effective as of the publication in the Official Government
Daily Newspaper, which occurred on December 12, 2002.
The signing of the above mentioned term rendered the migration of the
exploration regimen of the cellular mobile service ("SMC - Servico Movel
Celular"), effective through a concession granted by the Federal
Government, to the personal mobile service ("SMP - Servico Movel
Pessoal"), effective through authorization also granted by the Federal
Government.
The authorizations conceded to the subsidiaries Telerj and Telest are
effective for the remaining period of concession, previously granted and
presently substituted, November 30, 2005 and November 30, 2008,
respectively, and latter renewable, for one more period, for a 15 year
term, being this renewal payable in the future.
The main alterations occurring from the migration of the SMC to SMP are:
- Migration from SMC to SMP consolidated the joint venture process
between the companies Telefonica Moviles and Portugal Telecom.
24
- Access of the cellular phone in its authorized registered area, being
conceded to the clients the code for choosing the service company
("CSP - codigo de selecao de prestadora") - as of May 31, 2003 for
calls outside their registered area;
- Stricter quality targets, with the affiliated companies having a 6
(six) month adaptation period after the publication of the migration
in the Official Government Daily Newspaper;
Joint Venture
On December 27, 2002 the transfer of the assets held by the shareholders PT
Moveis - Servicos de Telecomunicacoes, SGPS ("PT") and Telefonica Moviles
S.A. "(TEM") in the Brazilian mobile telephone telecommunication market was
implemented, concerning their direct and indirect participation in Telesp
Celular Participacoes S.A., Tele Sudeste Celular Participacoes S.A., Tele
Leste Celular Participacoes S.A., CRT Celular Participacoes S.A. and Global
Telecom S.A., to BRASILCEL N.V., a Company with headquarters in
Netherlands, which is held equally by TEM and PT.
Consequently, Tele Sudeste Celular Participacoes S.A. is a publicly-traded
company which, on December 31, 2002, was controlled by Sudestecel
Participacoes S.A. (19,25% of the total capital), Brasilcel N.V. (13,88% of
the total capital) and Tagilo Participacoes Ltda. (10,35% of the total
capital) in the Brazilian market. Sudestecel Participacoes S.A. is
controlled by Brasilcel N.V. (89.5% of total capital), NTT Docomo, INC.
(7.00% of total capital) and Itochu Corporation (3.50% of total capital).
The Senior Management of the companies involved understand that the
mentioned process will result in significant gains for all the
corporations, mainly due to the synergies obtained with the operations
increase volume and the unification of operative processes, which may
cause systemic adjustments.
2. PRESENTATION OF FINANCIAL STATEMENTS
The individual (Company) and consolidated financial statements were
prepared in accordance with accounting practices adopted in Brazil,
Brazilian corporate law, standards applicable to telecommunications
concessionaires and standards and accounting procedures established by the
Brazilian Securities Commission (CVM).
The consolidated financial statements include the balances and
transactions of the Company's subsidiaries, Telerj and Telest. In the
consolidated financial statements, all intercompany balances and
transactions were eliminated.
The financial statements as of December 31, 2001 were, when necessary,
reclassified for better comparability.
25
3. PRINCIPAL ACCOUNTING PRACTICES
a. Cash and Cash Equivalents
Represent all existent cash and bank balances and highly liquid temporary
cash investments, stated at cost, plus income accrued to the balance sheet
date.
b. Accounts Receivable
Accounts receivable from telecommunication services are stated at the
tariffs prevailing on the date services are rendered. They also include
accounts receivable for services rendered but not billed yet on the
balance sheet date. Additionally, this caption includes balances from the
sale of cellular handsets and accessories.
c. Allowance for Doubtful Accounts
Provision is recognized for trade accounts receivable for which
recoverability is considered improbable.
d. Foreign Currency Transactions
Transactions in foreign currency are recorded based on the prevailing
exchange rate at the date of the related transactions and the
corresponding balances are updated to the balance sheet date, and exchange
variations are charged on statements of income. Foreign currency and
premium on derivatives contracts are monthly accrued and recorded, not
depending on liquidation.
e. Inventories
Inventories are represented by cellular handsets and accessories stated at
average acquisition cost. A provision was recognized to cover losses on
costs of products considered obsolete or whose quantities are higher than
those usually traded by the subsidiaries over a reasonable period.
f. Prepaid expenses
Represented by values effectively disbursed but not incurred.
g. Investments
Investments in subsidiaries are carried under the equity method of
accounting. The accounting practices held by the subsidiaries are in
accordance with the followed by the Company.
h. Property, Plant and Equipment
Stated at acquisition or construction cost less accumulated depreciation,
which is calculated under the straight-line method based on the estimated
useful life of the asset. Incurred expenses on maintenance and repair
costs, which means improvement, increase of useful life, are recorded on
assets, while, the others are charged on statement of income.
26
i. Income and Social Contribution Taxes
Calculated and recorded by the effective rate prevailing on the balance
sheet date on the accrual basis. Deferred taxes attributable to temporary
differences, tax losses, and social contribution tax loss carryforwards
are recorded as deferred assets on the assumption of future realization.
j. Loans and Financing
Updated by exchange variations and incurred interest to the balance sheet
date.
k. FISTEL Fee
The amount of FISTEL (Telecommunication Inspection Fund) fees paid on
monthly activation during the year was deferred for amortization over the
customers' estimated retention period, equivalent to 24 months.
l. Reserve for Contingencies
Based on the legal counsel and management's opinion on the probable result
of pending litigations and updated to the balance sheet date in an amount
sufficient to cover probable losses, according to the nature of each
contingency.
