##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 20-F o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
 OR x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission file number 001-14493 TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. (Exact name of Registrant as specified in its charter)
 Tele Sudeste Cellular Holding Company
(Translation of Registrants name into English) The Federative Republic of Brazil
(Jurisdiction of incorporation or organization) Praia de Botafogo, 501, 7o andar
22250-040 Rio de Janeiro, RJ, Brazil
(Address of principal executive offices) 
 Securities registered
or to be registered pursuant to Section 12(b) of the
Act
 Title of each class:
    
    Name of each exchange on which registered:Preferred Shares, without par value
    
    New York Stock Exchange*American Depositary Shares (as evidenced
by American Depositary Receipts), each
representing 5,000 shares of Preferred Stock
    
    New York Stock Exchange
    
 Securities registered or to be registered pursuant to Section 12(g) of the Act:
None 
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None 
 The number of outstanding shares of each class of stock of Tele Sudeste Celular Participações S.A., as of December 31, 2003: 173,023,182,132        Shares of Common Stock
259,575,036,202        Shares of Preferred Stock Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
  x        No  o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17
   o
        Item 18  x




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TABLE OF CONTENTS PagePART IITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    10ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    25ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    46ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    48ITEM 9.
    
    THE OFFER AND LISTING
    
    
    53ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    58ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    71ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    72PART IIITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    73ITEM 14.
    
    MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    73ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    73ITEM 16.
    
    [RESERVED]
    
    
    73PART IIIITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    75ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    75ITEM 19.
    
    EXHIBITS
    
    
    75
  i




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INTRODUCTION All references in this annual report to:  
    
    Tele Sudeste Celular Participações S.A., Tele Sudeste,
we, our and us are to Tele Sudeste Celular Participações S.A.
and its consolidated subsidiaries (unless the context otherwise
requires), including the operations of Telerj Celular S.A., known as
Telerj Celular, and Telest Celular S.A., known as Telest Celular;
    
    Brazilian government are to the federal government of the Federative Republic of Brazil;
    
    real, reais or R$ are to Brazilian reais, the official currency of Brazil;
    
    U.S.$, dollars or U.S. dollars are to United States dollars;
    
    ADRs are to the American Depositary Receipts evidencing our ADSs;
    
    ADSs are to our American Depositary Shares, each
representing 5,000 shares of our non-voting preferred stock;
    
    Commission are to the U.S. Securities and Exchange Commission;
    
    CVM are to the Comissão de Valores Mobiliários, the Brazilian securities commission;
    
    Brazilian Central Bank, Central Bank of Brazil or
Central Bank are to the Banco Central do Brasil, the Brazilian
central bank;
    
    General Telecommunications Law are to Lei Geral de
Telecomunicações, as amended, which regulates the telecommunications
industry in Brazil;
    
    Brazilian corporate law are to Law No. 6,404 of December,
1976, as amended;
    
    Anatel are to Agência Nacional de Telecomunicações 
ANATEL, the Brazilian telecommunication regulatory agency;
    
    Telebrás are to Telecomunicações Brasileiras S.A. 
TELEBRAS;
    
    CDMA are to Code Division Multiple Access, an aerial
interface technology for cellular networks based on spectral
spreading of the radio signal and channel division in the code
domain;
    
    1XRTT are to 1x Radio Transmission Technology, the CDMA
2000 1X technology, which, pursuant to the ITU (International
Telecommunication Union) and in accordance with the IMT-2000 rules,
is the 3G (third generation) Technology;
    
    TDMA are to Time Division Multiple Access, a radio
interface technology for cellular networks based on spectral
spreading of the radio signal and channel division in the time
domain;
    
    AMPS are to Advanced Mobile Phone System, a radio interface
technology for cellular networks based on spectral spreading of the
radio signal and channel division in the frequency domain;
    
    SMC are to Serviço Movél Celular(Mobile Cellular Service),
a service rendered pursuant to a concession granted by Anatel to
provide mobile service in a specific frequency range; ii




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
    
    SMP are to Serviço Móvel Pessoal(Personal Cellular
Service), a service rendered pursuant to an authorization granted by
Anatel to provide mobile service in a specific frequency range;
    
    WAP are to Wireless Application Protocol, an open and
standardized protocol started in 1997, which allows access to
Internet servers through specific equipment, a WAP Gateway at the
carrier, and WAP browsers in customers handsets;
    
    SMS are to Short Message Service for cellular handsets,
which allow customers to send and receive alphanumerical messages;
    
    Customers are to number of wireless lines in service; and
    
    Net additions are to the total number of new customers
acquired in the period minus the reduction in the number of
customers. Unless otherwise specified, data relating to the Brazilian
telecommunications industry included in this annual report was obtained from
Anatel. PRESENTATION OF FINANCIAL INFORMATION Our consolidated financial statements as of December 31, 2003 and 2002 and
for the years ended December 31, 2003, 2002 and 2001, have been prepared in
accordance with the accounting practices adopted in Brazil, as prescribed by
the Brazilian Corporate Law, or Brazilian Corporate Law Method, which differs
in certain significant respects from generally accepted accounting principles
in the United States, or U.S. GAAP. Note 35 to our financial statements
appearing elsewhere in this annual report describes the principal differences
between the Brazilian Corporate Law Method and U.S. GAAP as they relate to us,
and provides a reconciliation to U.S.GAAP of net income and shareholders
equity. These consolidated financial statements have been audited by Deloitte
Touche Tohmatsu Auditores Independentes. In previous years, we presented financial information in our annual report
on Form 20-F using price-level accounting methodology prescribed by the
Brazilian Federal Accountancy Council. The Brazilian Corporate Law Method does
not permit price-level accounting for periods beginning from 1996. We have
changed to the Brazilian Corporate Law Method in this annual report on Form
20-F because we do not primarily rely on price-level accounting in reporting to
investors and authorities in Brazil. For consistency purposes, we presented all
our financial information in this annual report according to the Brazilian
corporate law method. As a result, the financial information included in this
annual report as of and for the year ended December 31, 2002 or for previous
years is different from the information we presented in our annual report for
the year ended December 31, 2002 or for previous years. FORWARD-LOOKING STATEMENTS Certain information included in this annual report, principally in Item
3D. Risk Factors, Item 4. Information on the Company and Item 5. Operating
and Financial Review and Prospects, contains information that is
forward-looking, including, but not limited to:  
    
    statements concerning our operations and prospects;
    
    the size of the Brazilian telecommunications market;
    
    estimated demand forecasts; iii




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




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. Selected Financial Data Our consolidated financial statements included in this annual report on
Form 20-F and the selected financial data presented for the periods described
below have been prepared in accordance with the Brazilian Corporate Law Method,
which is the same basis of accounting used in our annual and interim financial
statements published in Brazil, and audited by Deloitte Touche Tohmatsu
Auditores Independentes. For consistent presentation, we have used the
Brazilian Corporate Law Method for all periods described in this annual report
on Form 20-F. See Note 2 to the consolidated financial statements. The financial information included in this annual report on Form 20-F is
different from the information we presented in our annual report on Form 20-F
for the year ended December 31, 2002. See Presentation of Financial
Information for more information about it. Brazilian Corporate Law Method and U.S. GAAP Our consolidated financial statements are prepared in accordance with the
Brazilian Corporate Law Method, which differs in certain material respects from
U.S. GAAP. See Note 35 to our consolidated financial statements for a summary
of the differences between the Brazilian Corporate Law Method and U.S. GAAP as
they relate to us and a reconciliation to U.S. GAAP of shareholders equity as
of December 31, 2003 and 2002, and net income for the years ended December 31,
2003, 2002 and 2001. Selected Financial Information The following tables present a summary of our selected financial data at
the dates and for each of the periods indicated. You should read the following
information together with our financial statements and the notes thereto
included elsewhere in this annual report and with Item 5. Operating and
Financial Review and Prospects. 1




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais except when indicated)Income Statement Data:Brazilian Corporate Law MethodNet operating revenue
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299
    
    
    
    1,516,715
    
    
    
    1,490,938Cost of services and goods
    
    
    (1,052,487
    )
    
    
    (981,741
    )
    
    
    (877,284
    )
    
    
    (797,840
    )
    
    
    (965,796
    )Gross profit
    
    
    839,964
    
    
    
    865,890
    
    
    
    826,015
    
    
    
    718,875
    
    
    
    525,142Operating income (expenses)Selling expenses
    
    
    (387,466
    )
    
    
    (392,482
    )
    
    
    (293,418
    )
    
    
    (245,768
    )
    
    
    (308,971
    )General and administrative expenses
    
    
    (224,408
    )
    
    
    (229,947
    )
    
    
    (233,479
    )
    
    
    (206,760

    )
    
    
    (131,574
    )Other operating income (expenses), net
    
    
    13,309
    
    
    
    (16,954
    )
    
    
    5,413
    
    
    
    12,906
    
    
    
    (887
    )Operating income (loss) before interest
    
    
    241,399
    
    
    
    226,507
    
    
    
    304,531
    
    
    
    279.253
    
    
    
    83,710Financial expense, net
    
    
    (15,017
    )
    
    
    (15,112
    )
    
    
    (83,222
    )
    
    
    (72,263
    )
    
    
    (40,397
    )Operating income (loss)
    
    
    226,382
    
    
    
    211,395
    
    
    
    221,309
    
    
    
    206,990
    
    
    
    43,313Net non-operating income (expense)
    
    
    (8,535
    )
    
    
    (1,202
    )
    
    
    (991
    )
    
    
    (3,096
    )
    
    
    2,509Income (loss) before minority interests
and taxes
    
    
    217,847
    
    
    
    210,193
    
    
    
    220,318
    
    
    
    203,894
    
    
    
    45,822Income and social contribution taxes
benefit (expense)
    
    
    (61,610
    )
    
    
    (69,817
    )
    
    
    (57,404
    )
    
    
    (58,039
    )
    
    
    13,277Minority interests (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,979
    )
    
    
    42,985Net income
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914
    
    
    
    121,876
    
    
    
    0,13Earnings per thousand shares
    
    
    0.36
    
    
    
    0.34
    
    
    
    0.41
    
    
    
    0.31
    
    
    
    0.13Operating income (loss) per thousand shares
    
    
    0.52
    
    
    
    0.51
    
    
    
    0.56
    
    
    
    0.52
    
    
    
    0.13Dividends per thousand preferred
sharesR$ (a)
    
    
    0.089
    
    
    
    0.255
    
    
    
    0.108
    
    
    
    0.119
    
    
    
    0.073Dividends per thousand common
sharesR$ (a)
    
    
    0.081
    
    
    
    0.232
    
    
    
    0.108
    
    
    
    0.119
    
    
    
    0.014Dividends per thousand preferred
sharesUS$ (a) (b)
    
    
    0.031
    
    
    
    0.075
    
    
    
    0.047
    
    
    
    0.057
    
    
    
    0.046Dividends per thousand common
sharesUS$ (a) (b)
    
    
    0.028
    
    
    
    0.068
    
    
    
    0.047
    
    
    
    0.057
    
    
    
    0.009
   (a)
    
    For the year 2000, there was an additional dividend for preferred and
common shares issued as a result of the reorganization in the amount of
R$0.019 (U.S.$0.009).(b)
    
    U.S. dollar amount determined according to the applicable exchange rate
at the date of the general shareholders meeting that approved the
dividend distribution. 2




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais except when indicated)U.S. GAAPNet operating revenue
    
    
    2,446,136
    
    
    
    2,220,491
    
    
    
    2,017,644
    
    
    
    1,749,607
    
    
    
    1,995,900Operating income (loss)
    
    
    96,173
    
    
    
    121,931
    
    
    
    206,284
    
    
    
    307,843
    
    
    
    (13,860
    )Net income (loss) before cumulative effect
of adoption of accounting principle
    
    
    89,578
    
    
    
    4,021
    
    
    
    129,860
    
    
    
    166,069
    
    
    
    6,816Cumulative effect of adoption of accounting
principle (SFAS 133) , net of income tax
effects of R$1,025
    
    
    
    
    
    
    
    
    
    
    2,081
    
    
    
    
    
    
    
    Net income
    
    
    116,823
    
    
    
    4,021
    
    
    
    131,941
    
    
    
    166,069
    
    
    
    6,816Net income (loss) per thousand shares:Common sharesbasic
    
    
    0.26
    
    
    
    
    
    
    
    0.33
    
    
    
    0.49
    
    
    
    (0.02
    )Common sharesdiluted
    
    
    0.23
    
    
    
    
    
    
    
    0.25
    
    
    
    0.35
    
    
    
    (0.02
    )Weighted average number of
common shares outstanding
basic (thousands)
    
    
    168,375,242
    
    
    
    148,443,147
    
    
    
    136,479,679
    
    
    
    125,390,242
    
    
    
    124,369,031Weighted average number of
common shares outstanding
diluted (thousands)
    
    
    227,501,934
    
    
    
    222,297,796
    
    
    
    225,110,055
    
    
    
    221,471,887
    
    
    
    124,369,031Preferred sharesbasic
    
    
    0.28
    
    
    
    0.01
    
    
    
    0.33
    
    
    
    0.49
    
    
    
    0.04Preferred sharesdiluted
    
    
    0.25
    
    
    
    0.01
    
    
    
    0.29
    
    
    
    0.41
    
    
    
    0.04Weighted average number of
Preferred shares outstanding
basic and diluted (thousands)
    
    
    259,575,036
    
    
    
    259,575,037
    
    
    
    259,587,240
    
    
    
    214,170,953
    
    
    
    210,029,997
 Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais
except when indicated)(1)Cash Flow Data:Brazilian Corporate Law MethodOperating activities:Total net cash provided by (used in) operating activities
    
    
    743,365
    
    
    
    756,910
    
    
    
    597,607
    
    
    
    523,115
    
    
    
    (4,152
    )Investing activitiesTotal net cash used in investing activities
    
    
    (255,635
    )
    
    
    (370,544
    )
    
    
    (408,342
    )
    
    
    (428,173
    )
    
    
    (441,266
    )Financing activities:Total net cash provided by (used in) financing activities
    
    
    (208,665
    )
    
    
    (362,754
    )
    
    
    (229,112
    )
    
    
    (38,179
    )
    
    
    430,003Increase (decrease) in cash and cash equivalents
    
    
    279,065
    
    
    
    23,612
    
    
    
    (39,847
    )
    
    
    56,763
    
    
    
    (15,415
    )Cash and cash equivalents at beginning of year
    
    
    109,373
    
    
    
    85,761
    
    
    
    125,608
    
    
    
    68,845
    
    
    
    84,260Cash and cash equivalents at end of year
    
    
    388,438
    
    
    
    109,373
    
    
    
    85,761
    
    
    
    125,608
    
    
    
    68,845
 On December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais)Balance Sheet Data:Brazilian Corporate Law MethodProperty, plant and equipment, net
    
    
    1,398,014
    
    
    
    1,585,057
    
    
    
    1,592,391
    
    
    
    1,467,696
    
    
    
    1,264,431Total assets
    
    
    2,823,436
    
    
    
    2,793,786
    
    
    
    2,690,638
    
    
    
    2,696,190
    
    
    
    1,971,575Net assets
    
    
    1,903,363
    
    
    
    1,779,685
    
    
    
    1,735,749
    
    
    
    1,622,473
    
    
    
    917,168Loans and financingcurrent portion
    
    
    165,802
    
    
    
    200,922
    
    
    
    189,726
    
    
    
    305,002
    
    
    
    252,943Loans and financingnon-current
portion
    
    
    53,153
    
    
    
    259,597
    
    
    
    294,939
    
    
    
    263,499
    
    
    
    270,541Shareholders equity
    
    
    1,903,363
    
    
    
    1,779,685
    
    
    
    1,735,749
    
    
    
    1,622,473
    
    
    
    917,168Capital stock
    
    
    778,838
    
    
    
    685,321
    
    
    
    595,722
    
    
    
    595,722
    
    
    
    407,775Number of shares as adjusted to reflect
changes in capital
    
    
    432,598,218
    
    
    
    414,006,458
    
    
    
    396,041,635
    
    
    
    396,345,036
    
    
    
    334,399,028
 3




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On December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais)U.S. GAAPProperty, plant and equipment, net
    
    
    1,267,294
    
    
    
    1,511,160
    
    
    
    1,636,935
    
    
    
    1,566,091
    
    
    
    1,347,698Total assets
    
    
    2,960,940
    
    
    
    2,996,686
    
    
    
    3,098,880
    
    
    
    3,153,941
    
    
    
    2,016,539Net assets
    
    
    2,001,746
    
    
    
    1,921,296
    
    
    
    2,007,812
    
    
    
    1,935,512
    
    
    
    941,703Loans and financingcurrent portion
    
    
    165,802
    
    
    
    200,922
    
    
    
    189,726
    
    
    
    305,002
    
    
    
    252,943Loans and financingnon-current
portion
    
    
    53,153
    
    
    
    259,597
    
    
    
    294,939
    
    
    
    263,499
    
    
    
    270,541Shareholders equity
    
    
    2,001,746
    
    
    
    1,921,296
    
    
    
    2,007,812
    
    
    
    1,935,512
    
    
    
    941,703Capital stock
    
    
    778,838
    
    
    
    685,321
    
    
    
    595,722
    
    
    
    595,722
    
    
    
    407,775Number of shares as adjusted to reflect
changes in capital
    
    
    432,598,218
    
    
    
    414,006,458
    
    
    
    396,041,635
    
    
    
    396,345,036
    
    
    
    334,399,028
 Exchange Rates There are two principal legal foreign exchange markets in Brazil:  
    
    the commercial rate exchange market; and
    
    the floating rate exchange market. Most trade and financial foreign-exchange transactions are carried out on
the commercial rate exchange market. These transactions include the purchase
or sale of shares or payment of dividends or interest with respect to shares.
Foreign currencies may only be purchased through a Brazilian bank authorized to
operate in these markets. In both markets, rates are freely negotiated but may
be influenced by Central Bank intervention. In 1999, the Central Bank placed
the commercial exchange rate and the floating rate exchange market under
identical operational limits, which led to a convergence in the pricing and
liquidity of both markets. Since February 1, 1999, the floating market rate
has been the same as the commercial market rate, and the system relying on the
foreign exchange rate band has been eliminated. However, there is no guarantee
that these rates will continue to be the same in the future. Despite the
convergence in pricing and liquidity of both markets, each market continues to
be regulated separately. Since 1999, the Central Bank has allowed the real/U.S. dollar exchange
rate to float freely, and during that period, the real/U.S. dollar exchange
rate has fluctuated considerably. In the past, the Central Bank has intervened
occasionally to control unstable movements in foreign exchange rates. We
cannot predict whether the Central Bank or the Brazilian government will
continue to let the realfloat freely or will intervene in the exchange rate
market through a currency band system or otherwise. The realmay depreciate or
appreciate substantially in the future. For more information on these risks,
see Risk FactorsRisks relating to Brazil. The following tables set forth the commercial selling rate, expressed in
reaisper U.S. dollar (R$/U.S.$), for the periods indicated. Exchange Rate of R$ per U.S.$Year ended December 31,
    
    Low
    
    High
    
    Average(1)
    
    Year-End1999
    
    
    1.2078
    
    
    
    2.1647
    
    
    
    1.8150
    
    
    
    1.78902000
    
    
    1.7234
    
    
    
    1.9847
    
    
    
    1.8295
    
    
    
    1.95542001
    
    
    1.9357
    
    
    
    2.8007
    
    
    
    2.3522
    
    
    
    2.32042002
    
    
    2.2709
    
    
    
    3.9552
    
    
    
    2.9309
    
    
    
    3.53332003
    
    
    2.8219
    
    
    
    3.6623
    
    
    
    3.0715
    
    
    
    2.8892
   Source: Central Bank of Brazil, PTAX. PTAX is the average of the exchange
rates negotiated in the commercial rate market on a given day.(1)
    
    Represents the average of the exchange rates (PTAX) on the last day of each
month during the relevant period. 4




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Exchange Rate of R$ per U.S.$Month Ended
    
    Low
    
    HighDecember 31, 2003
    
    
    2.8883
    
    
    
    2.9434January 31, 2004
    
    
    2.8022
    
    
    
    2.9409February 29, 2004
    
    
    2.9042
    
    
    
    2.9878March 31, 2004
    
    
    2.8752
    
    
    
    2.9410April 30, 2004
    
    
    2.8743
    
    
    
    2.9522May 31, 2004
    
    
    2.9569
    
    
    
    3.2051June 25, 2004
    
    
    3.1030
    
    
    
    3.1651
   Source: Central Bank of Brazil, PTAX. PTAX is the average of the exchange
rates negotiated in the commercial rate market on a given day. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors This section is intended to be a summary of more detailed discussions
contained elsewhere in this annual report. The risks described below are not
the only ones we face. Our business, results of operations or financial
condition could be harmed if any of these risks materializes and, as a result,
the trading price of the ADSs could decline. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions have a direct impact on our business, operations and the
market price of our preferred shares and our ADSs. In the past, the Brazilian government has intervened in the Brazilian
economy and occasionally made drastic changes in policy. The Brazilian
governments actions to control inflation and affect other policies have often
involved wage and price controls, currency devaluations, capital controls, and
limits on imports, among other things. Our business, financial condition,
results of operations and the market price of our preferred shares and ADSs may
be adversely affected by changes in government policies, as well as general
economic factors, including:  
    
    currency fluctuations;
    
    inflation;
    
    price instability;
    
    energy policy;
    
    interest rates;
    
    tax policy; and 5




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##### Table of Contents




    
    other political, diplomatic, social and economic developments in or affecting Brazil. Inflation and certain government measures to curb inflation may have
adverse effects on the Brazilian economy, the Brazilian securities market
and/or our business and operations. Brazil has historically experienced extremely high rates of inflation.
Inflation and certain of the Brazilian governments measures taken in the
attempt to curb inflation have had significant negative effects on the
Brazilian economy. Since 1994, Brazils inflation rate has been substantially
lower than in previous periods. However, inflationary pressures persist, and
actions taken in an effort to curb inflation, coupled with public speculation
about possible future governmental actions, have contributed to economic
uncertainty in Brazil and heightened volatility in the Brazilian securities
market. In 2003, the general price index, or the IGP-DI (the índice Geral de
Preços  Disponibilidade Interna), an inflation index developed by the Fundação
Getúlio Vargas, a private Brazilian economic organization, reflected inflation
of 7.7%, compared to 26.4% in 2002 and 10.4% in 2001. If Brazil experiences
significant inflation, we may be unable to increase service rates to our
customers in amounts that are sufficient to cover our increasing operating
costs, and our business may be adversely affected. Fluctuations in the value of the real against the value of the U.S. dollar
may adversely affect our ability to pay U.S. dollar-denominated or U.S.
dollar-linked obligations and could lower the market value of our preferred
shares and ADSs. The Brazilian currency has historically experienced frequent devaluations.
The realdevalued against the U.S. dollar by 18.7% in 2001. During 2002, the
realcontinued to undergo significant devaluation due in part to the political
uncertainty in connection with the elections and the global economic slowdown.
In 2002, the realdevalued against the U.S. dollar by 52.3%. In 2003, the
internal economy showed an inflation stabilization and the dissipation about
uncertainty in the Governmental economic team, which promoted an appreciation
of the realby 18.2%. However, there is no guarantee that this trend will
continue or that the exchange rate will remain at current levels. Devaluations
of the realwould reduce the U.S. dollar value of distributions and dividends
on preferred shares and the ADSs and may also reduce the market value of the
preferred shares and the ADSs. See Selected Financial DataExchange Rates
for more information on exchange rates. As of December 31, 2003, we had R$ 365 million in total debt, all
denominated in U.S. dollars. As of December 31, 2003, we had currency
derivatives in place to cover all of our U.S. dollar-denominated debt. Also,
significant costs relating to our network infrastructure are payable or linked
to payment by us in U.S. dollars. At the same time, while we may derive income
from derivative transactions denominated in foreign currencies, all of our
operating revenues are generated in reais. To the extent that the value of the
realdecreases relative to the U.S. dollar, our debt becomes more expensive to
service and it becomes more costly for us to import the technology and the
goods that are necessary to operate our business. Deterioration in economic and market conditions in other countries,
especially emerging market countries, may adversely affect the Brazilian
economy and our business. The market for securities issued by Brazilian companies is influenced by
economic and market conditions in Brazil and, to varying degrees, market
conditions in other Latin American and emerging market countries. Although
economic conditions are different in each country, the reaction of investors to
developments in one country may cause the capital markets in other countries to
fluctuate. Developments or conditions in other emerging market countries have
at times significantly affected the availability of credit in the Brazilian
economy and resulted in considerable outflows of funds and declines in the
amount of foreign currency invested in Brazil. 6




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Adverse developments in other emerging market countries could lead to a
reduction in both demand and the market price for our preferred shares and
ADSs. Risks Relating to the Brazilian Telecommunications Industry and Us Extensive government regulation of the telecommunications industry may
limit our flexibility in responding to market conditions, competition and
changes in our cost structure. Our business is subject to extensive government regulation, including any
changes that may occur during the period of our authorization to provide
telecommunication services. Anatel, which is the main telecommunications
industry regulator in Brazil, regulates, among other things:  
    
    industry policies and regulations;
    
    licensing;
    
    tariffs;
    
    competition;
    
    telecommunications resource allocation;
    
    service standards;
    
    technical standards;
    
    interconnection and settlement arrangements; and
    
    universal service obligations. This extensive regulation and the conditions imposed by our authorization
to provide telecommunication services may limit our flexibility in responding
to market conditions, competition and changes in our cost structure. Our results may be affected in the medium or long term as a result of the
new SMP rules. In 2002, Anatel changed the SMP regime (first enacted in December 2000),
thus encouraging companies operating under the SMC system to migrate to the SMP
system. Under the SMP regime, we no longer receive payment from our customers
for outbound long distance traffic, but we receive payment for the use of our
network, in accordance with the network usage remuneration plan. In 2003, this
change had little impact on us Andrea: efeito inexpressivo but we cannot
assure that in the next years the interconnection fees that we will receive
from long distance operators will compensate us for the revenues that we would
have received from our customers for outbound long distance traffic. Until June 30, 2004, SMP service providers may opt to establish a price
cap or freely negotiate their interconnection charges. After that date, free
negotiation will be the rule, subject to Anatel regulations to be issued
relating to the traffic capacity and interconnection infrastructure that must
be made available to requesting parties. In addition, under the SMP regime, an SMP cellular operator will pay for
the use of another SMP cellular operators network in the same registration
area only if the traffic carried from the first operator to the second exceeds
55% of the total traffic exchanged between them. In that case, only those calls
that have surpassed the 55% 7




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##### Table of Contents



level will be subject to payment for network usage. This rule is valid until
June 30, 2005, after which no payments will be due for network usage between
SMP networks, regardless of the amount of traffic. As a result, if the traffic
we terminate for other SMP cellular operators exceeds the traffic they
terminate for our company, our revenues and results of operations may be
adversely affected. The new rules may negatively affect our revenues and results of
operations. If the inflation adjustment index now applied to our tariffs is changed,
the new index may not be adequate. The Brazilian government is considering replacing the IGP-DI, the monetary
adjustment index currently used in connection with the tariffs applied in the
telecommunications industry, with another index, which has not yet been
identified. We cannot assure you that a new index, if any, would adequately
reflect the effect of inflation on our tariffs. We face substantial competition that may reduce our market share and harm
our financial performance. There is substantial competition in the telecommunications industry. We
not only compete with companies that provide wireless services and trunking,
but also with companies that provide fixed-line telecommunications and Internet
access services, due to the trend towards the convergence and substitution of
mobile services for these other services. We expect competition to intensify as a result of the entrance of new
competitors and the rapid development of new technologies, products and
services. Our ability to compete successfully will depend on our marketing
techniques, as well as on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by our competitors. To the extent
that we do not keep pace with technological advances, or fail to timely respond
to changes in competitive factors in our industry, we could lose a portion of
our market share or experience a decline in our revenue. Competition from
other mobile communications service providers in the region in which we operate
may also affect our financial results by causing, among other things, the rate
of our customer growth to decline and bring about decreases in tariff rates and
increases in selling expenses. This could have a material adverse effect on
our results of operations. There has been consolidation in the Brazilian telecommunications market,
and we believe this trend may continue. Consolidations may result in increased
competitive pressures within our market. We may be unable to adequately
respond to pricing pressures resulting from consolidation, which would
adversely affect our business, financial condition and results of operations. Our results of operations would be affected by a high rate of customer turnover
or a decrease in our customer growth. A high rate of customer turnover and/or a decrease in our customer growth
could adversely affect our results of operations as well as our competitive
position. The rate of customer turnover may be the result of several factors,
including limited network coverage and lack of sufficient reliability of our
services, as well as increased competition in the region in which we operate
and the economic conditions in Brazil. 8




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The industry in which we conduct our business is subject to rapid
technological changes and these changes could have a material adverse effect on
our ability to provide competitive services. The telecommunications industry is subject to rapid and significant
technological changes. Our success depends, in part, on our ability to
anticipate and adapt in a timely manner to technological changes. We expect
that new products and technologies will emerge and that existing products and
technologies will be further developed. The advent of new products and technologies could have a variety of
consequences for us. These new products and technologies may reduce the price
of our services by providing lower-cost alternatives, or they may be superior
to, and render obsolete, the products and services we offer and the
technologies we use, requiring investment in new technology. The cost of
upgrading our products and technology in order to continue to compete
effectively could be significant, and our ability to fund this upgrading may
depend on our ability to obtain additional financing. Our controlling shareholders have a great deal of influence over our
business. PT Móveis SGPS, S.A. and Telefónica Móviles, S.A., our principal
shareholders, own, directly and indirectly, approximately 53.6% of our common
shares and 30.3% of our total capital as of December 31, 2003. PT Móveis
SGPS, S.A. is 100% controlled by Portugal Telecom SGPS, S.A. See Item 7.
Major Shareholders and Related Party TransactionsMajor Shareholders. Due to
their share ownership, our principal shareholders have the power to control us
and our subsidiaries, including the power to elect our directors and officers
and determine the outcome of any action requiring shareholder approval,
including transactions with related parties, corporate reorganizations and the
timing and payment of our dividends. In addition, PT Móveis SGPS, S.A. and
Telefónica Móviles, S.A. share their participation in us equally. Any
disagreement or dispute between them may have an impact on the decision-making
capabilities of our management. The wireless industry, including us, may be harmed by reports suggesting
that radio frequency emissions cause health problems and interfere with medical
devices. Media and other reports have suggested that radio frequency emissions from
wireless handsets and base stations may cause health problems. If consumers
harbor health-related concerns, they may be discouraged from using wireless
handsets. These concerns could have an adverse effect on the wireless
communications industry and, possibly, expose wireless providers, including us,
to litigation. We cannot assure you that further medical research and studies
will refute a link between the radio frequency emissions of wireless handsets
and base stations and these health concerns. Government authorities could
increase regulation of wireless handsets and base stations as a result of these
health concerns or wireless companies, including us, could be held liable for
costs or damages associated with these concerns, which could have an adverse
effect on our business. The expansion of our network may be affected by these
perceived risks if we experience problems in finding new sites to expand our
network, which in turn may delay the expansion and may affect the quality of
our services. Risks Relating to Our Preferred Shares and Our ADSs Our preferred shares and our ADSs generally do not have voting rights. In accordance with Brazilian corporate law and our by-laws, holders of our
preferred shares, and therefore of our ADSs, are not entitled to vote at
meetings of our shareholders, except in limited circumstances. See Item 10B.
Memorandum and Articles of Association. 9




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You might be unable to exercise preemptive rights with respect to our
preferred shares unless there is a current registration statement in effect
that covers those rights or unless an exemption from registration applies. You will not be able to exercise the preemptive rights relating to our
preferred shares underlying your ADSs unless a registration statement under the
U.S. Securities Act of 1933, as amended, or the Securities Act, is effective
with respect to those rights, or unless an exemption from the registration
requirements of the Securities Act is available. We are not obligated to file
a registration statement. Unless we file a registration statement or an
exemption from registration applies, you may receive only the net proceeds from
the sale of your preemptive rights by the depositary, or, if the preemptive
rights cannot be sold, they will lapse and you will not receive any value for
them. For more information on the exercise of your rights, see Item 10.
Additional Information. An exchange of ADSs for preferred shares risks loss of certain foreign
currency remittance and Brazilian tax advantages. The ADSs benefit from the certificate of foreign capital registration,
which permits The Bank of New York, as depositary, to convert dividends and
other distributions with respect to preferred shares into foreign currency, and
to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for
preferred shares will then be entitled to rely on the depositarys certificate
of foreign capital registration for five business days from the date of
exchange. Thereafter, they will not be able to remit non-Brazilian currency
abroad unless they obtain their own certificate of foreign capital
registration, or unless they qualify under Resolution 2,689 of the Central Bank
of Brazil, dated January 26, 2000, known as Resolution 2,689, which entitles
certain investors to buy and sell shares on Brazilian stock exchanges without
obtaining separate certificates of registration. If holders of ADSs do not qualify under Resolution 2,689, they will
generally be subject to less favorable tax treatment on distributions with
respect to our preferred shares. There can be no assurance that the
depositarys certificate of registration or any certificate of foreign capital
registration obtained by holders of ADSs will not be affected by future
legislative or regulatory changes, or that additional Brazilian law
restrictions applicable to their investment in the ADSs may not be imposed in
the future. The relative volatility and illiquidity of the Brazilian securities
markets may adversely affect holders of ADSs. Investments in securities, such as the preferred shares or the ADSs, of
issuers from emerging market countries, including Brazil, involves a higher
degree of risk than investing in securities of issuers from more developed
countries. The Brazilian securities market is substantially smaller, less liquid,
more concentrated and more volatile than major securities markets in the United
States. There is also significantly greater concentration in the Brazilian
securities market than in major securities markets in the United States. These
features may substantially limit the ability to sell the preferred shares
underlying the ADSs at a price and time at which holders wish to do so. 
 ITEM 4. INFORMATION ON THE COMPANY A. Our History and Development General We are incorporated under the laws of the Federative Republic of Brazil
under the name of Tele Sudeste Celular Participacões S.A., known as Tele
Sudeste. We have the legal status of a sociedade por ações, or a stock 10




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corporation, operating under Brazilian corporate law. Our principal
executive offices are located at Praia de Botafogo, 501, Torre Corcovado, 7o
andar, 22250-040, Rio de Janeiro, RJ, Brazil. Our telephone number is +55 21
2586 6613, our facsimile number is +55 21 2586-6813 and our website is
www.vivo.com.br. The information on our website is not part of this annual
report. Our agent for service of process in the United States is CT
Corporation, located at 111 Eighth Avenue, New York, New York 10011. According to market share data published by Anatel, we are a leading
provider of cellular telecommunications services in Brazil through our
subsidiaries Telerj Celular and Telest Celular. The following chart shows our
corporate structure as of December 31, 2003: (CHART FLOW) 11




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Telebrás and the Privatization Tele Sudeste was created as a result of a restructuring of Telebrás in
July 1998. Before 1972, there were more than 900 telecommunications companies
operating throughout Brazil. Between 1972 and 1975, Telebrás and its operating
subsidiaries, known as the Predecessor Companies, collectively known as the
Telebrás System, were created acquiring almost all of the telecommunication
companies in Brazil, and creating a near monopoly over the provision of public
telecommunications services in Brazil. In 1995, the federal government began a comprehensive reform of Brazils
telecommunications regulatory system. In July 1997, Brazils national congress
adopted the General Telecommunications Law, which provided for the
establishment of a new regulatory framework, the introduction of competition
and the privatization of the Telebrás System. In January 1998, in preparation for the restructuring and privatization of
the Telebrás System, the cellular telecommunications operations of the Telebrás
System were spun off into separate companies. In May 1998, the Telebrás System
was restructured to form, in addition to Telebrás, 12 new holding companies.
Virtually all of the Predecessors Companies assets and liabilities were
allocated to the new holding companies, which we refer to as the New Holding
Companies. Tele Sudeste was one of the New Holding Companies. Tele Sudeste was
allocated all of the share capital held by Telebrás in Telerj Celular and
Telest Celular, the cellular operating companies that had provided cellular
telecommunications service in the states of Rio de Janeiro and Espírito Santo,
respectively since 1993. The federal governments common shares of Tele Sudestes capital stock
were purchased by a consortium comprising Telefónica Internacional S.A.,
Iberdrola Investimentos Sociedade Unipessoal Ltda., NTT Mobile Communications
Network, Inc. and Itochu Corporation. Purchase of Shares from Iberdrola On April 5, 2001, Telefónica S.A. and Iberdrola S.A. signed an agreement
through which Telefónica S.A. was going to acquire all the Iberdrola groups
shareholdings in the Brazilian telecommunications operators in which both
groups held interests. Anatel authorized this transaction on August 22, 2001 and in December 2001
Telefónica S.A. acquired 7% of the capital stock of Sudestecel Participações
S.A. (the holding company which controls Tele Sudeste Celular Participações
S.A.). In exchange, Iberdrola received shares of Telefónica S.A. In May 2002, Telefónica S.A. contributed these shares to its affiliated
company, Telefónica Móviles S.A. Brasilcel On January 23, 2001, Portugal Telecom and Telefónica Móviles entered into
a strategic agreement to create a mobile services company in Brazil that would
aggregate all of their investments in cellular telecommunications businesses to
the extent permitted under Brazilian law. In December 2002, Anatel approved
the joint venture between Portugal Telecom and Telefónica Móviles. This joint
venture, named Brasilcel N.V., or Brasilcel, with headquarters in the
Netherlands, has 56.2% of the total market in Brazil, with 20.7 million
customers at December 31, 2003, according to data published by
Anatel. Its operations cover an area of approximately 130 million inhabitants,
or 73% of the Brazilian population, and approximately 83% of its GDP. Portugal
Telecom and Telefónica Móviles are managing the joint venture on an equal
basis. In December 2002, after Anatel approved this joint venture, Portugal
Telecom and Telefónica transferred to Brasilcel all of their direct and
indirect interests in: 12




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##### Table of Contents




    
    us;
    
    Telesp Celular Participações S.A., which controls an A Band
operator in the state of São Paulo, Global Telecom S.A., and a B
Band operator in the states of Paraná and Santa Catarina;
    
    Tele Leste Celular Participações S.A., which controls A Band
operators in the states of Bahia and Sergipe; and
    
    Celular CRT Participações S.A., which controls an A Band
operator in the state of Rio Grande do Sul. On April 25, 2003, Telesp Celular Participações S.A. acquired 64.03% of
the voting stock of Tele Centro-Oeste Celular Participações S.A., or TCO. TCO
is an A Band operator providing cellular telecommunications services in the
Federal District of Brazil, as well as in the Brazilian states of Goiás, Mato
Grosso do Sul, Mato Grosso, Rondônia, Acre and Tocantins and a B Band operator,
which provides cellular telecommunications service in the Brazilian states of
Amapá, Amazonas, Maranhão, Pará and Roraima. TCP acquired additional shares of
voting capital stock of TCO in a public tender offer, bringing the percentage
of TCOs outstanding voting capital stock that TCP owns to 90.73%. Vivo All of the operating companies participating in the joint venture between
Portugal Telecom and Telefónica Móviles, named Brasilcel, have been operating
under the brand name Vivo since April 2003. The consolidation of a unified
commercial model for the whole country centered on the Vivo brand substituting
the different brands under which the different companies offered their services
in their respective states. The commercial strategy of Vivo is to increase
their customer base as well as revenues, by retaining customers as well as
maintaining their distribution channels. The launching of the Vivo brand was
accompanied by loyalty programs and other measures designed to contribute to
the success of the commercial strategy. Sudestecel On
June 21, 2004, after Anatels approval, Brasilcel purchased all
the shares that NTT DoCoMo, Inc. and Itochu Corporation held on
Sudestecel Participações Ltda. Capital Expenditures The following table sets forth our capital expenditures for the periods
indicated: Year ended December 31,2003
    
    2002
    
    2001(in thousands of reais)Automatic switching equipment
    
    
    59,289
    
    
    
    87,735
    
    
    
    121,317Other equipment
    
    
    160,986
    
    
    
    130,081
    
    
    
    211,677Real estate
    
    
    3,433
    
    
    
    21,821
    
    
    
    15,553Other assets (1)
    
    
    31,235
    
    
    
    131,246
    
    
    
    60,109Total capital expenditures
    
    
    254,943
    
    
    
    370,883
    
    
    
    408,656
  (1)
    
    Handsets for rental, network constructions, furniture and fixtures,
office equipment and store layouts. We anticipate that our capital expenditures for 2004 will be approximately
R$267.8 million. We intend to fund these capital expenditures mostly with cash
generated from operations. See Item 5B. Liquidity and Capital Resources. 13




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##### Table of Contents



The primary focus of our capital expenditure program has been, and
continues to be the expansion of the capacity of the services we currently
offer and the development of new services. B. Business Overview Overview We provide cellular telecommunications services in Brazil through our
subsidiaries Telerj Celular and Telest Celular in the states of Rio de Janeiro
and Espírito Santo, respectively, referred to in this annual report as our
Region. We are the leading provider of cellular telecommunications services in
our Region according to market share data published by Anatel. The table below
sets forth the net operating revenues for Telerj Celular and Telest Celular for
the periods indicated in 2001, 2002 and 2003: Year ended December 31,2003
    
    2002
    
    2001(thousands of reais)Telerj Celular
    
    
    1,623,731
    
    
    
    1,614,075
    
    
    
    1,496,552Telest Celular
    
    
    287,652
    
    
    
    240,174
    
    
    
    211,561Deductions from consolidation
    
    
    (18,932
    )
    
    
    (6,618
    )
    
    
    (4,814
    )Total
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299
 Our Operations The following table sets forth information on our cellular
telecommunication base, coverage and related matters for the years indicated. 2003
    
    2002
    
    2001Cellular lines in service at year-end
    
    
    3,708,599
    
    
    
    3,454,870
    
    
    
    3,028,213Contract customers
    
    
    1,156,483
    
    
    
    1,086,657
    
    
    
    1,004,947Prepaid customers
    
    
    2,552,116
    
    
    
    2,368,213
    
    
    
    2,023,266Customer growth during the year
    
    
    7.4
    %
    
    
    14.1
    %
    
    
    21.0
    %Prepaid lines in service at year-end
    
    
    2,552,116
    
    
    
    2,368,213
    
    
    
    2,023,266Churn (1)
    
    
    29.5
    %
    
    
    18.2
    %
    
    
    17.9
    %Estimated population of Region
at year-end (millions)(2)
    
    
    18.1
    %
    
    
    18.0
    
    
    
    17.9Estimated covered population at
year-end (millions) (3)
    
    
    17.4
    %
    
    
    15.8
    
    
    
    15.3Percentage of population of Region covered
at year-end (4)
    
    
    96.0
    %
    
    
    87.4
    %
    
    
    85.9
    %Penetration
at year-end (5)
    
    
    41.0
    %
    
    
    32.7
    %
    
    
    27.7
    %Percentage of municipalities covered
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Average monthly minutes of use per customer (6)
    
    
    112
    
    
    
    110
    
    
    
    127Market share (7)
    
    
    49.6
    %
    
    
    57.3
    %
    
    
    62
    %
   (1)
    
    Churn is the number of customers that leave us during the year,
calculated as a percentage of the simple average of customers at the
beginning and the end of the year.(2)
    
    Projections based on estimates of the Instituto Brasileiro de Geografia e
Estatística  IBGE.(3)
    
    Number of people within our Region that can access our cellular
telecommunication signal.(4)
    
    Percentage of the population in our Region that can access our cellular
telecommunication signal.(5)
    
    Number of cellular lines in service in our Region, including those of our
competitors, divided by the population of our Region.(6)
    
    Average monthly minutes of use per lines in service is the total minutes
of calls received and made by our customers divided by the simple average
of lines in service during the relevant year (includes roaming in and
excludes roaming out).(7)
    
    Information published by Anatel. 14




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Our Services We provide cellular telecommunications services using both digital and
analog technologies. Our network provides both CDMA digital service and AMPS,
or analog services. All our services are provided in the frequency of 850 MHz. We provide voice service and ancillary services, including voicemail and
voicemail notification, call forwarding, three-way calling, caller
identification, short messaging, limitation on the number of used minutes,
cellular chat room, and data service such as wireless application protocol
service through which clients can access WAP sites and portals. We offer direct
access to the Internet through either PCMCIA (Personal Computer Memory Card
International Association, an organization consisting of some 500 companies
that has developed standardized small, credit card-sized devices, called PC
Cards) cards designed to connect compatible PDAs (Personal Digital Assistant,
a handheld device that combines computing, telephone/fax, Internet and
networking features) and laptops or cellular phones by cable connection that
offers to corporate subscribers secure access to their intranet and office
resources. In addition we launched in 2003 MMS (Multimedia Message Service) and MExE
(Mobile Execution Environment) that enable the handset to download applications
and execute them at the mobile. We also launched a user interface with icons at
the handset to identify the main services, such as Voice Mail, Downloads, SMS,
etc, for a friendlier access to our services. We offer roaming services, through agreements with local cellular service
providers throughout Brazil and other countries that allow our subscribers to
make and receive calls while out of our concession areas. We also provide
reciprocal roaming services to subscribers of those cellular service providers
while they are in our concession areas. Our Region We provide mobile telecommunications services on the A Band frequency
range in the States of Rio de Janeiro and Espírito Santo, covering
approximately 89,773.6 square kilometers, representing approximately 1.1% of
Brazils territory, or our Region. This area includes more than 18 million
people, representing 10.3% of Brazils population. TSD covers 100% of the
municipalities in our Region and 96.4% of the population of our Region. The following table sets forth population, gross domestic product (GDP)
and per capita income statistics for each state in our Region at the dates and
for the year indicated. At December 31, 2003
    
    Year ended December 31, 2003Population
    
    % of Brazils
    
    GDP (billions of
    
    % of Brazils
    
    Per capita incomeArea
    
    (million) (1)
    
    population (1)
    
    reais) (2) (3)
    
    GDP (3)
    
    (reais) (2) (3)Rio de Janeiro state
    
    
    14.9
    
    
    
    8.5
    %
    
    
    174.0
    
    
    
    11.6
    %
    
    
    11,655.37Espírito Santo state
    
    
    3.2
    
    
    
    1.8
    %
    
    
    28.6
    
    
    
    1.9
    %
    
    
    8,952.67Our Region
    
    
    18.1
    
    
    
    10.3
    %
    
    
    202.6
    
    
    
    13.5
    %
    
    
    11,178.95
   Source: IBGE. We calculated the GDP for the states based on percentages
published by IBGE in previous years.  (1)
    
    Estimates from Target 2003  Brazil em Foco.(2)
    
    Our estimates are expressed in nominal reais.(3)
    
    Nominal Brazilian GDP was R$1,497 billion as of December 2003 calculated
by IBGE. Our business, financial condition, results of operations and prospects
depend in part on the performance of the Brazilian economy. See Item 3D. Risk
Factors. 15




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Marketing and Sales We closely follow the developments in the markets where we operate and
constantly launch new promotions. A strong customer acquisition policy has been implemented across all the
companys operators through aggressive mass sales promotions and segmented
actions. Efforts to acquire new customers for prepaid and postpaid services
have mostly been made through joint promotions designed to increase intranet
traffic and stimulate the use of data services. With the premise of keeping a sustainable customer base, the acquisition
promotions have also been open to current customers who wished to change their
cell phones. The company is strongly involved in a high-value customer loyalty
program by offering aggressive discounts on cell phones through direct
marketing actions. TSD currently has 42 shops and kiosks of its own, and an authorized
third-party network, on an exclusive or nonexclusive basis, with 560 service
points capable of selling services and cell phones. The credit recharges are
available for customers in more than 24,000 sites. Customer Service As part of the strategy for standardizing service provided by TSD
operators to their customers, we have outsourced 100% of the customer services
while keeping full management control. These services are available on a
24-hour basis from our call center and our website. Satisfaction evaluation Customer satisfaction is evaluated by regular satisfaction surveys. More
than 8,700 Vivo customers were interviewed all over the country in 2003 for
aspects such as customer assistance, technical assistance, products and
services. The overall satisfaction mark was 8.25 on a range from 1 to 10.
Several actions have since been carried out in order to increase our customer
satisfaction. Assistance to customer claims TSD is provided with a qualified staff designed to assist and provide
explanations to customers in any and all requests or doubts concerning services
provided. All customers are given a feedback to their requests. Vivo was ranked first in 2003 in a survey entitled Companies that most
respect consumers, carried out by the IBRC (Brazilian Institute of Customer
Relations) for the Consumidor Moderno (Modern Consumer) issue. Our Network Before November 1998, our network used only AMPS analog technology. After
the privatization in 1998, we began to use CDMA digital and TDMA digital
technologies. Digitalization offers certain advantages, such as greater
network capacity and additional revenue through the sale of value-added
services. Digital cellular telecommunications service also reduces the risk of
fraud. We continue to increase network capacity and coverage to improve our
quality of service and to meet customer demand. Our networks are connected primarily through a fiber-optic transmission
capacity we lease from the incumbents wire line companies, consisting of
cellular switches, base stations and other communication devices, such as
voicemail, prepaid service, SMS, Home Location Registers, Signalling Transfer
Point, PDSN and gateways. NEC do Brasil S.A., Nortel Networks  Northern
Telecom do Brasil and Lucent Technologies do Brasil, Ind. e Com. Ltda. are our
principal suppliers. We continue to increase network capacity and coverage to
improve quality of service and to meet consumer demand. 16




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Our advanced network management technology ensures global management and
supervision of our network process and performance. The network management
center operates in the city of Rio de Janeiro. Our network management center
is able to identify abnormalities in our network and in other networks, using
the latest failure and signal monitoring systems. In addition, quality and
service standards are constantly monitored. The network management center is
integrated with the maintenance and operations center, which is designed to
supervise our Network Elements, Infrastructure and Transmission division, and
operate the Radio Network Elements, Computing Centrals, Backbone and Service
Platforms divisions. Our network is equipped to provide continuity of service to our customers
in the event of network interruptions. We have developed contingency plans for
potential catastrophes in our switching centers, power supply interruptions and
security breaches. Telecommunication concessions or authorizations require companies to meet
certain obligations for service quality and annual network expansion. See
Regulation of the Brazilian Telecommunications IndustryObligations of
Telecommunications Companies. We have already met all of our network
expansion obligations required under our authorization. Sources of Revenue We generate revenue from:  
    
    usage charges, which include measured service charges for calls and other similar charges;
    
    network usage charges (or interconnection charges), which are
amounts we charge other cellular and fixed-line service providers
for the use of our network;
    
    monthly subscription charges, which are not charged to our prepaid customers;
    
    sale of cellular handsets and accessories; and
    
    other charges, including charges for call forwarding, call
waiting, call blocking and Data Services, such as short message
service, wap, downloads and MMS services. They are charged only when
the customers plan does not include these services. Our rates are subject to approval by Anatel. See Regulation of the
Brazilian Telecommunications IndustryRate Regulation. The table below sets forth our net operating revenues by category of
activity: Year ended December 31,2003
    
    2002
    
    2001(in thousands of reais)Usage charges
    
    
    1,087,927
    
    
    
    925,973
    
    
    
    821,063Interconnection charges
    
    
    809,860
    
    
    
    795,067
    
    
    
    702,049Montly subscription charge
    
    
    198,496
    
    
    
    281,613
    
    
    
    367,211Goods sold (cellular handsets
and accessories)
    
    
    394,577
    
    
    
    348,635
    
    
    
    283,244Other
    
    
    35,601
    
    
    
    15,579
    
    
    
    13,071Total gross operating revenue
    
    
    2,526,461
    
    
    
    2,366,867
    
    
    
    2,175,473
 17




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Contract Customers Since October 1994, cellular telecommunications service in Brazil has been
offered on a calling-party pays basis, under which the customer pays only for
calls that it originates. In addition, customers pay roaming charges on calls
made or received outside their home registration area. Customer charges are calculated based on the customers calling plan, the
location of the party called, the place from which the call originates and
certain other factors, as described below. Our Region is divided into five
areas, called registration areas, designated for payment purposes, comprised of
the metropolitan area of Rio de Janeiro, two areas of upstate Rio de Janeiro
and two areas in the state of Espírito Santo. Interconnection Charges We earn revenues from any call that originates from another cellular or
fixed-line service provider network connecting one of our customers. We charge
the service provider from whose network the call originates a network usage
charge for every minute that our network is used in connection with the call.
See Operating AgreementsInterconnection Agreements. Tariff increases are
subject to Anatel  ́s review and approval. Bill and Keep Under the SMP system, usage of the network remuneration between SMP mobile
operators will only be due if traffic carried in the same registration area
between two networks, in a given direction, exceeds 55% of the total traffic
exchanged between them. In this case, only those calls which have surpassed
the 55% threshold will be subject to payment for network usage. This rule is
valid until June 30, 2005. Thereafter, SMP operators will adopt full Bill and
Keep, by which no remuneration will be due for network usage among SMP
networks, regardless of the amount of carried traffic. Roaming Fees We receive revenue pursuant to roaming agreements with other cellular
service providers. When a call is made from within our Region by a customer of
another cellular service provider, that service provider pays us for the call
at the applicable rate. Conversely, when one of our customers makes a cellular
call outside our Region, we must pay the charges associated with that call to
the cellular service provider in whose region the call originates. See
Operating AgreementsRoaming Agreements. Handset Sales We sell dual-mode (800MHz CDMA-1xRTT/AMPS and 800MHz CDMA/AMPS) and
tri-mode (1900MHz CDMA and 800MHz CDMA/AMPS) cellular handsets and PCMCIA
boards through our own stores and dealers. Although we still have some
customers using analog service (approximately 2.3% of our total customer base
at December 31, 2003), we have provided a number of incentives to encourage our
analog customers to switch to digital handsets by offering discounts on digital
handsets (19.0% in 2003 and 5.0% in 2002) and on monthly digital service fees
so that our customers can take advantage of our services that require digital
handsets. From time to time, we offer certain advantages or promotions to
create incentives for customers to switch their existing handsets for more
technologically advanced digital handsets. We also offer our individual
contract customers the option of using their points to partially pay for the
acquisition of new handsets or for a new line. See Our Services. Our current suppliers are Samsung, Motorola, LG, Nokia, Qualcom, Maxon
Epsilon, Gradiente, Sony Ericsson and GTran. 18




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Operating Agreements TSE has an agreement with Telemar to share physical space, real estate,
air conditioning, energy, security and cleaning services. TSE leases from
Telemar transmission capacity necessary to complete the construction of our
network infrastructure. Interconnection Agreements The terms of our interconnection agreements include provisions with
respect to the number of connection points and traffic signals. See
Regulation of the Brazilian Telecommunications IndustryObligations of
Telecommunications Companies and Interconnection. We believe that our subsidiaries have adequate interconnection agreements
with all the fixed line operators they need for the provision of their
services. We also believe that our subsidiaries have all the necessary
interconnection agreementswith local distance carriers. Roaming Agreements We are member of the Brazilian Roaming Committee, a group comprised of 21
companies providing cellular services in Brazil through either A and B bands.
The Committee was created to standardize roaming services in Brazil and
elsewhere. The roaming agreements require us and the other cellular service providers
to provide service to roaming customers on the same basis that each member
provides service to its own customers, and to carry out a monthly
reconciliation of roaming customer usage charges. We offer automatic international roaming in Argentina, Uruguay, Chile,
United States, Mexico, Canada, Dominican Republic and South Korea. Since 2000
we provide international GSM services through the use of GSM handsets in most
parts of Europe, Africa, Asia and Oceania. Additionally, we offer our
customers, through third-party partners, cellular services in Japan. Taxes on Telecommunications Services and Handset Sales The cost of telecommunications services and handset sales to customers
incorporates a variety of taxes, including:  
    
    ICMS. The principal tax is the Imposto sobre Circulação de
Mercadorias e Serviços, or ICMS. The ICMS is a tax that the
Brazilian states impose at varying rates from 25% to 30% on certain
revenues from the sale of goods and services, including
telecommunications services.
    
    COFINS. The Contribuição Para Financiamento da Seguridade
Social, or COFINS, is a social contribution tax on gross operating
revenues at a rate of 3%.
    
    PIS. The Programa de Integração Social, or PIS, is another
social contribution tax that is imposed on gross operating revenues
at rates varying between 0.65% and 1.65%.
    
    FUST. On August 17, 2000, the Brazilian federal government
created the Fundo de Universalização dos Serviços de
Telecomunicações, or FUST, a social contribution tax applicable to
all telecommunications services at a rate of 1%. The purpose of the
FUST tax is to fund a portion of the costs incurred by
telecommunication service providers to meet the universal service
targets required by Anatel, in case these costs are not entirely
recoverable through the provision of the telecommunications
services.
    
    FUNTTEL. On November 28, 2000, the Brazilian federal
government created the Fundo para Desenvolvimento Tecnológico das
Telecomunicações, or FUNTTEL, a social contribution tax 19




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applicable to all telecommunications services at a rate of 0.5%. The
purpose of the FUNTTEL tax is to promote the development of
telecommunications technology in Brazil and to improve competition.
    
    FISTEL. On July 7, 1966, the Brazilian federal government
created the Fundo de Fiscalização das Telecomunicações, or FISTEL, a
tax applicable to telecommunications transmission equipment. The
purpose of the FISTEL is to provide financial resources for the
Brazilian federal government to control and inspect the industry.The FISTEL tax is comprised of two different fees:  
    
    an installation and inspection fee that is assessed
every time we activate a new cellular number; and
    
    an operation and inspection fee, assessed annually on
the basis of the total number of cellular numbers in use and the
total number of radio base stations installed at the end of the
fiscal year,.  The installation and inspection fee is assessed based on the net
activation of cellular numbers, i.e., the number of new cellular
activations subtracted from the number of cancelled subscriptions, as
well as on the basis of the net additions of radio base stations. Billing and Collection Pursuant to Brazilian law, customers must receive a bill at least five
days before its due date, and companies must allow customers at least 15 days
from the due date before suspending outgoing service for nonpayment. Tele Sudeste has established a uniform policy for dealing with delinquent
customer accounts. Any suspension of service may be done only after providing
notice to the customer. If a customers payment is more than 15 days past due,
outgoing service is suspended, and if payment is more than 40 days past due,
both outgoing and incoming services are suspended until full payment for all
outstanding charges is received. If a customers payment is more than 90 days
past due, service is discontinued. In 2003, approximately 63,3% of our mobile
bills were paid in full within the due date, 77,6% before the first reminder
was sent, and 96% before the second reminder was sent. Tele Sudestes collection system has improved its background check
proceedings designed for tracking customers who are delinquent in making
payments, thereby improving our collection rate. In addition, we have employed
eight outside collection agencies to recover payments from customers that are
more than 95 days past due. We provision for customer accounts over 90 days past due and write off
customer accounts that are over than 180 days past due. This represented
approximately R$ 40 million in 2003. Our provisions for doubtful accounts (Provision for doubtful accounts
including handsets/Gross operating revenue) were 1.59%, 3.72% and 3.29% of
gross operating revenue in 2003, 2002 and 2001, respectively. See Item 5A.
Operating ResultsResults of Operations for 2003, 2002 and 2001Operating
Expenses. After each collection cycle, we and other telecommunications service
providers settle the roaming and network usage fees outstanding balances. See
Sources of RevenueRoaming Fees and Item 5A. Operating ResultsResults of
Operations for 2003, 2002 and 2001Operating Revenues. For international
calls made by our customers, we forward the gross amounts collected for such
calls to the international long distance carrier and charge them a fee for the
use of our cellular telecommunications network. Domestic long distance fees
are reconciled and distributed to each Brazilian telecommunication operating
company by a clearinghouse operated by Embratel. 20




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Fraud Detection and Prevention We incur costs associated with the unauthorized use of our wireless
networks, particularly our analog cellular networks. These costs include
administrative and capital costs associated with detecting, monitoring and
reducing the incidence of fraud. Fraud also affects interconnection costs,
capacity costs, administrative costs and payments to other carriers for
unbillable fraudulent roaming. The two most prevalent types of fraud are cloning fraud and subscription
fraud. Cloning fraud consists of duplicating the cellular signal of a bona
fide customer, enabling the perpetrator of the fraud to make calls using the
customers signal. We ultimately bear the costs of all fraudulent calls
originating from our cell phone base. We have installed a fraud detection
system that analyzes various aspects of customers usage in order to detect
cloning fraud. In addition, the introduction of digital service is
significantly reducing the incidence of cloning fraud. We do not consider
cloning fraud a significant problem. Subscription fraud occurs when a person, typically using false or stolen
documents, obtains cellular telecommunications service, and then incurs
substantial charges that are billed to a customer who does not exist or who did
not request the service. In order to safeguard ourselves against these fraudulent activities, we
review documentation provided by customers and conduct a credit check prior to
initiating service. We use credit bureaus to enhance our reviews. We have implemented certain detection and prevention measures to reduce
fraud-related losses, including the automatic review of call detail records in
the states of Rio de Janeiro and Espírito Santo to identify abnormal calling
patterns. Fraud prevention measures include restrictions on international calls
from a given number, restrictions on international calls to certain high-risk
destinations, automatic blocking of calls to certain high-risk destinations and
restrictions on three-way calling by customers with international direct-dial
access. We have installed, and are a part of, a nationwide fraud-detection system.
This system aids in fraud detection in various ways, including identifying
simultaneous usage by a single customer, call frequency and unusually high
usage patterns. We are able to monitor usage by our customers even when they
are located outside of our areas. Competition We face intense competition in all the areas in which we operate,
principally from other cellular service providers and also from fixed line
operators. Many of these competitors are part of large, national or
multinational groups and therefore have access to financing, new technologies
and other benefits that derives from being owned by such a group. Fixed line
operators generally charge much lower tariffs than cellular service providers. TSDs principal cellular competitor is Algar Telecom Leste S.A., or ATL,
which operates in the states of Rio de Janeiro and Espírito Santo. ATL is
controlled by a consortium led by the Telecom Américas Ltd. (controlled by
América Móvil S.A. de C.V.). ATL began providing cellular telecommunications
services in our Region in the end of 1998. The rights and obligations under
ATLs license are substantially identical to our rights and obligations.
Although ATL provides only digital service, its customers use TDMA dual-mode
cellular handsets that can operate on an analog network and GSM handsets.
Telecom Américas launched a new trademark, known as Claro. The principal fixed
line operator in its area is Telemar Norte Leste S.A. We also compete with certain other wireless telecommunications services,
such as mobile radio (including digital trunking technology, offered by
Nextel), paging and beeper services, which are used by some in our areas as a
substitute for cellular telecommunications services. Satellite services, which
provide nationwide coverage, are also available in Brazil. Although satellite
services have the benefit of covering a much greater area than cellular
telecommunications services, they are considerably more expensive than cellular
telecommunications services and do not offer comparable coverage inside
buildings. We do not plan to offer mobile satellite services (other than
pursuant to a roaming arrangement with a satellite service provider). Finally,
we also face intra-company 21




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competition, when we offer services that may be used by our customers in
substitution for mobile calls, such as SMS and Personal Digital Assistance. Regulation of the Brazilian Telecommunications Industry General Our business, the services we provide and the prices we charge are subject
to regulation under the General Telecommunications Law and various
administrative enactments, which regulate the services provided by Brazilian
telecommunications operators. Anatel is the agency that regulates telecommunications under the General
Telecommunications Law and the July 2001 Regulamento da Agência Nacional de
Telecomunicações, known as the Anatel Decree. Anatel is financially
autonomous, and administratively independent of the federal government. Anatel
maintains a close relationship with the Ministry of Communications. Any
regulation proposed by Anatel is subject to a period of public comment, which
may include public hearings. Anatels actions may be challenged in the
Brazilian courts. On November 25, 1998, Anatel enacted Resolution 73 
Regulation of Telecommunication Services, which regulates in detail the new
comprehensive framework for the provision of telecommunications services in
Brazil established by the General Telecommunications Law. Concessions and Authorizations Before January 2000, Anatel had only authorized two mobile service
providers in each of the 10 franchise areas under A Band and B Band. A
Band and B Band mobile service providers were granted concessions pursuant to
the Lei Mínima, or the Minimum Law. Each concession is a specific grant of
authority to supply cellular telecommunications services, subject to certain
requirements contained in the applicable list of obligations appended to each
concession. If a mobile service provider wishes to offer any
telecommunications service other than those authorized by its concession, it
may apply to Anatel for an authorization to offer such other services. In accordance with the General Telecommunications Law, a concession
relates to the provision of telecommunication services under the public regime,
as determined by the public administration. A concession may only be granted
upon a prior auction bidding process. As a result, regulatory provisions are
included in the relevant concession agreements and the concessionaire is
subject to public service principles of continuity, changeability and equal
treatment of customers. Also, Anatel is empowered to direct and control the
performance of the services, to apply penalties and to declare the expiration
of the concession and the return of assets of the concessionaire to the
government authority upon termination of the concession. Another distinctive
feature is the right of the concessionaire under the concession agreement to be
able to maintain certain economic and financial standards. The concession is
granted for a fixed period of time and is generally renewable only once. An authorization is a permission granted by the public administration
under the private regime, which may or may not be granted upon a prior auction
bidding process, to the extent that the authorized party complies with the
objective and subjective conditions deemed necessary for the rendering of the
relevant type of telecommunication service in the private regime. The
authorization is granted for an indeterminate period of time. Under an
authorization, the government does not guarantee to the authorized company the
economic-financial equilibrium, as is the case under concessions. SMP Regulation In November 2000, Anatel adopted certain regulations for the issuance of
new licenses, which are authorizations to provide wireless communication
services through SMP, personal mobile service, to compete with the then
existing cellular operators in the various regions of Brazil. These
regulations divided Brazil into three main regions covering the same geographic
areas as the concessions for the fixed-line telecommunication services. Anatel
organized auctions for three new licenses for each of those regions. The new
licenses provided that the new services would be operated in the 1,800 MHz
radio frequency bands, and they were denominated C Band, D Band 22




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and E Band. These new licenses were auctioned by Anatel and awarded
during the first quarter of 2001 and at the end of 2002. Under these new licenses:  
    
    services are to be provided using the 1,800 MHz frequency;
    
    each operator may provide domestic and international long distance services in its licensed area;
    
    existing cellular service providers, as long as they do not
have partnerships with fixed-line operators, as well as new entrants
into the Brazilian telecommunications market can bid for C Band, D
Band and E Band licenses. However, fixed-line operators, their
controlling shareholders and affiliated cellular providers can only
bid for D Band and E Band licenses;
    
    a cellular operator, or its respective controlling
shareholders, may not have geographical overlap between licenses;
and
    
    current A Band and B Band cellular service providers can
apply for an extra frequency range. Pursuant to the SMP services regulation, each of the three main regions is
divided into registration areas, or tariff areas. In order to transfer our services to SMP, we were required to comply with
several technical and operational conditions, including, among others, the
adoption of a carrier selection code for long distance calls originating from
our network. Under the General Telecommunications Law, all mobile telecommunications
service providers must provide interconnection upon the request of any other
mobile or fixed-line telecommunications service provider. Until June 30, 2004,
SMP service providers may opt to establish a price cap or freely negotiate
their interconnection charges. The conditions of the network usage fee
negotiation will be regulated by Anatel. Thereafter, the terms and conditions
of the interconnection are freely negotiated between wireless and fixed-line
operators, subject to compliance with regulations to be established by Anatel
relating to the traffic capacity and interconnection infrastructure that must
be made available to requesting parties. If a service provider offers any
party an interconnection tariff below the price cap, it must offer the same
tariff to any other requesting party on a nondiscriminatory basis. If the
parties cannot reach an agreement on the terms of interconnection, including
with respect to the interconnection tariff, Anatel will act as the final
arbiter. Because Anatel considers us to be affiliated with Telefónica, which
already provides wireline long distance services in the state of São Paulo and
was awarded a license to provide these services nationwide, Anatel will not
award a wireline long distance license to us. Though we and other mobile
operators have requested that Anatel revise the current SMP regime, there can
be no assurance it will do so. Under the SMP regime, we will receive revenues
from interconnection fees paid to us by wireline long distance operators due to
long distance traffic originating and terminating on our network. The authorizations consist of two licenses  one to provide mobile
telecommunications services, and another to use the frequency spectrum for a
period of 15 years. The frequency license is renewable for another 15-year
period upon the payment of an additional license fee. Benefit of the SMP System According to the General Telecommunications Law and Decree No. 2056/96,
control of the concessionaire can only be transferred after five years from the
date of the privatization in the case of A Band concessionaires or the
commencement of services in the case of B Band concessionaires. On the other
hand, under the SMP system, the authorization or control of the authorized
party can be transferred through merger of the relevant cellular mobile service
provider, whether it is providing services under the A Band or the B Band. 23




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Obligations of Telecommunications Companies As a telecommunications service provider, we are subject to regulations
concerning quality of service and network expansion, as established in our
authorizations and our original concession agreements. Any breach by the companies of telecommunications legislation or of any
obligation set forth in their authorizations may result in a fine of up to R$50
million. Our authorizations impose obligations to meet quality of service
standards, such as: the systems ability to make and receive calls, call
failure rates, the networks capacity to handle peak periods, failed
interconnection of calls and customer complaints. Anatel published the method
for collecting these quality service standards data on April 23, 2003 (Anatel
Resolution No. 335/03). Interconnection Under the General Telecommunications Law, telecommunications service
providers are classified as providers of either collective or restricted
services. All cellular operators, including SMP service providers, are
classified by Anatel as collective service providers. All providers of
collective services are required to provide interconnection upon request to any
other collective service provider. The terms and conditions of interconnection
are freely negotiated between parties, subject to price caps and other rules
established by Anatel. Providers must enter into interconnection agreements,
regarding, among other things, tariffs, commercial conditions and technical
issues, with all requesting parties on a nondiscriminatory basis. If the
parties cannot agree upon the terms and conditions of interconnection, Anatel
may determine terms and conditions by arbitration. Interconnection agreements must be approved by Anatel and may be rejected
if they are contrary to the principles of free competition and the applicable
regulations. Rate Regulation Our authorizations continue to provide for a price-cap mechanism to set
and adjust rates on an annual basis. The cap is a maximum weighted average
price for a package of services. The package consists of the services in our
Basic Plan, including activation fees, monthly subscription fees, and certain
roaming charges, which are charged for the use of mobile services under the SMP
regime. The price cap is revised annually to reflect the rate of inflation as
measured by the IGP-DI. However, mobile operators are able to freely set the
rates for alternative service plans. The initial price cap agreed to by Anatel and us in our authorizations had
been based on the previously existing or bidding prices, and was adjusted
annually on the basis of a formula contained in our authorizations. The price
cap has been revised to reflect the rate of inflation as measured by the
IGP-DI. The weighted average price for the entire package of services may not
exceed the price cap, but the price for individual services within the package
may be increased. Other telecommunications companies that interconnect with and use our
network must pay certain fees, primarily an interconnection fee. The
interconnection fee is a flat fee charged per minute of use. The
interconnection fee charged by us and other A and B Band service providers is
still subject to a price cap stipulated by Anatel. This price cap is valid
until June 30, 2004 and, thereafter, the terms and conditions of the
interconnection are freely negotiated among the operators. Anatel will regulate
the conditions of the network usage fee negotiation. The price cap for the
interconnection fee varies from company to company, on the basis of the
underlying cost characteristics of each companys network. B Band service
providers are subject to price caps established during the auction process for
their licenses. Internet and Related Services in Brazil In Brazil, Internet service providers, or ISPs, are deemed to be suppliers
of value-added services and not telecommunications service providers. Anatels
Resolution 190 requires cable operators to act as carriers of third-party
Internet service providers. The Brazilian House of Representatives is
considering a law that would penalize 24




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##### Table of Contents



Internet service providers for knowingly providing services that allow
illegal goods or services to be sold on the Internet, and would impose
confidentiality requirements on Internet service providers regarding nonpublic
information transmitted or stored on their networks. C. Organizational Structure As of December 31, 2002, our voting shares were indirectly controlled by
two major shareholders: PT Móveis and Telefónica Móviles, through Brasilcel
N.V., with 56.5% of our voting stock, 12.8% of our preferred shares and 30.3%
of our total capital stock. Our subsidiaries are Telerj Celular and Telest Celular. Substantially all
our assets consist of shares in our subsidiaries. We rely very substantially
on dividends from our subsidiaries to meet our needs for cash, including cash
to pay dividends to its shareholders. See Item 5Operating and Financial
Review and ProspectsLiquidity and Capital Resources. For a more detailed description of our ownership structure and the joint
venture between PT Móveis and Telefónica Móviles, see Our History and
Development. D. Property, Plant and Equipment Our principal physical property consists of transmission equipment,
switching equipment, base stations and other communication devices, such as
voicemail, prepaid service, SMS, Home Location Registers, Signalling Transfer
Point, PDSN and gateways . All switches, cell sites, administrative buildings,
warehouse, administrative facilities and stores are insured against damages for
policy operation risks. At December 31, 2003, we had 20 cellular switches and other equipments
installed in four owned spaces and six shared places. We lease almost all of
the sites where our cellular telecommunications network equipment is installed.
Our 1,856 base stations were installed in 1,409 cell sites, and the average
term of these leases is five years. In addition, we have our own
administrative buildings (approximately 11,561 square meters) and one store and
also lease administrative facilities (approximately 12,022 square meters),
warehouse space (approximately 12,100 square meters) and 41 retail stores
throughout our region. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion in conjunction with our
consolidated financial statements and accompanying notes and other financial
information included elsewhere in this annual report, and in conjunction with
the financial information included under Item 3A. Selected Financial Data. Critical Accounting Policies In preparing our consolidated financial statements, we have relied on
estimates and assumptions derived from historical experience and various other
factors that we deemed reasonable and relevant. Critical accounting policies
are those that are important to the portrayal of our financial condition and
results and utilize managements most difficult, subjective or complex
judgments, estimates and assumptions. The significant accounting policies that
we believe are critical to aid in fully understanding and evaluating our
reported financial position and results of operations reported under Brazilian
Corporate Law Method are described in Note 3 to our consolidated financial
statements. A description of the differences in accounting policies between
Brazilian Corporate Law Method and U.S. GAAP is included in Note 37 to our
consolidated financial statements. The application of these critical accounting
policies often requires judgments made by our management regarding the effects
of matters that are inherently uncertain on the carrying value of our assets
and liabilities and the results of our operations. Our results of operation
and financial condition may differ from those set forth in our consolidated
financial statements, if our actual experience differs from managements
assumptions and estimates. The following is a discussion of our 25




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critical accounting policies, including some of the variables, assumptions
and sensitivities underlying the estimates relating to:  
    
    revenue recognition;
    
    depreciation of property, plant and equipment;
    
    valuation of property, plant and equipment;
    
    provisions for contingencies;
    
    deferred income taxes; and
    
    financial instruments. a. Revenue recognition Under Brazilian Corporate Law Method and U.S. GAAP, revenues from customer
calls are based on time used, according to Brazilian Corporate Law Method, and
recognized when services are provided. We consider revenue recognition to be a critical accounting policy,
because of the uncertainties caused by different factors such as the complex
information technology required, high volume of transactions, fraud and piracy,
accounting regulations, managements determination of collectibility and
uncertainties regarding our right to receive certain revenues (mainly revenues
for usage of our network). Significant changes in these factors could cause us
to fail to recognize revenues or to recognize revenues that we may not be able
to realize in the future, despite our internal controls and procedures. We
have not identified any significant need to change our revenue recognition
policy for U.S. GAAP or for Brazilian Corporate Law Method. b. Depreciation and Amortization Depreciation on property, plant and equipment is calculated on a
straight-line method of the estimated useful lives of the underlying assets,
which consider historical information available to us, as well as known
industry trends. The sensitivity of an impact in changes in the useful lives of
property, plant and equipment was assessed by applying a hypothetical decrease
of 10% to the useful lives of switching and transmission equipment existing at
December 31, 2003. This hypothetical change would result in an incremental
increase in the annual depreciation expense of R$30.052 million in the year of
the change. c. Valuation of property, plant and equipment In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Under Brazilian Corporate Law Method, the
recoverability of assets as mentioned above, if negative, would indicate the
amount that would be considered impaired. A determination of the fair value of an asset requires management to make
certain assumptions and estimates with respect to projected cash inflows and
outflows related to future revenues and expenditures and expenses. These
assumption and estimates can be influenced by different external and internal
factors, such as economic tendencies, industry trends, interest rates and
changes in the marketplace. The use of different assumptions and estimates
could significantly change our financial statements, for example, if we had
used more conservative assumptions and estimates the expected future net cash
flow may have led us to recognize impairment charges on our property, plant and
equipment, which would have decreased our results of operations and
shareholders equity. No impairment losses have been recognized for any of the
periods presented. d. Provisions for contingencies 26




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We are subject to proceedings, lawsuits and other claims related to tax,
labor and civil matters. We are required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential ranges of
probable losses. A determination of the amount of reserves required, if any,
for these contingencies is made after careful analysis of each individual
issue, based on legal advice. The required reserves may change in the future
due to new developments in each matter or changes in approach, such as a change
in settlement strategy in dealing with these matters. Future possible changes
in the recorded reserve amounts would impact our results of operations in the
period that such changes are recorded. e. Deferred income taxes We compute and pay income taxes based on results of operations under
Brazilian Corporate Law Method. Under U.S. GAAP, we recognize deferred tax
assets and liabilities based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We regularly
review the deferred tax assets for recoverability and establish a valuation
allowance if it is more likely than not that the deferred tax assets will not
be realized, based on historical taxable income, projected future taxable
income, and the expected timing of the reversals of existing temporary
differences. When performing such reviews, we are required to make significant
estimates and assumptions about future taxable income. In order to determine
future taxable income, we need to estimate future taxable revenues and
deductible expenses, which are subject to different external and internal
factors, such as economic tendencies, industry trends, interest rates, changes
in our business strategies and changes in the type of services we offer to the
market. The use of different assumptions and estimates could significantly
change our financial statements. For example, if we had used more conservative
assumptions and estimates with respect to our expected future taxable income,
we would be required to recognize valuation allowance charges on deferred
income tax assets, which would decrease our results of operations and
shareholders equity. If we operate at a loss or are unable to generate
sufficient future taxable income, or if there is a material change in the
actual effective tax rates, the time period within which the underlying
temporary differences become taxable or deductible, or any change in our future
projections, we could be required to establish a valuation allowance against
all or a significant portion of our deferred tax assets resulting in a
substantial increase of our effective tax rate and a material adverse impact on
our operating results. f. Financial instruments With respect to financial instruments, we must make assumptions as to
future foreign currency exchange and interest rates. For a discussion of the
possible impact of fluctuations in the foreign currency exchange and interest
rates on our principal financial instruments and positions, see Item
11Quantitative and Qualitative Disclosures About Market Risk. We have no majority-owned subsidiaries that are not included in our
consolidated financial statements, nor do we have any interests in, or
relationships with, any special purpose entities that are not reflected in our
consolidated financial statements. U.S. GAAP Reconciliation We prepare our consolidated financial statements in accordance with the
Brazilian corporate law method, which differs in significant respects from U.S.
GAAP. Under U.S. GAAP, we recorded net income for 2003, 2002 and 2001 of
R$89.0 million, R$4.0 million, and R$131.9 million, respectively, compared to
net income of R$156.2 million, R$140.4 million, and R$162.9 million,
respectively, under the Brazilian corporate law method. Shareholders equity
at December 31, 2003 and 2002 was R$1,973.9 million and R$1,921.3 million,
respectively, under U.S. GAAP, compared to R$1,903.4 million and R$1,779.7
million, respectively, under the Brazilian corporate law method. See Note 35 to our audited consolidated financial statements for a
description of the principal differences between the Brazilian corporate law
method and U.S. GAAP as they relate to us, and a reconciliation to U.S. GAAP of
net income/loss and total shareholders equity. New Accounting Pronouncements 27




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In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
result in any impact on the Companys financial statements. In April 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The adoption
of SFAS 150 did not result in any impact on the Companys financial statements. In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51
(FIN 46R or the Interpretation). FIN 46R clarifies the application of ARB
No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support. FIN 46R requires
the consolidation of these entities, known as variable interest entities
(VIEs), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that will absorb a majority of the entitys expected
losses, receive a majority of the entitys expected residual returns, or both. Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003, (b)
eased some implementation problems, and (c) added new scope exceptions. FIN 46R
deferred the effective date of the Interpretation for public companies, to the
end of the first reporting period ending after March 15, 2004, except that all
public companies must at a minimum apply the provisions of the Interpretation
to entities that were previously considered special-purpose entities under
the FASB literature prior to the issuance of FIN 46R by the end of the first
reporting period ending after December 15, 2003. The Company does not
anticipate that the adoption of FIN 46R will have a material impact on its
financial position, cash flows and results of operations. In December 2003, the FASB issued SFAS No. 132, Revised 2003, (SFAS
132R), which requires an entity to make additional disclosures about pensions
and other postretirement benefits. These disclosures include information
describing the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows and components of net periodic benefit cost. SFAS
132R would be effective for any domestic plans beginning with fiscal years
ending after December 15, 2003 and any foreign plans beginning with fiscal
years ending after June 15, 2004. The Company has adopted these additional
disclosures for the year ended December 31, 2003 (See Note 38.a). In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is currently following the
guidance of SAB 104. In November 2002, the Emerging Issues Task Force (EITF), of the FASB
reached a consensus on EITF 00-21. EITF 00-21 provides guidance on how to
account for arrangements that may involve multiple revenue-generating
activities, for example, the delivery of products or performance of services,
and/or rights to use other assets. The requirements of EITF 00-21 will be
applicable to agreements entered into for periods beginning after June 15, 2003
and will therefore first apply to the Company for any arrangements entered into
from April 1, 2004. The adoption of this EITF had no impact on the Companys
financial position or results of operations. 28




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In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to clarify
the requirements of identifying whether an arrangement should be accounted for
as a lease at its inception. The guidance in the consensus is designed to
mandate reporting revenue as rental or leasing income that otherwise would be
reported as part of product sales or service revenue. EITF Issue No. 01-08
requires both parties to an arrangement to determine whether a service contract
or similar arrangement is, or includes, a lease within the scope of SFAS No.
13, Accounting for Leases. The Company does not anticipate that the adoption
of EITF Issue No. 01-08 will have a material effect on its consolidated results
of operations, cash flows or financial position. In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that
determining whether realized gains and losses on derivative contracts not held
for trading purposes should be reported on a net or gross basis is a matter of
judgment that depends on the relevant facts and circumstances and the economic
substance of the transaction. In analyzing the facts and circumstances, EITF
Issue No. 99-19, and Opinion No. 29, Accounting for Nonmonetary Transactions,
should be considered. EITF Issue No. 03-11 is effective for transactions or
arrangements entered into after September 30, 2003. The Company does not
anticipate that the adoption of EITF Issue No. 03-11 will have a material
effect on its consolidated results of operations, cash flows or financial
position. A. Operating Results Results of Operations for 2003, 2002 and 2001 The following table sets forth certain components of our income, as well
as the percentage change of each year from the prior year, for the years ended
December 31, 2003, 2002, and 2001. The financial statements referring to
December 31, 2002 and 2001 were reclassified when applicable, for comparative
purposes. Statement of Income Year ended December 31,
    
    Percentage Change2003
    
    2002
    
    2001
    
    2002-2003
    
    2001-2002(in thousands of reais)Net operating revenue
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299
    
    
    
    2.4
    
    
    
    8.5Cost of services and goods
    
    
    (1,052,487
    )
    
    
    (981,741
    )
    
    
    (877,284
    )
    
    
    7.2
    
    
    
    11.9Gross profit
    
    
    839,964
    
    
    
    865,890
    
    
    