m. Pension Plan
Tele Sudeste and subsidiaries participate together with other companies,
participants of the Telecommunications System, in a private pension entity
(SISTEL) to administrate the pension plan and other post-retirement
benefits provided to their employees. The amount of contributions and
actuarial liabilities are recorded on accrual basis.
n. Revenue Recognition
Revenue from services, billed and not billed, is recognized when the
services are rendered and billing is on a monthly basis. Revenues from
sales of prepaid cellular handset cards are deferred and recognized in
income when cards are effectively used.
o. Financial Income and Expenses
Represented by interest, monetary restatement and exchange variations on
cash investments, loans and financing obtained and granted. Also include
exchange gains and losses on futures and swap contracts.
p. Derivatives
Telerj has some derivatives to manage the exposure of its cash flows in
foreign currency to the interest and exchange rate fluctuation in relation
to the Brazilian real. These derivatives are calculated and recorded on
contractual terms basis, exchange rates and interest at the balance sheet
date. The premiums pre received or prepaid, are deferred for amortization
during the effective period of the respective contracts and the gains and
losses, realized or not, are recorded as "Financial revenues or expenses,
net".
27
q. Earnings per Thousand Shares
Computed based on the number of shares outstanding at the balance sheet
date.
4. CASH AND CASH EQUIVALENTS
Company Consolidated
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Banks 855 252 16,704 17,888
Temporary cash investments 13,207 64,154 106,466 67,873
------ ------ ------- ------
Total 14,062 64,406 123,170 85,761
====== ====== ======= ======
Temporary cash investments refer, at most, to CDB's operations (Bank
Deposit Certificates), indexed to CDI's variation (Interbank Deposit
Certificates).
5. ACCOUNTS RECEIVABLE, NET
Consolidated
----------------------------
December 31, December 31,
2002 2001
------------ ------------
Unbilled services 50,308 71,151
Billed services 68,894 84,377
Interconnection 97,433 116,417
Receivables from products sold 89,502 73,461
Allowance for doubtful accounts (31,867) (37,626)
------- -------
Total 272,907 307,780
======= =======
Changes in the allowance for doubtful accounts are as follows:
Consolidated
--------------------------
2002 2001
---------- -----------
Beginning balance 37,626 22,261
Supplementary provision 57,955 53,567
Write-offs (63,714) (38,202)
------- -------
Ending balance 31,867 37,626
======= =======
28
6. INVENTORIES
Consolidated
----------------------------
December 31, December 31,
2002 2001
------------ ------------
Cellular handsets 70,625 60,145
Other 5,001 5,959
Provision for obsolescence (16,366) (350)
-------- -------
Total 59,260 65,754
======== =======
7. RECOVERABLE AND DEFERRED TAXES
Company Consolidated
-------------------------- --------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Recoverable income tax and social contribution 33,336 27,640 100,308 64,439
Withholding income tax 4,608 2,747 21,656 24,610
Recoverable ICMS (state VAT) - - 67,734 61,685
------ ------ ------- ------
Recoverable taxes 37,944 30,387 189,698 150,734
Deferred income and social contribution tax 3 - 345,033 412,747
Other 686 - 826 238
------ ------ ------- -------
Total 38,633 30,387 535,557 563,719
====== ====== ======= =======
Current 38,633 30,387 261,639 213,100
Noncurrent - - 273,918 350,619
====== ====== ======= =======
29
The main components of deferred income and social contribution tax assets are as
follows:
Consolidated
-----------------------------
December 31, December 31,
2002 2001
------------ ------------
Tax credits from corporate restructuring 254,222 348,965
Provision-
For obsolescense 5,564 119
For contingencies 16,321 6,639
Allowance for doubtful accounts 10,835 12,793
Accrual for rewards program 7,813 3,613
Tax losses and negative carryforwards 32,670 39,803
Accelerated depreciation 9,164 -
Other 8,444 815
------- -------
Total 345,033 412,747
Current 109,241 104,941
------- -------
Noncurrent 235,793 307,806
======= =======
The deferred tax credits were recognized on the assumption of future
realization, as follows:
a. Tax losses and negative carryforwards will be compensated on a 30% limit of
the tax basis for upcoming years. The subsidiaries, in accordance to the
assumption of future projected results, estimate to carryforwards tax loss
until 5 years.
b. Tax credits from corporate restructuring - represented by the balance of
goodwill net of the equity maintenance reserve (see Note 26); the
realization of those tax credits occurs in the same proportion as the
amortization of goodwill on the subsidiaries. Studies by external
consultants used in the restructuring process support the recovery of the
amount in five years.
c. Temporary differences: The realization will occur by payment of provisions,
the effective loss on allowance for doubtful accounts or provision for
inventories losses.
In July 2002, CVM Instruction No. 371 was enacted, establishing cumulative
conditions for the accounting recognition and maintenance of deferred charges
arising from temporary differences and tax loss carryforwards, as follows: -
- Presentation of profitability history based on the generation of taxable
income in at least three of the last five years or presentation of grounded
actions implemented for the future generation of taxable income;
- Presentation of the expected generation of future taxable income,
discounted to present value based on the estimated realization period,
grounded on a technical feasibility study, permitting the realization of
the deferred tax assets over a period not exceeding ten years.
30
Technical studies approved by the management, indicate the full recovery of the
amounts recognized by the Subsidiaries within the time frames established by the
Instruction. Based on these studies, the expected period for the realization of
these assets is as follows:
December,
31 2002
---------
2003 109,240
2004 132,926
2005 101,941
2006 926
-------
Total 345,033
=======
The Instruction also establishes that periodic studies must be carried out to
support the maintenance of the recorded amounts.