    826,015
    
    
    
    (3.0
    )
    
    
    4.8Operating expenses:Selling
    
    
    (387,466
    )
    
    
    (392,482
    )
    
    
    (293,418
    )
    
    
    (1.3
    )
    
    
    33.8General and administrative
    
    
    (224,408
    )
    
    
    (229,947
    )
    
    
    (233,479
    )
    
    
    (2.4
    )
    
    
    (1.5
    )Other operating expense, net
    
    
    13,309
    
    
    
    (16,954
    )
    
    
    5,413
    
    
    
    (178.5
    )
    
    
    (413.2
    )Total
    
    
    (598,565
    )
    
    
    (639,383
    )
    
    
    (521,484
    )
    
    
    (6.4
    )
    
    
    22.6Operating income (loss) before interest
    
    
    241,399
    
    
    
    226,507
    
    
    
    304,531
    
    
    
    6.6
    
    
    
    (25.6
    )Financial expense, net
    
    
    (15,017
    )
    
    
    (15,112
    )
    
    
    (83,222
    )
    
    
    (0.6
    )
    
    
    (81.8
    )Operating income (loss)
    
    
    226,382
    
    
    
    211,395
    
    
    
    221,309
    
    
    
    7.1
    
    
    
    (4.5
    )Net non-operating income (expense)
    
    
    (8,535
    )
    
    
    (1,202
    )
    
    
    (991
    )
    
    
    610.1
    
    
    
    21.3Income (loss) before minority
interests and taxes
    
    
    217,847
    
    
    
    210,193
    
    
    
    220,318
    
    
    
    3.6
    
    
    
    (4.6
    )Income and social contribution taxes
benefit (expense)
    
    
    (61,610
    )
    
    
    (69,817
    )
    
    
    (57,404
    )
    
    
    (11.8
    )
    
    
    21.6Net income
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914
    
    
    
    11.3
    
    
    
    (13.8
    )
 Net Operating Revenue Our operating revenue consists of the following:  
    
    usage charges, which include charges for outgoing calls,
roaming and similar services, and revenues from the sale of airtime
for prepaid services; 29




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
    
    revenues from the sale of cellular handsets and accessories;
    
    monthly subscription charges paid by our contract customers;
    
    interconnection charges, which are amounts we charge other
cellular, fixed-line service providers for the use of our network in
order to complete calls originated outside our network;
    
    other charges, including charges for the transfer of cellular
lines, call forwarding, call waiting, additional voicemail services
and call blocking, SMS and WAP services. The composition of our operating revenues has been affected by the shift
toward prepaid services (which generate usage charges and interconnection
charges but do not generate monthly subscription charges, and which have
attracted lower income customers to our services). Net additions increased the
number of contract customers by 7.4% to 3,708.6 thousand in 2003, and by 14.1%
to 3,454.9 thousand in 2002, from 3,028.2 thousand in 2001. Net additions
increased the number of prepaid customers by 7.8% to 2,552.2 thousand in 2003,
and by 17.0% to 2,368.2 thusand in 2002, from 2,023.3 thousand in 2001.
Interconnection charges increased by 10.0% in February 2002 and 22.0% since
February 2003. Anatel authorizes cellular operators to increase tariffs based
upon the prior 12-month periods cumulative inflation, measured by the IGP
variation from February to January of each year. As of July 6, 2003, cellular telecommunications operators in Brazil were
required by the SMP rules to implement long distance Carrier Selection Codes
(Códigos de Seleção de Prestadora, or CSP) used by customers to choose their
carrier for domestic long distance services (VC2 and VC3) and international
cellular calls. As a result, TSD no longer receives revenues from VC2 or VC3
calls or international calls. Additionally, in accordance with Anatel regulations, Bill & Keep rules
were adopted for interconnection charges in July 2003. The rules provide that
companies under the SMP regime are not required to pay tariffs for the use of
the local network of another SMP provider as long as customers use local
service (i.e., make calls in the same registration area) and as long as there
is a traffic balance between them. However, when traffic from the SMP provider
that originates the call to the SMP provider that terminates the call
represents more than 55% of the local traffic between the two providers, the
SMP provider who originates the higher traffic must pay the other provider the
local usage tariff for the portion of the traffic that exceeds 55%. The composition of operating revenues by category of service is presented
in our consolidated financial statements and discussed below. We do not
determine operating revenues on a net basis (i.e., after deduction of taxes) by
category of service. The following table sets forth the components of our net operating
revenues, as well as the percentage change of each year from the prior year,
for the years ended December 31, 2003, 2002 and 2001. Year ended December 31,
    
    Percentage change2003
    
    2002
    
    2001
    
    2002-2003
    
    2001-2002(in thousands of reais)
    
    (in percentages)Usage charges
    
    
    1,087,927
    
    
    
    925,973
    
    
    
    821,063
    
    
    
    17,5
    
    
    
    12.8Interconnection charges
    
    
    809,860
    
    
    
    795,067
    
    
    
    702,049
    
    
    
    1.9
    
    
    
    13.2Montly subscription charge
    
    
    198,496
    
    
    
    281,613
    
    
    
    367,211
    
    
    
    (29.5
    )
    
    
    (23.3
    )Goods sold (cellular handsets and
accessories)
    
    
    394,577
    
    
    
    348,635
    
    
    
    283,244
    
    
    
    13.2
    
    
    
    23.1Other
    
    
    35,601
    
    
    
    15,579
    
    
    
    13,071
    
    
    
    128.5
    
    
    
    19.2Total gross operating revenue
    
    
    2,526,461
    
    
    
    2,366,867
    
    
    
    2,175,473
    
    
    
    6.7
    
    
    
    9.0Value-added and other indirect taxes
    
    
    511,435
    
    
    
    417,649
    
    
    
    380,889
    
    
    
    22.5
    
    
    
    9.7Discounts granted and return of goods
    
    
    122,575
    
    
    
    101,587
    
    
    
    91,289
    
    
    
    20.7
    
    
    
    11.3Net operating revenue
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299
    
    
    
    2.4
    
    
    
    8.5
 Net operating revenue increased 2.4% to R$1,892.5 million in 2003 from
R$1,847.6 million in 2002, which in turn represented an 8.5% increase from
R$1,703.3 million in 2001. The increase in 2003 was principally due to an
increment in revenues due to increased local outgoing traffic; an increase of
7.4% in our customer base resulted 30




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in an increase in usage charges; a 13.2% increase in sales of cellular
handsets and accessories; and a 128.5% increase in revenues from other
services, mainly due to nationwide campaigns addressed to users of SMS (Short
Message Service), WAP and 1xRTT services. The increase in net operating
revenues in 2002 was principally due to an increase in revenues due to an
increase in tariffs charged to our customers and in interconnection charges;
and an increase of 14.1% in our customer base which resulted in an increase in
usage charges. The increases in 2003 and 2002 were partially offset by lower average
monthly revenues per customer. The average number of customers, calculated as
the number of customers at the beginning of the year plus the number of
customers at the end of the year, divided by two, increased 10.5% to 3,582
thousand customers in 2003 from 3,242 thousand customers in 2002, representing
in turn a 17.2% increase from 2,766 thousand customers in 2001. Average
monthly net revenues from services per customer decreased principally as a
result of an increase in the percentage of prepaid customers in relation to
total customers as a result of new customers acquired and customers switching
from contract plans to prepaid plans; and the introduction of new service plans
directed at users with lower monthly subscription charges. Usage charges.Usage charges increased 17.5% to R$1,087.9 million in
2003, from R$ 926.0 million in 2002, which in turn represented a 12.8% increase
from R$ 821.1 million in 2001. The increase in revenues from customer usage
charges in 2003, compared to 2002, , resulted principally from higher usage of
our services due to the increase in our customer base. Beginning in July 2003,
this increase was partially offset by the impact of the new rules relating to
the long distance Carrier Selection Code described above. The increase in
revenues from customer usage charges in 2002, compared to 2001, resulted
principally from higher usage of our services due to the increase in our
customer base and launching of new plans. Interconnection charges.Our revenues from network usage charges increased
1.9% to R$809.9 million in 2003, from R$795.1 million in 2002, which in turn
represented a 13.2% increase from R$702.1 million in 2001. The increases in
network usage revenues in 2002 and 2003 reflected the increase in our average
interconnection charges, which were higher due to rate increases, partially
offset by a reduction in the incoming calling traffic, despite the increase in
our customer base of prepaid customers. Monthly subscription charges.Revenues from monthly subscription charges
decreased 29.5% to R$198.5 million in 2003, from R$281.6 million in 2002, which
in turn represented a 23.3% decrease from R$367.2 million in 2001. The
decreases in 2003 and 2002 resulted mainly from contract plan customers
switching to plans with lower monthly subscription fees, which was partially
offset by the increase of the monthly subscription fees charged to the contract
plan customers. Goods sold (cellular handsets and accessories).Revenues from goods sold
(cellular handsets) increased 13.2% to R$394.6 million in 2003, from R$348.6
million in 2002, which in turn represented a 23.1% increase from R$283.2
million in 2001. The increases in 2002 and in 2003 were a result of the
increase in handset sale prices, as well as the increase in the quantity of
medium and high-level handsets sold in comparison with the previous year.
Revenues from handset sales are reported before commissions and promotional
discounts, and include value-added taxes. In general, the purpose of handset
sales is to encourage growth in customers and traffic, as opposed to generating
profits on the sales, and we therefore subsidize portions of the costs of
handsets. Although profit margins vary from one handset model to another and
from time to time, on average profit margins are negative after taxes and
discounts. The subsidy resulted in a gross loss (calculated as the difference
from operating revenues from sales minus the cost of goods sold) of
approximately R$87.7 million, R$94.9 million and R$121.3 million on handsets
sales in 2003, 2002 and 2001, respectively. Other.Revenues from other services increased 128.5% to R$ 35.6 million
in 2003, from R$ 15.6 million in 2002, which in turn represented a 19.2%
increase from R$ 13.1 million in 2001. The increase in revenues from other
services in 2003 and 2002 resulted mainly from greater utilization of such
supplementary services as caller identification, data transmission, SMS and
other services aimed principally at corporate customers was due primarily to
increases in the use of the SMS services and voicemail. Value-added and other indirect taxes.Value-added and other indirect taxes
were 20.2% of our gross operating revenues in 2003, 17.6% in 2002 and 17.5% in
2001. Value-added taxes and other indirect taxes increased 31




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22.5 % to R$511.4 million in 2003, from R$417.6 million in 2002, which in turn
represented a 9.7% increase from R$380.9 million in 2001. The effective rate of
taxes on gross operating revenues varies depending upon the composition of our
revenues. As the interconnection charges are not subject to ICMS, the increase
in our interconnection charges as a result of the increase in the use of
prepaid plans tends to reduce our effective tax rate. The increases in 2003 and
in 2002 reflected the change in the composition of our gross operating
revenues, not all of which have been subject to value-added and other indirect
taxes over the entire period. See Item 4B. Business Overview  Taxes on
Telecommunications Services and Handset Sales. Discounts granted and return of goods. Discounts granted and return of
goods increased 20.7% to R$ 122.6 million in 2003, from R$ 101.6 million in
2002, which in turn represented an 11.3% increase from R$ 91.3 million in 2001.
Discounts granted vary depending on how competitive the company intends to be. Cost of Services and Goods The following table sets forth certain components of our cost of services
and goods sold, as well as the percentage change of each year from the prior
year, for the years ended December 31, 2003, 2002 and 2001. Year ended December 31,
    
    Percentage change2003
    
    2002
    
    2001
    
    2002-2003
    
    2001-2002(in thousands of reais)Cost of services and goods sold:Depreciation and amortization
    
    
    (325,786
    )
    
    
    (288,519
    )
    
    
    (235,462
    )
    
    
    12.9
    
    
    
    22.5Inventory (cellular handsets and
accessories)
    
    
    (367,833
    )
    
    
    (325,542
    )
    
    
    (289,154
    )
    
    
    13.0
    
    
    
    12.6Network usage charges
    
    
    (128,657
    )
    
    
    (130,846
    )
    
    
    (125,685
    )
    
    
    (1.7
    )
    
    
    4.1Charges for leased lines
    
    
    (74,764
    )
    
    
    (84,332
    )
    
    
    (76,051
    )
    
    
    (11.3
    )
    
    
    10.9Materials and third-party services
    
    
    (34,224
    )
    
    
    (34,548
    )
    
    
    (34,301
    )
    
    
    (0.9
    )
    
    
    0.7Fistel tax and other
    
    
    (59,616
    )
    
    
    (60,624
    )
    
    
    (63,373
    )
    
    
    (1.7
    )
    
    
    (4.3
    )Rental and insurance
    
    
    (44,013
    )
    
    
    (40,493
    )
    
    
    (39,909
    )
    
    
    8.7
    
    
    
    1.5Personnel
    
    
    (15,573
    )
    
    
    (14,631
    )
    
    
    (13,283
    )
    
    
    6.4
    
    
    
    10.1Other supplies
    
    
    (2,021
    )
    
    
    (2,206
    )
    
    
    (66
    )
    
    
    (8.4
    )
    
    
    3,242.4Total
    
    
    (1,052,487
    )
    
    
    (981,741
    )
    
    
    (877,284
    )
    
    
    7.2
    
    
    
    15.3
 Cost of services and goods sold increased 7.2% to R$1,052.5 million in
2003, from R$981.7 million in 2002, which in turn represented an 11.9% increase
from R$877.3 million in 2001. The increase in 2003 was principally due to a
13.0% increase in the cost of goods sold, principally due to an increase in the
sales of handsets and accessories, mainly of more sophisticated ones; a 12.9%
increase in depreciation and amortization, resulting from the growth of our
network; and a 6.4% increase in TSDs cost of personnel, due to the contract
signed in December 2003, retroactive to November 1st, for a linear increase of
7.5% in salaries in line with inflation. Furthermore, the cost of personnel
item was impacted by end-year bonus payments. The increase in 2002 was
principally due to an increase in the cost of goods sold, principally due to an
increase in the cost of handsets due to the devaluation of the realand an
increase in the sales of more sophisticated handsets; an increase in
depreciation expenses due to the expansion of our network and supporting
systems during the period; and an increase in network usage charges, as a
result of the increase in the interconnection charges paid to other cellular
service and fixed-line providers. The gross profit margin (gross profit as a
percentage of net revenues) was 44.4% in 2003, compared to 46.9% in 2002, and
44.7% in 2001. Depreciation and amortization.Depreciation and amortization expenses
increased 12.9% to R$325.8 million in 2003, from R$288.5 million in 2002, which
in turn represented a 22.5% increase from R$235.5 million in 2001. The
increases in 2003 and 2002 were due primarily to the expansion of our network,
resulting in an increase in depreciable assets. Inventory (cellular handsets and accessories).The cost of handsets sold
increased 13.0% to R$367.8 million in 2003, from R$325.5 million in 2002, which
in turn represented a 12.6% increase from R$289.2 million in 2001. The increase
in 2003, compared to 2002, was principally due to an increase in the sales of
handsets and 32




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accessories, mainly of more sophisticated ones. The increase in 2002 was
principally due to an increase in the cost of handsets due to the devaluation
of the real and an increase in the sales of more sophisticated handsets. Network usage charges.Expenses from network usage charges include fees
we paid to other telecommunications service providers for the use of their
network to complete local, long distance and international calls originating in
our network. Usage charges decreased 1.7% to R$128.7 million in 2003, from
R$130.9 million in 2002, which in turn represented a 4.1% increase from R$125.7
million in 2001. The decrease in 2003 was mainly due to a decrease in the usage
of other networks by our subscribers despite an overall increase in traffic on
Telesudeste Celulars networkThe increase in 2002, compared to 2001, resulted
principally from an increase in the interconnection rates and an increase in
the number of minutes of outgoing calls from our network, as a result of an
increase in the number of calls originated by users of our plans. Charges for leased lines.Charges for leased lines decreased 11.3% to
R$74.8 million in 2003, from R$84.3 million in 2002, which in turn represented
a 10.9% increase from R$76.0 million in 2001. The decrease in 2003, compared to
2002, resulted principally from a decrease in the number of minutes of outgoing
calls from our network. The increase in 2002, compared to 2001, resulted
principally from the increase in the number of circuits between our base
stations and switching centers and from the increase in rates we were charged
for the use of such circuits. Materials and services.Materials and services include costs of materials
purchased from, and services rendered by, third-parties and other
telecommunications service providers, such as network maintenance services.
Cost of materials and services decreased by 0.9% to R$34.2 million in 2003,
from R$34.5 million in 2002, which in turn represented a 0.7% increase from
R$34.3 million in 2001. The decrease in 2003, compared to 2002, was due
primarily to a decrease in the costs of third-party materials and services,
partially offset by higher costs we incurred in connection with the expansion
of our network. The increase in 2002, compared to 2001, was due primarily to
the increase in the average costs of third-party materials and services due to
the significant increase of our network in 2001. Fistel tax and other.Fistel and other taxes were R$59.6 million in 2003,
a 1.7% decrease from R$60.6 million in 2002, which in turn represented a 4.3%
decrease from R$63.4 million in 2001. The decreases in 2003 and 2002 were
principally due to the change in the assessment of this tax. Rental and insurance.Rental and insurance includes equipment rental,
insurance and other costs of providing our services and selling handsets.
Rentals and insurances increased 8.7% to R$44.0 million in 2003, from R$40.5
million in 2002, which in turn represented a 1.5% increase from R$39.9 million
in 2001. The increase over the three-year period was due primarily to the
expansion of our network, which led to an increase in the number of sites we
rented in connection with an increase in the number of our radio base stations. Personnel.Personnel expenses increased 6.4% to R$15.6 million in 2003,
from R$14.6 million in 2002, which in turn reflected a 10.1% increase from
R$13.3 million in 2001. The increase in 2003, compared to 2002, principally
derived from the contract signed in December 2003, retroactive to November 1st,
for a linear increase of 7.5% in salaries in line with inflation. Furthermore,
the cost of personnel item was impacted by end-year bonus payments. The
increase in 2002, compared to 2001, principally derived from the increase in
the number of employees we hired to service our expanding network and customer
base. Operating Expenses The following table sets forth certain components of our operating
expenses, as well as the percentage change of each component from the prior
year, for each of the years in the three-year period ended December 31, 2003. 33




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Year ended December 31,
    
    Percentage change2003
    
    2002
    
    2001
    
    2002-2003
    
    2001-2002(in thousands of reais)Operating expenses:Selling expenses
    
    
    (387,466
    )
    
    
    (392,482
    )
    
    
    (293,418
    )
    
    
    (1.3
    )
    
    
    33.8General and administrative expenses.
    
    
    (224,408
    )
    
    
    (229,947
    )
    
    
    (233,479
    )
    
    
    (2.4
    )
    
    
    (1.5
    )Other net operating income (expense)
    
    
    13,309
    
    
    
    (16,954
    )
    
    
    5,413
    
    
    
    (178.5
    )
    
    
    (413.2
    )Total
    
    
    (598,565
    )
    
    
    (639,383
    )
    
    
    (521,484
    )
    
    
    (6.4
    )
    
    
    22.6
 Operating expenses decreased 6.4% to R$598.6 million in 2003, from R$639.4
million in 2002, which in turn represented a 22.6% increase from R$521.5
million in 2001. The decrease in 2003 resulted mainly from a R$30.3 million
increase in other net operating income, as well as a R$5.6 million decrease in
general and administrative expenses and a R$5.0 million decrease in selling
expenses. The increase in 2002 resulted mainly from a R$99.0 million increase
in selling expenses. Selling expenses.Selling expenses decreased 1.3% to R$387.5 million in
2003, from R$392.5 million in 2002, which in turn represented a 33.8% increase
from R$293.4 million in 2001. The decrease in 2003, compared to 2002, was due
principally to a R$56.6 million decrease in the provisions for the allowance
for doubtful accounts. The increase in 2002, compared to 2001, was due
principally to an increase in our expenses for personnel, depreciation and
third-party services. Provisions for the allowance for doubtful accounts and network usage
charges, included in our selling expenses, decreased 58.4% to R$40.2 million in
2003, from R$96.8 million in 2002, which in turn represented a 34.7% increase
from R$71.8 million in 2001. The decrease in 2003, compared with 2002, was
primarily due to the adoption of more effective methods of evaluating customer
credit and the growth of TSDs prepaid customer base. The increase in 2002,
compared to 2001, was due primarily to the increase in the total amount of our
past due accounts due to an increase in interconnection charges of other
operators. Tariff increases of the network usage charges of the other
operators (TU-M) and a larger customer base increased the number of outgoing
calls. General and administrative expenses. General and administrative expenses
decreased 2.4% to R$224.4 million in 2003, from R$229.9 million in 2002, which
in turn represented a 1.5% decrease from R$233.5 million in 2001. The decrease
in 2003, compared to 2002, resulted mainly from a R$18.8 million decrease in
outsourced services and a R$5.1 million decrease in taxes paid in 2003. The
decrease in 2002, compared to 2001, resulted mainly from a decrease in
personnel expenses by 33.8% to R$39.0 million in 2002, from R$58.5 million in
2001, and a decrease in rent, insurance and building services fees. Other net operating income (expense).Other net operating income
(expense) decreased 178.5% to R$13.3 million of income in 2003, from a net
operating expense of R$17.0 million in 2002, which in turn represented a 413.2%
decrease from a net operating income of R$5.4 million in 2001. The increase in
2003, compared to 2002, resulted mainly from a R$21.1 million increase in
recovered expenses. The decrease in 2002, compared to 2001, resulted mainly
from the increase in provisions for contingencies. See Item 8A. Consolidated
Statements and Other Financial InformationLegal Matters. Net Financial Expense The following table sets forth certain components of our net financial
expenses, as well as the percentage change of each component from the prior
year, for each of the years in the three-year period ended December 31, 2003. 34




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Year ended December 31,
    
    % Change2003
    
    2002
    
    2001
    
    2002-2003
    
    2001-2002(R$ million)Financial income
    
    
    82.114
    
    
    
    42.674
    
    
    
    20.809
    
    
    
    92.4
    
    
    
    105.1Exchange gains and losses
    
    
    61.528
    
    
    
    (238.090
    )
    
    
    (113.266
    )
    
    
    (125.8
    )
    
    
    110.2Gains (losses) on
foreign currency
derivative contracts
    
    
    (112.341
    )
    
    
    221.010
    
    
    
    76.807
    
    
    
    (150.8
    )
    
    
    187.7Other, net
    
    
    (34.317
    )
    
    
    (17.403
    )
    
    
    (10.916
    )
    
    
    98.3
    
    
    
    59.4Financial expenses
    
    
    (12.001
    )
    
    
    (23.303
    )
    
    
    (56.656
    )
    
    
    (48.5
    )
    
    
    (58.9
    )(15.017
    )
    
    
    (15.112
    )
    
    
    (83.222
    )
    
    
    0.7
    
    
    
    (81.8
    )
 Net financial expense reflects, among others, the net effect of interest
income and expense, and net effect of exchange rate fluctuation affecting our
loans, financings and derivative operations. See Note 8 to our consolidated
financial statements. Our net financial expense did not show any relevant change in 2003 when
compared to 2002, remaining practically flat at R$15.2 million in 2003 from
R$15.1 million in 2002. The increases in our financial income and exchange
gains and the decrease in our financial expenses were partially offset by the
increase in our losses on foreign currency derivative contracts and by the
increase in other net financial expenses. In 2002, net financial expense
decreased 81.8% to R$15.1 million, from R$83.2 million in 2001. The decrease in
2002, compared to 2001, resulted principally from a decrease in our financial
expense and an increase in our financial income and in our gains on foregin
currency derivative contracts, which was partially offset by an increase in our
exchange losses. In 2003, we had a R$112.3 million decrease in loss from
derivative transactions. Income and Social Contribution Taxes We incurred income and social contribution taxes in the amount of R$61.6
million in 2003, an 11.7% decrease from R$69.8 million in 2002, which in turn
represented a 21.6% increase from an income tax liability in the amount of
R$57.4 million in 2001. The effective income tax rate before minority interests
was approximately 28.3% in 2003, 33.2% in 2002, and 26.1% in 2001. The income
and social contribution taxes vary proportionately to our net income (loss).
In addition, the changes in our effective tax rate in 2002 and 2003 are
principally a result of the distribution of interest on shareholders equity,
which was recorded in equity and reduced our tax expense. See Note 10 to our
consolidated financial statements. B. Liquidity and Capital Resources Sources of Funds We generated cash flow from operations of R$743.5 million, R$756.9 million
and R$597.6 million in 2003, 2002 and 2001, respectively. We had R$ 53.2 million of long-term loans and financing as of December 31,
2003. Our R$ 165.8 million in short-term loans and financing as of December 31,
2003 consisted primarily of funding from financial institutions applied to long
lived assets. At December 31, 2003, we had a working capital increase (current
liabilities minus current assets) of R$300.9 million, attributable primarily
to: (i) an increase of R$47.7 million in trade accounts payable, resulting from
the higher level of capital expenditures; and (ii) R$ 165.8 million in
short-term debt. Excluding financial items, working capital at December 31,
2003 was R$96.6 million, representing a decrease of R$93.4 million compared to
December 31, 2002, attributable primarily to (i) an increase of R$ 72.8 million
in accounts receivable from customers mainly due to a 26.7% increase in service
revenues; (ii) a decrease of R$7.9 million in handset inventories; and (iii) an
increase of R$47.7 million in accounts payable due to the higher level of
capital expenditures. Our principal assets are the shares of Telerj Celular and Telest Celular,
and we rely on dividends from our subsidiaries to meet our cash needs,
including the payment of dividends to our shareholders. We control the 35




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payment of dividends by our subsidiaries, subject to limitations under
Brazilian law. There are no contractual restrictions on the payment of
dividends by our subsidiaries to us. We believe that our available borrowing capacity, together with funds
generated by operations, should provide sufficient liquidity and capital
resources to pursue our business strategy for the foreseeable future, with
respect to working capital, capital expenditures and other operating needs. Uses of Funds Our principal uses of funds are for capital expenditures, servicing our
debt, and payments of dividends to shareholders. Acquisition of property,
plants and equipment used funds in the amount of R$254.9 million, R$370.9
million, and R$408.7 million, in 2003, 2002, and 2001, respectively. Dividends
and interest on shareholders equity payments consumed cash flows of R$16.3
million, R$116.3 million, and R$47.1 million, in 2003, 2002, and 2001,
respectively. Payment of debt consumed cash flows of R$200.1 million, R$246.5
million, and R$398.4 million, in 2003, 2002 and 2001, respectively. Capital Expenditures Capital Expenditures. The following table shows our capital expenditures
for each year in the three-year period ended December 31, 2003. Year Ended December 31,2003
    
    2002
    
    2001(in thousands of constant reais as of December 31, 2002)Automatic switching equipment
    
    
    59,289
    
    
    
    87,735
    
    
    
    121,317Other equipment
    
    
    160,986
    
    
    
    130,081
    
    
    
    211,677Real estate
    
    
    3,433
    
    
    
    21,821
    
    
    
    15,553Other Assets
    
    
    31,235
    
    
    
    131,246
    
    
    
    60,109Total
    
    
    254,943
    
    
    
    370,883
    
    
    
    408,656
 We made capital expenditures of R$254.9 million, R$370.9 million and
R$408.7 million in 2003, 2002, and 2001, respectively. These expenditures
related primarily to the expansion of the capacity of the services we currently
offer, investments in property, plant and equipment, the provision of new
services and the development of our information systems. See Item 4A. Our
History and DevelopmentCapital Expenditures. We
have budgeted approximately R$267.8 million for 2004 capital expenditures, mainly for
investments in network expansion and introduction of new products and services
that will make customers lives easier and maximize the use of cellular
telephony, besides improving the quality of our services. Our management
expects to finance 2004 capital expenditures principally with cash generated
from operations. Payments of Dividends to Shareholders See Item 8Financial InformationConsolidated Statements and Other
Financial InformationPayment of Dividends. Debt As of December 31, 2003, TSDs total debt position was as follows: 36




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##### Table of Contents



Amount Outstanding as ofDebt
    
    December 31, 2003(R$ millions)Loans
    
    
    219.0Related parties
    
    
    Total long-term debt, excluding the short-term portion
    
    
    53.2Short-term debt
    
    
    165.8Total debt
    
    
    219.0
 As of December 31, 2003, TSDs total debt was R$219.0 million, all of
which was denominated in U.S. dollars. Devaluation of the realresults in
exchange losses on foreign currency indebtedness. In order to protect against
the risk of devaluation of the real, we have entered into over-the-counter
derivatives transactions with international and domestic financial
institutions. In 2003, our derivatives positions produced a loss of R$112.3
million, which largely offset the R$61.5 million of exchange gains from our
foreign currency-denominated debt. In 2002, our derivatives positions produced
a gain of R$221.0 million, which was offset by R$238.1 million of exchange loss
on our foreign currency-denominated debt. On December 31, 2003, approximately
16.5% of our indebtedness bore interest at floating rates, primarily LIBOR, and
83.5% bore interest at fixed rates. Therefore, we have little exposure to
interest rate risk. C. Research and Development We did not make any contributions or incur any expenses relating to
research and development during 2003 and 2002. Our aggregate expenditures on
research and development, including our contribution to the Centro de Pesquisa
e Desenvolvimento da Telebrás, or the Center, a nonprofit foundation for the
development of telecommunications technology, was R$0.8 million for 2001. D. Trend Information A significant growth in cellular telephony is expected to exceed Brazils
economic growth once again in 2004. In 2004, the maintenance of fierce
competition is expected, as a result of the entry of new competitors,
accelerating consolidation of national coverage and continuing efforts towards
improving network technology. E. Off-balance sheet arrangements We do not have any off-balance sheet financing. We have no majority-owned
subsidiaries that are not included in our consolidated financial statements,
nor do we have any interests in, or relationships with, any special purpose
entities that are not reflected in our consolidated financial statements. 37




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##### Table of Contents



F. Tabular disclosure of contractual obligations The following table represents our contractual obligations and commercial
commitments as of December 31, 2003: Payments due by period in thousands of reaisLess than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 year
    
    years
    
    years
    
    yearsContractual obligations:Long-term debt
    
    
    218,955
    
    
    
    165,802
    
    
    
    53,153
    
    
    
    
    
    
    
    Operating leases
    
    
    152,844
    
    
    
    35,504
    
    
    
    80,700
    
    
    
    18,293
    
    
    
    18,347Unconditional purchase obligations
    
    
    31,867
    
    
    
    31,867
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    403,666
    
    
    
    233,173
    
    
    
    133,853
    
    
    
    18,293
    
    
    
    18,347
 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management Board of Directors Our administration consists of a board of directors and a board of
executive officers. Our shareholders elect the members of the board of
directors. The board of directors must have between eight and 12 members, each
serving a three-year term. The board currently consists of 11 members. The
terms of the current members of the board of directors will expire in March
2006. The board of directors holds regular quarterly meetings, and the
chairman or two board members may call special meetings. The following are the current members of our board of directors and their
respective positions. Name
    
    Position
    
    Date ElectedFelix Pablo Ivorra Cano
    
    Chairman
    
    March 25, 2003Shakhaf Wine
    
    Director
    
    March 16, 2004Fernando Xavier Ferreira
    
    Director
    
    March 25, 2003Luis Miguel Gilpérez López
    
    Director
    
    March 16, 2004Ernesto Lopez Mozo
    
    Director
    
    March 25, 2003Ignacio Aller Malo
    
    Director
    
    March 25, 2003Zeinal Abedin Mahomed Bava.
    
    Director
    
    March 25, 2003Carlos Manuel de Lucena e Vasconcellos Cruz
    
    Director
    
    March 25, 2003Eduardo Perestrelo Correia de Matos
    
    Director
    
    March 25, 2003Pedro Manuel Brandão Rodrigues
    
    Director
    
    March 25, 2003Kazuo Moriya (1)
    
    Director
    
    July 11, 2003
 (1) Mr. Kazuo Moriya resigned on June 22nd, 2004. This position is currently
vacant. Our directors will serve until the general shareholders meeting to be
held in 2006. Set forth below are brief biographical descriptions of the
directors. Félix Pablo Ivorra Cano, 58 years old, is the president of the board of
directors and has been a member of the board of directors since February 1999.
Mr. Ivorra currently is the president of the board of directors of Telefónica
Móviles and serves on the board of directors of Telecomunicações de São Paulo
S.A, Brasilcel N.V., Celular CRT Participaçoes, S.A., Tele Leste Celular
Participaçoes, S.A., Tele Sudeste Celular Participaçoes, S.A., Telesp Celular
Participaçoes, S.A., Tele Centro Oeste Celular Participaçoes, S.A., Telefónica
Móviles SAC Perú, Telefónica Móviles Perú Holding, S.A.A and MobiPay
International, S.A. He joined the Telefónica Group in July 1972 and served in
the areas of Technical Specifications, Network Planning, Commercial Planning
and as General Director of Advanced Communications. In 1993, he was appointed
General Director of the team that founded 38




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Telefónica Servicios Móviles, where he held several positions including
General Commercial Director and General Director of Business Development.
During 1997 and part of 1998, he was chairman of the board of Telefónica
Móviles group companies Mensatel, S.A. and Radiored, S.A. He has a degree in
telecommunication engineering from Escola Técnica Superior de Engenharia  ETSI
in Madrid, and a post-graduate degree in Business Administration from the
Instituto Católico de Administração de Empresas  ICADE also in Madrid. Shakhaf Wine, 36 years old, is currently an executive officer of Portugal
Telecom S.G.P.S. and also a member of the board of directors of Brasilcel N.V.,
Telesp Celular Participações S.A., Tele Centro Oeste Celular Participações
S.A., Tele Sudeste Celular Participaçoes, S.A., Celular CRT Participações S.A,
Teleacre Celular S.A., Telegoiás Celular S.A., Norte Brasil Telecom S.A.,
Telemat Celular S.A., Telems Celular S.A., TCO-IP S.A., Teleron Celular S.A.,
Universo Online S.A. e Banco1.Net S.A. Mr Wine was an executive officer of
investment bank and was in charge of the European corporate clients group of
Global Telecommunications of Merrill Lynch International from 1998
until 2003,
Senior Associate Officer of the Latin American and Telecommunications groups of
Deutsche Morgan Grenfell from 1993 until 1998. He holds a degree in economy from
the Pontifícia Universidade Católica do Rio de Janeiro. Fernando Xavier Ferreira,55 years old, is currently the Chief Executive
Officer of the Telefónica Group in Brazil and member among others of the Board
of Directors of Telefónica Móviles, Brasilcel, N.V. Tele Centro Oeste Celular
Participações, S.A., Celular CRT Participações, S.A., Tele Sudeste Celular
Participaçoes, S.A., Tele Leste Celular Participaçoes, S.A. and Telesp Celular
Participações, S.A. During 1998, Mr. Ferreira served as a member of ANATEL.
From 1995 to 1998, he was General Director of Telebrás and president of the
board of directors of Embratel and Telesp S.A. Mr. Ferreira was President of
Telecomunicações do Paraná S.A. Telepar from 1997 to 1999 and Vice President of
that company from 1979 to 1987. He is currently a member of the Latin-America
Committee of the New York Stock Exchange and the Global Infrastructure
Commission. He holds a degree in electrical engineering from the Catholic
University of Rio de Janeiro, Brazil. Luis Miguel Gilpérez López, 46 years old, is the Executive Director of the
International Area of Telefónia Móviles. Mr. Gilpérez also serves on the board
of directors of Medi Telecom, S.A., Telefónica Móviles México, S.A. de C.V.,
Tele Sudeste Celular Participaçoes, S.A., Tele Leste Celular Participaçoes,
S.A., Tele Centro Oeste Celular Participaçoes, S.A., Celular CRT Participaçoes,
S.A., Telesp Celular Participaçoes, S.A. He is also de Executive Chairman of
MobiPay International, S.A. He began his career at an insurance company, where
he worked for six years, in various departments. He joined the Telefónica
group in 1981, where he has worked since then. He has particularly been
involved with activities related to mobile telephony. He was in charge of the
services commercial activities from 1987 to 1993, when Telefónica Móviles
España was created. At Telefónica Móviles España he has held management
positions in virtually all its business areas. He has a post-graduate degree in
Business Administration and holds a degree in Industrial Engineering. Ernesto Lopez Mozo, 40 years old, serves as Chief Financial Officer
General Manager for Finance and Management Control of Telefónica Móviles S.A.
Mr. Lopez is a member of the board of directors of Telefónica Móviles de
España, S.A., Mobipay International, S.A., Telefónia Móviles México, S.A. de
C.V., Brasilcel N.V, Telesp Celular Participações, S.A., Tele Centro Oeste
Celular Participações, S.A., Tele Sudeste Celular Participaçoes, S.A., Tele
Leste Celular Participações S.A. and Celular CRT Participações, S.A. He was
previously a senior manager in the financing department of Telefónica, S.A.,
where he was also responsible for relationships with credit rating agencies.
Before joining Telefónica in March 1999, Mr. Lopez worked for five years at
J.P. Morgan. He holds a degree in civil engineering from ETSICCP in Madrid and
a masters degree in business administration from the Wharton School. Ignacio Aller Malo, 59 years old, is a member of the board of directors of
Telefónia Móviles México, S.A. de C.V., Brasilcel N.V, Telesp Celular
Participações, S.A., Tele Centro Oeste Celular Participações, S.A., Tele
Sudeste Celular Participaçoes, S.A., Tele Leste Celular Participações S.A. and
Celular CRT Participações, S.A. Mr. Aller has served as Chief Operating
Officer of Telefónica Móviles S.A. by 2003 and has held several positions at
Telefónica de España since 1967. Zeinal Abedin Mahomed Bava,38 years old, is currently the Chief Financial
Officer of Portugal Telecom, SGPS, S.A. since 2000; Chief Executive Officer of
TV Cabo Portugal, S.A. since March 2004, Executive Vice- 39




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Chairman of the Board of Directors of PT Comunicações, S.A. since January
2004; Member of the Board of Directors of PT Corporate  Soluções Empresariais
de Telecomunicações e Sistemas, S.A. since June 2003; Chief Executive Officer
of PT MultimediaServiços de Telecomunicações e Multimedia, SGPS, S.A. since
May 2003; Member of the Board of Directors of PT ComprasServiços de
Consultoria e Negociação, S.A. since May 2003; Member of the Board of Directors
of Fundação Portugal Telecom since March 2003; Chairman of the Board of
Directors of PrevisãoSociedade Gestora de Fundos de Pensões, S.A. since March
2003; Chairman of the Board of Directors of PT Serviços de Gestão, S.A. since
February 2003; Member of the Board of Directors of Brasilcel, N.V. since
December 2002; Vice-Chairman of the Board of Directors of PT
MultimediaServiços de Telecomunicações e Multimedia, SGPS, S.A. since November
2002; Member of the Board of Directors of Portugal Telecom Brasil, S.A. since
July 2002; Member of the Board of Directors of BESTBanco Electrónico de
Serviço Total, S.A. since May 2001; Member of the Board of Directors of Telesp
Celular Participações S.A. since April 10, 2001; Member of the Board of
Directors of Tele Centro Oeste Participações, S.A. since 2003; Member of the
Board of Directors of CRT Celular Participações, S.A. since 2003; Member of the
Board of Directors of Tele Sudeste Celular Participações, S.A. since 2003;
Member of the Board of Directors of Tele Leste Celular Participações, S.A.
since 2003; Vice-Chairman of the Board of Directors of PT Ventures, SGPS, S.A.
(formerly Portugal Telecom Internacional, SGPS, S.A.) from 2000 until 2002;
Director and Relationship Manager for Portugal of Merrill Lynch International
from 1998 until 1999; Executive Director of Deutsche Morgan Grenfell from 1996
until 1998; Executive Director of Warburg Dillon Read from 1989 until 1996. He
holds a degree in electronic and electrical engineering from the University of
London B.S.C. Carlos Manuel de Lucena e Vasconcellos Cruz,46 years old, is currently
the Chief Executive Officer of Portugal Telecom Investimentos
InternacionaisConsultoria Internacional S.A. and PT Ventures, SGPS, S.A. since
April 2004; Member of the Board of Directors of PT Corporate  Soluções
Empresariais de Telecomunicações e Sistemas, S.A. since June 2003; Chief
Executive Officer of PT Comunicações, S.A. from May 2002 until January 2004;
Chief Executive Officer of PT Prime, SGPS, S.A. from 2002 until January 2004;
Chairman of the Board of Directors of PT Prime, SGPS, S.A. from 2002 until
January 2004; Chairman of the Board of Directors of PT ContactTelemarketing e
Serviços de Informação, S.A. from 2002 until January 2004; Chief Executive
Officer of PTM.com, SGPS, S.A. from May 2003 until January 2004; Member of the
Board of Directors of PT ComprasServiços de Consultoria e Negociação, S.A.
since May 2003; Member of the Board of Directors of Fundação Portugal Telecom
since March 2003; Member of the Board of Directors of Brasilcel, N.V. since
December 2002; Member of the Board of Directors of Portugal Telecom Brasil,
S.A. since July 2002; Member of the Board of Directors of TMNTelecomunicações
Móveis Nacionais, S.A. from June 2002 until May 2003; Member of Board of
Directors of Telesp Celular Participações S.A. since April 2001; Vice-Chairman
of Telesp Celular Participações S.A. since 2001; Member of the Board of
Directors of Tele Centro Oeste Celular Participações, S.A. since 2003; Member
of the Board of Directors of CRT Celular Participações, S.A. since 2003; Member
of the Board of Directors of Tele Sudeste Celular Participações, S.A. since
2003; Member of the Board of Directors of Tele Leste Celular Participações S.A.
since 2003; Chairman and Chief Executive Officer of Telesp Celular S.A. from
May 2001 until May 2002; President and Chief Executive Officer of Tradecom,
SGPS, S.A. from 2000 until 2001; Executive Board Member of PT Prime, SGPS, S.A.
from 2000 until 2001; Invited Professor of Universidade Católica Portuguesa and
ISCTE for Post-Graduate Courses and MBA Program from 2000 until 2001; Member of
World Board of Dun & Bradstreet Corporation, Executive Vice-President of Dun &
Bradstreet Corporation, President and Chief Executive Officer of D&B GMC,
Executive Vice President of D&B Europe, President and Chief Executive Officer
of D&B Iberia, Vice president of Trans Union España Credit Burear S/A from 1997
until 1999; Senior Vice-President of Dun & Bradstreet Corporation, Senior
Vice-President of Dun & Bradstreet Europe, President and Chief Executive
Officer of D&B Iberia & Middle West, Vice-President of A.P.E.I.N. (Associação
Portuguesa de Empresas de Informação de Negócio) in 1996; President & Chief
Executive Officer of Dun & Bradstreet Ibéria in 1995; President and Chief
Executive Officer of Dun & Bradstreet Portugal, Vice-President of Associação
Portuguesa para a Qualidade from 1990 until 1993; President of European
Customer Service group of Dun & Bradstreet in 1992; General Director of Dun &
Bradstreet France in 1989; General Director of Sales of Dun & Bradstreet France
in 1988; Commercial Director of Dun & Bradstreet Portugal in 1987; National
Director of Sales of Dun & Bradstreet Portugal in 1986; Director of Sales
Department of Dun & Bradstreet Portugal in 1985; Senior Economist of
LEASEINVEST from 1983 until 1985; Economist of Finance Ministry of Portugal
from 1978 until 1983. Mr. Cruz holds a degree in business from the I.S.C.T.E.
(Instituto Superior de Ciências do Trabalho e da Empresa or Higher Education
Institute for Labor and Corporate Sciences), Portugal, and a post-graduate
degree in management from D.S.E. (the German Foundation for International
Development), Germany. 40




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Eduardo Perestrelo Correia de Matos, 55 years old, is currently the
president of Portugal Telecom Brasil S.A. and a member of the board of
directors of each of PT Móveis, Serviços de Telecomunicações, S.G.P.S., S.A.,
Tele Leste Celular Participações S.A., Tele Sudeste Celular Participaçoes,
S.A., Tele Centro Oeste Celular Participações S.A., Telesp Celular
Participações S.A. and Celular CRT Participações S.A. From 1976 to 1987, Mr.
Matos held various operational positions in the planning and control areas of
CTT  Corrêios e Telecomunicações de Portugal S.A. and TLP-Telefones de Lisboa
e Porto S.A. From 1987 to 1990 he was the secretary of state for external
transportation and communications in Portugal. In addition, he served as
president at Marconi S.G.P.S. Comunicações, S.A. from 1990 to 1991 and at
Mobitel S.A. from 1991 to 1996. Mr. Matos was also a member of the board of
Portugal Telecom, S.G.P.S., S.A. from 1996 until May 2002. He holds a degree
in economics from the Technical University of Lisbon, Portugal. Pedro Manuel Brandão Rodrigues, 53 years old, is currently also a member
of the board of directors and of the Executive Committe of PT Móveis, S.G.P.S.,
S.A. and of Telecomunicações Móveis Nacionais  TMN. He was ellected for the
Assembly of the Republic in March 2002, and he is a member of the National
Council of Education of Portugal since July 2000. Mr. Brandão was a member of
the board of directors of several Portuguese corporations and, from 1993 to
2000, a member of the Executive Committee of Banco Mello and Banco Mello de
Investimentos. He holds a doctoral degree in engineering from the University of
Birmingham, England, a master degree in production process and management, and
an engineering degree from the Instituto Superior Técnico. Kazuo Moriya, 60 years old, is currently also a managing partner and the
president of NTT DoCoMo Telecomunicações Ltda. He has worked at Nippon
Telegraph and Telephone Corporation (NTT), holding positions in the area of
telecommunications both at its headquarters and in its several offices. From
1990 to 1995, he served as shareholding member and president of NTT do Brasil
Comércio e Representações Ltda. From 1995 to 1998, he served as vice president
of international relations and in 1998 he was the assistant senior vice
president of international investments for NTT Mobile Communications Network,
Inc. (NTT DoCoMo). He holds an engineering degree from Hosei University,
Japan. In accordance with the shareholders agreement between Portugal Telecom
SGPS, S.A., PT Movéis SGPS, S.A. and Telefónica Móviles S.A., PT Movéis is
responsible for the appointment of our Chief Executive Officer and Telefónica
Móviles is responsible to appoint the Chief Financial Officer. PT Movéis and
Telefónica Móviles appointed 10 (five each) of the 11 members of our Board of
Directors. Board of Executive Officers The board of executive officers consists of eight members, each elected by
the board of directors for a term of three years. The chief executive officer
is the chairman and, in his absence or temporary inability to perform his
duties, he will be replaced by the vice president for finance, planning and
control. In the case of a vacancy in any position in the board of executive
officers, the respective replacement shall be appointed by the board of
directors; in case of any inability, the chief executive officer shall choose a
replacement for that officer among the remaining officers. One officer may be
elected for more than one position on the board of executive officers, but the
members of the board of executive officers cannot be elected to the board of
directors. The board of directors may remove executive officers from office at
any time. The following are the current executive officers and their respective
positions. Name
    
    Position
    
    Date appointedFrancisco José Azevedo Padinha
    
    Chief Executive Officer
    
    October 17, 2003Fernando Abella Garcia (1)
    
    Executive Vice President for Finance,
Planning and Control and Investors
Relations Officer
    
    April 16, 2003Paulo Cesar Pereira Teixeira
    
    Executive Vice President for Operations
    
    April 16, 2003Luis Filipe Saraiva Castel-Branco de Avelar
    
    Executive Vice President for Marketing
and Innovation
Executive Vice President for IT and
Product and Service Engineering
    
    June 12, 2003
 41




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Name
    
    Position
    
    Date appointedJavier Rodríguez García
    
    Executive Vice President for
Technology and Networks
    
    June 12, 2003Guilherme Silvério Portela Santos
    
    Executive Vice President for Customers
    
    October 10, 2003José Carlos de la Rosa Guardiola
    
    Executive Vice President for
Regulatory Matters and Institutional
Relations
    
    August 25, 2003
   (1)
    
    Mr. Arcádio Luis Martinez Garcia was formally appointed for this
position, but will be elected and take office as soon as he receives his
permanent visa from the Brazilian authorities. For the time being, this
position is being temporarily filled by Mr. Fernando Abella Garcia. Set forth below is a brief biographical description of our executive
officers. Francisco José Azevedo Padinha, 57 years old, is currently the chief
executive officer of each of Brasilcel N.V., Tele Sudeste Celular Participações
S.A., Tele Leste Celular Participações S/A, Telesp Celular Celular
Participações S.A., Celular CRT Participações S.A., Telerj Celular S.A., Telest
Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Celular CRT S.A.,
Telesp Celular S.A. and Global Telecom S.A.; the chairman of the board of
directors of each of PT Prime Tradecom Soluções Empresariais de Comércio
Electrónico, S.A., Megamedia Soluções Multimédia, S.A., PT Prime, SGPS, S.A.,
the vice chairman of the board of directors of PT Ventures S.A.; a member of
the board of directors of PT Comunicações S.A.; and a member of the scientific
committee of Taguspark Sociedade de Promoção e Desenvolvimento do Parque da
Ciência e Tecnologia da Área de Lisboa, S.A. He was also the chairman of the
board of directors of Prymesys  Soluções Empresariais S.A. From 1989 until
1992, Mr. Padinha was the manager of the central department for research and
development of Companhia Portuguesa Rádio Marconi, S.A., and from1992 until
1994 he was the chairman of the board of directors of Telecom Portugal, S.A.
From 2000 to 2001, Mr. Padinha was the chief executive officer of PT Prime
SGPS, S.A., and from 1994 until 2002, he was a member of the board of directors
of Portugal Telecom. He holds a telecommunications and electronic engineering
degree from the Technical University of Lisbon, Portugal, a degree in corporate
upper management from AESE/University of Navarra, Spain, and a masters degree
in innovation and technology management from the Sloan School of
Management/MIT, United States. Fernando Abella Garcia, 41 years old, is currently the executive vice
president for finance, planning and control of each of Brasilcel N.V., Tele
Sudeste Celular Participações S.A., Tele Leste Celular Participações S/A,
Celular CRT Participações S.A., Telesp Celular Participações S.A., Telerj
Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular
S.A., Celular CRT S.A., Telesp Celular S.A. and Global Telecom S.A. He is also
Investor Relations Officer of Tele Sudeste Celular Participações S.A., Telesp
Celular Participações S.A., Celular CRT Participações S.A. and Tele Leste
Celular Participações S.A. and Executive Vice President for IT and Product and
Service Engineering of Tele Centro Oeste Celular Participações S/A; and a
member of the board of directors of Telefónica Factoring do Brasil Ltda. From
1994 until 1997, Mr. Garcia worked as an external consultant for the Telefónica
Group in several different areas. Since joining the Telefónica Group in 1997,
he has served in different positions in the financial and strategic planning
areas in Spain and Brazil. He was also a member of the board of directors of
Telefónica Móviles S.A.C. in Peru, Telefónica Móvil S.A. in Chile, Telefónica
Móviles El Salvador, S.A. de C.V. in El Salvador and Telefónica Centroamérica
Guatemala, S.A. in Guatemala. Mr. Garcia holds a degree in business from the
Faculty of Economic and Corporate Sciences at Valladolid, Spain, and masters
degree in business administration from the Corporate Institute of Madrid,
Spain. Paulo Cesar Pereira Teixeira, 46 years old, is currently the executive
vice president for operations of Tele Sudeste Celular Participações S.A., Tele
Leste Celular participações S/A, Telesp Celular Participações S.A., Celular CRT
Participações S.A., Telerj Celular S.A., Telest Celular S.A., Telebahia Celular
S.A., Telergipe Celular S.A., Celular CRT S.A., Telesp Celular S.A. and Global
Telecom S.A. From 1980 until 1987, Mr. Teixeira performed several different
managerial duties in Companhia Riograndense de Telecomunicações S.A.-CRT and
was also a member of the board of directors (1985-1986). In 1987 and 1988, he
served at several different positions in Telebrás or in the companies of the
Telebrás Group. Mr. Teixeira holds an electrical engineering degree from the
Catholic University of Pelotas, Brazil. Luis Filipe Saraiva Castel-Branco de Avelar, 50 years old, is currently
the executive vice president for IT and product and service engineering of each
of Tele Sudeste Celular Participações S.A., Tele Leste Celular 42




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Participações, Celular CRT Participações S.A., Telesp Celular
Participações S.A., Telerj Celular S.A., Telest Celular S.A., Telebahia Celular
S.A., Telergipe Celular S.A., Celular CRT S.A., Telesp Celular S.A. and Global
Telecom S.A. In 1989, 1991 and 1993, Mr. Avelar was respectively the corporate
accounts director of Telefones de Lisboa e Porto, an expert in
telecommunications services for the European Commission (DG XIII, Telecom
Policy Unit) and a strategic planning director at Comunicações Nacionais. From
1993 to 1998 he was a consultant in privatization and regulation projects for
the World Bank, the European Bank for Reconstruction and Development and the
European Commission. From 1996 to 1998 he was a portfolio director of Portugal
Telecom Group in the strategic marketing board of Portugal Telecom. From 1998
to 2000, Mr. Avelar was a special consultant to the president of Telesp Celular
Participações S.A. for the areas of marketing, sales, strategy, regulation and
special projects, and, from 2000 to 2001, he was a director at the internet and
e-commerce business unit at the same company. He holds an electrical-technical
engineering degree (specialized in telecommunications and electronics) from the
Lisbon Higher Education Technical Institute. Javier Rodríguez García, 47 years old, is currently executive vice
president for technology and networks of each Tele Sudeste Celular
Participações S.A., Tele Leste Celular Participações S/A, Celular CRT
Participações S.A., Telesp Celular Participações S.A., Telerj Celular S.A.,
Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Celular
CRT S.A., Telesp Celular S.A. and Global Telecom S.A. From 1986 until 1988,
Mr. García worked at INDELEC  Indústria Electrónica de Comunicaciones S.A., as
the manager responsible for the implementation of an automatic mobile
telecommunications project for Telefónica de España S.A. From 1988 until 1990,
he worked at Rede Electrica de España S.A., as the person responsible for the
project, installation and maintenance of radio mobile systems in Spain. From
1990 until 1992, Mr. García served as an engineering manager at Telcel S.A.,
where he was responsible for the implementation of automatic mobile
telecommunication system for Telefónica de España S.A. in Barcelona, Madrid and
Palma de Mallorca. From 1992 until 1996, he was an engineering manager
responsible for the installation and maintenance of systems at Compañia Europea
de Radiobusqueda S.A., and from 1996 until 1998, he worked in cellular
businesses for Telefónica Group in Spain and Peru, as a network quality manager
and technical area sub-manager, respectively. From 1998 until 2000, Mr. García
was the technology manager in the cellular business of Telefónica Group in
Brazil and from 2000 until 2002 he was the network manager of Telerj Celular
S.A. and Telest Celular S.A. He holds a degree in technical telecommunications
engineering from the Technical University of Madrid, Spain. Guilherme Silvério Portela Santos, 38 years old, is currently the
executive vice president for customers of each of Tele Sudeste Celular
Participações S.A., Tele Leste Cvelular Participações S/A, Telesp Celular
Participações S.A., Celular CRT Participações S.A., Telerj Celular S.A., Telest
Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Celular CRT S.A.,
Telesp Celular S.A. and Global Telecom S.A.; and an executive manager at PT
Móveis, SGPS, S.A. From 1989 until 1993, Mr. Santos was a consultant at
McKinsey & Co., and from 1994 until 1998 he worked as an officer for operations
and an officer for special projects at Parque Expo98, S.A. He was also a
coordination officer at Companhia de Seguros Tranquilidade. Mr. Santos holds a
civil engineering degree from the Higher Education Technical Institute,
Portugal, and a masters degree from INSEAD, France. José Carlos de la Rosa Guardiola, 56 years old, is currently the executive
vice president for regulatory matters and institutional relations of each of
Telesp Celular Participações S.A., Tele Leste Celular Participações S/A, Tele
Sudeste Celular Participações S.A., Celular CRT Participações S.A., Telerj
Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular
S.A., Celular CRT S.A., Telesp Celular S.A. and Global Telecom S.A. From
November 1998 until February 2002, Mr. Guardiola was engaged in the Regulation
and Operations Departments of these companies, and occupied the function of
vice president of Operations responsible for the commercial, administrative and
operations activities of each of Telebahia Celular S.A. and Telergipe Celular
S.A. He is also member of the board of directors of Saint Gobain, France,
National Semiconductors, USA end NEC Eletronics, Japan. He holds a degree in
telecommunications engineering from Universidad Politecnica de Madrid, Spain. Board of Auditors (Conselho Fiscal) We have a permanent board of auditors with a minimum of three and a
maximum of five members. They are elected annually at the annual general
shareholders meeting. The board currently consists of three members. The board of auditors is responsible for overseeing our management. Its
main duties are: 43




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
    
    to review and provide an opinion on the annual report of our
management,
    
    to review and approve the proposals of the management bodies
to be submitted to the shareholders meeting regarding changes to
share capital, issuance of debentures and subscription rights,
capital investment plans and budgets, distributions of dividends,
changes in corporate form, consolidations, mergers or split-up, and
    
    to review and approve the financial statements for the fiscal
year. The Board of Auditors holds regular meetings every three months and
special meetings when called by the President or by any member of the Board of
Auditors. The following are the current members of our board of auditors and their
alternates: Name
    
    Position
    
    Date AppointedMarcio Barbosa Lins(1)
    
    Member
    
    March 23, 2004Milton Shigueo Takarada
    
    Member
    
    March 23, 2004João Luis Tenreiro Barroso
    
    Member
    
    March 23, 2004Luiz Otávio Bianchini Laydner(1)
    
    Alternate
    
    March 23, 2004José Ricardo de Sousa Porpino
    
    Alternate
    
    March 23, 2004José Guilherme Feijão Queiroz de Ataíde
    
    Alternate
    
    March 23, 2004
 (1) Appointed by our preferred shareholders. B. Compensation For the year ended December 31, 2003, we paid to our directors and
executive officers as compensation an aggregate amount of R$5.2 million,
including bonuses and profit sharing plans. This amount includes performance
remuneration and profit sharing arrangements applicable to all employees.
Furthermore, the members of our board of executive officers are eligible to
participate in the same complementary retirement pension plan available to our
employees. C. Board Practices Our board of directors duties and responsibilities are set forth by
Brazilian law and our by-laws. Our board of directors is comprised of a minimum of eight and a maximum of
12 members, all shareholders, each serving a three-year term. Our directors
are elected by our shareholders at the annual general shareholders meeting.
There are no service contracts between us or our subsidiaries and any of our
directors providing for benefits upon termination of employment. The board of
directors holds regular quarterly meetings, and the chairman or two board
members may call special meetings. For more detailed information, see Directors and Senior Management,
Board of Executive Officers, and Board of Auditors, above. D. Employees At December 31, 2003, we had 1,668 full-time employees and 116 temporary
employees. The following table sets forth the number of our employees and a breakdown
of employees by main category of activity as of the dates indicated: 44




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At December 31,2003
    
    2002
    
    2001Total number of employees (including trainees)
    
    
    1,668
    
    
    
    1,972
    
    
    
    1,980Number by category of activity:Technical and operations area
    
    
    398
    
    
    
    482
    
    
    
    507Sales and marketing
    
    
    704
    
    
    
    790
    
    
    
    713Finance and administrative support
    
    
    337
    
    
    
    504
    
    
    
    470Customer service
    
    
    229
    
    
    
    196
    
    
    
    290
 Employees are represented by the Sindicato dos Trabalhadores em Empresas
de Telecomunicações e Operadoras de Mesas Telefônicas no Estado de São Paulo
(SINTETEL). We negotiate new collective-bargaining agreements every year with
the labor unions. The collective-bargaining agreements currently in force
include a salary and benefit increase of 7.5% effective as of December 31,
2003. Our management considers the relations between our work force and us to be
satisfactory. We have not experienced any work stoppage that materially
affected our operations. Each of our subsidiaries negotiates a new collective-bargaining agreement
every year with each local union. The collective-bargaining agreements now in
force expire on October, 2004. At the time of the privatization, employees had the right to maintain
their rights and benefits in Fundação Sistel de Seguridade Social, or Sistel, a
multi-employer defined benefit plan that supplements government-provided
retirement benefits. Under the Sistel plan, we made monthly contributions to
Sistel equal to a percentage of the salary of each employee who was a Sistel
member. Each employee member also made a monthly contribution to Sistel based
on age and salary. Members of Sistel qualified for pension benefits when they
qualified for the government-provided retirement benefits. Sistel operates
independently from us, and its assets and liabilities are fully segregated from
us. Employees hired since January 1999 are not members of Sistel. Before December 1999, the Sistel plan covered the employees of the former
Telebrás System and we were contingently liable for all of the unfunded
obligations of the plan. In January 2000, we and the other companies that
formerly belonged to the Telebrás system agreed to divide the existing Sistel
plan into 15 separate plans, resulting in the creation of private plans
covering those employees already enrolled in the Sistel plan. These new
private pension plans are still administered by Sistel and have retained the
same terms and conditions of the Sistel plan. The division was carried out so
as to allocate liability among the companies that formerly belonged to the
Telebrás system according to each companys contributions in respect of its own
employees. Joint liability among the Sistel plan sponsors will continue with
respect to retired employees who will necessarily remain members of the Sistel
plan. In 2000, we established the Plano de Benefícios Visão Celular, a new
private pension plan for our employees. Unlike Sistels defined benefits plan,
the Plano de Benefícios Visão Celularcalls for defined contributions by our
operating subsidiaries, as sponsors, and our employees, as participants. These
contributions are credited to the participants individual accounts. Those
employees who were members of the Sistel plan had the option to transfer to the
new pension plan by October 31, 2000. As of December 31, 2003, approximately
73% of our employees were members of the Plano de Benefícios Visão Celular. We
continue to have a contingent liability for the unfunded obligations of the
plan with respect to all inactive employees of the former Telebrás and all
post-retirement health care benefits for former Telebrás employees and current
employees of all the new holding companies. 45




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E. Share Ownership As of December 31, 2003, each of the members of the board of directors and
the board of executive officers owned, directly or indirectly, less than 0.01%
of any class of our shares. We do not offer stock option plans to any of our
directors or employees. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders The following table sets forth the principal holders of common and
preferred shares and their respective shareholdings as of May 31, 2004: Number of
    
    Percentage of
    
    Number of
    
    Percentage ofCommon
    
    Outstanding
    
    Preferred
    
    OutstandingName
    
    Shares Owned
    
    Common Shares
    
    Shares Owned
    
    Preferred SharesSudestecel
Participações S.A.
    
    
    108,974,602,160
    
    
    
    57.52
    %
    
    
    
    
    
    
    Brasilcel N.V.
    
    
    43,450,494,855
    
    
    
    22.94
    %
    
    
    14,015,090,743
    
    
    
    5.40
    %Brasilcel N.V. 
ADRS (1)
    
    
    
    
    
    
    
    
    
    
    174,288,020,000
    
    
    
    67.14
    %Tagilo
Participações
Ltda.
    
    
    15,168,831,917
    
    
    
    8.01
    %
    
    
    33,317,534,708
    
    
    
    12.84
    %All directors and
executive officers
as a group
    
    
    2,802
    
    
    
    0
    %
    
    
    130
    
    
    
    0
    %
   (1)
    
    In the form of ADRs held by The Bank of New York as depositary. The following table sets forth information concerning the control of
Sudestecel Participações S.A.: Percentage ofOutstandingSudestecel Participações S.A.
    
    Shares OwnedBrasilcel N.V.
    
    
    89.5
    %NTT DoCoMo, Inc.
    
    
    7.0
    %Itochu Corporation
    
    
    3.5
    %
 Tagilo is a wholly-owned company of Brasilcel N.V. We are not aware of any other shareholder owning more than 5.0% of the
common shares. The following is a brief description of our major shareholders, referred
to above. For a description of Brasilcel N.V., see Item 4A. Our History and
DevelopmentBrasilcel. NTT DoCoMo, Inc. is a company fully dedicated to telecommunications. NTT
performs telecommunications infrastructure building and maintenance;
development, maintenance, sale and leasing of mobile phones and related
services; development, production and sale of software to mobile communication
companies; and telecommunications research and services. Itochu Corporation is a Japanese company with a wide range of activities,
which include the production of organic and synthetic fibers, food and
beverages (alcoholic and non-alcoholic), fertilizers, animal food, wood
products, raw material for ceramic production and construction materials, pulp
and paper, rubber, leather derivatives, petroleum derivatives, pharmaceutical
and veterinary products, chemical products (agrochemical and 46




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others), and also activities in areas such as land and maritime
transportation, forestry, construction, mining and the generation and
distribution of electrical power. Brasilcel does not have different voting rights, but, as a
result of owning, directly and indirectly, 87.4% of our common shares, it has
the ability to control the election of our board of directors and the direction
of our future operations. On June 21, 2004, after Anatels
approval, Brasilcel purchased all the shares that NTT DoCoMo, Inc.
and Itochu Corporation held on Sudestecel Participações Ltda. Any significant change in the percentage ownership held
by any major shareholders during the past three years is disclosed in Item 4A.
Our History and Development. At May 31, 2004, there were approximately 137 record holders of ADSs in
the United States, including Brasilcel, which holds ADSs representing
approximately 67.1% of our preferred shares. The other ones hold ADSs
representing approximately 2.8% of our preferred shares. B. Related Party Transactions Each of our subsidiaries has entered into a Consulting Service Agreement
with Telefónica Móviles pursuant to which it receives marketing, technical and
business development advice. Under the Consulting Services Agreements, the
subsidiaries are obligated to make annual payments to Telefónica Móviles of
approximately of up to 2% net operating revenues. We also carry on transactions with other companies controlled by
Telefónica, such as network use and long distance (roaming) cellular
communication agreements. The counterparties to these agreements are:
Telebahia Celular S.A. and Telergipe Celular S.A. (both together, as Teleleste,
reported expense of R$ 0.1 million in 2003, and income of R$3.6 million, and
R$2.7 million, respectively in 2002 and 2001); Telesp (R$54.6 million and R$2.6
million of revenues in 2003 and 2002 and R$0.9 million of expenses in 2001);
Celular CRT S.A. (R$0.01 million expenses in 2003 and R$1.6 million and R$1.7
million in revenues in 2002 and 2001); Telesp Celular S.A., Global Telecom
S.A., Tele Centro Oeste Celular, Telems Celular, Telecom Celular, Telemat
Celular, Teleacre Celular, Telegoiás Celular, NBT (all together, as TCP,
reported R$1.3 million in revenues in 2003). The transactions relating to
roaming agreements are based on contracts entered into prior to the Break-up of
Telebrás, between Telebrás and each relevant Predecessor Company. The terms of
these agreements and of the ones for network use are regulated by Anatel. The following services are rendered by companies controlled by Portugal
Telecom and Telefónica:  
    
    transfer of general and administrative expenses with carriers
of the same group according to the costs actually incurred by us
with these services (R$34.7 million in revenues in 2003);  
    
    corporate services centralized at Telefónica Gestão de
Serviços Compartilhados do Brasil Ltda., transferred to other
companies at costs effectively incurred;  
    
    call center services rendered by Atento Brasil S.A. to users
of telecommunications services of subsidiaries, (R$45.7 million ,
R$35.3 million and R$31.5 million expenses respectively 2003, 2002
and 2001); and  
    
    implementation and maintenance of profitability and cost
control system by Telefónica Móbile Solution. We have engaged in a number of other transactions with related parties.
See note 29 to our consolidated financial statements. 47




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##### Table of Contents



C. Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information See Item 3A. Selected Financial Data and Item 17. Financial
Statements. Legal Matters Civil Litigation Related to the Breakup of Telebrás The Breakup of Telebrás is the subject of several lawsuits in which the
plaintiffs are seeking injunctions. Some preliminary injunctions were granted,
but all were quashed by decisions of the relevant federal court. These courts
also decided that the court of the state of Minas Gerais have original
jurisdiction over the proceedings. Several decisions quashing preliminary
injunctions are on appeal, and, if any such appeals are successful, the
shareholders of Telebrás may have to reapprove the Breakup of Telebrás or
legislative action may be required. The theories on which the lawsuits regarding the Breakup of Telebrás are
based include:  
    
    that the Brazilian constitution requires that the General
Telecommunications Law specifically authorize the creation of the 12
New Holding Companies,  
    
    that the Telebrás shareholders meeting held on May 22, 1998 which
approved the Breakup of Telebrás was not properly convened,  
    
    that national sovereignty will be threatened if Brazils
telecommunications companies are controlled by foreign entities, and  
    
    that the General Telecommunications Law requires that certain
matters, such as the entry of new competitors and the administration of
development and technology funds, be regulated prior to the Breakup of
Telebrás either by an executive order of the President or by an act of
Congress. If any of these lawsuits ultimately succeeds, the Breakup of Telebrás will
have to be reinitiated. This could require, depending upon the prevailing
plaintiffs theory, one or both of the following actions:  
    
    amending the Telecommunications Law; and  
    
    reconvening the May 22, 1998 Telebrás shareholders meeting. It is theoretically possible under Brazilian law for a court to require
that the Breakup of Telebrás be unwound, although we believe that this would
not be likely to occur. We believe that the ultimate resolution of the
proceedings will be favorable and will not have a material adverse effect on
our business or financial position. It is very difficult to quantify what the
potential impact to us would be if the Breakup of Telebrás were to be unwound.
This would require an assessment of the total amount of capital invested by
controlling shareholders in the 12 New Holding Companies and a prediction as to
any possible indemnification to which they may be entitled from the Brazilian
government. The results could be very far reaching and would affect all of the
New Holding Companies. 48




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Litigation
Arising Out of Events Prior to the Breakup of Telebrás Telebrás and our subsidiaries Predecessor Companies, our legal
predecessors, and our subsidiaries, respectively, are defendants in a number of
legal proceedings and subject to certain other claims and contingencies
relating to events prior to the Breakup of Telebrás. Liability for claims
arising out of acts committed by the Predecessor Companies prior to the
effective date of the spin-off of the cellular assets and liabilities of the
Predecessor Companies to our subsidiaries remains with the Predecessor
Companies, except for labor and tax claims (for which the Predecessor Companies
and our subsidiaries are jointly and severally liable, as the case may be, by
operation of law) and those liabilities with respect to which the Predecessor
Companies had made specific accounting provisions prior to the Breakup of
Telebrás, assigning them to our subsidiaries. Any claims against the
Predecessor Companies which are not satisfied by the Predecessor Companies
could result in claims against our subsidiaries to the extent that our
subsidiaries have received assets which might have been used to settle those
claims had they not been spun off from the Predecessor Companies. However,
under the shareholders resolution pursuant to which the spin-off was effected,
our subsidiaries have contribution rights against their Predecessor Companies
with respect to the entire amount of any payments made by our subsidiaries in
connection with any labor or tax claims brought against our subsidiaries and
relating to acts committed by the Predecessor Companies prior to the effective
date of the spin-off. We believe that the likelihood that claims of this kind will materialize
and have a material adverse financial effect on us is remote. Litigation
Related to Tax Credits Under certain conditions, Brazilian law permits companies to benefit from
tax credits related to the amortization of goodwill. Despite this fact, an
action was filed on December 16, 1999 against Anatel and the New Holding
Companies, including us, that have undergone a corporate restructuring in
connection with the Breakup of Telebrás and that recognized tax credits to
offset premiums paid by their controlling shareholders at the time of their
acquisition. We filed our answer in April, 2002. We do not think this action
will succeed as we believe the restructuring was done in compliance with
Brazilian law; however, based on the opinion of legal counsel, the chance of an
unfavorable outcome is possible in this case. The extent of any potential liabilities in connection with this action
will be determined in a separate but related lawsuit known as the calculation
of the award, which will only take place if we are unsuccessful in its
defense. Litigation
Related to the Ownership of Caller ID In July 2002, we, together with other Brazilian mobile telecommunication
operators, were named as defendants in an action filed by Lune Projetos
Especiais Telecommunicação Comércio Ind. Ltda., or Lune, pursuant to which Lune
claims to be the owner of patents relating to Equipamento Controlador de
Chamadas Entrantes e do Terminal Telefônico, or Caller ID, and also that the
mobile telecommunication operators are using the patent without proper
authorization. Therefore, Lune demands that the operators cease to provide
Caller ID services and that it should be indemnified for the unauthorized use
of the Caller ID system, upon payment of fees received by the operators in
consideration of the use of the system by their customers. Based on the opinion of our legal counsel, the chance of an unfavorable
outcome is possible in this case. However the indemnification that is allegedly
due from the mobile operators cannot be accurately calculated as of yet due to
the fact that the cost of the caller ID service provided by the companies has
never been separately calculated. Litigation
Related to the Validity of the Minutes in the Prepaid Plans We are defendant in various lawsuits brought by the federal public
prosecutors office and an association for consumers protection which
challenged the imposition of a deadline for the use of purchased prepaid
minutes. The plaintiffs allege that any purchased prepaid minutes should not
have a time limitation for usage. 49




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Based on external counsels opinion, we do not believe it will be resolved
against our interests. Tax-Related Litigation Related to the Application of the ICMS tax to activation fees: In June, 1998, the CONFAZ (Conselho Nacional de Política Fazendária)
agreed to apply the ICMS tax to certain service revenues, such as activation
fees, and to make the application to such activation fees retroactive for the
five years preceding June 30, 1998. We believe the extension of the ICMS tax to non-basic telecommunications
services such as cellular activation is unlawful because it would subject to
taxation certain services that are not telecommunications services and because
new taxes may not be applied retroactively. Each of our subsidiaries filed suit with the Justice Court (Tribunal de
Justiça do Estado) of the state in which it is located seeking injunctive
relief from retroactive and prospective application of the ICMS tax to cellular
activation fees, and each subsidiary obtained a temporary injunction relieving
it from payment during the duration of the lawsuits. In April 2000, Telerj
Celular obtained a favorable judicial decision and an important precedent from
the Lower Justice Court of the state of Rio de Janeiro on this matter,
prohibiting the assessment of ICMS tax on cellular activation fees. This
decision was later confirmed by the court of appeals (Tribunal de Segunda
Instância). Based upon advice from our legal counsel, we do not expect significant
losses arising from this matter and therefore have not made provisions for the
application of the ICMS tax on cellular activation. We do not believe that the
retroactive application is probable. Moreover, we believe that the Predecessor
Companies would be liable to our subsidiaries for any tax liability arising
from the retroactive application. Litigation Related to the Application to the ICMS in Telest Celular S.A. On the advice of our external counsel, with regard to the litigation that
arose out of the ICMS tax assessment made in 2002, our subsidiary Telest
Celular S.A. created a provision of R$12.1 million. With regard to other litigation that arose out of the ICMS tax (related to
telecommunication services and tax credits), Telest Celular S.A. created a
provision of R$8.1 million, and classified the case as possible loss. Litigation Related to the Application of the COFINS and PIS On November 27, 1998, the method for calculating the PIS and COFINS social
contributions was modified by Law no. 9,718, which increased the COFINS
contribution rate from 2% to 3% and authorized the deduction of up to 1/3 of
the amount due as COFINS from the amount due as CSLL. Since our subsidiaries
had a negative tax calculation basis, they could not benefit from this
deduction. Also, Law no. 9,718 indirectly increased the amounts of COFINS and
PIS due by the subsidiaries by including financial revenues in their
calculation basis. Based on our external counsels advice, we believe that this increase is
unconstitutional because: (i) article 195 of the Brazilian constitution, which
was effective when Law no. 9,718 was enacted, provided that the PIS
contribution could only be levied on compensation of employees, revenues and
profits; (ii) in order to increase the COFINS and PIS contributions, it would
be necessary to enact a law called lei complementar,which requires a greater
quorum than the one required to approve a law called lei ordinária,such as law
nr. 9,718; and (iii) the law was made effective before the expiration of the
required 90-day waiting period. Telerj Celular and Telest Celular obtained injunctions allowing them to
continue paying the COFINS and PIS contributions based on telecommunications
services and sales revenues and to continue paying the COFINS contribution at a
2% rate. However, the injunctions were partially reversed by decisions that
determined that the COFINS could be assessed at a 3% rate. Our subsidiaries
have accordingly resumed the payment of COFINS at the 3% rate. Said decisions,
however, remain valid with respect to the exclusion of financial revenues from
the 50




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calculation basis of both contributions. Notwithstanding, they continue
to dispute legally the COFINS and PIS increase and, if they win favorable
judicial decisions, may recoup overpaid taxes. Based on the changes introduced by the laws nrs. 10.637/02 and 10.833/03,
Telerj Celular and Telest Celular have been including, since December 2002,
financial revenues on the basis for the calculation of both PIS and COFINS. For
the periods before that date, we made provisions based on the judicial
decisions mentioned before. Administrative Proceedings Our subsidiaries are also defendants in administrative proceedings
amounting to R$44.6 million relating, among other issues, to (i) the failure to
collect ICMS in connection with revenues paid for services not strictly fitting
the category of telecommunication services, (ii) the failure to collect ICMS in
connection with international calls that were originated in Brazil, (iii) the
failure to collect ICMS in connection with calls made from administrative
stations and testing calls made by employees, (iv) the alleged failure to
collect the ICMS, ISS and other taxes. Based on the opinion of our external
counsel, we have not made any provision in connection with these proceedings. Other Litigation We are also party to certain legal proceedings arising in the normal
course of business. Our reserve amounts are sufficient to cover our estimated
losses due to adverse legal judgments. We believe that adverse judgments
arising from these other legal proceedings would not have a material adverse
effect on our business, financial condition or results of operations. Dividend Policy and Dividends We pay our shareholders both dividends and interest on shareholders
equity, which is a form of distribution that is tax deductible in Brazil. The
following table summarizes our history of payments of dividends and interest on
shareholders equity for the years 2003, 2002 and 2001. The table sets forth
amounts in reaisper thousand common shares and preferred shares and amounts in
U.S. dollars per ADS translated into U.S. dollars at the prevailing selling
rate for Brazilian currency into U.S. dollars in the commercial rate exchange
market on each of the respective dates of such payments. Year ended December 31,2003(1)
    
    2002
    
    2001R$ per
    
    U.S.$ per
    
    R$ per
    
    U.S.$ per
    
    R$ per
    
    U.S.$ perthousand
    
    ADS
    
    thousand
    
    ADS
    
    thousand
    
    ADSCommon
    
    
    0.0812
    
    
    
    
    
    
    
    0.2315
    
    
    
    
    
    
    
    0.10
    
    
    
    Preferred
    
    
    0.0894
    
    
    
    0.1555
    
    
    
    0.2547
    
    
    
    0.3503
    
    
    
    0.10
    
    
    
    0.1693
   (1)     Interest on shareholders equity is R$0.078780 per thousand common shares
and R$0.086658 per thousand preferred shares. In addition, there is a
complementary dividend in the amount of R$0.002497 per thousand commom shares
and R$0,002747 per thousand preferred shares. These amounts will be paid until
December 22, 2004. Under our by-laws, we are required to distribute as dividends in respect
of each fiscal year ending on December 31, to the extent amounts are available
for distribution, an aggregate amount equal to at least 25% of adjusted net
income on such date as mandatory dividend. Preferred shares are entitled to
receive minimum non cumulative cash dividends of 10% higher than those
attributed to common shares. The annual dividend distributed to our holders of
our preferred shares has priority in the allocation of adjusted net income. Under Brazilian corporate law, a company is permitted to suspend the
payment of the mandatory dividend in respect of its common and preferred shares
if: 51




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
    
    its board of directors, independent auditors and board of
auditors report to the shareholders meeting that the distribution
would be incompatible with the financial conditions of that company;
and
    
    the shareholders ratify this conclusion at the shareholders
meeting. In this case,  
    
    the board of executive officers would forward to the
CVM, within five days of the shareholders meeting, an
explanation for the suspension of the payment of the mandatory
dividend; and  
    
    the amounts which were not distributed are to be
recorded as a special reserve, and, if not absorbed by losses in
subsequent fiscal years, they must be distributed as dividends as
soon as the financial condition of that company permits.
Dividends may be distributed by us out of our retained earnings
or accumulated profits in any given fiscal year. For the purposes of Brazilian corporate law, accumulated profits are
defined as net income after the provision of income tax and social contribution
for the relevant fiscal year, net of any accumulated losses from prior fiscal
years and any amounts allocated to warrants, income bonds, employees and
managements participation in a companys profits. At each annual shareholders meeting, the board of directors is required
to determine how net profits for the preceding fiscal year are to be allocated.
Under Brazilian corporate law, we are required to maintain a statutory
reserve, to which we must allocate 5% of our net profits for each fiscal year
until the amount of such reserve equals 20% of our paid-in capital. Losses, if
any, may be charged against the statutory reserve. The Brazilian corporate law also provides for two additional discretionary
allocations of net profits that are subject to approval by the shareholders at
the annual shareholders meeting:  
    
    first, a percentage of net profits may be allocated to the
contingency reserve for anticipated losses that may be charged to it
in future years. Any amount so allocated in a prior year must be
either:  
    
    reversed in the fiscal year in which the loss was
anticipated if such loss does not in fact occur; or  
    
    written off in the event that the anticipated loss
occurs;  
    
    second, if the amount of unrealized revenue exceeds the sum
of (i) the statutory reserve and (ii) retained earnings, such excess
may be allocated to the unrealized profit at the direction of the
board of directors. Allocations may not hinder the payment of mandatory dividends. Unrealized
revenue reserve is defined under the Brazilian corporate law as the sum of:  
    
    the share of equity earnings of affiliated companies, which is not paid as cash dividends; and  
    
    profits as a result of income from operations after the end of the next succeeding fiscal year. The amounts available for distribution are determined on the basis of
financial statements prepared in accordance with Brazilian corporate law
method. Preferences of Preferred Shares On December 30, 2002, our extraordinary shareholders meeting approved
certain amendments to our by-laws to reflect certain amendments to the
Brazilian corporate law relating to the preemptive rights of our preferred
shares. Pursuant to those amendments, holders of our preferred shares are
entitled to receive dividends per share in an amount 10% greater than the
dividends per share to holders of common shares. Therefore, distribution of
dividends per year shall be as follows: 52




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
    
    first, we add to the number of preferred shares a 10% factor;
    
    second, we divide the dividends to be paid by the number
obtained above added up to the number of common shares;
    
    the resulting amount will correspond to the dividends payable
to common shares;
    
    thereafter, when we add 10% to this amount, we will find the
amount of dividends payable to preferred shares. Preferred shares are entitled to priority in the receipt of equity,
without premium, in case of liquidation. If the dividend to be paid to the
holders of preferred shares is not paid for a period of three years, holders of
preferred shares will be entitled to full voting rights until such time as that
dividend is paid in full for any year. Payment of Dividends We are required by Brazilian law and by our by-laws to hold an annual
shareholders meeting by April 30 of each year, at which, among other things,
an annual dividend may be declared by a decision of our shareholders on the
recommendation of our board of directors. The payment of annual dividends in
any given year is based on the financial statements prepared for the preceding
fiscal year ending December 31. Under the Brazilian corporate law, dividends
are required to be paid within 60 days of the annual shareholders meeting, or
on the date determined at a shareholders meeting, but in any case prior to the
end of the fiscal year in which such dividend was declared. A shareholder has
a three-year period from the dividend payment date to claim dividends in
respect of its shares, after which time unclaimed dividends revert back to us.
Because our shares are issued in book-entry form, dividends will be credited to
the depositary, which is responsible for the delivery of the dividends to their
respective holders. We are not required to adjust the amount of paid-in
capital for inflation. Annual dividends may be paid to shareholders on a pro
rata basis according to the date when the subscription price is paid to us. Our preferred shares underlying the ADSs are held in Brazil by a Brazilian
custodian, Banco Itaú S.A., as the agent for the depositary, which is the
registered owner of our shares. Payments of cash dividends and distributions, if any, will be made in
reaisto the Custodian on behalf of The Bank of New York, as depositary, which
will then convert those proceeds into U.S. dollars and will cause such U.S.
dollars to be delivered to the depositary for distribution to holders of ADRs.
In the event that the Custodian is unable to immediately convert the reais
received as dividends into U.S. dollars, the amount of U.S. dollars payable to
holders of ADRs may be adversely affected by devaluations of the realthat
occur before such dividends are converted and remitted. Dividends in respect
of our preferred shares paid to resident and non-resident shareholders,
including holders of ADSs, are not currently subject to Brazilian withholding
tax. B. Significant Changes None. 
 ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details Brazilian private equity and debt are principally traded on BOVESPA, which
is the trading market for our common and preferred shares. Our preferred
shares began trading on the Brazilian stock exchanges on September 21, 1998.
The following table sets forth the reported high and low closing sale prices
for our preferred shares on BOVESPA, for the periods indicated. 53