8. PREPAID EXPENSES
Consolidated
--------------------------
December 31, December 31,
2002 2001
------------ ------------
Current-
FISTEL fee 9,307 14,605
Rents 2,028 1,994
Financial charges 279 771
ICMS (State VAT) 7,024 2,041
Insurance premiums 606 578
Prepaid bonus card 20,884 2,776
Other 4,737 2,411
------- -------
Total 44,865 25,176
====== ======
Noncurrent-
FISTEL fee 2,944 3,589
Rents 6,334 2,581
Other 5,634 1,406
------- -------
Total 14,912 7,576
====== =======
The prepaid bonus card corresponds to the bonus service conceded to the clients,
being amortized as the service is rendered limited to two months.
31
9. INVESTMENTS
a. Investment in subsidiaries
Common Shares Ownership
Subsidiaries Interest Interest
------------------------------------------ ---------------------- -----------------------
Telerj Celular S.A. 100% 100%
Telest Celular S.A. 100% 100%
b. Ownership amount
Common Total of Common
Subsidiaries shares shares
------------------------------------------ ---------------------- -----------------------
Telerj Celular S.A. 30,449,109 30,449,109
Telest Celular S.A. 2,038,856 2,038,856
c. Subsidiaries information
Shareholder's Equity Net Income (Loss) of
Subsidiaries in 2002 the year
------------------------------------------ ---------------------- -----------------------
Telerj Celular S.A. 1,496,397 134,052
Telest Celular S.A. 247,362 (7,159)
d. Composition and Changes (Company)
December December
Subsidiaries 31, 2002 31, 2001
------------------------------------------ ---------------------- -----------------------
Investments in subsidiaries 1,743,759 1,645,465
Changes in the investment in 2002 and 2001 are as follows:
December December
31, 2002 31, 2001
------------- ------------
Balances as of December 31, 2001 1,645,465 1,102,454
Capital increase - 439,444
Prior year adjustment - 838
Equity pick-up in 2002 126,987 148,703
Interest on capital and dividends prescribed on subsidiaries 3,146 -
Dividends in 2002 (31,839) (45,974)
--------- ---------
Balances as of December 31, 2002 1,743,759 1,645,465
========= =========
32
10. PROPERTY, PLANT AND EQUIPMENT
------------------------------------------------------
Consolidated
----------------------------------------- ------------
December
December 31, 2002 31, 2001
----------------------------------------- ------------
Depreciation Accumulated Net book Net book
rates - % Cost depreciation value value
--------------- ------------ --------------- ----------- ------------
Transmission equipment 14.29 1,292,218 (758,302) 533,916 616,759
Switching equipment 14.29 639,647 (321,620) 318,027 318,465
Infrastructure 5.00 - 20.00 298,283 (126,273) 172,010 165,328
Software rights 20.00 209,267 (54,970) 154,297 89,428
Buildings 4.00 69,897 (7,775) 62,122 42,498
Terminal equipment 50.00 91,706 (52,160) 39,546 34,611
Other 0 - 20.00 133,777 (42,359) 91,418 60,821
Construction in progress - 213,721 - 213,721 264,481
--------- ---------- --------- ---------
Total 2,948,516 (1,363,459) 1,585,057 1,592,391
========= =========== ========= =========
11. SUPPLIERS AND ACCOUNTS PAYABLE
Company Consolidated
------------------------------- -------------------------------
December December December December
31, 2002 31, 2001 31, 2002 31, 2001
------------- ------------- ------------- -------------
Suppliers 3,738 2,203 324,953 247,117
Interconnection and interlink 649 659 53,622 37,451
----- ----- ------- -------
Total 4,387 2,862 378,575 284,568
===== ===== ======= =======
12. TAXES, OTHER THAN TAXES ON INCOME
Company Consolidated
----------------------------- ----------------------------
December December December December
31, 2002 31, 2001 31, 2002 31, 2001
-------------- -------------- ------------- -------------
ICMS (state VAT) - - 13,998 45,099
PIS / COFINS (taxes on revenue) 34 1,359 8,280 8,563
FISTEL fee - - 2,726 2,353
FUST and FUNTTEL (regulatory charges) - - 1,235 1,178
Other - - - 14
-- ----- ------ ------
Total 34 1,359 26,239 57,207
== ===== ====== ======
33
13. LOANS AND FINANCING
Composition of Debt
Consolidated
--------------------------
December 31, December 31,
Currency Annual charges 2002 2001
---------- -------------------------- ------------ ------------
Principal-
Financial institutions:
Citibank - OPIC US$ 5,20% p.y.+ libor 88,332 87,015
Resolution No. 63 US$ 7,59% to 14,00% p.y. 192,564 210,386
Other - Assumption of debt US$ 8,28% to 10,707% p.y. 133,353 144,732
NEC do Brasil S.A. US$ 7,30% p.y. + libor 33,087 28,972
Export Devel. Corpor. - EDC - Telest US$ 1,00% + libor - 898
Interest- 13,183 12,662
------- -------
460,519 484,665
======= =======
Current 200,922 189,726
Long-term 259,597 294,939
======= =======
Loans from Citibank-OPIC refer to financing for the expansion and modernization
of the cellular telephone network. Loans from Nec do Brasil supplier and from
Export Development Corporation refer to financing of fixed asset items.
Payment Time chart
The long-term portion has the following composition by maturity year:
December 31,
2002
------------
2004 194,594
2005 65,003
-------
Total 259,597
=======
34
Restrictive covenants
The financing from Citibank - OPIC has restrictive covenants, which the main
restrictions are related to the indebtedness level, EBITDA and financial
expenses.