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Nominal reais per 1,000preferred sharesLow
    
    High1999Annual
    
    
    3.60
    
    
    
    14.302000Annual
    
    
    6.80
    
    
    
    21.802001Annual
    
    
    5.10
    
    
    
    10.502002Annual
    
    
    5.67
    
    
    
    6.90First quarter
    
    
    5.68
    
    
    
    6.45Second quarter
    
    
    5.67
    
    
    
    6.50Third quarter
    
    
    5.99
    
    
    
    6.70Fourth quarter
    
    
    6.10
    
    
    
    6.902003Annual
    
    
    5.10
    
    
    
    7.40First quarter
    
    
    6.22
    
    
    
    6.98Second quarter
    
    
    6.79
    
    
    
    7.40Third quarter
    
    
    5.10
    
    
    
    6.64Fourth quarter
    
    
    5.69
    
    
    
    6.80Last Six MonthsDecember 2003
    
    
    5.79
    
    
    
    6.80January 2004
    
    
    6.51
    
    
    
    7.19February 2004
    
    
    6.12
    
    
    
    6.64March 2004
    
    
    5.31
    
    
    
    6.10April 2004
    
    
    5.70
    
    
    
    6.50May 2004
    
    
    4.61
    
    
    
    5.49June 2004 (until June 25, 2004)
    
    
    5.05
    
    
    
    6.50
 In the United States, our preferred shares trade in the form of ADSs, each
representing 5,000 preferred shares issued by The Bank of New York, as
depositary pursuant to a Deposit Agreement among us, the depositary and the
registered holders and beneficial owners from time to time of ADRs. The ADSs
commenced trading separately on the New York Stock Exchange on November 16,
1998 under the symbol TSD. At May 31, 2004, there were approximately 137
record holders of ADSs in the United States, including Brasilcel, which holds
ADSs representing approximately 67.1% of our preferred shares. The other ones
hold ADSs representing approximately 2.8% of our preferred shares. The
following table sets forth the reported low and high closing sales prices for
ADSs on the New York Stock Exchange for the dates and periods indicated. 54




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U.S. dollars per ADSLow
    
    High1999Annual
    
    
    12.87
    
    
    
    40.372000Annual
    
    
    17.25
    
    
    
    62.252001Annual
    
    
    10.60
    
    
    
    26.252002Annual
    
    
    7.70
    
    
    
    13.40First quarter
    
    
    11.80
    
    
    
    13.40Second quarter
    
    
    10.20
    
    
    
    12.33Third quarter
    
    
    7.90
    
    
    
    11.51Fourth quarter
    
    
    7.70
    
    
    
    9.582003Annual
    
    
    7.95
    
    
    
    12.80First quarter
    
    
    8.60
    
    
    
    9.99Second quarter
    
    
    10.70
    
    
    
    12.80Third quarter
    
    
    7.95
    
    
    
    12.10Fourth quarter
    
    
    9.82
    
    
    
    11.64Last Six MonthsDecember 2003
    
    
    9.82
    
    
    
    11.64January 2004
    
    
    11.38
    
    
    
    12.64February 2004
    
    
    10.66
    
    
    
    11.68March 2004
    
    
    9.25
    
    
    
    10.70April 2004 2003
    
    
    10.00
    
    
    
    11.20May 2004
    
    
    7.47
    
    
    
    9.25June 2004 (until June 25, 2004)
    
    
    7.80
    
    
    
    10.40
 B. Plan of Distribution Not applicable. C. Markets Trading on the São Paulo Stock Exchange The São Paulo Stock Exchange, or BOVESPA, is a non-profit entity owned by
its member brokerage firms. Trading on this exchange is limited to member
brokerage firms and a limited number of authorized nonmembers. Since April 7, 2003, the São Paulo Stock Exchange has open outcry trading
sessions each day, from 10:00 a.m. to 1:00 p.m. and from 2:00 p.m. to 4:45 p.m.
Trading is also conducted from 10:00 a.m. to 5:00 p.m. on an automated system
on the São Paulo Stock Exchange. On September 20, 1999, the São Paulo Stock
Exchange launched the After-Market, with the objective of expanding business
opportunities and offering investors a more flexible trading schedule.
After-Market trading takes place from 5:45 p.m. to 7:00 p.m. All stocks traded
during the regular trading session of the day may be traded on the
After-Market. However, only cash market trading via the São Paulo Stock
Exchanges electronic trading system is allowed. The maximum variation allowed
for stock prices, whether positive or negative, corresponds to 2% in relation
to the closing price at the regular trading session. In order to better control volatility, the São Paulo Stock Exchange has
adopted a circuit breaker system pursuant to which trading sessions may be
suspended for a period of 30 minutes or one hour whenever its indices fall
below the limits of 10% in relation to the index registered in the previous
trading session. 55




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There are no specialists or market makers for our shares on the São Paulo
Stock Exchange. Trading in securities listed on the São Paulo Stock Exchange
may be effected off the Exchange in certain circumstances, although such
trading is very limited. Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for
shares is made through the facilities of a separate clearinghouse, which
maintains accounts for member brokerage firms. The seller is ordinarily
required to deliver the shares to the exchange on the second business day
following the trade date. The clearinghouse for the São Paulo Stock Exchange
is Companhia Brasileira de Liquidação e Custódia S.A.  CBLC, which is wholly
owned by that Exchange. At December 31, 2003, the aggregate market capitalization of the 369
companies listed on BOVESPA was approximately U.S.$234.2 billion. Although all
the outstanding shares of an exchange-listed company may trade on BOVESPA, in
most cases the preferred shares or less than half of the listed common shares
are actually available for trading by the public, the remainder being held by
small groups of controlling persons that rarely trade their shares. For this
reason, data showing the total market capitalization of BOVESPA tends to
overstate the liquidity of the Brazilian equity securities market. The Brazilian equity market is relatively small and illiquid compared to
major world markets. In 2003, the combined dayly trading volumes on BOVESPA
averaged approximately U.S.$271.9 million. In 2003, the 10 most actively
traded shares represented approximately 53.5% of the total trading in the cash
market on BOVESPA. Trading on BOVESPA by nonresidents of Brazil is subject to
certain limitations under Brazilian foreign investment legislation. Regulation of Brazilian Securities Markets The Brazilian securities markets are regulated by the CVM, which has
authority over stock exchanges and the securities markets generally, by the
Conselho Monetário Nacional, or CMN, the National Monetary Council and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by Law No. 6,385, as amended, known as
the Brazilian Securities Law, and by Law No. 6,404, as amended, the Brazilian
corporate law. Law No. 10,303 of December 31, 2001 amended the Brazilian corporate law
and the Brazilian Securities Law. Consequently, some major modifications
resulted for the businesses of the publicly traded companies. Among the changes, Law No. 10,303, along with Executive Order No. 8 and
Decree No. 3.995, all dated October 31, 2001, provided that the CVM was to have
the scope of its authority altered and expanded. Additionally, CVMs
positioning in the regulatory hierarchy as well as its autonomy were modified. The modifications include changes in the proportions of common and
preferred shares, new rules for the issuance of debentures, other parameters
governing the exercise of the right of withdrawal, duties and powers of the
members of the board of auditors and the board of directors, and the ability of
publicly traded companies to make publications available over the Internet.
Also provided is the pooling agreement, the so-called block voting by which the
shareholders agree during a prior meeting on the direction of the votes that
will be cast at the general meetings. The purpose of this type of vote is to
prevent any possible individual dissidents or interests from harming corporate
interests. The period established for companies to adapt their by-laws is one year
from the publication of the law on November 1, 2001. Our shareholders held a
general shareholders meeting on December 30, 2002, where they addressed these
modifications in our by-laws. The CVM, which is the agency in charge of regulating the market, now
handles some functions that were reserved to the Banco Central, for example,
the regulation and organization of the futures and commodities markets. Under the Brazilian corporate law, a company is either public, a companhia
aberta, such as our company, or private, a companhia fechada. All public
companies are registered with the CVM and are subject to reporting 56




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requirements. A company registered with the CVM may have its securities
traded either on the São Paulo Stock Exchange or on the Brazilian
over-the-counter market. The shares of a public company may also be traded
privately, subject to certain limitations. In order to be listed on the
Brazilian stock exchanges, a company must apply for registration with the CVM
and the stock exchange. Once the stock exchange lists a company and the CVM
accepts its registration as a public company, its securities may start to be
traded. Trading in securities on the São Paulo Stock Exchange may be suspended at
the request of a company in anticipation of a material announcement. Trading
in the securities of a particular company may also be suspended on the
initiative of the São Paulo Stock Exchange or the CVM due to, among other
reasons, a belief that the company has provided inadequate information
regarding a material event or has provided inadequate responses to inquiries by
the CVM or the São Paulo Stock Exchange. The Brazilian securities law, the Brazilian corporate law and the
regulations issued by the CVM, the CMN and the Central Bank provide, among
other things, disclosure requirements and restrictions on insider trading,
price manipulation and protection of minority shareholders. However, the
Brazilian securities markets are not as highly regulated and supervised as the
U.S. securities markets or markets in some other jurisdictions. Principal Differences Between the Brazilian and the U.S. Corporate Governance
Practices The significant differences between our corporate governance practices and
the NYSE corporate governance standards are as follows: Independence of Directors and Independence Tests The Brazilian corporate law and our bylaws require that our directors be
elected by our shareholders at a general shareholders meeting. All our
directors are appointed by our controlling shareholders. Neither our board of directors nor our management test the independence of
the directors before such elections are made.However,both the Brazilian
corporate law and CVM establish rules in relation to certain qualification
requirements and restrictions, investiture, compensation, duties and
responsibilities of the companies executives and directors. Although we
believe these rules provide adequate assurances that our directors are
independent, we believe such rules would permit us to have directors that would
not otherwise pass the independence tests established by the NYSE. Executive Sessions According to the Brazilian corporate law, up to 1/3 of the members of the
board of directors can be elected into executive positions. The remaining
non-management directors are not expressly empowered to serve as a check on
management and there is no requirement that those directors meet regularly
without management. Notwithstanding, under our bylaws, the members of the
board of executive officers cannot be elected to the board of directors. Committees We are not required under applicable Brazilian corporate law to have, and
accordingly we do not have, a Nominating Committee, Corporate Governance
Committee and Compensation Committee.Pursuant to our bylaws our directors are
elected by our shareholders at a general shareholders meeting. Compensation
for our directors and executive officers is established by our shareholders. Audit Committee and Audit Committee Additional Requirements The Brazilian corporate law requires us to have a board of auditors
(Conselho Fiscal), which is composed of three to five members elected at the
general shareholders meeting. The board of auditors operates independently
from our management and from our external auditors. Its main function is to
examine the financial statements of 57




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each fiscal year and provide a formal report to our shareholders. We have a
board of auditors that consists of three members and three alternates and which
meets once a quarter. In April 2003, the SEC has stated that the listing of
securities of foreign private issuers will be exempt from the audit committee
requirements if the issuer meets certain requirements. We also have an audit committee, whose members do not follow the
independence requirements of the Exchange Act Rule 10A-3(c)(3), as we are still
exempt from such requirements by July 31, 2005 according to the Exchange Act
Rule 10A-3(a)(5)(A). See Item 16D  Exemptions from the Listing Standards for
Audit Committees. Under the Brazilian corporate law, an audit committee member may
simultaneously serve on the audit committees of more than three public
companies. In addition, our company does not impose limitations in this regard
and our board is not required to affirmatively determine and disclose that the
directors ability to effectively serve is not impaired. We are aware that the
members of our audit committee also serve on the audit committees of all of the
other companies that have been operating under the brand name Vivo: TCP, TLE,
TCO and Celular CRT Participações S.A. Shareholder Approval of Equity Compensation Plans Our shareholders do not have the opportunity to vote on all equity
compensation plans. However, any issuance of new shares that exceeds the
authorised capital is subject to shareholder confirmation. Corporate Governance Guidelines We have not adopted any corporate governance guidelines in addition to the
rules imposed upon us by applicable Brazilian law. We believe that the
corporate governance guidelines applicable to us under Brazilian law, such as
those regarding insider trading, public disclosure of material information, and
rules on the negotiation of equities by management and controlling
shareholders, are consistent with some of the guidelines established by the
NYSE. Code of Business Conduct and Ethics Although the adoption of a code of ethics is not required by Brazilian
corporate law, we implemented in June, 2003 our Code of Ethics regulating the
conduct of our senior financial officers. See Item 16B  Code of Ethics. We
do not have a code of business conduct and ethics applicable to all our
Directors and employees. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not applicable. 58




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B. Memorandum and Articles of Association The following summarizes certain material provisions of our by-laws and
Brazilian law, the main bodies of regulation governing us. Copies of our
by-laws have been filed as exhibits to this annual report on Form 20-F. Register Our by-laws were filed with the Public Registry of the state of Rio de
Janeiro (JUCERJ) on April 16, 2003 under company number (NIRE) 3330026819-7.
Article 5 of our by-laws will be amended as a result of the capital increase
determined by the Board of Directors of Tele Sudeste at its March 31, 2003
meeting, which was registered with JUCERJ under n. 00001314082. Objectives and Purposes We are a publicly traded company duly registered with the Brazilian
securities commission. Our by-laws provides that our corporate purpose is to:  
    
    exercise the control of operating companies which provide
cellular mobile telecommunications services, personal mobile
services and other services in conformity with the concessions,
authorizations and permissions that have been granted to us;
    
    promote, through our subsidiaries or controlled companies,
the expansion and implementation of the telecommunications services
within our concessions, authorizations and permissions;
    
    promote, carry out and direct the financing of capital from
internal or external sources to be used by us or our controlled
companies;
    
    promote, carry out and encourage study and research
activities aimed at the development of the telecommunications
sector;
    
    perform, through our subsidiaries and affiliated companies,
specialized technical services related to the telecommunications
sector;
    
    promote, encourage, carry out and coordinate, through our
subsidiaries or controlled companies, the development and training
of personnel necessary to perform activities in the
telecommunications sector;
    
    carry out and promote the import of goods and services for
the operations of our subsidiaries and controlled companies;
    
    execute other activities connected or related to our objective;
    
    participate in the equity capital of other companies; and
    
    trade equipment and materials necessary or useful for providing telecommunications services. Directors Following is a description of some of the provisions of our by-laws
concerning the members of our board of directors:  
    
    the board of directors has the power to approve investments
and acquisition of assets, assume any obligation and execute
contracts not included in the budget for an amount exceeding R$300
million, 59




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the public issuance of promissory notes, and the acquisition of our shares for cancellation or deposit with a custodian; and  
    
    the board of directors has the power to apportion the global
remuneration set forth by the shareholders meeting between the
directors and the executive officers. Pursuant to Brazilian corporate law, each member of the board of directors
must have at least one share of our capital stock to be elected as a director.
There are no provisions in our by-laws with respect to:  
    
    age limits for retirement of directors; and  
    
    anti-takeover mechanisms or other procedures designed to
delay, defer or prevent changes in our control. Although there are no provisions in our by-laws with respect to the
following, they are regulated by Brazilian corporate law and CVM regulations:  
    
    a directors power to vote on proposals in which the director is materially interested;  
    
    a directors power to vote compensation to him or herself in the absence of an independent quorum;  
    
    borrowing powers exercisable by the directors;  
    
    required shareholding for director qualification; and  
    
    disclosure of share ownership. Rights Attaching to Shares Dividend Rights See
Item 8A. Consolidated Statements and Other Financial
Information#Dividend Policy and Dividends, and
Payment of Dividends. Voting Rights Each common share entitles the holder to one vote at meetings of
shareholders. Our preferred shares do not entitle the holder to vote except as
discussed in our by-laws in Articles 7, 9 and 10. Holders of our preferred
shares are each entitled to attend or to address meetings of shareholders and
to elect members of our board of directors according to Article 141, fourth
paragraph, II, and Article 141, fifth paragraph, of Law No. 6,404/76, as
amended by Article 8, fourth paragraph of Law No. 10,303/01. One of the members of our board of auditors and his or her alternate are
elected by the majority vote of the holders of our preferred shares present at
the annual meeting of shareholders at which the members of the board of
auditors are elected. Brazilian corporate law provides that certain non-voting shares, such as
our preferred shares, acquire voting rights in the event we fail for three
consecutive fiscal years to pay the mandatory minimum dividend to which such
shares are entitled, until such payment is made. Our preferred shares are entitled to full voting rights in the event that
we fail to pay the mandatory minimum dividends to which they are entitled for
three consecutive years, and with respect to: 60




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
    
    the approval of any long-term contract between us and our
controlled subsidiaries, on the one hand, and any controlling
shareholder or that shareholders affiliates and related parties, on
the other hand; and  
    
    changes/eliminations of certain rights and obligations as
provided for in our by-laws. Any change in the preference, benefits, conditions of redemption and
amortization of our preferred shares, or the creation of a class of shares
having priority or preference over our preferred shares, would require the
approval of holders of a majority of our outstanding preferred shares at a
special meeting of holders of our preferred shares. Such a meeting would be
called by publication of a notice in the states official gazette and two other
Brazilian gazettes, as determined by the shareholders, at least thirty days
prior to the meeting, but would not generally require any other form of notice. In any circumstances in which holders of our preferred shares are entitled
to vote, each preferred share will entitle the holder to one vote. Meeting of Shareholders According to Brazilian law, shareholders must be previously convoked in
order for a general or extraordinary shareholders meeting to be installed.
The convocation must be published in the states official gazette and two other
gazettes, as determined by the shareholders, at least 15 days prior to the
meetings scheduled date. If the first meeting is not installed for some
reason, the second convocation must be published at least eight days before the
second meeting date. On the first call, meetings may only be installed with a minimum quorum of
one-fourth of the holders of voting shares. Extraordinary meetings, whose
object is the amendment of the by-laws, may only be installed on the first call
with a minimum of two-thirds of the voting capital present. In addition, some
decisions require the approval of at least one-half of the holders of voting
shares (qualified quorum). On a second call, the meetings are installed
regardless of quorum. Preemptive Rights Each of our shareholders has a general preemptive right to subscribe for
shares in any capital increase in proportion to its shareholding. A minimum
period of 30 days following the publication of notice of the capital increase
is allowed for the exercise of the right. In the event of a capital increase, which would maintain or increase the
proportion of capital represented by our preferred shares, holders of ADSs, or
of our preferred shares, would have preemptive rights to subscribe only to our
newly issued preferred shares. In the event of a capital increase, which would
reduce the proportion of capital represented by our preferred shares, holders
of ADSs, or of our preferred shares, would have preemptive rights to subscribe
to our preferred shares in proportion to their shareholdings and to our common
shares only to the extent necessary to prevent dilution of their interest. Preemptive rights to purchase shares may not be offered to U.S. holders of
our ADSs unless a registration statement under the Securities Act is effective
with respect to the shares underlying those rights, or an exemption from the
registration requirements of the Securities Act is available. Consequently, if
you are a holder of our ADSs who is a U.S. person or is located in the United
States, you may be restricted in your ability to participate in the exercise of
preemptive rights. Right of Redemption Brazilian corporate law provides for the right of redemption to minority
shareholders under certain circumstances. 61




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The right of a dissenting shareholder to seek redemption arises in case
our shareholders representing more than 50% of the voting shares, common shares
or preferred shares, as applicable, decide to:  
    
    change the preference of our preferred shares or to create a
class of shares having priority or preference over our preferred
shares, except if such actions are expressly permitted in the
by-laws at the time of their adoption by our shareholders;
    
    change the preference of our preferred shares, any right they
carry, their amortization or redemption rights, or to create a class
of shares having priority or preference over our preferred shares;
    
    reduce the mandatory distribution of dividends;
    
    change our corporate purposes;
    
    transfer all of our shares to another company in order to
make us a wholly owned subsidiary of that company;
    
    approve the acquisition of another company, the price of
which exceeds certain limits set forth in Brazilian corporate law;
    
    participate in a group of companies if certain liquidity
standards are not met according to the Brazilian corporate law as
amended by Law No. 10,303/01;
    
    merge or consolidate us with another company if certain
liquidity standards are not met according to the Brazilian corporate
law as amended by Law No. 10,303/01; and
    
    cisão, or split-up, Tele Sudeste, according to the Brazilian
corporate law, as amended by Law No. 10,303/01, in any of the
following situations: (i) reduction of minimum dividends; (ii)
participation in a group of companies; or (iii) change of our
corporate purposes, except in case the company receiving our assets
has a corporate purpose substantially identical to ours. The right to redemption lapses 30 days after publication of the minutes of
the relevant shareholders meeting or, whenever the resolution requires the
approval of the holders of our preferred shares by vote taken in a special
meeting of a majority of the holders of our preferred shares affected by the
resolution, within 30 days from the publication of the minutes of that special
meeting. We would be entitled to reconsider any action giving rise to
redemption rights within 10 days following the expiration of those rights if
the redemption of shares of dissenting shareholders would jeopardize our
financial stability. Unless otherwise provided in our by-laws, which is not the case, shares
are redeemable at their book value, determined on the basis of the last annual
balance sheet approved by the shareholders. If the shareholders meeting
giving rise to redemption rights occurs more than 60 days after the date of the
last annual balance sheet, a shareholder may demand that its shares be valued
on the basis of a new balance sheet that is as of a date within 60 days of such
shareholders meeting. Form and Transfer Our shares are maintained in book-entry form with a transfer agent, Banco
ABN-AMRO Real S.A., and the transfer of our shares is made in accordance with
the applicable provision of Brazilian corporate law, which provides that a
transfer of shares is effected by an entry made by the transfer agent on its
books, debiting the share account of the seller and crediting the share account
of the purchaser against presentation of a written order of the seller or
judicial authorization or order in an appropriate document which remains in the
possession of the transfer agent. Our preferred shares underlying our ADSs are
registered on the records of BOVESPA in the name of The Bank of New York, as
depositary of the ADSs. 62




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Transfers of shares by a foreign investor are made in the same way and
executed by such investors local agent on the investors behalf except that,
if the original investment was registered with the Central Bank of Brazil under
the Brazilian foreign investment in capital markets regulations, the foreign
investor should also seek amendment, if necessary, through its local agent, of
the certificate of registration to reflect the new ownership. BOVESPA operates a central clearing system. A holder of our shares may
choose, at its discretion, to participate in this system. All shares elected
to be put into the system will be deposited in custody with the relevant stock
exchange through a Brazilian institution duly authorized to operate by the
Central Bank of Brazil and having a clearing account with the relevant stock
exchange. The fact that such shares are subject to custody with the relevant
stock exchange will be reflected in our register of shareholders. Each
participating shareholder will, in turn, be registered in our register of
beneficial shareholders maintained by the relevant stock exchange and will be
treated in the same way as registered shareholders. C. Material Contracts On December 10, 2002, Telerj Celular entered into an authorization
agreement with Anatel, acting as a representative of the Brazilian government,
which enables it to provide personal cellular services (SMP) in the state of
Rio de Janeiro. The authorization replaces the concession agreement entered
into with Anatel on November 4, 1997, and authorizes Telerj Celular to provide
SMP services until November 30, 2005. It may be renewed for an additional term
of fifteen years upon payment of 2% of Telerj Celulars net revenues from usage
charges in its region in the year prior to the year when payment is due, and
every two years during the extension period. In consideration for the
authorization, Telerj Celular was required to pay R$9.0 thousand. The
authorization is a legal requirement for providing telecommunication services
in the region covered thereby. On December 10, 2002, Telest Celular entered into an authorization
agreement with Anatel, acting as a representative of the Brazilian government,
which enables it to provide personal cellular services (SMP) in the state of
Espíritio Santo. The authorization replaces the concession agreement entered
into with Anatel on November 4, 1997, and authorizes Telest Celular to provide
SMP services until November 30, 2008. It may be renewed for an additional term
of fifteen years upon payment of 2% of Telest Celulars net revenues from usage
charges in its region in the year prior to the year when payment is due, and
every two years during the extension period. In consideration for the
authorization, Telest Celular was required to pay R$9.0 thousand. The
authorization is a legal requirement for providing telecommunication services
in the region covered thereby. D. Exchange Controls There are no restrictions on ownership of preferred shares or common
shares by individuals or legal entities domiciled outside of Brazil. The right to convert dividend or interest payments and proceeds from the
sale of shares into foreign currency and to remit such amounts outside Brazil
is subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investments have been
registered with the Central Bank and the CVM. Such restrictions on the
remittance of foreign capital abroad may hinder or prevent the custodian for
our preferred shares represented by our ADSs or the holders of our preferred
shares from converting dividends, distributions or the proceeds from any sale
of these preferred shares into U.S. dollars and remitting the U.S. dollars
abroad. Holders of our ADSs could be adversely affected by delays in, or
refusal to grant any, required government approval to convert Brazilian
currency payments on the preferred shares underlying our ADSs and to remit the
proceeds abroad. Resolution No. 1,927 of the National Monetary Council provides for the
issuance of depositary receipts in foreign markets in respect of shares of
Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289 of
the National Monetary Council, known as the Annex V Regulations. The ADS
program was approved under the Annex V Regulations by the Central Bank and the
CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale
of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment
controls, and holders of the ADSs are entitled to favorable tax treatment. See
TaxationBrazilian Tax Considerations. 63




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Under Resolution 2,689 of the CMN, foreign investors registered with the
CVM may buy and sell Brazilian securities, including the preferred shares, on
Brazilian stock exchanges without obtaining separate certificates of
registration for each transaction. Registration is available to qualified
foreign investors, which principally include foreign financial institutions,
insurance companies, pension and investment funds, charitable foreign
institutions and other institutions that meet certain minimum capital and other
requirements. Resolution 2,689 also extends favorable tax treatment to
registered investors. See TaxationBrazilian Tax Considerations. Pursuant to Resolution 2,689, foreign investors must: (i) appoint at
least one representative in Brazil with the ability to perform actions
regarding the foreign investment; (ii) complete the appropriate foreign
investor registration form; (iii) obtain registration as a foreign investor
with CVM; and (iv) register the foreign investment with the Central Bank. The securities and other financial assets held by a foreign investor
pursuant to Resolution 2,689 must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
by the CVM or be registered in register, clearing and custody systems
authorized by the Central Bank or by the CVM. In addition, the trading of
securities is restricted to transactions carried out on the stock exchanges or
over-the-counter markets licensed by the CVM. Registered Capital Amounts invested in our preferred shares by a non-Brazilian holder who
qualifies under Resolution 2,689 and obtains registration with the CVM, or by
the depositary representing an ADS holder, are eligible for registration with
the Central Bank. This registration (the amount so registered is referred to
as registered capital) allows the remittance outside Brazil of foreign
currency, converted at the commercial market rate, acquired with the proceeds
of distributions on, and amounts realized through, dispositions of our
preferred shares. The registered capital per preferred share purchased in the
form of an ADS, or purchased in Brazil and deposited with the depositary in
exchange for an ADS, will be equal to its purchase price (stated in U.S.
dollars). The registered capital per preferred share withdrawn upon
cancellation of an ADS will be the U.S. dollar equivalent of (i) the average
price of a preferred share on the Brazilian stock exchange on which the most
preferred shares were traded on the day of withdrawal or (ii) if no preferred
shares were traded on that day, the average price on the Brazilian stock
exchange on which the most preferred shares were traded in the fifteen trading
sessions immediately preceding such withdrawal. The U.S. dollar equivalent
will be determined on the basis of the average commercial market rates quoted
by the Central Bank on these dates. A non-Brazilian holder of preferred shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. This
delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder. A certificate of registration has been issued in the name of the
depositary with respect to the ADSs and is maintained by the custodian on
behalf of the depositary. Pursuant to the certificate of registration, the
custodian and the depositary are able to convert dividends and other
distributions with respect to the preferred shares represented by our ADSs into
foreign currency and remit the proceeds outside Brazil. In the event that a
holder of ADSs exchanges such ADSs for preferred shares, such holder will be
entitled to continue to rely on the depositarys certificate of registration
for five business days after such exchange, following which such holder must
seek to obtain its own certificate of registration with the Central Bank.
Thereafter, any holder of preferred shares may not be able to convert into
foreign currency and remit outside Brazil the proceeds from the disposition of,
or distributions with respect to, such preferred shares, unless the holder is a
duly qualified investor under Resolution 2,689 or obtains its own certificate
of registration. A holder that obtains a certificate of registration will be
subject to less favorable Brazilian tax treatment than a holder of ADSs. See
TaxationBrazilian Tax Considerations. If the holder does not qualify under Resolution 2,689 by registering with
the CVM and the Central Bank and appointing a representative in Brazil, the
holder will be subject to less favorable Brazilian tax treatment than a holder
of ADSs. Regardless of qualification under Resolution 2,689, residents in tax
havens are subject to less favorable tax treatment than other foreign
investors. See TaxationBrazilian Tax Considerations. 64




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Under current Brazilian legislation, the federal government may impose
temporary restrictions on remittances of foreign capital abroad in the event of
a serious imbalance or an anticipated serious imbalance of Brazils balance of
payments. For approximately six months in 1989 and early 1990, the federal
government froze all dividend and capital repatriations held by the Central
Bank that were owed to foreign equity investors, in order to conserve Brazils
foreign currency reserves. These amounts were subsequently released in
accordance with federal government directives. There can be no assurance that
the federal government will not impose similar restrictions on foreign
repatriations in the future. See Item 3D. Risk FactorsRisks Relating to
Brazil. E. Taxation The following discussion contains a description of the material Brazilian
and U.S. federal income tax consequences of the ownership and disposition of
preferred shares or ADSs by certain holders. This summary is based upon the
tax laws of Brazil and the United States as in effect on the date of this
annual report, which are subject to change, possibly with retroactive effect,
and to differing interpretations. You should consult your own tax advisors as
to the Brazilian, U.S. federal or other tax consequences of the purchase,
ownership and disposition of preferred shares or ADSs, including, in
particular, the effect of any state, local or non-U.S., non-Brazilian tax laws. Although there is presently no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
whether or when a treaty will enter into force or how it will affect the U.S.
holders of preferred shares or ADSs. Brazilian Tax Considerations The following discussion mainly summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs by a U.S. holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a U.S. holder). This discussion does not address all the Brazilian
tax considerations that may be applicable to any particular non-Brazilian
holder, and each non-Brazilian holder should consult its own tax advisor about
the Brazilian tax consequences of investing in preferred shares or ADSs. Taxation of Dividends Dividends paid by us in cash or in kind from profits generated on or after
January 1, 1996 (i) to the depositary in respect of preferred shares underlying
ADSs or (ii) to a U.S. holder or non-Brazilian holder in respect of preferred
shares will generally not be subject to Brazilian withholding tax. We do not
have any undistributed profits generated before January 1, 1996. Distributions of Interest on Capital Brazilian corporations may make payments to shareholders characterized as
interest on capital as an alternative form of making dividend distributions.
The rate of interest may not be higher than the federal governments long-term
interest rate, or the TJLP, as determined by the Central Bank from time to time
(11% per annum for the three-month period beginning January 2003). The total
amount distributed as interest on capital may not exceed the greater of (i) 50%
of net income (before taking the distribution and any deductions for income
taxes into account) for the year in respect of which the payment is made or
(ii) 50% of retained earnings for the year prior to the year in respect of
which the payment is made. Payments of interest on capital are decided by the
shareholders on the basis of recommendations of the companys board of
directors. Distributions of interest on capital paid to Brazilian and non-Brazilian
holders of preferred shares, including payments to the depositary in respect of
preferred shares underlying ADSs, are deductible by us for Brazilian corporate
income tax purposes. These payments to U.S. holders or non-Brazilian holders
are subject to Brazilian withholding tax at the rate of 15%. If the recipient
of the payment is domiciled in a tax haven jurisdiction (i.e, a country that
does not impose any income tax or that imposes tax at a rate of less than 20%),
the rate will be 25%. 65




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No assurance can be given that our board of directors will not recommend
that future distributions of profits will be made by means of interest on
capital instead of by means of dividends. Amounts paid as interest on capital (net of applicable withholding tax)
may be treated as payments in respect of the dividends we are obligated to
distribute to our shareholders in accordance with our by-laws (estatutos) and
the Brazilian corporate law. Distributions of interest on capital in respect
of the preferred shares, including distributions to the depositary in respect
of preferred shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls. Taxation of Gains Gains realized outside Brazil by a U.S. holder or a non-Brazilian holder
on the disposition of ADSs or preferred shares to another U.S. holder or
non-Brazilian holder are not subject to Brazilian tax. Gains realized by a U.S. holder or a non-Brazilian holder on dispositions
of preferred shares in Brazil or in transactions with Brazilian residents may
be free of Brazilian tax, taxed at a rate of 20% or taxed at a rate of 15%,
depending on the circumstances. Gains on the disposition of preferred shares obtained upon cancellation of
ADSs are not taxed in Brazil if the disposition is made and the proceeds are
remitted abroad within five business days after cancellation, unless the
investor is a resident of a jurisdiction that, under Brazilian law, is deemed
to be a tax haven. Gains realized through transactions with Brazilian residents or through
transactions in Brazil off of the Brazilian stock exchanges are generally
subject to tax at a rate of 15%. Gains realized through transactions on Brazilian stock exchanges are
generally subject to tax at a rate of 20%, unless the investor is entitled to
tax-free treatment for the transaction under Resolution 2,689 of the National
Monetary Council Regulations, described immediately below. Resolution 2,689, which as of March 31, 2000 superseded the Annex IV
Regulations that previously provided tax benefits to foreign investors, extends
favorable tax treatment to a U.S. holder or non-Brazilian holder of preferred
shares who has (i) appointed a representative in Brazil with power to take
action relating to the investment in preferred shares, (ii) registered as a
foreign investor with the CVM and (iii) registered its investment in preferred
shares with the Central Bank. Under Resolution 2,689 securities held by
foreign investors must be maintained under the custody of, or in deposit
accounts with, financial institutions duly authorized by the Central Bank and
the CVM. In addition, the trading of securities is restricted under Resolution
2,689 to transactions on Brazilian stock exchanges or qualified
over-the-counter markets. Investors previously holding preferred shares under
the Annex IV Regulations were required to bring their investments into
conformity with Resolution 2,689 by June 30, 2000. The preferential treatment
generally afforded under Resolution 2,689 and afforded to investors in ADSs is
not available to residents of tax havens. There can be no assurance that the current preferential treatment for U.S.
holders and non-Brazilian holders of ADSs and U.S. holders and non-Brazilian
holders of preferred shares under Resolution 2,689 will be maintained. Gain on the disposition of preferred shares is measured by the difference
between the amount in Brazilian currency realized on the sale or exchange and
the acquisition cost of the shares sold, measured in Brazilian currency,
without any correction for inflation. The acquisition cost of shares
registered as an investment with the Central Bank is calculated on the basis of
the foreign currency amount registered with the Central Bank. See Registered
Capital. Under current law, the tax rate for transactions on a Brazilian stock
exchange is 20% for transactions occurring on or after January 1, 2002.
Brazils tax treaties do not grant relief from taxes on gains realized on sales
or exchanges of preferred shares. 66




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Gains realized by a U.S. holder and non-Brazilian holder upon the
redemption of preferred shares will be treated as gains from the disposition of
such preferred shares to a Brazilian resident occurring off of a stock exchange
and will accordingly be subject to tax at a rate of 15%. Any exercise of preemptive rights relating to the preferred shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the preferred shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the depositary or the investor and (ii) whether the transaction takes
place on a Brazilian stock exchange. Gains on sales or assignments made by the
depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on
other sales or assignments may be subject to tax at rates up to 15%. The deposit of preferred shares in exchange for the ADSs is not subject to
Brazilian income tax if the preferred shares we registered under Resolution
2,689 and the respective holder is not in a tax haven jurisdiction. If the
preferred shares are not so registered or the holder is in a tax haven
jurisdiction, the deposit of preferred shares in exchange for ADSs may be
subject to Brazilian capital gains tax at a rate of 15%. The withdrawal of preferred shares in exchange for ADSs is not subject to
Brazilian tax. On receipt of the underlying preferred shares, a U.S. holder or
non-Brazilian holder entitled to benefits under Resolution 2,689 will be
entitled to register the U.S. dollar value of such shares with the Central Bank
as described above, under Registered Capital. If a U.S. holder or non-Brazilian holder does not
qualify under Resolution 2,689, he will be subject to the less favorable tax
treatment described above in respect of exchanges of preferred shares. Other Brazilian Taxes There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of preferred shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some
states in Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil or in the relevant state to
individuals or entities that are resident or domiciled within this state in
Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or
duties payable by holders of preferred shares or ADSs. A financial transaction tax, or the IOF tax, may be imposed on a variety
of transactions, including the conversion of Brazilian currency into foreign
currency (e.g., for purposes of paying dividends and interest). The IOF tax
rate on such conversions is currently 0%, but the minister of finance has the
legal power to increase the rate to a maximum of 25%.Any increase will be
applicable only prospectively. The IOF may also be levied on transactions involving bonds or securities,
or IOF/Títulos, even if the transactions are effected on Brazilian stock,
futures or commodities exchanges. The rate of the IOF/Títulos with respect to
preferred shares and ADSs is currently 0%. The minister of finance, however,
has the legal power to increase the rate to a maximum of 1.5% of the amount of
the taxed transaction per each day of the investors holding period, but only
to the extent of gain realized on the transaction and only on a prospective
basis. In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions, or
the CPMF tax, will be imposed on distributions in respect of ADSs at the time
these distributions are converted into U.S. dollars and remitted abroad by the
Custodian. The CPMF tax was to expire in June 2002, but was extended until
December 31, 2004. It is currently imposed at a rate of 0.38%. This rate will
continue until December 31, 2003. After that date, the rate will be decreased
to 0.08% beginning on January 1, 2004. From July 13, 2002, transactions
conducted through the Brazilian stock exchanges in current accounts specified
for stock exchange transactions are exempt from the CPMF tax. U.S. Federal Income Tax Considerations The following discussion is a summary of the material U.S. federal income
tax consequences of the ownership and disposition of our preferred shares or
our ADSs by U.S. Holders, as defined below. This summary is based on the
Internal Revenue Code of 1986, as amended (referred to herein as the Code),
final, temporary and 67