Guarantees
Banks Guarantee
------------------------------------------- ----------------------------------------
Citibank Overseas Private Investment
Corporation (OPIC) guarantee - only
for politic risk
Resolucao No. 63 Promissory notes
Assumption of debt and Resolution No. 4,131 Promissory notes
NEC do Brasil S.A. Aval
Export Development Corporation - EDC Aval
On December 31, 2002, Telerj has exchange hedge operations in the total amount
of US$139,433 thousand, with maturity until November, 2005, to cover its debt in
foreign currency. As of that date, the Company and its subsidiaries had recorded
a net gain (accounting) of R$171,593 (R$76,807 on December 31, 2001) on its
exchange hedge operations and a book balance of R$123,901 in assets, from which
R$43,956 on short-term and R$79,945 on long term.
14. PROFIT SHARING
Company Consolidated
-------------------------- --------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest on capital 15,279 42,752 15,279 42,752
Dividends 14,243 5,914 16,646 10,904
Employee profit sharing - - 11,400 9,395
------- ------- ------- -------
Total 29,522 48,666 43,325 63,051
======= ======= ======= =======
Interest on capital and dividends are presented in Note 17b.
35
15. OTHER LIABILITIES
Consolidated
------------------------
December December
31, 2002 31, 2001
---------- ----------
Advances from customers - prepaid recharge cards 37,998 7,792
Accrual for rewards program 22,980 3,339
Other 3,233 1,900
---------- ----------
Total 64,211 13,031
========== ==========
In August 2001, subsidiaries started a rewards program, which transforms calls
into points, for future exchange for cellular phones. Points accumulated are
accrued as they are obtained, considering the cost of the cellular phones and
the expected utilization based on the registered customer's consumption profile.
The accrual is reduced when the customer obtains the phone. As of December 31,
2001, was recorded the amount of R$7,287 in the long-term liability, recorded as
other liabilities.
16. RESERVE FOR CONTINGENCIES
The company and its subsidiaries are parties to a number of lawsuits, stated on
different courts, in reference to Labor, Tax and Civil claims. The subsidiaries
management, based on legal counsel's opinion, recognized provision for the ones
for which the unfavorable termination is considered probable.
The composition of the balance is as follows:
Consolidated
-------------------------
December December
31, 2002 31, 2001
---------- ----------
Labor 7,848 3,169
Civil 4,944 4,262
Tax 35,210 12,095
---------- ----------
Total 48,002 19,526
========== ===========
Current 26,519 14,900
Long-term 21,483 4,626
========== ===========
36
a. Tax
In August 2000, the injunction obtained by Telerj Celular, which permitted
the payment of COFINS at the rate of 2%, was partially revoked. As a
consequence, the amount of R$12,473, duly restated, was paid in September
2000. However, this injunction remains valid for the financial income
exclusion from PIS and COFINS calculation basis, and the amount of R$20,931
remains accrued as of December 31, 2002 (R$10,065 as of December 31, 2001),
related to the amounts not paid based on the referred injunction.
On June 7, 1999, the subsidiary Telest obtained an injunction supporting the
unconstitutionality of the increase in COFINS rate and change in COFINS and
PIS calculation basis, and the future nonpayment of these taxes, as well as
the offsetting of the respective amount of R$609 already paid. The Company
did not recognize this contingent asset in its accounting records and
accrued, on a conservative basis, the amount of R$2,147, related to the
difference between the unpaid rate through December 31, 2002, supported by
the referred injunction (R$2,030 as of December 31, 2002).
The subsidiary Telest, based on legal counsel's opinion, recognized a
provision in the amount of R$12,132 regarding fiscal assessments of ICMS
occurred in 2002, which are on administrative level.
In July 1998, Agreement No. 69/98 established that ICMS (State VAT) should
be levied on the activation of new telephone lines. On December 14, 1998,
the subsidiaries obtained an injunction for nonpayment of ICMS on activation
fee, for both future amounts and taxable events occurring since the
subsidiaries' incorporation. The subsidiaries' management, based on the
opinion of legal counsel, believes that the chances of loss on this claim
are remote, and accordingly, did not recognize any provision. The Rio de
Janeiro State Supreme Court unanimously decided that no ICMS should be
levied on the referred activity.
The subsidiaries Telerj and Telest received tax assessments totaling
R$49,467, referring to: (i) R$3,657 - recording of ICMS credit on the
acquisition of permanent assets, which were recognized in the referred tax
assessment as items not directly related to the company's activity; (ii)
R$25,460 - nonpayment of ICMS on eventual or supplementary services that are
not considered telecommunications services; (iii) R$1,087 - nonpayment of
ICMS on calls originating from administrative terminals and tests used by
the employees; and (iv) R$4,069 - social contribution underpayment;
(v)R$8,089 - ICMS assessments that are on administrative level; and (vi)
R$7,110 miscellaneous. The Company, based on the opinion of its lawyers and
tax advisors, did not recognize a provision for these tax assessments.
b. Labor and civil
Refers to claims for indemnity for moral damages and several demands by
employees, in the amount of R$12,792 as of December 31, 2002 (R$7,431 as of
December 31, 2001), has been recognized to cover probable losses on these
lawsuits.
37
17. SHAREHOLDERS' EQUITY
As of December 30, 2002, at the Extraordinary Shareholders' General Meeting
was approved the adaptation of the Company Social Articles to the new
conditions described in the Law 10,313 of October 31, 2001.
a. Capital Stock
The capital is composed of shares without per value, as follows:
December December
31, 2002 31, 2001
------------ ------------
Common shares 154,431,421 136,466,598
Preferred shares 259,575,037 259,575,037
b. Dividends and interest on capital
Preferred shares have no voting right, but have priority in the
reimbursement of capital, without premium, and are entitled to receive
cash dividends 10% higher than those attributed to common shares.
At the 56th. Extraordinary Meeting of the Administration Council the
proposal and payment of interim dividends was approved based on the
financial statements as of June 30, 2002, to the holders of common and
preferred shares, in the amount of R$84,370, corresponding to
R$0.20378909 for each group of one thousand shares. The payment was made
on September 27, 2002.