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proposed Treasury regulations, administrative pronouncements of the U.S.
Internal Revenue Service (the IRS) and judicial decisions, all as currently
in effect and all of which are subject to change (possibly with retroactive
effect), and to different interpretations. It is also based in part on
representations by the depositary and assumes that each obligation under the
Deposit Agreement and any related agreement will be performed in accordance
with its terms. This discussion deals only with preferred shares and ADSs held
as capital assets (generally, for investment purposes). It does not discuss
all of the tax consequences that may be relevant to a U.S. Holder in light of
the U.S. Holders particular circumstances or to U.S. Holders subject to
special rules, such as financial institutions, insurance companies, tax-exempt
entities, dealers in securities or foreign currencies, partnerships and other
pass-through entities, investors liable for the alternative minimum tax,
persons who hold preferred shares or ADSs as part of an integrated investment
(including a straddle) comprised of a preferred share or ADS and one or more
other positions for tax purposes, persons whose functional currency is not the
U.S. dollar or persons who actually or constructively own (directly or
indirectly) 10% or more of our voting stock. Holders of preferred shares or
ADSs should consult their own tax advisors with regard to the application of
the U.S. federal income tax laws to their particular situations as well as any
tax consequences arising under the laws of any state, local or non-U.S. taxing
jurisdiction. As used herein, the term U.S. Holder means a beneficial owner of
preferred shares or ADSs that is, for U.S. federal income tax purposes, (1) a
citizen or individual resident of the United States, (2) a corporation (or
other entity treated as a corporation for U.S. federal income tax purposes)
organized under the laws of the United States or of any political subdivision
thereof, (3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (4) a trust (i) if a U.S. court can
exercise primary supervision over the trusts administration and one or more
U.S. persons are authorized to control all substantial decisions of the trust
or (ii) if the trust has a valid election in effect under applicable Treasury
regulations to be treated as a U.S. person. The U.S. federal income tax
treatment of a partner in a partnership that holds our preferred shares or ADSs
will depend on the status of the partner and the activities of the partnership.
Partners in such partnerships should consult their own tax advisors. THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS
INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. PROSPECTIVE PURCHASERS OF
PREFERRED SHARES OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF
PREFERRED SHARES OR ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAWS. General In general, for U.S. federal income tax purposes, holders of American
depositary receipts evidencing ADSs will be treated as the beneficial owners of
the preferred shares represented by those ADSs. Taxation of Dividends Distributions made by us of cash or property generally will constitute a
taxable dividend to the extent paid out of our current or accumulated earnings
and profits, as determined under U.S. federal income tax principles. The full
amount of any dividend paid in respect of our preferred shares or ADSs
(including the amount of Brazilian withholding taxes imposed on such dividend)
will be included in the gross income of a U.S. Holder, as ordinary income from
sources outside the United States, at the time that the dividend is received by
the U.S. Holder, in the case of our preferred shares, or by the depositary, in
the case of ADSs. If a distribution made by us exceeds our current and
accumulated earnings and profits, as determined under U.S. federal income tax
principles, such excess will be treated first as a nontaxable return of capital
to the extent of the U.S. Holders adjusted tax basis in our preferred shares
or ADSs, and thereafter as capital gain. The amount of any dividend paid in reaisgenerally will be measured by
reference to the spot rate for converting reaisinto U.S. dollars in effect on
the date that the dividend is received by the U.S. Holder, in the case of our
preferred shares, or by the depositary, in the case of ADSs. A U.S. Holder may
recognize foreign currency gain or loss, which would be treated as ordinary
gain or loss, upon a subsequent conversion of reaisinto U.S. dollars. U.S.
Holders should consult their own tax advisors regarding the calculation and
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of foreign currency gain or loss. The amount of any distribution of
property other than cash will be the fair market value of such property on the
date of distribution. Subject to certain exceptions for short-term and hedged positions, the
U.S. dollar amount of dividends received by an individual prior to January 1,
2009 with respect to the ADSs will be subject to taxation at a maximum rate of
15% if the dividends represent qualified dividend income. Dividends paid on
the ADSs will be treated as qualified dividend income if (i) the ADSs are
readily tradable on an established securities market in the United States and
(ii) we were not in the year prior to the year in which the dividend was paid,
and are not in the year in which the dividend is paid, a passive foreign
investment company (PFIC), foreign personal holding company (FPHC) or
foreign investment company (FIC). The ADSs are listed on the New York Stock
Exchange, and may qualify as readily tradable on an established securities
market in the United States so long as they are so listed. However, no
assurances can be given that the ADSs will be or remain readily tradable.
Based on our audited financial statements as well as relevant market and
shareholder data, we believe that we were not treated as a PFIC, FPHC or FIC
for United States federal income tax purposes with respect to our 2003 taxable
year. In addition, based on the our audited financial statements and current
expectations regarding the value and nature of its assets, the sources and
nature of its income, and relevant market and shareholder data, we do not
anticipate becoming a PFIC, FPHC or FIC for its 2004 taxable year. Because
these determinations are based on the nature of our income and assets from time
to time, and involve the application of complex tax rules, no assurances can be
provided that we will not be considered a PFIC, FPHC, or FIC for the current,
or any past or future tax year. Based on existing guidance, it is not entirely clear whether dividends
received with respect to the preferred shares will be treated as qualified
dividends, because the preferred shares are not themselves listed on a United
States exchange. In addition, the United States Treasury Department has
announced its intention to promulgate rules pursuant to which holders of ADSs
or preferred stock and intermediaries though whom such securities are held will
be permitted to rely on certifications from issuers to establish that dividends
are treated as qualified dividends. Because such procedures have not yet been
issued, we are not certain that we will be able to comply with them. U.S.
Holders of ADSs and preferred shares should consult their own tax advisors
regarding the availability of the reduced dividend tax rate in the light of
their own particular circumstances. Subject to certain limitations and restrictions, a U.S. Holder will be
entitled to a foreign tax credit against its U.S. federal income tax liability,
or a deduction in computing its U.S. federal taxable income, for Brazilian
income taxes withheld by us. The limitation on foreign taxes eligible for
credit is determined separately with respect to specific classes of income.
For this purpose, dividends paid by us with respect to our preferred shares or
ADSs will generally constitute passive income or, in the case of certain U.S.
Holders, financial services income from sources outside the United States.
The U.S. Treasury Department has expressed concerns that parties to whom
depositary shares such as the ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. Holders of such
ADSs. Accordingly, the analysis of the creditability of Brazilian taxes
described above could be affected by future actions that may be taken by the
U.S. Treasury. The rules relating to the calculation of foreign tax credits
and the applicable limitations are complex. U.S. Holders should consult their
own advisors concerning the implications of the foreign tax credit rules in
light of their particular circumstances. Taxation of Capital Gains or Losses Upon a sale or other taxable disposition of preferred shares or ADSs, a
U.S. Holder will recognize capital gain or loss for U.S. federal income tax
purposes equal to the difference, if any, between the amount realized on the
sale or other taxable disposition and the U.S. Holders adjusted tax basis in
the preferred shares or ADSs. Such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if the U.S. Holders holding period
in the preferred shares or ADSs exceeds one year at the time of the sale or
other taxable disposition. Certain U.S. Holders (including individuals) may be
eligible for preferential rates of U.S. federal income tax in respect of
long-term capital gains. The deductibility of capital losses is subject to
limitations under the Code. Gain or loss derived from the sale or other disposition of our preferred
shares or ADSs generally will be treated as U.S. source income or loss for
foreign tax credit purposes. Consequently, if a Brazilian withholding tax is
imposed on the sale or disposition of preferred shares or ADSs, and a U.S.
Holder does not receive significant foreign source income from other sources,
such U.S. Holder may not be able to derive effective U.S. foreign tax credit
benefits in respect of such Brazilian withholding tax. If a Brazilian tax is
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of preferred shares or ADSs, a U.S. Holders amount realized will include
the gross amount of the proceeds of such sale or disposition before deduction
of the Brazilian tax. See Brazilian Tax ConsiderationsTaxation of Gains
for a description of when a disposition may be subject to taxation by Brazil. Deposits and withdrawals of preferred shares in exchange for ADSs will not
result in the realization of gain or loss for U.S. federal income tax purposes. Information Reporting and Backup Withholding Information returns may be filed with the IRS in connection with
distributions on our preferred shares or our ADSs and the payment of proceeds
from their sale or other disposition. A U.S. Holder may be subject to U.S.
backup withholding tax (currently at a rate of 28%) on these payments if such
U.S. Holder fails to provide its taxpayer identification number or comply with
certain certification procedures or otherwise establish an exemption from
backup withholding. Backup withholding is not an additional tax. The amount
of any backup withholding from a payment to a U.S. Holder will be allowed as a
credit against such U.S. Holders U.S. federal income tax liability, if any,
and may entitle such U.S. Holder to a refund, provided that the required
information is timely furnished to the IRS. U.S. HOLDERS AND PROSPECTIVE PURCHASERS OF OUR PREFERRED SHARES OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE BRAZILIAN, U.S. FEDERAL, STATE,
LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR
PREFERRED SHARES OR ADSs BASED UPON THEIR PARTICULAR CIRCUMSTANCES. F. Dividends and Paying Agents Not applicable. G. Statement of Experts Not applicable. H. Documents on Display We are subject to the information requirements of the Exchange Act, except
that, as a foreign issuer, we are not subject to the proxy rules or the
short-swing profit disclosure rules of the Exchange Act. In accordance with
these statutory requirements, we file or furnish reports and other information
with the Commission. Reports and other information filed or furnished by us
with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commissions Regional Offices at 233
Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. You may also inspect these reports and other information at the offices
of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on
which our ADSs are listed. In addition, the Commission maintains a website that contains information
filed electronically, which can be accessed over the Internet at
http://www.sec.gov. We also file financial statements and other periodic reports with the CVM.
Copies of our annual report on Form 20-F and documents referred to in this
annual report and our by-laws will be available for inspection upon request at
our offices at Praia de Botafogo, 501, 7o andar, 22250-040 Rio de Janeiro, RJ,
Brazil. I. Subsidiary Information Not applicable. 70




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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in both foreign currency
exchange rates and interest rates. The foreign currency exchange rate risk
arises because certain of our costs (mostly interest on debt, capital
expenditures and the purchase of handsets) are all or partially denominated in
currencies (primarily the U.S. dollar) other than those in which we earn
revenues (primarily the real). Similarly, we are subject to market risk
deriving from changes in interest rates, which may affect the cost of our
financing. We have entered into derivative instruments, such as foreign currency
options and foreign currency swaps to manage the exchange rate risk. We do not
hold or issue derivative or other financial instruments for trading purposes. Exchange Rate Risk The principal foreign exchange rate risk faced by us arises from our U.S.
dollar-denominated financial indebtedness. At December 31, 2003, we had R$
219.0 million of financial indebtedness (equivalent to U.S.$ 75.8 million at a
rate of U.S.$1 = R$ 2.8892, the closing exchange rate on December 31, 2003).
Our revenues are earned almost entirely in reais. We have no material U.S.
dollar-denominated assets, except for our hedge contracts. At December 31,
2003, all of our U.S. dollar-denominated financial indebtedness was covered by long
positions of derivative agreements. Under those derivative agreements, our
subsidiaries U.S. dollar-denominated obligations are swapped for
real-denominated obligations bearing interest at rates linked to the
Certificado de Depósito Interbanćario(Interbank Deposit Certificate), or CDI.
At December 31, 2003, all of our U.S. dollar fixed- and floating-rate loans are
converted to floating-rate loans through our derivative transactions. In
addition, 100% of our other U.S. dollar liabilities, such as liabilities with
suppliers and management fees, were also covered by derivative agreements. On
December 31, 2003, we recorded financial expense from foreign currency
derivative transactions of R$ 112.3 million against financial income from
monetary and foreign exchange variations of approximately R$ 61.5 million. The potential loss to us over one year that would result from a
hypothetical, instantaneous and unfavorable change of 1000 basis points in the
foreign exchange applicable to financial assets and liabilities on December 31,
2003 would be approximately R$ 36.52 million. On the other hand, our
derivatives instruments would have a gross gain of R$ 36.57 million. The net gain
would be R$ 0.05 million. Exchange rate sensitivity analysis was made by applying a 10% change to
the Brazilian Central Bank exchange rate on December 31, 2003 of R$ 2.8892 to
U.S.$1.0, which would represent a devaluation of the realof R$ 0.2889 We then
assumed that this unfavorable currency move would be sustained from December
31, 2003 through December 31, 2004. The foreign exchange loss that affects
financial expenses was calculated by applying such devaluation to our
indebtedness and foreign exchange purchase commitments (essentially handset
purchases), net of derivative instruments. Interest Rate Risk We invest cash and cash equivalents (R$388.8 million at December 31, 2003)
mainly in short-term real-denominated instruments. We are exposed to interest rate risk as a consequence of our floating rate
debt in U.S. dollars. We are also exposed to interest rate risk due to the
nature of our derivative agreements, whereby our U.S. dollar-denominated
obligations are swapped into real-denominated obligations bearing interest
linked to the CDI. On December 31, 2003, approximately 16.5% of our
indebtedness bore interest at floating rates and 83.5% bore interest at fixed
rates. We have not entered into derivative contracts or made other
arrangements to hedge against this risk. Thus, if interest rates rise, then
our financing expenses will probably increase. We continuously monitor
interest rates with a view towards considering whether we should enter into
derivative arrangements to protect against this risk or not. The potential loss to us over one year that would result from a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rate applicable to financial assets and liabilities on December 31,
2003 would be approximately R$ 1.04 million. 71




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Interest rate sensitivity analysis was made by applying a 10% increase to
all floating-rate-denominated debt, assuming that the different indexes (CDI
and TJLP, LIBOR and EURIBOR) would all rise by 10% instantaneously on December
31, 2003 and that this unfavorable move would continue for one year. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 72




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS None. 
 ITEM 15. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures.Under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2003. Based on that evaluation, our principal executive officer
and principal financial officer have concluded that these controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely fashion. Changes in internal controls. No significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses, were made as a
result of the evaluation. 
 ITEM 16. [RESERVED] ITEM 16A. Audit Committee Financial Expert As of yet, we have not appointed an audit committee financial expert, as
defined by the SEC. As disclosed in item 16D below, we are currently exempt
from complying with the independence requirements of the audit committee
pursuant to Exchange Act Rule 10A-3(a)(5)(A). ITEM 16B. Code of Ethics In June, 2003, we approved a code of ethics to regulate the conduct of our
senior financial officers. Our code of ethics deals with the following issues:  
    
    honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
    
    full, fair, accurate, timely and understandable disclosure in
reports and documents that we file with, or submits to, the CVM and/or
the SEC and in other public communications made by us;
    
    compliance with applicable governmental laws, rules and
regulations;
    
    prompt internal reporting of violations of the code to the Internal
Audit Officer who, after review, has to report them to the CEO and CFO;
and
    
    accountability for adherence to the code. 73




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##### Table of Contents



A copy of our code of ethics is filed as an exhibit to this annual report.
A copy of this document is also available on our website (www.vivo.com.br). There have been no waivers to our code of ethics in 2003. ITEM 16C. Principal
Accountant Fees and Services Deloitte Touche Tohmatsu Auditores Independentes, or DTT, acted as our
independent auditor for the fiscal years ended December 31, 2003 and 2002. The
chart below sets forth the total amount billed to us by DTT for services
performed in the years 2003 and 2002, and breaks down these amounts by category
of service: Total Fees(in reais)2003
    
    2002Audit Fees
    
    
    445,213
    
    
    
    385,350Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    221,259
    
    
    
    276,133All Other Fees
    
    
    
    
    
    
    Total
    
    
    666,472
    
    
    
    661,483
 Audit Fees Audit Fees are the aggregate fees billed by Deloitte Touche Tohmatsu
Auditores Independentes for the audit of our consolidated and annual financial
statements, reviews of interim financial statements and attestation services
that are provided in connection with statutory and regulatory filings or
engagements. Tax Fees Tax fees in 2003 and 2002 were related to services for tax compliance. Pre-Approval Policies and Procedures We
have not set pre-approval policies and procedures for audit,
audit-related services, tax services and other services to be
provided by auditors, since we are not required to comply with such
audit committee rule by July 31, 2005, according to Exchange Act
Rule 10A-3(a)(5)(A) ITEM 16D. Exemptions from the Listing Standards for Audit Committees Pursuant to the exemption under Exchange Act Rule 10A-3(c)(3), we have our
conselho fiscal,a board of auditors which follows the requirements presented
by such rule. Furthermore, our current audit committee does not follow the
independence requirements of such rule as we are still exempt from such
requirements by July 31, 2005 according to Exchange Act Rule 10A-3(a)(5)(A). ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers Not required for the year ended December 31, 2003. 74




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##### Table of Contents



PART III 
 ITEM 17. FINANCIAL STATEMENTS Not applicable. 
 ITEM 18. FINANCIAL STATEMENTS See our consolidated financial statements beginning on Page F-1. 
 ITEM 19. EXHIBITS Documents filed as exhibits to this annual report:  1.1
    
    By-laws (Estatuto Social) of
Tele Sudeste, as amended (English Translation)4.1
    
    Authorization Term of the Personal
Mobile Service entered by Anatel and Telerj (English translation),
incorporated by reference to our annual report Form 20-F for the
fiscal year ended December 31, 2002, filed on June 24, 2003.4.2
    
    Authorization Term of the Personal
Mobile Service entered by Anatel and Telest (English translation),
incorporated by reference to our annual report Form 20-F for the
fiscal year ended December 31, 2002 filed on June 24, 2003.8.1
    
    List of subsidiaries11.1
    
    Code of Ethics (Código de
Erica) of Tele Sudeste (English translation).12.1
    
    Certification by Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification by Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification of Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.2
    
    Certification of Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 There are omitted from the
exhibits filed with or incorporated by reference into this annual
report certain promissory notes and other instruments and agreements
with respect to long-term debt of our company, none of which
authorizes securities in a total amount that exceeds 10% of the total
assets of our company. We hereby agree to furnish to the Securities
and Exchange Commission copies of any such omitted promissory notes
or other instruments or agreements as the Commission requests. 75
    Table of Contents  SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. TELE SUDESTE CELULAR PARTICIPAÇÔES S.A.By:
    /s/ Francisco José Azevedo PadinhaName:
    Francisco José Azevedo PadinhaTitle:
    Acting Chief Executive Officer By:
    /s/ Fernando Abella GarciaName:
    Fernando Abella GarciaTitle:
    Chief Financial Officer and interim Chief
Executive Officer Date: June 30, 2004
    TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31. 2003 AND 2002 AND FOR THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 2003 CONTENTS Report of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Income
    
    
    F-4Consolidated Statements of Changes in Financial Position
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to the Consolidated Financial Statements
    
    
    F-8
  F-1
    Table of Contents  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM To the Board of Directors and Shareholders of Tele Sudeste Celular Participações S.A.:
Rio de Janeiro, Brazil:  (1)
    
    We have audited the accompanying consolidated balance sheets of Tele
Sudeste Celular Participações S.A. and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of
income, changes in financial position and changes in shareholders equity
for each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.(2)
    
    We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.(3)
    
    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Tele Sudeste Celular Participações S.A. and subsidiaries as of
December 31, 2003 and 2002, the results of their operations and the
changes in their financial position, and in shareholders equity for each
of the three years in the period ended December 31, 2003, in conformity
with accounting practices adopted in Brazil.(4)
    
    Accounting practices adopted in Brazil vary in certain significant
respects from accounting principles generally accepted in the United
States of America. Information relating to the nature and effect of such
differences is presented in Note 35 to the consolidated financial
statements.(5)
    
    Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The consolidated statements
of cash flows for each of the three years in the period ended December 31,
2003 are presented for purposes of additional analysis and is not a
required part of the basic financial statements under accounting practices
adopted in Brazil. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.(6)
    
    As discussed in note 2.c, the Company has changed the basis of
presentation of consolidated the financial statements from the Constant
Currency Method to Brazilian Corporate Law Method. DELOITTE TOUCHE TOHMATSU
Auditores Independentes June 15, 2004
Rio de Janeiro, Brazil F-2
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
 (In thousands of Brazilian reais)
 December 31,Note
    
    2003
    
    2002Current assets:Cash and cash equivalents
    
    12
    
    
    388,438
    
    
    
    109,373Trade accounts receivable, net
    
    13
    
    
    345,688
    
    
    
    272,908Deferred and recoverable taxes
    
    14
    
    
    263,610
    
    
    
    268,663Inventories
    
    15
    
    
    51,349
    
    
    
    59,260Derivative transactions
    
    24.e
    
    
    
    
    
    
    57,753Prepaid expenses
    
    16
    
    
    27,143
    
    
    
    19,522Other current assets
    
    17
    
    
    67,238
    
    
    
    42,747Total current assets
    
    
    
    
    1,143,466
    
    
    
    830,226Noncurrent assets:Tax incentives
    
    
    
    
    1,479
    
    
    
    9,184Deferred and recoverable taxes
    
    14
    
    
    254,112
    
    
    
    273,918Derivative transactions
    
    24.e
    
    
    7,632
    
    
    
    79,945Prepaid expenses
    
    16
    
    
    12,372
    
    
    
    14,911Other assets
    
    17
    
    
    5,337
    
    
    
    212Total noncurrent assets
    
    
    
    
    280,932
    
    
    
    378,170Permanent assets:Investments
    
    
    
    
    409
    
    
    
    333Property, plant and equipment, net
    
    18.a
    
    
    1,398,014
    
    
    
    1,585,057Deferred assets, net
    
    
    
    
    615
    
    
    
    Total permanent assets
    
    
    
    
    1.399,038
    
    
    
    1,585,390Total assets
    
    
    
    
    2,823,436
    
    
    
    2,793,786Current liabilities:Payroll and related accruals
    
    19
    
    
    29,717
    
    
    
    22,888Accounts payable and accrued expenses
    
    20
    
    
    426,248
    
    
    
    378,575Taxes other than income taxes
    
    21
    
    
    44,020
    
    
    
    26,239Dividends payable
    
    22
    
    
    50,723
    
    
    
    31,925Loans and financing
    
    24
    
    
    165,802
    
    
    
    200,922Reserve for contingencies
    
    25
    
    
    52,079
    
    
    
    26,519Derivative transactions
    
    24.e
    
    
    18,392
    
    
    
    Other current liabilities
    
    23
    
    
    55,622
    
    
    
    44,690Total current liabilities
    
    
    
    
    842,603
    
    
    
    731,758Noncurrent liabilities:Loans and financing
    
    24
    
    
    53,153
    
    
    
    259,597Pension and other postretirement benefit plans
    
    26
    
    
    893
    
    
    
    1,132Reserve for contingencies
    
    25
    
    
    23,293
    
    
    
    21,483Total noncurrent liabilities
    
    
    
    
    77,339
    
    
    
    282,212Shareholders equityShare capital
    
    28.a
    
    
    778,838
    
    
    
    685,321Capital reserves
    
    28.b
    
    
    293,424
    
    
    
    378,069Income reserves
    
    28.c
    
    
    193,969
    
    
    
    79,163Retained earnings
    
    
    
    
    637,132
    
    
    
    637,132Total shareholders equity
    
    
    
    
    1,903,363
    
    
    
    1,779,685Funds for capitalization:Other funds
    
    
    
    
    131
    
    
    
    131Total funds for capitalization
    
    
    
    
    131
    
    
    
    131Total liabilities and shareholders equity
    
    
    
    
    2,823,436
    
    
    
    2,793,786
 The accompanying notes are an integral part of these consolidated financial statements. F-3
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
 (In thousands of Brazilian reais, except share earnings per thousand shares data)
 Years ended December 31,Note
    
    2003
    
    2002
    
    2001Net operating revenue
    
    
    4
    
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299Cost of services and goods sold
    
    
    5
    
    
    
    (1,052,487
    )
    
    
    (981,741
    )
    
    
    (877,284
    )Gross profit
    
    
    
    
    
    
    839,964
    
    
    
    865,890
    
    
    
    826,015Operating income (expenses):Selling
    
    
    6.a
    
    
    
    (387,466
    )
    
    
    (392,482
    )
    
    
    (293,418
    )General and administrative
    
    
    6.b
    
    
    
    (224,408
    )
    
    
    (229,947
    )
    
    
    (233,479
    )Other, net
    
    
    7
    
    
    
    13,309
    
    
    
    (16,954
    )
    
    
    5,413Operating income before financial expense
    
    
    
    
    
    
    241,399
    
    
    
    226,507
    
    
    
    304,531Financial expense, net
    
    
    8
    
    
    
    (15,017
    )
    
    
    (15,112
    )
    
    
    (83,222
    )Operating income
    
    
    
    
    
    
    226,382
    
    
    
    211,395
    
    
    
    221,309Nonoperating expense, net
    
    
    9
    
    
    
    (8,535
    )
    
    
    (1,202
    )
    
    
    (991
    )Income before minority interests and taxes
    
    
    
    
    
    
    217,847
    
    
    
    210,193
    
    
    
    220,318Income and social contribution taxes
    
    
    10
    
    
    
    (61,610
    )
    
    
    (69,817
    )
    
    
    (57,404
    )Net income
    
    
    
    
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914Shares outstanding at the balance sheet date (thousands)
    
    
    
    
    
    
    432,598,218
    
    
    
    414,006,458
    
    
    
    396,041,635Earnings per thousand shares (Brazilian reais)
    
    
    
    
    
    
    0.36
    
    
    
    0.34
    
    
    
    0.41
 The accompanying notes are an integral part of these consolidated financial statements. F-4
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
 (In thousands of Brazilian reais-R$) 2003
    
    2002
    
    2001SOURCES OF FUNDS:From operations:Net income
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914Items not affecting working capital:Depreciation and amortization
    
    
    436,934
    
    
    
    377,682
    
    
    
    283,318Monetary and exchange variations on noncurrent items
    
    
    (11,148
    )
    
    
    111,043
    
    
    
    59,990Provision for contingencies
    
    
    3,204
    
    
    
    16,937
    
    
    
    1,645Net book value of permanent asset disposals
    
    
    698
    
    
    
    535
    
    
    
    643Shared system depreciation apportionment
    
    
    4,949
    
    
    
    
    
    
    
    Total from operations
    
    
    590,874
    
    
    
    646,573
    
    
    
    508,510From third parties:Prior year adjustments  Pension and other
postretirement plans
    
    
    
    
    
    
    
    
    
    
    839Tax incentives
    
    
    288
    
    
    
    106
    
    
    
    584Transfer from noncurrent assets to current assets
    
    
    97,238
    
    
    
    
    
    
    
    Premium reserve adjustment  restructuring
    
    
    8,872
    
    
    
    
    
    
    
    Unclaimed dividends
    
    
    1,925
    
    
    
    7,333
    
    
    
    Total sources
    
    
    699,197
    
    
    
    654,012
    
    
    
    509,933USES OF FUNDS:Increase in noncurrent assets
    
    
    
    
    
    
    8,490
    
    
    
    957Additions to investments
    
    
    76
    
    
    
    83
    
    
    
    67Additions to property, plant and equipment
    
    
    254,943
    
    
    
    370,883
    
    
    
    408,656Addition to deferred assets
    
    
    1,210
    
    
    
    
    
    
    
    Decrease of noncurrent liabilities
    
    
    196,928
    
    
    
    167,378
    
    
    
    8,339Interest on shareholders equity
    
    
    42,500
    
    
    
    13,500
    
    
    
    50,297Dividends
    
    
    1,145
    
    
    
    90,379
    
    
    
    Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    764Total uses
    
    
    496,802
    
    
    
    650,713
    
    
    
    469,080INCREASE (DECREASE) IN WORKING CAPITAL
    
    
    202,395
    
    
    
    3,299
    
    
    
    40,853REPRESENTED BY:CURRENT ASSETS AT YEAR END
    
    
    1,143,466
    
    
    
    830,226
    
    
    
    728,317CURRENT LIABILITIES AT YEAR END
    
    
    (842,603
    )
    
    
    (731,758
    )
    
    
    (633,148
    )Working capital at year end
    
    
    300,863
    
    
    
    98,468
    
    
    
    95,169Working capital at beginning of the year
    
    
    98,468
    
    
    
    95,169
    
    
    
    54,316INCREASE (DECREASE) IN WORKING CAPITAL
    
    
    202,395
    
    
    
    3,299
    
    
    
    40,853
 The accompanying notes are an integral part of these consolidated financial statements. F-5
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
 (In thousands of Brazilian reais)
 Capital Reserves
    
    Income ReservesSpecial
    
    
    
    
    
    Reserve ForTax
    
    Premium
    
    
    
    
    
    Expansion and
    
    Treasury
    
    RetainedShare Capital
    
    Incentives
    
    Reserve
    
    Legal Reserve
    
    Modernization
    
    Stocks
    
    Earnings
    
    TotalBalance at December 31, 2000
    
    
    595,722
    
    
    
    3,487
    
    
    
    464,843
    
    
    
    27,069
    
    
    
    
    
    
    
    
    
    
    
    531,352
    
    
    
    1,622,473Tax incentives
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90Prior year adjustments  pension and other postretirement benefits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    839
    
    
    
    839Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (764
    )
    
    
    
    
    
    
    (764
    )Consolidation adjustments - tax incentives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    494
    
    
    
    494Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,914
    
    
    
    162,914Transfer to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,170
    
    
    
    
    
    
    
    
    
    
    
    (8,170
    )
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,752
    )
    
    
    (42,752
    )Income tax on interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,545
    )
    
    
    (7,545
    )Balance at December 31, 2001
    
    
    595,722
    
    
    
    3,577
    
    
    
    464,843
    
    
    
    35,239
    
    
    
    
    
    
    
    (764
    )
    
    
    637,132
    
    
    
    1,735,749Treasury shares canceled  Extraordinary Shareholders Meeting on April 02,
2002
    
    
    (764
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764
    
    
    
    
    
    
    
    Capital increase  Board of Directors Meeting on April 29,
2002
    
    
    90,363
    
    
    
    
    
    
    
    (90,363
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fiscal incentives
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Unclaimed dividends at holding Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,187
    
    
    
    4,187Consolidation adjustments:Tax incentives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    94Unclaimed dividends at subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,146
    
    
    
    3,146Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,376
    
    
    
    140,376Appropriations:Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,181
    
    
    
    
    
    
    
    
    
    
    
    (7,181
    )
    
    
    Transfer to expansion reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,743
    
    
    
    
    
    
    
    (36,743
    )
    
    
    Proposed dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,379
    )
    
    
    (90,379
    )Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,475
    )
    
    
    (11,475
    )Income tax on interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,025
    )
    
    
    (2,025
    )Balance at December 31, 2002
    
    
    685,321
    
    
    
    3,589
    
    
    
    374,480
    
    
    
    42,420
    
    
    
    36,743
    
    
    
    
    
    
    
    637,132
    
    
    
    1,779,685Capital increase  Board of Directors Meeting on March 31, 2003
    
    
    93,517
    
    
    
    
    
    
    
    (93,517
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unclaimed dividends at holding Company
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,525
    
    
    
    1,525Consolidation adjustments:Tax incentives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    288Unclaimed dividends at subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401
    
    
    
    401Adjustment of Premium reserve
    
    
    
    
    
    
    
    
    
    
    8,872
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,872Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,237
    
    
    
    156,237Appropriations:Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,846
    
    
    
    
    
    
    
    
    
    
    
    (7,846
    )
    
    
    Transfer to expansion reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    106,960
    
    
    
    
    
    
    
    (106,960
    )
    
    
    Proposed dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,145
    )
    
    
    (1,145
    )Interest on shareholders  equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,125
    )
    
    
    (36,125
    )Income tax on interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,375
    )
    
    
    (6,375
    )Balance at December 31, 2003
    
    
    778,838
    
    
    
    3,589
    
    
    
    289,835
    
    
    
    50,266
    
    
    
    143,703
    
    
    
    
    
    
    
    637,132
    
    
    
    1,903,363
 The accompanying notes are an integral part of these consolidated financial statements. F-6
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 and 2001
 (In thousands of Brazilian Reais)
 Years ended December 31,2003
    
    2002
    
    2001Operating activities:Net income
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914Items not affecting working capital:Depreciation and amortization
    
    
    436,934
    
    
    
    377,682
    
    
    
    283,318Monetary/exchange variation on long-term loans and financing
    
    
    (39,493
    )
    
    
    189,088
    
    
    
    113,266Loss on permanent asset disposals
    
    
    180
    
    
    
    196
    
    
    
    329Shared-system depreciation apportionment
    
    
    4,951
    
    
    
    
    
    
    
    Provision for loss on tax incentives investments
    
    
    7,917
    
    
    
    
    
    
    
    Provision for doubtful accounts
    
    
    40,239
    
    
    
    96,810
    
    
    
    71,847Increase in customer accounts receivable
    
    
    (146,788
    )
    
    
    (61,938
    )
    
    
    (30,190
    )(Increase) decrease in taxes receivable
    
    
    42,427
    
    
    
    39,763
    
    
    
    (15,870
    )(Increase) decrease in other current assets
    
    
    67,321
    
    
    
    (57,606
    )
    
    
    51,863(Increase) decrease in other noncurrent assets
    
    
    10,636
    
    
    
    (63,679
    )
    
    
    3,325Increase in payroll and related accruals
    
    
    6,829
    
    
    
    10,331
    
    
    
    2,484Increase (decrease) in accounts payable and accrued expenses
    
    
    45,648
    
    
    
    84,222
    
    
    
    (71,098
    )Increase (decrease) in taxes other than income taxes
    
    
    9,085
    
    
    
    (49,310
    )
    
    
    18,554Increase (decrease) in other current liabilities
    
    
    19,938
    
    
    
    6,458
    
    
    
    (2,143
    )Increase (decrease) in accrued interest
    
    
    59,165
    
    
    
    9,938
    
    
    
    (15,862
    )Decrease in income taxes payable
    
    
    
    
    
    
    (697
    )
    
    
    (2,552
    )Increase (decrease) in reserve for contingencies
    
    
    27,370
    
    
    
    28,476
    
    
    
    8,766Increase (decrease) in pension and other post-retirement benefit Plans
    
    
    (5,231
    )
    
    
    2,101
    
    
    
    Increase in other noncurrent liabilities
    
    
    
    
    
    
    4,699
    
    
    
    18,656Net cash provided by operating activities
    
    
    743,365
    
    
    
    756,910
    
    
    
    597,607Investing activities:Additions to property, plant and equipment
    
    
    (254,943
    )
    
    
    (370,883
    )
    
    
    (408,656
    )Additions to deferred charges
    
    
    (1,210
    )
    
    
    
    
    
    
    Proceeds from asset disposals
    
    
    518
    
    
    
    339
    
    
    
    314Net cash used in investing activities
    
    
    (255,635
    )
    
    
    (370,544
    )
    
    
    (408,342
    )Financing activities:Loans repaid
    
    
    (200,124
    )
    
    
    (246,502
    )
    
    
    (398,377
    )New loans obtained
    
    
    7,830
    
    
    
    
    
    
    
    217,137Purchase of treasury shares
    
    
    
    
    
    
    
    
    
    
    (764
    )Dividends and interest on shareholders equity paid
    
    
    (16,371
    )
    
    
    (116,252
    )
    
    
    (47,108
    )Net cash used in financing activities
    
    
    (208,665
    )
    
    
    (362,754
    )
    
    
    (229,112
    )Increase (decrease) in cash and cash equivalents
    
    
    279,065
    
    
    
    23,612
    
    
    
    (39,847
    )Cash and cash equivalents at beginning of year
    
    
    109,373
    
    
    
    85,761
    
    
    
    125,608Cash and cash equivalents at end of year
    
    
    388,438
    
    
    
    109,373
    
    
    
    85,761
 The accompanying notes are an integral part of these consolidated financial statements. F-7
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 1. Operations and background Tele Sudeste Celular Participações S.A. was formed on May 22, 1998,
through the spin-off of certain assets and liabilities of Telebrás, a
state-owned company which hold the monopoly for the telecommunication services
in Brazil, including 70.7% and 85.2% of the share capital of Telerj Celular
S.A. and Telest Celular S.A., respectively. Until August 4, 1998, these
Companies were controlled by the Federal Government. On July 29, 1998, the
Federal Government separated Telebrás into twelve newly formed holding
companies (the New Holding Companies) and sold to twelve buyers (the New
Controlling Shareholders) its rights to receive shares of the New Holding
Companies. In connection with this sale, the Federal Government assigned to the
New Controlling Shareholders substantially all its economic and voting rights
with respect to the New Holding Companies and, as a consequence, effective
August 4, 1998 the New Controlling Shareholders controlled the New Holding
Companies. Tele Sudeste Celular Participações S.A. is a publicly traded Company
controlled by Brasilcel N.V. (53.57% of total capital), Sudestecel
Participações S.A. (22.01% of total capital), and Tagilo Participações Ltda.
(10.61% of total capital) as of December 31, 2003. Sudestecel Participações
S.A. is controlled by Brasilcel N.V. (89,5% of total capital), NTT Docomo, INC.
(7% of total capital) and Itochu Corporation (3.50% of total capital) and
Tagilo is held by Brasilcel N.V. (100.00% of total capital). Brasilcel N.V. is owned by Telefónica Móviles S.A. (50.00% of total
capital), PT Móveis Serviços de Telecomunicações, SGPS, S.A. (49.999% of total
capital) and Portugal Telecom, SGPS, S.A. (0.001% of total capital). On December 31, 2003, Tele Sudeste Celular Participações S.A (the Holding
Company, or together with its subsidiaries, the Company ) holds 100% of the
capital of Telerj Celular S.A. (Telerj) and Telest Celular S.A (Telest),
which are providers of cellular telecommunications services in the States of
Rio de Janeiro and Espírito Santo, respectively, and are also engaged in
related activities required or useful for the performance of these services, in
conformity with concessions and authorizations granted to them. The subsidiaries activities, including the services that they may provide
and the tariffs they may charge, are regulated by Agência Nacional de
Telecomunicações(Anatel), the regulatory authority for the Brazilian
telecommunications industry pursuant to Law No. 9,472 of July 16, 1997. Migration from SMC to SMP On December 10, 2002 the Authorization Terms for Personal Mobile System
were signed between ANATEL and the subsidiaries, which became effective as of
the publication in the Official Federal Gazette on December 12, 2002. The authorizations granted to the subsidiaries Telerj and Telest are
effective for the remaining period of their concessions, previously granted and
presently substituted through, November 30, 2005 and November 30, 2008,
respectively, and will be renewable for an additional period, for a 15 year
term, subject to a renewal fee. On July 6, 2003, wireless operators in Brazil implemented the Carriers
Selection Code (CSP) on national (VC2 and VC3) and international long distance
calls, according to SMP rules. The operators no longer receive VC2 and VC3
revenues; instead, they receive interconnection revenues for the use of their
networks on these calls. F-8
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 2. Presentation of the financial statements  a.
    
    Presentation of consolidated financial statements as of and for the
years ended December 31, 2003, 2002 and 2001 The accompanying financial statements are a translation and adaptation
from those originally issued in Brazil. Certain reclassifications,
modifications and changes in terminology have been made in order to conform
more closely to reporting practices in the United States.  b.
    
    Methods of presentation of the Financial Statements Until December 31, 1995, publicly-traded companies in Brazil were
required to prepare financial statements pursuant to two methods: (i) the
corporate law method, which was and remains valid for all legal purposes,
including the basis for determining income taxes and calculation of mandatory
minimum dividends; and (ii) the constant currency method, to present
supplementary price-level adjusted financial statements, pursuant to standards
prescribed by the Brazilian Securities Commission (CVM).  (i)
    
    The Corporate Law Method  The corporate law method provided a simplified methodology for accounting
for the effects of inflation until December 31, 1995. It consisted of
restating permanent assets (property, plant and equipment, investments and
deferred charges) and stockholders equity accounts using indices mandated
by the Federal Government. The net effect of these restatements was
credited or charged to the statement of operations in a single caption,
usually entitled Monetary correction adjustments or Inflation
adjustments.  (ii)
    
    The Constant Currency Method  Under the Constant Currency Method, all historical Brazilian real amounts
in the financial statements and notes thereto are expressed in constant
purchasing power as of latest balance sheet date, in accordance with
standards prescribed by the CVM for publicly traded entities. Under the
Constant Currency Method, financial statements are adjusted for inflation
up to December 31, 2000.  c.
    
    Change in Basis of Presentation of Financial Statements The accompanying consolidated financial statements are prepared in
accordance with Brazilian corporate law, standards applicable to
concessionaries of public telecommunications services, and accounting
standards and procedures established by the Brazilian Securities Commission 
CVM, which includes monetary restatement of permanent assets and shareholders
equity through December 31, 1995 (hereinafter referred to as BR CL). In prior periods, the Company had prepared its financial statements for
presentation in the United States in accordance with the Constant Currency
Method. In order to conform the financial statements for the use of its
shareholders in the United States to the same basis used in the primary market
in Brazil, the Company has elected to present its financial statements in
accordance with BR CL.  d.
    
    Summarized financial statements for the two prior years under Constant
Currency Method  The following is summarized condensed financial information previously
reported using the Constant Currency Method: F-9
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)   December 31,2002
    
    2001AssetsCurrent assets
    
    
    848,545
    
    
    
    728,317Noncurrent assets
    
    
    378,170
    
    
    
    369,680Permanent assets
    
    
    1,751,098
    
    
    
    1,858,345Total assets
    
    
    2,977,813
    
    
    
    2,956,342Liabilities and Shareholders equityTotal current liabilities
    
    
    759,137
    
    
    
    646,616Total noncurrent liabilities
    
    
    329,493
    
    
    
    398,481Total shareholders equity
    
    
    1,889,009
    
    
    
    1,911,071Total funds for capitalization
    
    
    174
    
    
    
    174Total liabilities and shareholders equity
    
    
    2,977,813
    
    
    
    2,956,342
 Years ended December 31,2002
    
    2001
    
    2000Income StatementNet operating
revenue
    
    
    1,847,631
    
    
    
    1,703,299
    
    
    
    1,561,474Cost of goods and services sold
    
    
    (1,110,522
    )
    
    
    (963,211
    )
    
    
    (920,485
    )Gross profit
    
    
    737,109
    
    
    
    740,088
    
    
    
    640,989Income before taxes and minority interest
    
    
    110,197
    
    
    
    116,655
    
    
    
    141,706Net income for the year
    
    
    74,378
    
    
    
    94,497
    
    
    
    92,399
 Reconciliation of net income and shareholders equity balances between BR CL
and the Constant Currency Method is as follows: 2002
    
    2001
    
    2000Net income according to BR
CL
    
    
    140,376
    
    
    
    162,914
    
    
    
    121,876(-) Realization of assets (depreciation, amortization
and write-offs)
    
    
    (99,997
    )
    
    
    (103,664
    )
    
    
    (83,385
    )(+) Inflationary gains on monetary items,
net
    
    
    
    
    
    
    
    
    
    
    16,648(+) Reversal of deferred
taxes
    
    
    33,999
    
    
    
    35,247
    
    
    
    24,632(+) Minority interest on above
adjustments
    
    
    
    
    
    
    
    
    
    
    12,628(=) Net income according to the Constant Currency Method
    
    
    74,378
    
    
    
    94,497
    
    
    
    92,399
 2002
    
    2001Shareholders equity as of December 31 according to BR
CL
    
    
    1,779,685
    
    
    
    1,735,749(+) Balance remaining from the constant currency appreciation until
December 31, 2000
    
    
    165,664
    
    
    
    265,661(-) Deferred taxes on above
balance
    
    
    (56,340
    )
    
    
    (90,339
    )(=) Shareholders equity as of December 31 according to the Constant
Currency Method
    
    
    1,889,009
    
    
    
    1,911,071
 e. Principles of consolidation These consolidated financial statements include the accounts operations of
the Holding Company, Telerj and Telest as of December 31, 2003 and 2002 and for
the three years in the period ended December 31, 2003. All inter-company
balances and transactions have been eliminated on consolidation. F-10
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) f. Reclassifications Certain reclassifications have been made to the prior periods to conform
to the 2003 presentation. 3. Summary of principal accounting policies a. Cash and cash equivalents Are considered to be all available balances in cash and banks and highly
liquid temporary cash investments, stated at cost, plus accrued interest to the
balance sheet date, with original maturity dates of three months or less. b. Trade accounts receivable Accounts receivable from telephone subscribers are calculated at the
tariff rate on the date the services were rendered. Trade accounts
receivable, net also include services provided to customers up to the balance
sheet date, but not yet invoiced, as well as the accounts receivable from the
sale of handsets and accessories. c. Provision for doubtful accounts Provision is made for trade accounts receivable whose recoverability is
not considered probable. d. Foreign currency transactions Are recorded at the prevailing exchange rate at the date of the related
transactions. Foreign currency denominated assets and liabilities are
translated using the exchange rate at the balance sheet date. Resulting gains
and losses related to exchange variations on foreign currency denominated
assets and liabilities are recognized in the statements of income, as part of
financial expense, net. Exchange variation and premiums related to foreign currency are calculated
and recorded on an accrual basis regardless of the settlement period. e. Inventories Consist of handsets and accessories stated at the average cost of
acquisition. A provision is recognized to adjust the cost of handsets and
accessories to net realizable value for inventory considered obsolete or
slow-moving. f. Prepaid expenses Are stated at amounts disbursed for expenses which have not been incurred. g. Property, plant and equipment Property, plant and equipment are stated at acquisition or construction
cost less accumulated depreciation, restated for inflation until December 31,
1995. Cost incurred for maintenance and repair, which increase installed
capacity or useful life are capitalized. Other maintenance and repair costs are
charged to income as incurred. Depreciation is calculated using the
straight-line method based on the estimated useful lives of the underlying
assets. Depreciation rates are shown in Note 18(b). F-11
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Through 1998, capitalized interest was calculated at a rate of 12% per
annum on construction-in-progress. In 2003 and 2002, the Company capitalized
interest on construction-in-progress using the specific interest rates of the
loans that financed the construction-in-progress. The Company did not
capitalize interest in 2001. h. Vacation payable accrual Cumulative vacation payable due to employees is accrued as earned. i. Accrual for rewards program The Subsidiaries have implemented a rewards program that enables users to
accumulate points based on cellular services used, which may be exchanged in
the future for cellular handsets. An accrual is recorded based on points earned
as of the balance sheet date which are calculated, considering the cost of the
cellular handsets and the expected utilization based on the registered
customers consumption profile. j. Income and social contribution taxes Income and social contribution taxes are calculated and recorded based on
the tax rates in effect on the balance sheet date, on an accrual basis.
Deferred income taxes attributable to temporary differences and loss
carryforwards are recorded as assets or liabilities when it is more likely than
not that the assets will be realized. k. Loans and financing Loans and financing are updated for monetary and/or exchange variations
and include accrued interest to the balance sheet date. l. Fistel fee Fistel (Telecommunication Inspection Fund) fee paid at activation of
subscribers are deferred and amortized over the customers estimated retention
period, equivalent to 24 months. m. Reserve for contingencies A reserve is recorded based on the opinion of management and the Companys
external legal counsel relating to cases in which the likelihood of an
unfavorable outcome is probable. n. Pension and postretirement benefits The subsidiaries, together with other companies of the Brazilian
Telecommunications System, sponsor a private pension entity (SISTEL) to manage
the pension funds (defined benefit and defined contribution) and other
postretirement benefits to their employees. Actuarial liabilities are
determined using the projected unit credit method and plan assets are stated at
fair market value. Actuarial gains and losses are recorded in income (See Note
25). o. Revenue recognition Revenue from services is recognized when the services are rendered.
Billing is on a monthly basis. Unbilled revenues are estimated and recognized
as revenue when the services are rendered. Revenue from the sale of prepaid
cellular handset cards is deferred and recognized in income when such cards are
used, based on minute usage. Revenue from the sale of handsets and accessories
is recorded at the moment of the sale to the final customer. Sales made through
dealers are recorded as revenue when the handsets are activated. F-12
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) p. Financial expense, net Represents interest earned (incurred) during the period and monetary and
exchange variation resulting from financial investments and loans and
financing. Gains and losses on derivative contracts are also included in
financial expense, net. q. Derivatives The Company enters into certain derivative contracts to manage the
exposure of its cash flows in foreign currency to fluctuations in the exchange
rates in relation to the Brazilian real. These derivative contracts are
calculated and recorded based on contractual terms, and the exchange rates in
effect at the balance sheet date. Resulting gains and losses, realized or
unrealized, are recorded as Financial expense, net. Premiums paid or
received in advance are deferred for amortization over the period of the
respective contracts. r. Research and development Research and development costs are charged to expense as incurred and
recorded as general and administrative expenses. Research and development
expense in 2001 amounted to R$790. The Company did not incur research and
development expenses in 2003 and 2002. s. Advertising expense Advertising costs are charged to expense as incurred. t. Employees profit sharing Accruals are made to recognize the estimated expenses for employees
profit sharing, for which payment is subject to approval at the annual
Shareholders Meeting. u. Earnings per thousand shares Earnings per thousand shares are calculated based on the number of shares
outstanding at the balance sheet date. v. Segment information The Companies operate solely in one segment for local and regional
cellular telecommunications. All revenues are generated in relation to services
provided in or routed through the states of Rio de Janeiro and Espírito Santo. x. Use of estimates The preparation of consolidated financial statements in conformity with BR
CL requires management to make estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the period reported. Actual results could
differ from those estimates. F-13
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 4. Net operating revenue 2003
    
    2002
    
    2001Monthly subscription charges
    
    
    198,496
    
    
    
    281,613
    
    
    
    367,211Usage charges
    
    
    1,028,300
    
    
    
    858,877
    
    
    
    742,373Charges for use outside the concession area
    
    
    12,390
    
    
    
    23,950
    
    
    
    25,267Additional charges per call
    
    
    47,237
    
    
    
    43,146
    
    
    
    53,423Network usage charges
    
    
    809,860
    
    
    
    795,067
    
    
    
    702,049Additional services
    
    
    27,778
    
    
    
    15,539
    
    
    
    13,004Other
    
    
    7,823
    
    
    
    40
    
    
    
    67Gross operating revenue from services
    
    
    2,131,884
    
    
    
    2,018,232
    
    
    
    1,903,394Value-added tax on services and goods sold  ICMS
    
    
    (385,108
    )
    
    
    (297,709
    )
    
    
    (287,208
    )Employees profit participation program PIS
    
    
    (13,839
    )
    
    
    (13,087
    )
    
    
    (12,173
    )Social contribution on billing  COFINS
    
    
    (63,749
    )
    
    
    (60,393
    )
    
    
    (56,182
    )Service tax  ISS
    
    
    (79
    )
    
    
    
    
    
    
    Discounts granted
    
    
    (23,236
    )
    
    
    (30,050
    )
    
    
    (45,983
    )Net operating revenue from services
    
    
    1,645,873
    
    
    
    1,616,993
    
    
    
    1,501,848Goods sold (handsets and others)
    
    
    394,577
    
    
    
    348,635
    
    
    
    283,244Value-added tax on services and goods sold  ICMS
    
    
    (33,493
    )
    
    
    (35,527
    )
    
    
    (27,796
    )Employees profit participation program PIS
    
    
    (5,382
    )
    
    
    (2,362
    )
    
    
    (1,548
    )Social contribution on billing  COFINS
    
    
    (9,785
    )
    
    
    (8,571
    )
    
    
    (7,147
    )Discounts granted
    
    
    (74,961
    )
    
    
    (51,063
    )
    
    
    (18,545
    )Returns of goods
    
    
    (24,378
    )
    
    
    (20,474
    )
    
    
    (26,757
    )Net operating revenue from goods sold (handsets and others)
    
    
    246,578
    
    
    
    230,638
    
    
    
    201,451Net operating revenue
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299
 There were no customers who contributed more than 5% of total gross
operating revenues of the Company in 2003, 2002 and 2001, except for TELEMAR,
the fixed service provider for the area that contributed approximately 23% of
total gross operating revenues in 2003 (26% and 25% in 2002 and 2001,
respectively), mainly in relation to network usage charges. F-14
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 5. Cost of services and goods sold 2003
    
    2002
    
    2001Depreciation and amortization
    
    
    (325,786
    )
    
    
    (288,519
    )
    
    
    (235,462
    )Products sold
    
    
    (367,833
    )
    
    
    (325,542
    )
    
    
    (289,154
    )Interconnection/ interlinks
    
    
    (128,657
    )
    
    
    (130,846
    )
    
    
    (125,685
    )Network connections
    
    
    (74,764
    )
    
    
    (84,332
    )
    
    
    (76,051
    )Outside services
    
    
    (34,224
    )
    
    
    (34,548
    )
    
    
    (34,301
    )Taxes
    
    
    (59,616
    )
    
    
    (60,624
    )
    
    
    (63,373
    )Rent, insurance and building services fees
    
    
    (44,013
    )
    
    
    (40,493
    )
    
    
    (39,909
    )Personnel
    
    
    (15,573
    )
    
    
    (14,631
    )
    
    
    (13,283
    )Other
    
    
    (2,021
    )
    
    
    (2,206
    )
    
    
    (66
    )(1,052,487
    )
    
    
    (981,741
    )
    
    
    (877,284
    )
 6. Operating (expenses): a. Selling 2003
    
    2002
    
    2001Outsourced services (i)
    
    
    (228,349
    )
    
    
    (190,841
    )
    
    
    (156,611
    )Provision for doubtful accounts
    
    
    (40,239
    )
    
    
    (96,810
    )
    
    
    (71,847
    )Personnel
    
    
    (41,980
    )
    
    
    (44,066
    )
    
    
    (31,069
    )Depreciation
    
    
    (61,295
    )
    
    
    (47,131
    )
    
    
    (18,962
    )Rent, insurance and building services fees
    
    
    (11,139
    )
    
    
    (9,789
    )
    
    
    (8,610
    )Materials
    
    
    (3,295
    )
    
    
    (3,211
    )
    
    
    (3,120
    )Taxes
    
    
    (381
    )
    
    
    (360
    )
    
    
    (357
    )Other
    
    
    (788
    )
    
    
    (274
    )
    
    
    (2,842
    )(387,466
    )
    
    
    (392,482
    )
    
    
    (293,418
    )
 (i) Outsourced services include advertising expenses amounting to
R$73,183, R$53,821, R$42,024, for the years ended December 31, 2003, 2002 and
2001. b. General and administrative 2003
    
    2002
    
    2001Outsourced services
    
    
    (102,620
    )
    
    
    (121,452
    )
    
    
    (121,469
    )Depreciation
    
    
    (49,258
    )
    
    
    (42,032
    )
    
    
    (28,894
    )Personnel
    
    
    (49,976
    )
    
    
    (39,043
    )
    
    
    (58,472
    )Rent, insurance and building services fees
    
    
    (13,949
    )
    
    
    (11,408
    )
    
    
    (18,563
    )Taxes
    
    
    (2,923
    )
    
    
    (8,057
    )
    
    
    (1,018
    )Materials
    
    
    (4,328
    )
    
    
    (3,837
    )
    
    
    (3,365
    )Other
    
    
    (1,354
    )
    
    
    (4,118
    )
    
    
    (1,698
    )(224,408
    )
    
    
    (229,947
    )
    
    
    (233,479
    )
 F-15
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 7. Other operating income (expense), net 2003
    
    2002
    
    2001Other operating incomeFines
    
    
    9,816
    
    
    
    10,175
    
    
    
    9,905Recovered expenses
    
    
    27,470
    
    
    
    6,344
    
    
    
    5,859Reimbursement of shared costs
    
    
    3,066
    
    
    
    703
    
    
    
    Other
    
    
    17,177
    
    
    
    17,930
    
    
    
    4,182Other operating expenseProvision for contingencies
    
    
    (20,467
    )
    
    
    (28,527
    )
    
    
    (10,290
    )Taxes other than income taxes
    
    
    (18,355
    )
    
    
    (19,105
    )
    
    
    (3,805
    )Amortization of pre-operational expenses
    
    
    (595
    )
    
    
    
    
    
    
    Other
    
    
    (4,803
    )
    
    
    (4,474
    )
    
    
    (438
    )13,309
    
    
    
    (16,954
    )
    
    
    5,413
 8. Financial expense, net 2003
    
    2002
    
    2001Interest income on short-term investments
    
    
    82,114
    
    
    
    42,674
    
    
    
    20,809Interest expense on loans and financing
    
    
    (12,001
    )
    
    
    (23,303
    )
    
    
    (56,656
    )Monetary/exchange variation
    
    
    61,528
    
    
    
    (238,090
    )
    
    
    (113,266
    )Net gain (loss) on derivative transactions
    
    
    (112,341
    )
    
    
    221,010
    
    
    
    76,807Other, net
    
    
    (34,317
    )
    
    
    (17,403
    )
    
    
    (10,916
    )(15,017
    )
    
    
    (15,112
    )
    
    
    (83,222
    )
 In 2003 and 2002, financial expense is presented net of capitalized
interest during the year in the aggregate amount of R$40,443 and R$30,411,
respectively. No interest was capitalized during the year ended December 31,
2001. 9. Nonoperating expense, net 2003
    
    2002
    
    2001Gain (loss) on permanent asset disposals
    
    
    (180
    )
    
    
    (196
    )
    
    
    (329
    )Provision for loss on tax incentive
investments
    
    
    (7,917
    )
    
    
    
    
    
    
    Other
    
    
    (438
    )
    
    
    (1,006
    )
    
    
    (662
    )(8,535
    )
    
    
    (1,202
    )
    
    
    (991
    )
 10. Income and social contribution taxes Brazilian income taxes comprise federal income tax and the social
contribution tax. For the three-year period ended December 31, 2003, the income
tax rate was 25% and the social contribution tax rates were 9%. Deferred income
tax assets and liabilities related to temporary differences and tax loss
carryforwards were calculated at the tax rate of 34%. The composition of income tax expense is as follows: F-16
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 2003
    
    2002
    
    2001CurrentIncome tax
    
    
    1,306
    
    
    
    2,015
    
    
    
    97Social contribution charge
    
    
    480
    
    
    
    718
    
    
    
    30Deferred
    
    
    59,824
    
    
    
    67,084
    
    
    
    57,277Total income and social contribution taxes
    
    
    61,610
    
    
    
    69,817
    
    
    
    57,404
 The following is a reconciliation of the reported income tax expense and
the amount calculated by applying the combined statutory tax rates of 34% in
2003, 2002 and 2001: 2003
    
    2002
    
    2001Income before taxes as reported in the accompanying
financial statements
    
    
    217,847
    
    
    
    210,193
    
    
    
    220,318Taxes charged at the combined statutory rate
    
    
    74,068
    
    
    
    71,466
    
    
    
    74,908Permanent additions:Non-deductible expenses
    
    
    2,032
    
    
    
    2,999
    
    
    
    739Permanent exclusions:Interest on shareholders equity (Note 28)
    
    
    (14,450
    )
    
    
    (4,590
    )
    
    
    (17,101
    )Other
    
    
    (40
    )
    
    
    (58
    )
    
    
    (1,142
    )Income and social contribution taxes as reported in
the accompanying financial statements
    
    
    61,610
    
    
    
    69,817
    
    
    
    57,404Effective rate
    
    
    28.3
    %
    
    
    33.2
    %
    
    
    26.06
    %
 The composition of deferred tax assets is as follows: 2003
    
    2002Deferred tax assets:Tax credit on amortization of goodwill (Note 27)
    
    
    168,351
    
    
    
    254,222Accrual/ Allowance for:Inventory obsolescence
    
    
    9,877
    
    
    
    5,564Contingencies
    
    
    25,626
    
    
    
    16,321Doubtful accounts
    
    
    10,773
    
    
    
    10,835Rewards program
    
    
    6,718
    
    
    
    7,813Income tax and social contribution tax losses carryfowards
    
    
    41,862
    
    
    
    32,670Accelerated depreciation
    
    
    17,344
    
    
    
    9,164Other
    
    
    15,522
    
    
    
    8,444Total (see Note 14)
    
    
    296,073
    
    
    
    345,033Current
    
    
    112,111
    
    
    
    109,240Noncurrent
    
    
    183,962
    
    
    
    235,793
 Deferred taxes have been recorded as it is more likely than not that
they will be realized, as follows: F-17
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  a)
    
    Tax carryforwards, mainly from the subsidiaries, will be
compensated up to a limit of 30% limit of the tax basis for upcoming
years. The Company estimates based on projected future taxable income
that these tax carryforwards will be recovered within 5 years.b)
    
    Tax credits from corporate restructuring - represented by the
balance of goodwill net of the equity maintenance reserve (see Note
27); the realization of these tax credits occurs in the same proportion
as the amortization of goodwill in 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 obsolescence. 11. Supplemental cash flow information 2003
    
    2002
    
    2001Income and social contribution tax paid
    
    
    2,120
    
    
    
    37,740
    
    
    
    41,651Interest paid
    
    
    34,373
    
    
    
    47,651
    
    
    
    72,519
 Non-cash transactions: 2003
    
    2002
    
    2001Tax incentive investment credits received
    
    
    288
    
    
    
    106
    
    
    
    584
 12. Cash and cash equivalents 2003
    
    2002Banks
    
    
    11,102
    
    
    
    16,704Temporary cash investments
    
    
    377,336
    
    
    
    92,669Total
    
    
    388,438
    
    
    
    109,373
 Temporary cash investments refer principally to bank deposit certificates
(CDBs) which are indexed to interbank deposit (CDI) rates. 13. Trade accounts receivable, net 2003
    
    2002Unbilled services
    
    
    81,573
    
    
    
    50,308Billed services
    
    
    93,157
    
    
    
    68,894Interconnection
    
    
    95,900
    
    
    
    96,070Receivables from products sold
    
    
    106,743
    
    
    
    89,503Allowance for doubtful accounts
    
    
    (31,685
    )
    
    
    (31,867
    )Total
    
    
    345,688
    
    
    
    272,908
 F-18
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) There were no customers who contribute more than 10% of trade accounts
receivable, net of the Company in 2003 and 2002, except for TELEMAR, the fixed
service provider for the area that contributed approximately 16% and 22% of
such account in 2003 and 2002, respectively, mainly in relation to
interconnection charges. The changes in the allowance for doubtful accounts were as follows: 2003
    
    2002
    
    2001Beginning balance
    
    
    31,867
    
    
    
    37,626
    
    
    
    22,261Provision
    
    
    40,239
    
    
    
    96,811
    
    
    
    71,847Write-offs
    
    
    (40,421
    )
    
    
    (102,570
    )
    
    
    (56,482
    )Ending balance
    
    
    31,685
    
    
    
    31,867
    
    
    
    37,626
 14. Deferred and recoverable taxes 2003
    
    2002Federal income tax
    
    
    104,079
    
    
    
    86,556Social contribution tax
    
    
    37,469
    

    
    
    13,752Deferred tax assets
    
    
    296,073
    
    
    
    345,033Withholding tax
    
    
    8,700
    
    
    
    21,656Sales and other taxes
    
    
    71,401
    
    
    
    75,584517,722
    
    
    
    542,581Current
    
    
    263,610
    
    
    
    268,663Noncurrent
    
    
    254,112
    
    
    
    273,918
 15. Inventories 2003
    
    2002Cellular handsets and accessories
    
    
    75,857
    
    
    
    70,625Supplies
    
    
    4,542
    
    
    
    5,001Reserve for obsolescence
    
    
    (29,050
    )
    
    
    (16,366
    )51,349
    
    
    
    59,260
 Reserve for obsolescence is calculated for cellular handsets which are
considered to be obsolete or for slow moving inventories. 16. Prepaid expenses 2003
    
    2002Fistel fee
    
    
    9,553
    
    
    
    12,251Rents
    
    
    8,395
    
    
    
    8,362Advertising
    
    
    13,076
    
    
    
    2,065Employees benefits
    
    
    1,255
    
    
    
    1,238
 F-19
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 2003
    
    2002Others
    
    
    7,236
    
    
    
    10,51739,515
    
    
    
    34,433Current
    
    
    27,143
    
    
    
    19,522Noncurrent
    
    
    12,372
    
    
    
    14,911
 17. Other assets 2003
    
    2002Judicial deposits
    
    
    9,759
    
    
    
    2,732Employees advance
    
    
    1,485
    
    
    
    1,523Credit with suppliers
    
    
    13,003
    
    
    
    5,527Related parties credits
    
    
    33,769
    
    
    
    28,185Subsidy on handset sales
    
    
    5,899
    
    
    
    Other assets
    
    
    8,660
    
    
    
    4,99272,575
    
    
    
    42,959Current
    
    
    67,238
    
    
    
    42,747Noncurrent
    
    
    5,337
    
    
    
    212
 The subsidy on handsets sales to dealers began to be deferred in 2003, and
recorded in income as the handsets network became ready for operation. Due to
this procedure, net income for the year ended December 31, 2003 was increased
by R$3,893, net of taxes. 18. Property, plant and equipment, net a. Composition 2003
    
    2002Accumulated
    
    Net Book
    
    Net BookCost
    
    Depreciation
    
    Value
    
    ValueConstruction-in-progress
    
    
    158,357
    
    
    
    
    
    
    
    158,357
    
    
    
    213,721Automatic switching equipment
    
    
    698,936
    
    
    
    (416,303
    )
    
    
    282,633
    
    
    
    318,027Transmission equipment
    
    
    1,404,108
    
    
    
    (953,682
    )
    
    
    450,426
    
    
    
    533,916Handset (ii)
    
    
    130,359
    
    
    
    (94,993
    )
    
    
    35,366
    
    
    
    39,546Buildings
    
    
    73,327
    
    
    
    (10,628
    )
    
    
    62,699
    
    
    
    62,122Infrastructure
    
    
    327,857
    
    
    
    (156,366
    )
    
    
    171,491
    
    
    
    172,010Software
    
    
    261,210
    
    
    
    (106,301
    )
    
    
    154,909
    
    
    
    154,297Other assets (i)
    
    
    147,593
    
    
    
    (65,460
    )
    
    
    82,133
    
    
    
    91,4183,201,747
    
    
    
    (1,803,733
    )
    
    
    1,398,014
    
    
    
    1,585,057
  (i)
    
    Other assets balance includes the book value of land of R$4,353 as of
December 31, 2003 and 2002.(ii)     
In March 2003, the Company changed its estimate of the useful life of
handsets from 24 to 18 months to better reflect the impact of usage of these
assets. The effect for this year of the referred change was an increase in
depreciation expenses in the amount of R$2,697 as compared with the prior
year. F-20
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) In 2003, the Company capitalized as assets the financial expenses on
loans, that are used for financing the construction in progress, in the amount
of R$40,443 (R$30,411 in 2002). The Company did not capitalize interest in
2001. b. Depreciation rates The annual depreciation rates applied to property, plant and equipment for
the years ended December 31, 2003, 2002 and 2001 are as follows: %Automatic switching equipment
    
    
    14.29Transmission equipment
    
    
    14.29Terminal equipment (i)
    
    
    66.67Buildings
    
    
    4.00Infrastructure
    
    
    5.00 - 20.00Software
rights
    
    
    20.00Other assets (excluding land)
    
    
    0-20.00
  (i)
    
    50.00% and 33.33% for the years ended December 31,2002 and 2001,
respectively. c. Rentals The Company rents equipment and premises through a number of operating
leases agreements that expire at different dates. Total annual rent expense
under these agreements was R$67,102, R$55,565 and R$60,679 for the years ended
December 31, 2003, 2002 and 2001, respectively. Rental commitments relate
primarily to facilities. The future minimum rental payments under
non-cancelable leases are as follows: (Unaudited)Year ending December 31,
    
    Amount2004
    
    
    35,5042005
    
    
    33,9042006
    
    
    25,8142007
    
    
    20,9822008
    
    
    18,2932009 and thereafter
    
    
    18,347Total minimum payments
    
    
    152,844
 19. Payroll and related accruals 2003
    
    2002Wages and salaries
    
    
    76
    
    
    
    Accrued social security charges
    
    
    12,665
    
    
    
    10,264Accrued benefits
    
    
    14,289
    
    
    
    11,421Payroll withholdings
    
    
    2,687
    
    
    
    1,20329,717
    
    
    
    22,888
 F-21
    Table of Contents  TELE SUDESTE CELULAR
PARTICIPAÇÕES S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 20. Accounts payable and accrued expenses 2003
    
    2002Suppliers
    
    
    351,293
    
    
    
    324,953Interconnection and interlink
    
    
    74,955
    
    
    
    53,622426,248
    
    
    
    378,575
 21. Taxes other than income taxes 2003
    
    2002ICMS (State VAT)
    
    
    20,943
    
    
    
    13,998PIS and COFINS (taxes on operating revenues)
    
    
    12,519
    
    
    
    8,280FISTEL fee
    
    
    5,612
    
    
    
    2,726FUST and FUNTTEL (regulatory charges)
    
    
    1,101
    
    
    
    1,235Other
    
    
    3,845
    
    
    
    44,020
    
    
    
    26,239
 22. Dividends payable 2003
    
    2002Payable by the Company to:Common shareholders
    
    
    14,063
    
    
    
    4,280Preferred shareholders
    
    

    23,207
    
    
    
    13,204Prior year dividends not claimed
    
    
    13,453
    
    
    
    14,44150,723
    
    
    
    31,925
 Dividends payable as of December 31, 2003 include interest on
shareholders equity in the amount of R$36,125,net of withholding income tax of
R$6,375, (R$11,475 in 2002) and proposed dividends of R$1,145 (R$90,379 in
2002), which payments are subject to approval at the annual shareholders 
meeting. In accordance with the Company Social Article and in conformity to the
Corporate Law 6.404/76, unclaimed dividends prescribe after 3 years as of the
date payments commence. 23. Other current liabilities 2003
    
    2002Prior year dividends not claimed
    
    
    13,453
    
    
    
    14,441Accrual for rewards program
    
    
    19,760
    
    
    
    22,980Advances from customers-prepaid recharge cards
    
    
    21,786
    
    
    
    19,679Others
    
    
    14,076
    
    
    
    2,03155,622
    
    
    
    44,690
 F-22
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 24. Loans and financing a. Composition of Debt at December 31: Currency
    
    Annual interest
    
    Maturity
    
    2003
    
    2002(1)Financial
institutions-Citibank  OPIC
(i)
    
    US$
    
    4.30% p.a. + Libor
    
    Nov/2004
    
    
    36,115
    
    
    
    88,332Resolution no. 63
and 2770
(ii)
    
    US$
    
    4.14% to 14,00% p.a.
    
    Jan/2004 to Oct/2005
    
    
    80,898
    
    
    
    192,564Resolution 4,131
(iii)
    
    US$
    
    2.30% to 11.77% p.a.
    
    Jun/2004
    
    
    73,489
    
    
    
    133,084NEC do Brasil S.A.
(iv)
    
    US$
    
    7,30% p.a.
    
    May/2004 to Nov/2005
    
    
    18,037
    
    
    
    33,087Accrued
Interest
    
    
    
    
    
    
    
    
    
    Jan/2004 to Aug/2004
    
    
    10,416
    
    
    
    13,452218,955
    
    
    
    460,519Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165,802
    
    
    
    200,922Noncurrent
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,153
    
    
    
    259,597
  (1)
    
    At December 31, 2003 and 2002, 1(one) US dollar has equivalent to R$2.8892
and R$3.5333, respectively.(i)
    
    Loans from Citibank-OPIC - refer to financing obtained for the expansion
and modernization of the cellular network.(ii)
    
    Resolutions 63 and 2770 issued by Central Bank of Brazil - enables
Brazilian financial institutions to re-lend loan proceeds from international
borrowings to local borrowers.(iii)
    
    Resolution 4,131  represents the assumption of debt originally
contracted by an unrelated party and receipt of the corresponding proceeds
thereof, intermediated by a Brazilian financial institution.(iv)
    
    Loans from NEC do Brasil supplier and Export Development Corporation of
Japan refer to supplier credit for the financing of fixed assets purchased from
NEC do Brasil. b. Repayment schedule The noncurrent portion as of December 31, 2003 matures as follows: 2005
    
    
    53,15353,153
 c. Restrictive covenants The financing from Citibank  OPIC has restrictive covenants, which
include restrictions related to indebtedness level, EBITDA (Earnings Before
Taxes, Interest, Depreciation and Amortization) and financial expenses. The
Company was in compliance with all such covenants at December 31, 2003. Further
more, these covenants have not restricted the Companys ability to conduct its
normal business or incur additional debt to fund its working capital or capital
expenditures needs as of the date of this annual report. F-23
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) d. Guarantees Creditors
    
    GuaranteeCitibank
    
    Overseas Private Investment Corporation (OPIC) - guarantee only for political riskResolution no.
63
    
    Promissory NotesAssumption of Debt and
Resolution no.
4.131
    
    Promissory NotesNEC do Brasil
S.A.
 e. Derivatives On December 31, 2003, Telerj had outstanding currency swap contracts with
notional amounts of US$126,563 thousand (US$139,433 thousand on December 31,
2002), to hedge coverage of its entire foreign currency liabilities. These
swaps contain rates ranging from US$ + 1,5% per year to US$ +14,3% per year and
maturities from January 5, 2004 to November 28, 2005. Under the terms of the swap arrangements, the Company is required to pay
the counter parties the amount that the variation of the CDI (Brazilian bank
certificates of deposit rate) on the notional value exceeds the variation of
the U.S. dollar exchange rate. If the inverse occurs, the subsidiaries are
entitled to receive the difference from the counter parties. The gains and
losses attributable to these instruments are calculated as if the contract were
settled on the balance sheet date and accrued and recognized as an adjustment
to financial income or expense in the period in which the change occurs. As of
December 31, 2003, the Company had recorded a net loss of R$10,760 (net gain of
R$137,698 on December 31, 2002) on its exchange hedge operations, represented
by a balance of R$7,632 in long-term assets (R$57,753 in current assets and
R$79,945 in long-term assets on December 31, 2002), and current liability of
R$18,392. 25. Reserve for contingencies The Company is party to a number of lawsuits, with respect to labor, tax
and civil claims. The Companys management, based on external legal counsels
opinion, has recognized a provision for those claims for which an unfavorable
outcome is considered probable. Components of the reserve are as follows: 2003
    
    2002Labor claims
    
    
    8,042
    
    
    
    7,848Civil claims
    
    
    15,403
    
    
    
    4,944Disputed taxes
    
    
    51,927
    
    
    
    35,21075,372
    
    
    
    48,002Current
    
    
    52,079
    
    
    
    26,519Long-term
    
    
    23,293
    
    
    
    21,483
 The changes in the reserve for contingencies are as follows: F-24
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 2003
    
    2002
    
    2001Beginning balance.
    
    
    48,002
    
    
    
    19,526
    
    
    
    10,760Additional reserve
    
    
    20,467
    
    
    
    28,527
    
    
    
    10,290Monetary variation
    
    
    8,677
    
    
    
    
    
    
    
    Payments
    
    
    (365
    )
    
    
    (48
    )
    
    
    (792
    )Reversals
    
    
    (1,409
    )
    
    
    (3
    )
    
    
    (732
    )Ending balance
    
    
    75,372
    
    
    
    48,002
    
    
    
    19,526
 The main tax contingencies, in which the subsidiaries are involved, are as
follows: 25.1 Tax Claims Probable losses  a)
    
    ICMSThe subsidiaries, based on legal counsels opinion, recognized a
provision in the amount of R$12,097, being R$161 for Telerj and R$11,936
for Telest, as of the year ended December 31, 2003 (R$12,132 as of
December 31, 2002) regarding fiscal assessments of ICMS received in 2002,
which are examined at administrative level.b)
    
    PIS and COFINSOn November 27, 1998, computation of the PIS and COFINS tax was altered
by Law no. 9,718 that (i) increased the COFINS rate from 2% to 3%, (ii)
authorized the deduction of up to 1/3 of the COFINS from the Social
Contribution on Net Profits  CSLL and (iii) indirectly increased the PIS
and COFINS due by the subsidiaries, by determining the inclusion of the
revenues exceeding billing in their tax calculation bases.According to the Companys external legal counsel, this increase is
unconstitutional, since: (i) article 195 of the Brazilian Federal
Constitution, in force at the date Law 9,718 was enacted, established
that the PIS and COFINS tax would only be due on payroll, billing and
profits; (ii) the Federal Government made use of an improper means to
increase the rate of the PIS and the COFINS taxes, i.e., the increase was
introduced through an ordinary law, instead of a complementary law.;
(iii) the Government did not comply with the ninety-day term as from
publication for the increase in tax rate to take effect.Both Telerj and Telest obtained judicial decisions authorizing them to
exclude the revenues exceeding billing from the PIS and COFINS tax
calculation bases and also authorizing those Companies to continue to pay
the COFINS tax at the 2% (two percent) rate.With respect to the claim filed by Telerj, this decision was partially
revoked in August 2000, only remaining valid the authorization to exclude
the revenues exceeding billing from the tax calculation bases. In
September 2000, due to this decision, Telerj paid the updated amount of
R$12,473. With respect to the part still valid, Telerj set up a provision
of R$35,726 for the year ended December 31, 2003 (R$20,931 as of December
31, 2002). Telest set up a provision of R$4,104 (R$2,147 as of December
31, 2002).Due to the alterations introduced by Law no. 10,637/02, the subsidiaries
Telerj and Telest started to include revenues exceeding billing in the
PIS tax calculation basis as from December 2002. However, the F-25
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  provisions for taxable events prior to said law remain accrued, in
addition to being duly supported by the aforementioned judicial
decisions.Possible LossBased on the Companys external legal counsel and tax advisors, the
Companys Management believes that the probability of an adverse outcome
relating to the claims described below is possible and consequently, a
provision has not been recorded for these items.a)
    
    ICMS, ISS and other taxesThe subsidiaries Telerj and Telest receive tax assessment notifications
in the total amount of R$44,666 for: (i) R$26,625  lack of payment of
the ICMS tax on eventual or complementary services not classified as
telecommunication services; (ii) R$5,460  lack of payment of the ICMS
tax on international calls originating from Brazil destined for abroad;
(iii) R$1,113  lack of payment of the ICMS tax on calls originating from
administrative terminals and tests used by employees; (iv) R$11,468  in
respect of several notifications regarding the ICMS, ISS and other taxes
that are being challenged at the administrative level.b)
    
    CSLLTelerj was notified for having used part of the CSLL negative tax
calculation basis determined by the Company (Telecomunicações do Rio de
Janeiro S.A.) from which it originated through a spin-off for year 1997.
For the year ended December 31, 2003, said infringement notice amounts to
R$4,065.25.2

    Labor and Civil ClaimsThese claims comprise several labor and civil litigations, for which
provision has been set up as previously mentioned, and that is considered
sufficient to cover probable losses on those lawsuits.With respect to the claims with possible loss, the amount provided for is
R$15,566 for civil claims and R$4,234 for labor claims.a)
    
    Litigation Related to the Ownership of Caller IDIn July 2002, the Company, together with other Brazilian mobile
telecommunication operators, were named as defendants in an action filed
by Lune Projetos Especiais Telecommunicação Comércio Ind. Ltda., or Lune,
pursuant to which Lune claims to be the owner of patents relating to
Equipamento Controlador de Chamadas Entrantes e do Terminal Telefônico,
or Caller ID, and also that the mobile telecommunication operators are
using the patent without proper authorization. Therefore, Lune demands
that the operators cease to provide Caller ID services and that it should
be indemnified for the unauthorized use of the Caller ID system, upon
payment of fees received by the operators in consideration of the use of
the system by their customers. Based on the opinion of the Companys
management and external legal counsel, an unfavorable outcome related to
this lawsuit is possible. The indemnification allegedly due by the mobile
operators could not be accurately calculated as of yet, due to the fact
that the cost of the caller ID service provided by the companies has
never before been calculated separately.b)
    
    Litigation Related to the Validity of the Minutes in the Prepaid PlansThe Company is defendant in various lawsuits brought by the federal
public prosecutors office and an association for consumers protection
which challenged the imposition of a deadline for the use of purchased
prepaid minutes. The plaintiffs allege that any purchased prepaid minutes
should not have a time limitation for usage. This lawsuit is still in its
initial stages. Based on the opinion of the Companys management and
external counsel, an unfavorable outcome related to this lawsuit is
possible. F-26
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 26. Pension and other postretirement benefit plans The subsidiaries, together with other companies of the former Telebrás
system, sponsor private pension and health care plans for retired employees,
managed by Fundação Sistel de Seguridade Social  (Sistel).Until December
1999, all sponsors of the plans managed by Sistel were joint and severally
liable participants in relation to all plans then existent. On December 28,
1999, a single-employer sponsored pension plan for active employees was created
(PBS  Tele Sudeste Celular Plan). Pension benefits for retired employees
(PBS-A) and postretirement health care benefits (PAMA) remained as part of the
multiemployer plans. The implementation of the restructuring was approved by
Secretaria de Previdência Complementar (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 84% of the subsidiaries employees, there is an individual
defined contribution plan  Visão Celular Benefit Plan, established by SISTEL
in August 2000. The Visão Celular Plan is supported by contributions made by
the participants (employees) and by the sponsor, which are credited to
participants individual accounts. The subsidiaries are responsible for 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
Visão 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 matching contribution to the Visão Celular Plan is 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 2003, the subsidiaries contributed the amount of R$46 (R$210 in
2002) to PBS Tele Sudeste Celular Plan and R$2,859 (R$3,111 in 2002) to Visão
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. The
Company recorded the actuarial gains and losses in the net income as of
December 31, 2003 and 2002. Regarding the actuarial valuation of the plans, the
Company established the projected unit credit method for the plans positions
as of November 30, 2003 and November 30, 2002, respectively. For
multi-sponsored plans (PAMA and PBS-A), the apportionment of the plans assets
was made in accordance with the Companys actuarial liabilities, in relation to
the plans total liabilities. The net amount recorded was R$839. Following is the composition of the pension plans and post-retirement
benefits provisions as of December 31, 2003, as well as the information
required by Deliberation CVM No. 371 with respect to such plans: F-27
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Plan
    
    2003
    
    2002Accrued pension cost  PBS/Visão Tele
Sudeste
    
    
    
    
    
    
    406PAMA Telerj /
Telest
    
    
    893
    
    
    
    726Accrued pension and postretirement
 benefits - noncurrent
liabilities
    
    
    893
    
    
    
    1,132
 a) Reconciliation between assets and liabilities 2003PBS/Visão (i)(iii)
    
    PAMA
    
    PBS-ATelerj/Telest
    
    (ii)
    
    (ii) (iii)Benefit
obligation
    
    
    11,022
    (a)
    
    
    2,049
    
    
    
    9,787Fair value of plan
assets
    
    
    (14,109
    )
    
    
    (1,156
    )
    
    
    (11,693
    )Accrued (prepaid) pension and
postretirement
benefits
    
    
    (3,087
    )
    
    
    893
    
    
    
    (1,906
    )
 2002PBS/Visão (i)
    
    PAMA
    
    PBS-ATelerj/Telest
    
    (ii)
    
    (ii) (iii)Benefit
obligation10,955
    
    
    
    1,307
    
    
    
    8,063Fair value of plan
assets
    
    
    (10,549
    )
    
    
    (581
    )
    
    
    (10,072
    )Accrued (prepaid)
pension and
postretirement
benefits406
    
    
    
    726
    
    
    
    (2,009
    )
  (i)
    
    Even though the Visão Telerj and Telest plans are defined contribution
plans, there is an actuarial risk of death and disability of participants,
that is paid by the sponsor, requiring an actuarial estimate of those risks.(ii)
    
    Refers to proportional participation of Telerj and Telest in assets and
liabilities of the multi-employer plan  PAMA and PBS-A.(iii)
    
    While these plans have a surplus as of December 31, 2003 and 2002, no
assets were recognized by the sponsor, due to the legal impossibility of
reimbursement of this surplus, in addition to the fact that the PBS-A plan
is non-contributory, which precludes a reduction of contributions by the
sponsor in the future. b) Change in benefit obligation 2003PBS/VisãoTelerj/Telest
    
    PAMA
    
    PBS-ABenefit obligation as of
December 31,
2002
    
    
    10,955
    
    
    
    1,307
    
    
    
    8,063Service
cost
    
    
    632
    
    
    
    20
    
    
    
    Interest
cost
    
    
    1,079
    
    
    
    145
    
    
    
    877Benefits paid in the
year
    
    
    (595
    )
    
    
    (85
    )
    
    
    (705
    )Actuarial (Gains) or Losses
    
    
    (1,049
    )
    
    
    662
    
    
    
    1,552Benefit obligation as of
December 31,
2003
    
    
    11,022
    
    
    
    2,049
    
    
    
    9,787
 F-28
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) c) Changes in plan assets 2003PBS/VisãoTelerj/Telest
    
    PAMA
    
    PBS-AFair value of plan
assets as of December
31, 2002
    
    
    10,549
    
    
    
    581
    
    
    
    10,072Return on plan assets
in the
year
    
    
    3,636
    
    
    
    650
    
    
    
    2,326Contributions in the
year
    
    
    519
    
    
    
    10
    
    
    
    Benefits paid in the
year
    
    
    (595
    )
    
    
    (85
    )
    
    
    (705
    )Fair value of plan
assets as of December
31, 2003
    
    
    14,109
    
    
    
    1,156
    
    
    
    11,693
 Although Visão plans are defined contribution plans, there is an actuarial
risk of death and of disability of its participants that is paid by the
sponsor, being necessary an actuarial calculation of these risks. d) Forecast Expense for 2004 Plan
    
    PBS.Visão
    
    PAMA
    
    PBS-AService
cost
    
    
    531
    
    
    
    10
    
    
    
    Interest
cost
    
    
    1,189
    
    
    
    227
    
    
    
    1,063Expected return on
assets
    
    
    (1,642
    )
    
    
    (126
    )
    
    
    (1,278
    )Employees
contributions
    
    
    (118
    )
    
    
    
    
    
    
    (40
    )
    
    
    111
    
    
    
    (215
    )
 e) Actuarial Assumptions December 31, 2003Plan
    
    PBS.Visão
    
    PAMA
    
    PBS-ADiscount rate for
determining
projected benefit
obligation
    
    
    11.30% a.a.
    
    
    
    11.30% a.a.
    
    
    
        11.30% a.a.Plan assets
expected return
rate
    
    
        11.30% a.a.
    
    
    
        11.30% a.a.
    
    
    
        11.30% a.a.Salary increase
rate
    
    
        7.10% a.a.
    
    
    
        7.10% a.a.
    