Dividends are calculated in accordance with the Company's Social Article
and in conformity to the Corporation Law. The proposed dividends, prior
of the interest on capital inclusion, were calculated as follows:
December December
31, 2001 31, 2002
---------- ----------
Net income for the year 143,616 163,408
Pension plan equity - 839
Legal reserve appropriation (7,181) (8,170)
---------- ---------
Net income adjusted 136,435 156,077
Dividends / interest on capital (103,879) (50,297)
Gross interest on capital 13,500 50,297
Withholding income tax above interest on capital (2,025) (7,545)
---------- ---------
Net interest on capital 11,475 42,752
Advanced dividends 84,370 -
38
Supplementary dividend 6,009 -
Number of shares ( - ) Treasury shares
Common 154,431,421 136,466,598
Preferred 259,575,037 259,575,037
----------- -----------
414,006,458 396,041,635
----------- -----------
Dividends / Net interest on capital of the year
Common 35,751 14,731
Preferred 66,103 28,021
Dividends / Interest on capital per thousand shares
(Reais)
Common 0.231506 0.107946
Preferred 0.254657 0.107949
c. Special Reserve for Goodwill
This reserve represents the goodwill special reserve recognized as a result of
the Company's corporate restructuring.
d. Legal Reserve
The legal reserve is calculated based on 5% of annual net income until this
reserve reaches 20% of paid-up capital stock or 30% of capital stock plus
capital reserves; thereafter, the appropriation to this reserve is not
mandatory. The purpose of this reserve is to assure the integrity of capital
stock and can only be used to offset losses or increase capital.
e. Reserve for Expansion and Modernization
Based on the budget approved by the Management Council, which describes the need
of resources for investments projects for the next years, was transferred to the
special reserve of expansion and modernization the balance of retained earnings,
after the distribution of profits prescribed by law and the dividends
prescribed.
39
18. NET OPERATING REVENUE
Consolidated
----------------------------
December 31, December 31,
2002 2001
------------ ------------
Monthly subscription charges 281,613 367,211
Usage charges 874,651 742,373
Charges for use outside the concession area 23,950 25,267
Additional charges per call 43,146 53,423
Interconnection (network usage charges) 795,067 702,049
Additional services 15,539 13,005
Products sold 348,635 283,244
Other 40 66
------------ ------------
Gross operating revenue 2,382,641 2,186,638
Revenue deductions (535,010) (483,339)
------------ ------------
Net operating revenue 1,847,631 1,703,299
============ ============
19. COST OF SERVICES AND SALES
Consolidated
----------------------------
December 31, December 31,
2002 2001
------------ ------------
Personnel 14,713 13,283
Outside services 34,548 32,198
Network connections 130,846 125,685
Rent, insurance and building services fees 40,493 39,909
Interconnection / interlinks 84,332 76,051
Taxes 60,624 63,373
Depreciation 322,565 245,103
Products sold 334,853 289,154
Other 2,206 2,169
------------ ------------
Total 1,025,180 886,925
============ ============
40
20. SELLING EXPENSES
Consolidated
------------------------------
December 31, December 31,
2002 2001
------------ ------------
Personnel 44,333 31,069
Materials 3,211 3,120
Outside services 188,893 156,611
Rent, insurance and building services fees 9,789 8,610
Taxes 360 357
Depreciation 13,085 9,321
Allowance for doubtful accounts 96,810 71,847
Other 274 2,842
-------- --------
Total 356,755 283,777
======== ========
21. GENERAL AND ADMINISTRATIVE EXPENSES
Company Consolidated
--------------------------- --------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Personnel 3,961 2,113 38,696 58,472
Materials - - 3,837 3,365
Outside services 8,426 7,403 123,399 121,469
Rent, insurance and building services fees 21 774 11,408 18,563
Taxes 50 19 8,057 1,018
Depreciation 431 431 42,032 28,894
Other - 64 4,118 1,698
-------- -------- -------- --------
Total 12,889 10,804 231,547 233,479
======== ======== ======== ========
41
22. FINANCIAL INCOME (EXPENSES), NET
Company Consolidated
-------------------------- --------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Financial Income
Income from temporary cash investments 14,042 63,694 42,674 37,910
Interest on income - 35,900 - -
Hedge operations, net 13,137 - 221,010 76,807
Monetary/exchange variations 728 674 4,980 362
Financial Expenses
Charges on financial transactions (500) (471) (43,291) (70,676)
Interest on income (13,500) (50,297) (13,500) (50,297)
Monetary/exchange variations - - (238,090) (127,625)
-------- -------- -------- --------
Total 13,907 13,600 26,217 (133,519)
======== ======== ======== ========
23. INCOME TAX AND SOCIAL CONTRIBUTION
The Company and its subsidiaries has been recording monthly the portion of
Tax and Social contribution on income, in accordance with accrual basis,
and pay these taxes based on monthly estimates. Deferred taxes are
attributable to temporary differences, as of Note 7. The composition of
income tax and social contribution expense is as follow:
Company Consolidated
-------------------------- --------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Social contribution tax expense (10) (84) (51,395) (42,212)
Income tax expense 1 (39) (18,422) (15,192)
----- ------ -------- --------
Total 9 (123) (69,817) (57,404)
===== ====== ======== ========
42
The following is a reconciliation of the reported expense of taxes on income
and the amounts calculated based on the combined official rates of 34%:
Company Consolidated
----------------------------- -----------------------------
December December December December
31, 2002 31, 2001 31, 2002 31, 2001
------------- ------------- -------------- -------------
Income before taxes and employee profit sharing
(combined) 143,625 163,531 340,326 369,021
-------- ---------- ------------ ------------
Tax expense at the combined official rate (48,833) (55,601) (115,711) (125,467)
Permanent additions: (11) (18) (2,999) (739)
-------- ---------- ------------ ------------
Nondeductible fines - - (347) (49)
Other additions (11) (18) (2,652) (690)
Permanent exclusions: 48,835 55,496 48,893 68,802
---------- ---------- ------------ ------------
Equity pick-up 44,245 50,559 44,245 50,559
Other exclusions 4,590 4,895 4,590 17,101
---------- ---------- ------------ ------------
Tax expense in statements of income (9) (123) (69,817) (57,404)
========== ========== ============ ============
24. FINANCIAL INSTRUMENTS AND MANAGEMENT RISK (CONSOLIDATED)
a. Risks considerations
The subsidiaries Telerj and Telest provide cellular communications services
in the States of Rio de Janeiro and Espirito Santo under concessions from
the Federal Government. Both of them are also engaged in activities of
purchasing and distribution of cellular telephones through their own
distribution network in order to increase their business operations.
The main market risks that Telerj and Telest are exposed to on their
activities are:
. Credit Risk: originates from the difficulties in which these
companies have in collecting the service charges for rendered
services to their clients, including the sales of cellular
telephones to the distribution networks.
. Interest Rate Risk: originates from a portion of the debt and the
derivatives premium contracted on floating rates, and involves
financial expenses increase risk by unfavorable movement on
interest rates (principally Libor and CDI).
. Exchange Rate Risk: originates from the debt and the derivatives
contracted on foreign currency and are related to potential losses
on unfavorable movement on exchange rates.
Since its creation Telerj and Telest have been practicing a pro-active
position over the management of sundry risks that are submitted, through
initiative procedures and operational general politics that allow decrease
the inherent risks of the activities.
43
Credit Risk
The credit risk related to telecommunications services rendered, is
minimized by the control performed on costumer's basis and management of
indebtedness by clear politics for concession of billed cellular telephone.
Tele Sudeste has 68.55% of its client basis participating on prepaid mode,
which requires prepaid phone cards and not represent credit risk.
Costumer's indebtedness represented 3.72% of gross revenue in 2002 (3.53%
in 2001).
The credit risk related to cellular telephones sales is managed by the
conservative politic on credit concession, through updated management
methods, which involves the "credit scoring", technical application,
balance analysis and commercial data basis consultation as well as the
automatic control for sales authorization integrated to the distribution
system. Network distribution's indebtness represented just about 1.57% of
cellular telephones sales during the year of 2002 (1.79% in 2001).
As of December 31, 2002, the Company's net exposure to exchange rate risk,
at book and market values, is as follows:
US$
---------
Loans and financing (130,337)
Other liabilities (41,296)
Derivative instruments 169,611
---------
Net exposure (2,022)
=========
b. Derivative operations
Telerj has recorded gain and losses on derivative contracts as "Financial
income (expenses), net".
The table below shows an estimation of book value evaluation and market
value of loans and financing and foreign currency liabilities, as well as
derivative operations:
Book value Market value
------------ ------------
Loans and financing (460,519) (407,159)
Other liabilities (145,912) (145,910)
Derivative instruments - contracted amount 599,287 536,388
-------- -------
Total (7,144) (16,681)
======== ========
The market value of loans and financing, as well as "swaps" was stated,
based on discounted cash flows, using available interest rate
projections.
The market values are calculated in a specific moment, based on
available information and own evaluation methodologies, therefore the
indicated estimations do not necessarily
44
represent market realization values. The usage of different assumptions
may mean fully the estimations.
25. PENSION PLANS
The subsidiaries, together with other companies of the former Telebras
System, sponsor private pension and health care plans for retired
employees, managed by Fundacao Sistel de Seguridade Social - SISTEL. Until
December 1999, all sponsors of the plans managed by SISTEL were unified as
to all plans then existent. On December 28, 1999, the sponsors negotiated
conditions to create pension plans individualized by sponsor (PBS - Tele
Sudeste) and maintenance of unification only for the participants already
covered and who were in such position on January 31, 2000 (PBS - A),
resulting in a proposal for the restructuring of SISTEL's bylaws and
regulations, which was approved by the Secretariat for Social Security and
Supplementary Benefits on January 13, 2000.
Due to the end of unification in December 1999, the subsidiaries
individually sponsor a defined benefit plan (PBS Tele Sudeste Celular
Plan), which covers approximately 1% of the Company's employees. In
addition to the supplementary pension benefit, a multi-sponsored health
care plan is provided to retired employees and their dependents, at shared
costs (PAMA).
Contributions to the PBS Tele Sudeste Celular Plan are determined based on
actuarial valuations prepared by independent actuaries, in accordance with
the standards applicable in Brazil. The method used for cost determination
is the capitalization method and the sponsor's contribution represents
13.5% of the participating employees' payroll, 12% of which is earmarked
for PBS Tele Sudeste Celular Plan and 1.5 % for the PAMA Plan.
For the other 83% of the subsidiaries' employees, there is an individual
defined contribution plan - Visao Celular Benefit Plan, established by
SISTEL in August 2000. The Visao Celular Plan is supported by
contributions made by the participants (employees) and by the sponsor,
which are credited to participants' individual accounts. The subsidiaries
are responsible for the costing of all administrative and maintenance
expenses, including risks of death and disability of participants. The
employees participating in the defined benefit plan (PBS Tele Sudeste
Celular) were granted the option of migrating to the Visao Celular Plan.
This option was extended to employees who did not participate in the PBS
Tele Sudeste Celular Plan, as well as to all new hires. The Company's
contributions to the Visao Celular Plan are similar to those of the
participants, varying from 2% to 9% of the contribution salary, according
to the percentage opted for by the participant.
During 2002, the subsidiaries contributed the amount of R$210 (R$116 in
2001) to PBS Tele Sudeste Celular Plan and R$3,111 (R$1,720 in 2001) to
Visao Celular Plan.
As permitted by CVM Instruction No. 371, of December 13, 2000, the Company
elected to recognize the actuarial liabilities of its benefit plans
directly in shareholders' equity as of December 31, 2001, net of related
tax effects. On December 31, 2002, the Company elected to recognize the
actuarial liabilities of its benefit plans directly as expense of the
year. Regarding the actuarial valuation of the plans, the Company
established the projected unit credit method for the plans' positions as
of November 30, 2002 and November 30, 2001, respectively. For
multi-sponsored plans (PAMA and PBS-A), the apportionment of the
45
plan's assets was made in accordance with the Company's actuarial
liabilities, in comparison with the plan's total liabilities. The own net
amount recorded was R$839.
For the year ended on December 31, 2002, the Company recognized
proportionally the actuarial cost estimated for the year 2002, and R$2,471
was recorded related to these costs.
See below the composition of the pension plans and post-retirement
benefits provisions as of December 31, 2002, as well the information
required by the Deliberation CVM No. 371 about such plans:
Plan Telerj Telest Consolidated
--------------------------------------------------- -------------- ------------- --------------
PBS 307 99 406
PAMA 564 163 727
-------------- ------------- --------------
Consolidated total 871 262 1,133
Deferred taxes (296) (89) (385)
-------------- ------------- --------------
Total net effects 575 173 748
============== ============= ==============
I - PBS/Visao
I - a. Reconciliation between Assets and Liabilities
Plano Telerj Telest Consolidated
--------------------------------------------------------- --------------- --------------- --------------
Total actuarial liabilities 8,531 2,424 10,955
Fair value of assets 8,224 2,325 10,549
--------------- --------------- --------------
Liabilities recognized in balance sheet, net 307 99 406
=============== =============== ==============
Although Visao plans are defined contribution plans, there is an actuarial risk
of death and of disability of its participants that are paid by the sponsor,
being necessary an actuarial calculation above these risks.
I - b. Forecast expense for 2003
PBS/Visao Telerj Telest Consolidated
---------------------------------------------------------------- --------------- --------------- ----------------
Cost of service 568 64 632
Cost of interest 840 239 1,079
Expected return on assets (844) (235) (1,079)
Employees' contributions (120) (34) (154)
--------------- --------------- ----------------
444 34 478
=============== =============== ================
46
I - c. Actuarial Assumptions
Rate used for present value discount of actuarial liabilities 10.24% p.y.
Plan assets expected return rate 10.24% p.y.
Salary increase rate 6.08% p.y.
Mortality rate GAM1971
Disability mortality rate RRB1944
Disability rate RRB1944
% of married active participants on retirement date 95%
Number of PBS Plan active participants 14
Number of PBS Plan retired participants 20
Number of Visao Plan active participants 1,626
II - PAMA
II - a. Reconciliation between Assets and Liabilities
PAMA (*) Telerj Telest Consolidated
------------------------------------------------------------ --------------- ------------- -----------------
Total actuarial liabilities 1,014 293 1,307
Fair value of assets (451) (130) (581)
--------------- ------------- -----------------
Liabilities recognized in balance sheet, net 563 163 726
=============== ============= =================
(*) Refers to proportional participation of Telerj and Telest in assets and
liabilities of the multi-sponsored plan - PAMA, according to actuarial
calculations. Based on the actuarial and legal counsels opinions, the Company,
conservatively, recorded this potential liability as of December 31, 2002.
II - b. Actuarial Assumptions
Rate used for present value discount of actuarial liabilities 11.30% p.y.
Plan assets expected return rate 14.45% p.y.
Inflation rate 5% p.y.
Growth medial cost rate 10,62% p.y.
Mortality rate GAM1971
Number of retired as of November 30, 2002 28
47
III - PBS-A
Although the PBS-A Plan has a superavit as of December 31, 2002, no assets
were recorded by the sponsor, due to the legal impossibility of
reimbursement of this superavit, besides the fact that is a
non-contributive plan, which not allow the contributions reduction of the
sponsor in the future.
III - a. Reconciliation between Assets and Liabilities
PBS-A (*) Telerj Telest Consolidated
--------------------------------------------------- --------------- ------------- ----------------
Total actuarial liabilities 7,621 442 8,063
Fair value of assets (9,520) (552) (10,072)
------ ---- -------
Liabilities recognized in balance sheet, net (1,899) (110) (2,009)
====== ==== =======
(*)Refers to proportional participation of Telerj and Telest in assets and
liabilities of the multi-sponsored plan - PBS-A, according to actuarial
calculations.
III - b. Forecast expense for 2003
Telerj Telest Consolidated
----------- ---------- ---------------
Cost of interest 785 48 833
----- -- -----
Expected return on assets 1,085 77 1,162
===== == =====
c. Actuarial Assumptions
Rate used for present value discount of actuarial liabilities 11.30% p.y.
Plan assets expected return rate 14.45% p.y.
Salary increase rate 8.15% p.y.
Real increase benefits rate 5.00% p.y.
Mortality rate UP84 with 1 year of increase
Disability rate Disability Mercer's Rate
Number of participants 20
48
26. CORPORATE RESTRUCTURING
On November 30, 2000, the corporate restructuring process was concluded, in
which the goodwill paid on the privatization process of the Company was
transferred to its subsidiaries.
The financial statements maintained for the Companies' corporate and tax
purposes include specific accounts related to transferred goodwill and
reserves, and corresponding amortization, reversals and tax credits, the
balances of which, as of December 31, 2002, are as follows:
December December
Balances Tele Sudeste spin-off ABCD0002 31, 2001 31, 2002
as of ------------------------ ----------- -------------- --------------
spin-off Telerj Telest Telerj Consolidated Consolidated
------------ ---------- -------- ----------- -------------- --------------
Balance sheet:
Goodwill - spun-off 1,168,270 1,059,504 108,766 225,009 1,052,460 773,804
Reserves - spun-off 778,206 705,755 72,451 150,231 703,495 519,582
---------- ---------- -------- -------- ---------- --------
Net effect equivalent to tax
credit from corporate
restructuring 390,064 353,749 36,315 74,778 348,965 254,222
========== ========== ======== ======== ========== ========
Statements of income:
Goodwill amortization 278,656 278,656
Reversal of reserve (183,913) (183,913)
Tax credit (94,743) (94,743)
---------- --------
Net effect on income - -
========== ========
As shown above, the amortization of goodwill, net of the reversal of the
reserve and of the corresponding tax credit, results in a zero effect on
income and, consequently, on the basis for calculating the minimum mandatory
dividend. In order to better present the financial position of the Companies
in the financial statements, the net amount of R$254,222 as of December 31,
2002 (R$348,965 as of December 31, 2001), which, in essence, represents the
tax credit from the partial spin-off, was classified in the balance sheet as
a noncurrent asset - deferred taxes (see Note 7).
Tax credit from corporate restructuring will be capitalized as realization
happens. On December 31, 2002, the company capitalized R$90,363 and was
waiting for the approval of the supervisory council to capitalize the amount
of R$93,516. The difference to R$94,743 corresponds to the partially
realization of tax credit generated on Telest. Additionally R$19,613 and
R$7,129 was recorded as tax credit on tax losses and negative basis of social
contribution, respectively, due to not generating the respective tax benefit.
49
27. ADMINISTRATOR FEE
During 2002 and 2001, administrator fees of R$2,400 and R$2,100 were recorded,
respectively, as expenses.
28. TRANSACTIONS WITH RELATED PARTIES
The principal transactions with unconsolidated related parties are as
follows:
(a) Use of Network and Long-distance (Roaming) Cellular Communication--These
transactions involve the companies owned by same group, Telerj Celular
S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A.,
Telecomunicacoes de Sao Paulo S.A. - Telesp, Celular CRT S.A, and
Telefonica Servicios Moviles and Telesp Celular S.A These transactions were
established based on contracts between Telebras and the operating
concessionaires before privatization. The terms of these transactions are
regulated by ANATEL. As from 2002 the Telecomunicacoes de Sao Paulo S.A -
Telesp, started to provide long-distance services to the operators,
replacing Embratel.
(b) Technical Assistance -- The subsidiaries due to Telefonica Moviles S.A
technical assistance by telecommunication services.
(c) Rendering of Services--The following services are rendered by companies
owned by the same group:
. Corporate services centralized at Telerj Celular S.A. and
Telecomunicacoes de Sao Paulo S.A - Telesp, transferred to other
subsidiaries at costs effectively incurred.
. Call center services rendered by Atento Brasil S.A. to users of
telecommunications services of subsidiaries.
. Implementation and maintenance of profitability and cost control
system by Telefonica Mobile Solution.
. Services of implementation of facilities' security system rendered by
Telefonica Engenharia.
The commercial conditions of these services are based on the usual market
practices applied to the contracts with other Companies.
50
The summary of balances and transactions with unconsolidated related
parties is presented as follows:
Company Consolidated
---------------------- ----------------------
December December December December
31, 2002 31, 2001 31, 2002 31, 2001
-------- -------- -------- --------
Current assets:
Accounts receivable - - 928 625
Other assets 13.503 12.817 28.063 7.507
Liabilities:
Accounts payable and accrued expenses (3.531) (1.789) 137.176) (71.776)
Other liabilities (1.552) (924) (2.340) (1.185)
Income (losses)
Net operating revenue from services - - 7.308 7.089
Cost of services rendered - - (3.483) (3.545)
Services rendered - - (35.319) (31.509)
General and administrative expenses (4.269) (2.981) (28.680) (17.808)
Financial revenues (expenses), net 728 - (48.515) -
29. INSURANCE
The Company and subsidiaries hold politics to monitor inherent risks on its
operations. Therefore, as of December 31, 2002, the Company and
subsidiaries held insurance agreements to cover operational risks, loss of
income, civil liabilities, heath etc. The Company and subsidiaries
administration know insurance cover amount is enough to cover contingent
losses. The main assets, responsibilities, or cover interest by insurance
and the respective amount is shown bellow:
Classification Covered amount
-------------- --------------
Operating risks US$600,000 thousands
Vehicle fleet R$1,000
51
30. RECONCILIATION BETWEEN COMPANY NET INCOME AND CONSOLIDATES NET INCOME
As of December 31, 2002, the reconciliation between company net income and
consolidated net income is as follows:
Consolidated
-------------------------
December December
31, 2002 31, 2001
-------- --------
Company net income 143,616 163,408
Telest capital reserve (94) (494)
Prescribed dividends 1998 (3,146) -
-------- -------
Consolidated net income 140,376 162,914
======== =======
31. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH
The accompanying financial statements are presented on the basis of
accounting practices adopted in Brazil. Certain accounting practices
applied by the Company and its subsidiaries that conform with those
accounting practices in Brazil may not conform with generally accepted
accounting principles in the countries where these financial statements may
be used.
52
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.
TELE SUDESTE CELLULAR HOLDING COMPANY
Date: February 17, 2003. By: /s/ Charles E. Allen
-----------------------------------
Name: Charles E. Allen
Title: Investor Relations Director