    
    
        7.10% a.a.Mortality
rate
    
    UP84+1
    
    UP84+1
    
    UP84+1Disability
mortality
rate
    
    IAPB-57Disability
rate
    

    Mercer Disability
    
    Mercer Disability
    
    Mercer Disability% of married
active
participants on
retirement
date
    
    
        95%Number of PBS
Plan active
participants
    
    
        14Number of PBS
Plan retired
participants
    
    
        14
    
    
    
        55
    
    
    
        20Number of Visão
Plan active
participants
    
    
        1,419
 F-29
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) December 31, 2002PBS/VisãoTelerj/Telest
    
    PAMA
    
    PBS-ADiscount rate for
determining projected benefit obligation
    
    
    10.24% p.a.
    
    
    
    11.30% p.a.
    
    
    11.30% p.a.Plan assets expected return rate
    
    
    10.24% p.a.
    
    
    
    14.45% p.a.
    
    
    14.45% p.a.Salary increase rate
    
    
    6.08% p.a.
    
    
    
    8.15% p.a.
    
    
    8.15% p.a.Long term inflation rate
    
    
    4.00% p.a.
    
    
    
    5.00% p.a.
    
    
    5.00% p.a.Medical costs increase rate
    
    Not applicable
    
    
    10.62% p.a.
    
    
    Not applicableBenefits increase rate
    
    
    4.00% p.a.
    
    
    
    5.00% p.a.
    
    
    5.00% p.a.Mortality rate
    
    GAM-71
    
    GAM-71
    
    UP84 with one year severityDisability mortality rate
    
    RRB1944
    
    
    
    
    
    Disability
rate
    
    RRB1944
    
    Mercer
    
    Disability Mercers rate% of married active
participants on
retirement
date
    
    
    95%
    
    
    
    
    
    
    Number of retired
participants
Telerj/Telest
    
    
    
    
    
    
    28
    
    
    Number of PBS Plan
active participants
Telerj/Telest
    
    
    14
    
    
    
    
    
    
    20Number of PBS Plan
retired participants
Telerj/Telest
    
    
    20
    
    
    
    
    
    
    Number of Visão Plan
active participants
Telerj/Telest
    
    
    1,626
    
    
    
    
    
    
    
 27. Corporate restructuring On November 30, 2000, a corporate restructuring was completed to transfer
the goodwill recorded by the Holding Company as a result of the privatization
process to the Subsidiaries, to ensure their realization. The restructuring was
in essence a transfer of the tax benefits associated with the goodwill
amortization; however, for local tax purposes it involved a series of spin-offs
and mergers. For the Companys corporate and tax purposes, the tax benefit is recorded
in two separate components, comprised of the related goodwill transferred and
the related reserve for the maintenance and integrity of the merged companys
equity. These amounts are recorded net in the balance sheet as a deferred tax
asset, presented as part of deferred and recoverable taxes as follows: Original
    
    At December 31,Balances
    
    2003
    
    2002Balance sheets:Goodwill -
spun-off
    
    
    1,393,279
    
    
    
    495,148
    
    
    
    773,804Reserves -
spun-off
    
    
    (928,437
    )
    
    
    (326,197
    )
    
    
    (519,582
    )Net tax credit from corporate
restructuring
    
    
    464,842
    
    
    
    168,351
    
    
    
    254,222
 F-30
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Statements of income:Goodwill amortization
    
    
    278,656
    
    
    
    278,656Reversal 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.
The net amount of R$168,351 as of December 31, 2003 (R$254,222 as of December
31, 2002), which, in essence, represents the tax credit transferred, has been
classified in the balance sheet in current and non-current assets as deferred
taxes (see Note 10). The tax credit from corporate restructuring will be capitalized based on
its effective realization. In 2003, the Company effectively realized R$86,490
of tax credit from corporate restructuring. The subsidiaries did not realize
the total tax credit and recorded R$25,670 and R$9,325 as tax credit on tax
losses and negative basis of social contribution, respectively. On December 31, 2003, the subsidiaries adjusted the reserve amount in view
of the change in the social contribution law, introduced after the
restructuring, generating a total increase in the goodwill reserve in the
amount of R$8,872. 28. Shareholders equity a. Share capital The Companys authorized capital at December 31, 2003 was 700 billion
shares. Capital subscribed and paid-up at the balance sheet date was
represented by the following shares, without par value: Total
    
    
    
    
    
    Totaloutstanding
    
    Capital
    
    outstandingNumber of shares
    
    on Dec, 31,
    
    increase
    
    on Dec, 31,(in thousands)
    
    2002
    
    (a)
    
    2003Common shares
    
    
    154,431,421
    
    
    
    18,591,761
    
    
    
    173,023,182Preferred shares
    
    
    259,575,037
    
    
    
    
    
    
    
    259,575,037Total outstanding
    
    
    414,006,458
    
    
    
    18,591,761
    
    
    
    432,598,219In thousand of Brazilian
reais  Corporate law
(historical)
    
    
    685,321
    
    
    
    93,517
    
    
    
    778,838
   (a)
    
    Capitalization of tax credit approved by Board of Directors Meeting on
March 31, 2003 F-31
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) At the 56th Extraordinary Meeting of the Administration Council held on
March 31, 2003 the increase of capital stock by R$ 93,517 was approved, through
the issuance of 18,591,761 thousand new shares as a result of the financial
realization of part of the capital reserve generated in the corporate
restructuring. The capital may be increased only by a decision taken at a shareholders
meeting or by the Board of Directors in connection with the capitalization of
profits or reserves previously allocated to capital increases at a
shareholders meeting. The preferred shares are non-voting except under limited circumstances and
are entitled to receive cash dividends 10% higher than those attributed to
common shares and have priority over the common shares in the case of
liquidation of the Company. b. Capital reserves Special premium reserve This reserve represents the formation of a special reserve for goodwill as
a result of the corporate restructuring (see Note 27). According to CVM
Instruction No. 319, of December 3, 1999, this reserve shall be used in future
capital increases on behalf of the controlling shareholder (Sudestecel
Participações S.A and Tagilo Participações S.A.) whenever the amortization of
the goodwill paid in the acquisition of the Company results in a reduction of
income tax and social contribution tax payable. Tax Incentive Comprised of income tax reduction incentives, which are converted into
investment certificates. c. Income reserves Legal reserve Brazilian corporations are required to appropriate 5% of annual net income
to a legal reserve until that reserve reaches 20% of paid-in share capital, or
30% of nominal paid-in share capital plus capital reserves; thereafter,
appropriations to this reserve are not mandatory. This reserve can be used only
to increase share capital or offset accumulated losses. Reserve for Expansion and Modernization Based on the budget approved by the Board of Directors, which describes
the resource needs for future investment projects, the balance of retained
earnings was transferred to the special reserve for expansion and
modernization, after distributions determined by Brazilian Corporate Law and
the reversal of unclaimed dividends of 1999. d. Dividends Pursuant to its by-laws, the Company is required to distribute as
dividends in respect of each fiscal year ending on December 31, to the extent
amounts are available for distribution, an aggregate amount equal to at least
25% of Adjusted Net Income (as defined below) on such date. The annual dividend
distributed to holders of preferred shares (the preferred dividend) has
priority in the allocation of Adjusted Net Income. Remaining amounts to be
distributed are allocated first to the payment of a dividend to holders of
common shares in an amount equal to the preferred dividend and the remainder is
distributed equally among holders of preferred shares and common shares. F-32
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 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. For purposes of Brazilian Corporate Law, and in accordance with the
Companies by-laws, the Adjusted Net Income is an amount equal to the
Companys net income adjusted to reflect allocations to or from (i) the legal
reserve; (ii) the statutory reserve; (iii) a contingency reserve for
anticipated losses, if any; (iv) a reserve for future investment projects, if
any and (v) an unrealized income reserve, if any. The proposed dividend was calculated as follows: 2003
    
    2002
    
    2001Consolidated net income
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914Add:Consolidation adjustments
    
    
    689
    
    
    
    3,240
    
    
    
    494Net income at Holding Company level in accordance with Brazilian Corporate Law
    
    
    156,926
    
    
    
    143,616
    
    
    
    163,408Deduct:Appropriation to legal reserve
    
    
    (7,846
    )
    
    
    (7,181
    )
    
    
    (8,170
    )Adjusted net income
    
    
    149,080
    
    
    
    136,435
    
    
    
    155,238Minimum dividend (25%
 on adjusted net income)
    
    
    37,270
    
    
    
    34,109
    
    
    
    38,809Proposed dividend and interest
 on shareholders equity:Common shares
    
    
    14,063
    
    
    
    35,751
    
    
    
    14,731Preferred shares
    
    
    23,207
    
    
    
    66,103
    
    
    
    28,021Total
    
    
    37,270
    
    
    
    101,854
    
    
    
    42,752
 Dividend and interest on equity per thousand shares (Brazilian reais) 2003
    
    2002
    
    2001Common shares
    
    
    0.081277
    
    
    
    0.231506
    
    
    
    0.107946Preferred shares
    
    
    0.089404
    
    
    
    0.254657
    
    
    
    0.107949
 The Holding Company has an option to pay interest on shareholders equity,
deductible for tax purposes, in lieu of paying dividends, which are not tax
deductible. In 2003, 2002 and 2001 the Holding Company decided to pay interest on
shareholders equity, which is subject to a 15% withholding tax. The amount of
dividends declared, for payment as interest on shareholders equity, included
applicable withholding tax. Interest on shareholders equity proposed by the
Holding Company management was accounted for considering its approval by the
Shareholders Meeting. Management proposed for the year ended December 31, 2003 that interest on
shareholders equity, net of withholding tax, in the amount of R$36,125
(R$0.083507 per thousand shares) payable to common and preferred shares. This
interest on shareholders equity was approved by Ordinary Shareholders Meeting
held on March 23, 2004. Management proposed for the year ended December 31,
2002 that interest on shareholders  ́ equity, net of withholding tax, in the
amount of R$11,475 (R$0.027717 per thousand shares) payable to common and
preferred shares. This interest on shareholders equity was approved by
Ordinary Shareholders Meeting held on March 25,2003. At the 56th. Extraordinary Meeting of the Board of Directors held on
September 18, 2002 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$0.203789
per thousand shares. The F-33
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) payment was made on September 27, 2002. These
dividends were approved by Ordinary Shareholders Meeting held on March 25,
2003. Also, management proposed supplementary dividends for the year ended
December 31, 2003 and 2002 of R$ 1,145 and R$6,009 (R$0.002647 and R$0.023149
per thousand shares), respectively, exclusively to preferred shares. These
dividends were approved by Ordinary Shareholders Meeting held on March 23,
2004 and March 25, 2003, respectively. In 2003, in accordance with the Corporation Law, the Company reversed
dividends payable, in the amount of R$1,525 related to unclaimed dividends of
1999 (R$4,187 in 2002 related to 1998). Also, Subsidiaries reversed dividends
payable of R$401 related to unclaimed dividends of 1999 (R$3,146 in 2002
related to 1998) Dividends are calculated on the Holding Companys adjusted net income for
the year, which is determined using the equity method to account for the
participation in the Subsidiaries net results. Consequently, the items shown as
Consolidation adjustments in the consolidated statements of changes in
shareholders equity, which are required to reconcile consolidated net income
to the Holding Companys net income, become part of the basis for calculating
dividends. 29. 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: Telesp Celular
S.A., Global Telecom S.A., Telerj Celular S.A., Telest Celular S.A.,
Telebahia Celular S.A., Telergipe Celular S.A., Telecomunicações de São
Paulo S.A.  Telesp, Celular CRT S.A., Tele Centro Oeste Celular, Telems
Celular, Teleron Celular, Telemat Celular, Teleacre Celular, Telegoiás
Celular and NBT. Part of these transactions was established based on
contracts between Telebrás and the operating concessionaires before
privatization. The terms of these transactions are regulated by Anatel.
As from July 2003, users may select the long distance operator.b.
    
    Technical assistance  The technical assistance is due to Telefónica
Móviles for Telecommunication services, based on a percentage applied to
the net revenue for services, monetarily restated. The amount of R$22,196,
R$17,367 and R$30,251, excluding taxes and currency exchange, was recorded
in operating expenses for the years ended December 31, 2003, 2002 and
2001, respectively.c.
    
    Rendering of Services  These services are rendered by companies owned by
the same group:  
    
    Sharing of centralized expenses from Telerj. and Telesp Celular
S.A. transferred to other subsidiaries by the effective cost incurred.
    
    Call center services rendered by Dedic/Atento to users of
telecommunications services of the subsidiaries Telerj and Telest.
    
    Services for implementation and maintenance of systems rendered by Telefónica Móbile Solution.
    
    Services for implementation of a facilities security system rendered by Telefónica Engenharia. F-34
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) A summary of the balances and transactions with unconsolidated related
parties is as follows: 2003
    
    2002Current assets:Trade accounts receivable
    
    
    12,833
    
    
    
    928Other
    
    
    33,669
    
    
    
    28,155Current liabilities:Accounts payable and accrued
expenses
    
    
    (154,441
    )
    
    
    (136,527
    )Profit sharing
    
    
    (32,105
    )
    
    
    (14,952
    )Other liabilities
    
    
    (15,850
    )
    
    
    (2,340
    )
 STATEMENTS OF INCOME 2003
    
    2002
    
    2001Net Operational RevenueCRT Celular
    
    
    298
    
    
    
    2.207
    
    
    
    2.257Tele Leste and subsidiaries
    
    
    931
    
    
    
    5.178
    
    
    
    4.075Telesp Celular and subsidiaries
    
    
    6,168
    
    
    
    
    
    
    
    Telecomunicações de São Paulo S.A. - TELESP
    
    
    55,338
    
    
    
    3.820
    
    
    
    757Total
    
    
    62,735
    
    
    
    11,205
    
    
    
    7,089Cost of ServicesCRT Celular
    
    
    (374
    )
    
    
    (638
    )
    
    
    (594
    )Tele Leste and subsidiaries
    
    
    (1,033
    )
    
    
    (1.589
    )
    
    
    (1.334
    )Telesp Celular and subsidiaries
    
    
    (4,870
    )
    
    
    
    
    
    
    Telecomunicações de São Paulo S.A.  TELESP
    
    
    (689
    )
    
    
    (1.256
    )
    
    
    (1.617
    )Total
    
    
    (6,966
    )
    
    
    (3,483
    )
    
    
    (3,545
    )Selling ExpensesAtento  Contract
    
    
    (26,521
    )
    
    
    (24.890
    )
    
    
    (21.724
    )Atento  Prepaid
    
    
    (19,186
    )
    
    
    (10.429
    )
    
    
    (9.785
    )Total
    
    
    (45,707
    )
    
    
    (35,319
    )
    
    
    (31,509
    )General and Administrative ExpensesTelecomunicações de São Paulo S.A.  TELESP
    
    
    (768
    )
    
    
    (4.269
    )
    
    
    (2.981
    )Telefonica Móviles  Technical assistence
    
    
    (21,123
    )
    
    
    (17.367
    )
    
    
    (14.827
    )Total
    
    
    (21,891
    )
    
    
    (21,636
    )
    
    
    (17,808
    )Financial Income (Expense)Telefonica Internacional S.A.
    
    
    10,728
    
    
    
    (28.377
    )
    
    
    Telefonica Móviles Hold
    
    
    13,113
    
    
    
    (20.138
    )
    
    
    Total
    
    
    23,841
    
    
    
    (48,515
    )
    
    
    Recovered expenses from companies - Joint Venture BrasilcelCRT Celular
    
    
    10,632
    
    
    
    
    
    
    
    Tele Leste and subsidiaries
    
    
    4,987
    
    
    
    
    
    
    
    Telesp Celular and subsidiaries
    
    
    53,882Total
    
    
    69,501
    
    
    
    
    
    
    
    
 F-35
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 2003
    
    2002
    
    2001Expenses distributed from companies - Joint Venture BrasilcelCRT Celular
    
    
    1,821
    
    
    
    
    
    
    
    Tele Leste and subsidiaries
    
    
    1,761
    
    
    
    
    
    
    
    Telesp Celular and subsidiaries
    
    
    31,175
    
    
    
    
    
    
    
    Total
    
    
    34,757
    
    
    
    
    
    
    
    
 30. Commitments (unaudited) a. Capital expenditures At December 31, 2003 the Companies had the following capital expenditure
commitments: Expected year of expenditure
    
    Contracted
    
    Not contracted
    
    Total2004
    
    
    31,867
    
    
    
    235,935
    
    
    
    267,802
 These commitments relate to the continuing expansion and modernization of
the cellular system, information technology, transmission equipment and the
messaging system. b. Commitments to Anatel Goals The Company is subject to obligations concerning quality of services,
network expansion and modernization. Failure to meet these obligations may
result in fines and penalties up to R$50 million. The Company believes that it is currently in compliance with its quality
of service and expansion obligations. 31. Management Compensation In 2003, 2002 and 2001 management fees of R$2,304, R$2,400 and R$2,100,
respectively, were recorded as expenses. 32. Insurance The Companys management has established policies to monitor inherent
risks in its operations. As of December 31, 2003, the Company had contracted
insurance to cover operational risks, loss of income, civil liabilities, heath
etc. Management believes that the insurance coverage is sufficient to cover
operating risks, civil liability, health, etc. The following is information
related to the Companies insurance coverage: Classification
    
    CoverageOperating risks
    
    US$300 millionVehicle fleet
    
    R$1,000General civil
liability
    
    R$7,325
 33. Financial instruments and risk management a. Risks considerations F-36
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) The subsidiaries provide cellular communication services in the States of
Rio de Janeiro and Espírito Santo under concessions from the Federal Government
and are engaged in activities of purchasing and distribution of cellular
handsets through their own distribution network in order to increase their
business operations. The main market risks to which Telerj and Telest are exposed in their
activities are: Credit Risk: originates from the difficulties in which the Subsidiaries
have in collecting the service charges for services rendered to their clients,
including the sales of cellular handsets to the distribution networks. Interest Rate Risk: originates from a portion of the debt and derivatives
contracted at floating rates, and involves the risk of financial expenses
increasing by unfavorable movement in interest rates (principally Libor and
CDI). Exchange Rate Risk: originates from the debt and derivatives contracted in
foreign currency and are related to potential losses on unfavorable
fluctuations in exchange rates. The Company actively manages and mitigates risks inherent in its
operations by means of comprehensive operating procedures, policies and
initiatives. Credit Risk Credit risk from providing telecommunication services is minimized by
strictly monitoring the customer portfolio and actively addressing
delinquent receivables by means of clear policies relating to postpaid
services. The Company has 68.82% of its client basis participating on prepaid
service, which requires prepaid handset cards and does not represent credit
risk. Customers indebtedness represented 1.59% of gross revenue in 2003 (3.72%
in 2002). The credit risk related to cellular handsets sales is managed by a
conservative policy for granting of credit, through modern management methods,
which involve the credit scoring, technical application, balance sheet
analysis and commercial data base consultation as well as the automatic control
for sales authorization integrated into the distribution system. Network
distributions indebtedness represented about 2.32% of cellular handsets sales
during the year of 2003 (1.57% in 2002). The Company has established a uniform policy for dealing with delinquent
customer accounts. Any suspension of service may be done only after providing
notice to the customer. If a customers payment is more than 15 days past due,
outgoing service is suspended, and if payment is more than 40 days past due,
both outgoing and incoming services are suspended until full payment for all
outstanding charges is received. If a customers payment is more than 90 days
past due, service is discontinued. Interest Rate Risk The Company is exposed to the risk of increase in interest rates,
especially interest associated with the cost of Certificados de Depósitos
Interbancários  CDI, due to the liability position of the operations with
interest rate derivatives. These operations amount to R$376,425 as of December
31, 2003 (R$ 461,623 in 2002). Loans contracted in foreign currency present the same risk of increase in
interest rates associated with the loans. These operations amount to R$104,807
as of December 31, 2003. The Company has not entered into derivative contracts to cover these
risks. F-37
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Exchange Rate Risk Telerj has entered into derivative contracts in order to hedge its foreign
currency loans from exchange rate variation. The related instruments used are
swaps. As of December 31, 2003, the Company net exposure to exchange rate risk,
at book value, is as follows: US$Loans and
financing
    
    
    (75,784
    )Other
liabilities
..
    
    
    (50,602
    )Derivative contracts  nominal value contracted
    
    
    126,563Net
    
    
    177
 b. Fair value of derivative operations and debt The table below shows book values and estimated market values of loans and
financing and foreign currency liabilities, as well as derivative operations: 2003UnrealizedBook value
    
    Market value
    
    gain (loss)Loans and
financing
    
    
    (218,955
    )
    
    
    (228,237
    )
    
    
    (9,282
    )Other
liabilities
    
    
    (146,201
    )
    
    
    (146,201
    )
    
    
    Derivative
contracts
    
    
    (10,760
    )
    
    
    (113
    )
    
    
    10,647Total
    
    
    (375,916
    )
    
    
    (374,551
    )
    
    
    1,365
 2002UnrealizedBook value
    
    Market value
    
    gain (loss)Loans and
financing
    
    
    (460,519
    )
    
    
    (407,159
    )
    
    
    53,360Other
liabilities
    
    
    (145,912
    )
    
    
    (145,910
    )
    
    
    2Derivative
contracts
    
    
    137,698
    
    
    
    129,229
    
    
    
    (8,469
    )Total
    
    
    (468,733
    )
    
    
    (423,840
    )
    
    
    44,893
 The market value of loans and financing, as well as swaps, were 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 evaluation methodologies, therefore the indicated estimates do
not necessarily represent market realization values. The use of different
assumptions may significantly affect the estimates. c. Fair value of other financial instruments The fair values of the Companys other financial instruments representing
cash, trade accounts receivable, and accounts payable, approximate their book
values because their short term nature. F-38
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) 34. Telefónica Móviles Stock Plan In May, 2001, Telefónica Móviles, S.A. (Telefónica Móviles) launched a
stock option plan based on Telefónica Móviles stock (the Plan) that covered
the employees of the Company. Pursuant to the Plan, between May 20 and July 20,
2002, Telefónica Móviles granted a total of 231,016 stock options to the
Companys employees, vesting over a four-year period. The options were granted
in Series A, B and C, with strike prices of 11.00 Euros, 16.50 Euros and 7.23
Euros, respectively. The total options granted to each employee consisted of
25% Series A options, 25% Series B options, and 50% Series C options. The
market price of Telefónica Móviles stock as traded at the Madrid Stock
Exchange was 8.28 Euros on December 31, 2003 (6.20 Euros in 2002). The Plan
also gives the Companys employees the option to receive in cash, the
appreciation in the market price of Telefónica Móviles stock over the
respective strike price. In accordance with the stock option plan conditions based on Telefónica
Móviles S.A. stocks (Mos Program), the employees of the Companies did not
comply with the basic assumption of the program, i.e. the control stock of the
Companies in which they are participating by Telefónica Móviles S.A. As a
result, on December 31, 2003, the existing options were settled. The settlement
amount was calculated for 50% of Series C options, considering the Telefônica
Moviles, S.A. stocks final bid price on January 2, 2004, converted average
exchange at the date of payment. In accordance with accounting practices followed in Brazil, the Companies
is not required to account for any effect of the plan, therefore no effect in
the financial statements of the Companies was recorded. 35. Summary of the differences between BR CL and U.S. GAAP The Companys accounting policies that comply with BR CL which differ
significantly from accounting principles generally accepted in the United
States of America (U.S. GAAP) are described below: As discussed in Note 2.c., the Company changed the basis of presentation
of these financial statements from the Constant Currency Method to BR CL in
2003. Under the Constant Currency Method, the effects of monetary restatement
were recorded until December 31, 2000. This effect was not eliminated in the
prior period reconciliations to US GAAP because the application of inflation
restatement represented a comprehensive measure of accounting for the effects
of Brazilian price-level changes. Under BR CL, the effects of monetary
restatement are recorded until December 31, 1995. Since Brazil was still
considered a highly inflationary economy until 1997, the U.S. GAAP
reconciliation presented below includes an adjustment to record monetary
restatement up to December 31, 1997 (see Note 36.b.). The applicable prior
period US GAAP adjustments have also been restated to reflect this change in
basis of presentation. Following is a reconciliation of shareholders equity
and net income under US GAAP as of December 31, 2002 and for the two years in
the period ended December 31, 2002 between the originally reported amounts and
the restated amounts. Shareholdersequity
    
    Net income2002
    
    2002
    
    2001US GAAP as originally
reported
    
    
    2,001,595
    
    
    
    (42,474
    )
    
    
    85,485Effect of change in monetary
restatement on US GAAP:Adjustments
    
    
    (52,997
    )
    
    
    30,687
    
    
    
    61,786Interest tax on above
adjustments
    
    
    27,302
    
    
    
    (15,808
    )
    
    
    (15,330
    )US GAAP as
restated
    
    
    1,921,296
    
    
    
    4,021
    
    
    
    131,941
 F-39
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  a.
    
    Different criteria for capitalizing and amortizing capitalized interest Until December 31, 1998, under BR CL as applied to companies in the
telecommunications industry, interest attributable to construction-in-progress
was computed at the rate of 12% per annum of the balance of
construction-in-progress and that part which related to interest on third party
loans was credited to interest expense based on actual interest costs, with the
balance relating to own capital being credited to capital reserves. For the
two-year period ended December 31, 2003, the Companies did not capitalize
interest attributable to construction-in-progress at the rate of 12%; rather
the actual effective interest related to construction was used to determine
capitalized interest. In 2001, the Companies did not capitalize interest
attributable to construction-in-progress. Under U.S. GAAP, in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 34, Capitalization of Interest
Costs, interest incurred on borrowings is capitalized to the extent that
borrowings do not exceed construction-in-progress. The credit is a reduction of
interest expense. Under U.S. GAAP, the amount of interest capitalized excludes
the monetary gain associated with local currency borrowings and the foreign
exchange gains and losses on foreign currency borrowings. The effects of these different criteria for capitalizing and amortizing
capitalized interest are presented below: 2003
    
    2002
    
    2001Capitalized interest differenceU.S. GAAP capitalized interest:Interest capitalized during the period
    
    
    13,887
    
    
    
    16,079
    
    
    
    26,088Capitalized interest on disposals
    
    
    (108
    )
    
    
    (90
    )
    
    
    (520
    )13,779
    
    
    
    15,989
    
    
    
    25,568Less BR CL capitalized interest:Interest capitalized during the period
    
    
    (40,443
    )
    
    
    (30,411
    )
    
    
    Capitalized interest on disposals
    
    
    82
    
    
    
    59
    
    
    
    402U.S. GAAP difference
    
    
    (26,582
    )
    
    
    (14,363
    )
    
    
    25,970Amortization of capitalized interest differenceAmortization under BR CL
    
    
    29,279
    
    
    
    18,872
    
    
    
    16,562Capitalized interest on disposals
    
    
    (49
    )
    
    
    (36
    )
    
    
    (227
    )29,230
    
    
    
    18,836
    
    
    
    16,335Less amortization under U.S. GAAP
    
    
    (33,117
    )
    
    
    (27,896
    )
    
    
    (22,391
    )Capitalized interest on disposals
    
    
    64
    
    
    
    55
    
    
    
    294(33,053
    )
    
    
    (27,841
    )
    
    
    (22,097
    )U.S. GAAP difference
    
    
    (3,823
    )
    
    
    (9,005
    )
    
    
    (5,762
    )
  b.
    
    Reversal of proposed dividends Under BR CL proposed dividends are accrued for in the financial statements
in anticipation of their approval at the shareholders meeting. Under U.S.
GAAP, dividends are not accrued until they are formally declared. The interest on shareholders equity is a legal liability from the date it
is declared, therefore, these amounts are included as dividends in the year
they are proposed for U.S. GAAP purposes. F-40    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  c.
    
    Pension and other postretirement benefits The Subsidiaries participate in two multiemployer benefit plans (PBS-A and
PAMA) that are operated and administered by Sistel, and provide for the costs
of pension and other postretirement benefits based on a fixed percentage of
remuneration, as recommended annually by independent actuaries. For purposes of
U.S. GAAP, multiemployer plans are accounted for similar to defined
contribution plans and consequently, the Company is required to disclose its
annual contributions and the funded status of those plans. The Subsidiaries
also sponsor a
single-employer defined pension benefit plan (PBS-Tele Sudeste). The
provisions of SFAS No. 87, Employers Accounting for Pensions, for the
purposes of calculating the funded status, were applied with effect from
January 1, 1992, because it was not feasible to apply them from the effective
date specified in the standard (see Note 36). On December 13, 2000, CVM issued Instruction No. 371, which provisions are
very similar to SFAS No. 87 and SFAS No. 106, except for the following
differences:  
    
    A company that participates in a multiemployer defined benefit pension
or postretirement benefit plan is required to recognize any assets or
liabilities in respect to its participation in such plans, while SFAS
Standards require only the disclosure of funded status of those plans.  
    
    The unrecognized net obligation existing at the date of initial
application of this standard shall be amortized over five years or
remaining service period or remaining life expectancy, whichever is
lower. Alternatively, companies were granted the option to recognize
such initial transition obligation as of December 31, 2001, directly
to shareholders  ́ equity. Such option has been adopted by the Company.
Under SFAS No. 87, the unrecognized net obligation existing at the
date of its initial application is being amortized over the remaining
service period.  
    
    Under BR CL, actuarial gains and losses are recorded in income when
incurred up to the amount of pension liability recorded. Under U.S.
GAAP, certain actuarial gains and losses are deferred and amortized
over the remaining service period of the active employees expected to
receive benefits under the plan. The effects of these different criteria for recognition of pension and
other postretirement benefits on accrued pension (postretirement) benefit as of
December 31, 2003 and 2002, are presented below: 2003
    
    2002U.S.
    
    
    
    
    
    Accumulated
    
    U.S.
    
    
    
    
    
    AccumulatedGAAP
    
    BR CL
    
    Difference
    
    GAAP
    
    BR CL
    
    DifferenceActive employees
defined pension 
PBS Tele Sudeste
    
    
    1,714
    
    
    
    
    
    
    
    1,714
    
    
    
    1,641
    
    
    
    406
    
    
    
    1,235Multiemployer
health care plan 
PAMA
    
    
    
    
    
    
    893
    
    
    
    (893
    )
    
    
    
    
    
    
    726
    
    
    
    (726
    )Accrued pension
(postretirement)
benefit
    
    
    1,714
    
    
    
    893
    
    
    
    821
    
    
    
    1,641
    
    
    
    1,132
    
    
    
    509
  d.
    
    Interest income (expense) BR CL requires interest to be shown as part of operating income. Under
U.S. GAAP interest income (expense) would be shown after operating income. F-41
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  e.
    
    Permanent assets BR CL has a class of assets called permanent assets. This is the
collective name for all assets on which indexation adjustments were calculated
until December 31, 1995 in the corporate and fiscal law accounts of Brazilian
companies. Under U.S. GAAP the assets in this classification would be
noncurrent assets.  f.
    
    Monetary Restatement of 1996 and 1997 The amortization of the asset appreciation, which originated from the
inflation accounting during 1996 and 1997, when Brazil was still considered as
high inflationary economy for U.S. GAAP purposes, has been recognized as an
adjustment to income in the reconciliation to U.S. GAAP. The loss related to
monetary restatement on disposals of such assets is classified for U.S. GAAP
purposes as a component of operating income.  g.
    
    Items posted directly to shareholders equity Under BR CL various items are posted directly to shareholders equity,
which under U.S. GAAP would be posted to the consolidated statements of
operations. The posting of such items to shareholders equity gives rise to
adjustments in the consolidated statement of changes in shareholders equity.
Since the original postings to the equity accounts would, under U.S. GAAP, be
made directly to the consolidated statements of income, the adjustment is
included in the reconciliation of the income differences between US and BR CL.
Tax incentives and others are adjusted in the Companys financial statements
for U.S. GAAP purposes.  h.
    
    Income taxes The Company fully accrues for deferred income taxes on temporary
differences between tax and accounting records. The existing policies for
providing for deferred taxes are substantially in accordance with SFAS No.109,
Accounting for Income Taxes, except with respect to social contribution rate
adopted, as explained below:  
    
    Under BR CL, at December 31,1999 the Company recognized a change in the
combined tax rate from 33% to 34% based on a provisional measure for an
increase in the social contribution rate from 8% to 9% effective January
1, 2000. Provisional measures are temporary and must be re-approved every
30 days or they lapse. Under SFAS 109, the provisional measures discussed
are not considered to be enacted law. Therefore, for 2001 the combined
deferred tax effect calculated on temporary differences would be 33%, not
34%. For 2003 and 2002, no difference related to the social contribution
tax rate was considered as the provisional measure was approved in Law
10,637, as of December 30, 2002. Under BR CL, the deferred taxes are presented gross. Under U.S. GAAP, the
deferred taxes are presented net.  i.
    
    Earnings per share Under BR CL, net income per share is calculated based on the number of
shares outstanding at the balance sheet date. In these consolidated financial
statements, information is disclosed per lot of one thousand shares, because
this is the minimum number of shares that can be traded on the Brazilian stock
exchanges. Each American Depositary Share (ADS) is equivalent to five
thousand shares. In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. This statement became effective December 15, 1997,
and provides computation, presentation and disclosure requirements for earnings
per share. Since the preferred and common stockholders have different dividend,
voting and liquidation rights, basic and diluted earnings per share have been
calculated using the two-class method. The two-class method is an F-42
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) earnings allocation formula that determines earnings per share for preferred
and common stock according to the dividends to be paid as required by the
Companys by-laws and participation rights in undistributed earnings. Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred
shareholders and dividing net income available to common shareholders by the
number of common shares outstanding. Net income available to preferred
shareholders is the sum of the preferred stock dividends (10% higher than those
attributed to common shares, as defined in the Companys by-laws for the years
ended December 31, 2003 and 2002) and the preferred shareholders portion of
undistributed net income. Undistributed net income is computed by deducting
total dividends (the sum of preferred and common stock dividends) from net
income. Undistributed net income is allocated to preferred shares 10% higher
than that attributed to common shares on a pro rata basis. Total dividends are
calculated as described in Note 28. At December 31, 2003 and 2002, the Company
was obligated to issue shares to the controlling shareholder for the amount of
the tax benefit realized on the amortization of the intangible related to
concession transferred in the merger (See Note 28b). The number of shares
issuable are considered dilutive as defined in SFAS No. 128 and have been
included in the weighted average common shares  diluted presented below. The
number of shares issuable was computed considering the balance of the goodwill
reserve (R$289,835 in 2003, R$374,480 in 2002 and R$464,843 in 2001) by the
average price of common shares traded on the São Paulo Stock Exchange
(Bovespa) on the last 20 trading days of each year. The computation of basic and diluted earnings per share is as follows: At December 31, 2003
    
    At December 31, 2002
    
    At December 31, 2001(in thousands, except per share data and percentages)Common
    
    Preferred
    
    Common
    
    Preferred
    
    Common
    
    PreferredBasic numeratorActual dividends
declared
    
    
    14,063
    
    
    
    23,207
    
    
    
    35,751
    
    
    
    66,103
    
    
    
    14,731
    
    
    
    28,021Basic allocated
undistributed dividends
(a)
    
    
    30,018
    
    
    
    49,535
    
    
    
    (35,593
    )
    
    
    (62,240
    )
    
    
    30,733
    
    
    
    58,456Allocated net income
available for common and
preferred
shareholders
    
    
    44,081
    
    
    
    72,742
    
    
    
    35,751
    
    
    
    66,103
    
    
    
    45,464
    
    
    
    86,477Basic denominatorWeighted average shares
outstanding
    
    
    168,375,242
    
    
    
    259,575,036
    
    
    
    148,443,421
    
    
    
    259,575,037
    
    
    
    136,479,679
    
    
    
    259,587,240Basic earnings per share
    
    
    0,26
    
    
    
    0,28
    
    
    
    
    
    
    
    0,01
    
    
    
    0,33
    
    
    
    0,33Diluted numeratorActual dividends
declared
    
    
    14,063
    
    
    
    23,207
    
    
    
    35,751
    
    
    
    66,103
    
    
    
    14,731
    
    
    
    28,021Diluted allocated
undistributed earnings
(a)
    
    
    37,157
    
    
    
    42,396
    
    
    
    (45,132
    )
    
    
    (52,701
    )
    
    
    41,422
    
    
    
    47,767Allocated net income
available for common and
preferred
shareholders
    
    
    51,220
    
    
    
    65,603
    
    
    
    (9,381
    )
    
    
    13,402
    
    
    
    56,153
    
    
    
    75,788Diluted denominator:Weight average shares
outstanding
    
    
    168,375,242
    
    
    
    259,575,036
    
    
    
    148,443,421
    
    
    
    259,575,037
    
    
    
    136,479,679
    
    
    
    259,587,240Dilutive effects of
premium
reserve
    
    
    59,126,692
    
    
    
    
    
    
    
    73,854,649
    
    
    
    
    
    
    
    88,630,376
    
    
    
    Diluted weight average
shares
    
    
    227,501,934
    
    
    
    
    
    
    
    222,297,796
    
    
    
    259,575,037
    
    
    
    225,110,055
    
    
    
    259,587,240Diluted earnings per
share
    
    
    0,23
    
    
    
    0,25
    
    
    
    
    
    
    
    0,01
    
    
    
    0,25
    
    
    
    0,29
  (a)
    
    Effective December 30, 2002, preferred shareholders are entitled to
receive per-share dividends of at least 10% greater than the per-share
dividends paid to common shareholders. Undistributed earnings, therefore,
from December 30, 2002 forward have been allocated to common and preferred
shareholders on a 100 to 110 basis, respectively, based upon the weight
average number of shares outstanding during the period to total F-43
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  shares
(allocation percentage). Because the allocation percentage for each class
differs for basic and diluted earnings per share purpose, allocated
undistributed earnings differ for such calculations. The Holding Companys preferred shares are non-voting, except under
certain limited circumstances and are entitled to a preferential, noncumulative
dividend and to priority over the common shares in the event of liquidation of
the Company. For 2003 and 2002, the Holding Company declared dividends of
R$0.89404 and R$0.254657, respectively, per thousand preferred shares and R$
0.081277 and R$0.231506 per thousand common shares, respectively. For 2001 the
amount of dividends per share paid to the preferred shareholders was equal to
the amount per share paid to the common shareholders (see Note 28).  j.
    
    Revenue recognition Under BR CL, revenues and costs from sales of handsets, including
applicable value-added and other sales taxes, are recognized at the moment of
sale to the customer. Under U.S. GAAP, in accordance with Staff Accounting
Bulletin no. 101 (SAB 101), revenues from sales of handsets along with the
related costs, including applicable value-added and other sales taxes, are
deferred and amortized based on the expected useful life of the handset,
estimated by management to be 18 months. Any excess of the cost over the amount
of deferred revenue related to handset sales is recognized on the date of sale
(see below discussion under Negative margins on sale of prepaid handsets). As
substantially all of the Companys handsets are sold below cost, this
difference in accounting policy had no impact on net income or in shareholders
equity. The amount of unamortized deferred revenue and the related amounts of
unamortized deferred costs was R$293,400, R$321,518 and R$276,730 at December
31, 2003, 2002 and 2001, respectively. The impact of this difference under US
GAAP was to increase both net revenues and
cost of services and goods by R$28,118 in 2003 and decrease them by
R$44,788 and R$80,172 in 2002 and 2001, respectively.  k.
    
    Value-added and other sales taxes Under BR CL, these taxes are recorded as a reduction to revenues. Under US
GAAP, these taxes are recorded gross as revenue and related costs of services
and goods. Accordingly, this difference in accounting policy has no impact in
net income (loss) or in shareholders equity. The impact of this difference
under US GAAP was to increase both net revenues and cost of services and goods
by R$511,437, R$417,648 and R$394,517 for 2003, 2002 and 2001, respectively.  l.
    
    Roaming The Company has roaming agreements with other cellular service providers.
When a call is made from within one coverage area by a subscriber of another
cellular service provider, that service provider pays the Subsidiaries for the
service at the applicable rates. Conversely, when one of the Subsidiaries
customers roams outside the coverage area, the Subsidiaries pay the charges
associated with that call to the cellular service provider in whose region the
call was originated and charges the same amount to its subscriber. Under BR
CL, revenues for roaming charges are recorded net of the related costs when the
services are provided. Under U.S. GAAP, revenues and costs for roaming charges
should be recorded gross. Accordingly this difference in accounting policy has
no impact on net income (loss) or in the reconciliation of shareholders
equity. The impact of this difference under U.S. GAAP was to increase both
revenues and cost of goods and services by R$14,130 for 2003. F-44
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  m.
    
    Fistel tax on activation fee Beginning in 1999, under BR CL, the Fistel (Telecommunication Inspection
Fund) fee, assessed on each activation of a new cellular line, is deferred and
amortized over the customers estimated subscription period. For US GAAP
purposes, this tax would be charged directly to the consolidated statements of
income. Therefore, the deferred Fistel taxes on activation fees at December 31,
2003, 2002 and 2001 is being adjusted in the reconciliation of the income
differences between US GAAP and BR CL.  n.
    
    Derivative instruments As mentioned in Note 24.e., the Company has entered into foreign currency
swap and option contracts for long-term agreements at various exchange rates,
in the notional amount of US$126,563 (US$139,433 at December 31, 2002). Under
BR CL, foreign currency swap contracts are recorded at the notional amount
multiplied by the terms of the contract as if they had been settled at the
balance sheet date. In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which was
subsequently amended by SFAS Nos. 137, 138. SFAS No. 133 must be applied to
all derivative instruments and certain derivative instruments embedded in
hybrid instruments and requires that such instruments be recorded in the
balance sheet either as an asset or liability measured at its fair value.
Changes in the derivatives fair value are recognized currently in earnings
unless specific hedge accounting criteria are met. If the derivative is designated as a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives that are considered to be
effective, as defined, will either offset the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or will be
recorded in other comprehensive income until the hedged item is recorded in
earnings. Any portion of a change in a derivatives fair value that is
considered to be ineffective, as defined, must be immediately recorded in
earnings. Any portion of a change in a derivatives fair value that the Company
has elected to exclude from its measurement of effectiveness, such as the
change in time value of option contracts, will also be recorded in earnings. For US GAAP purposes, the Company has not designated its derivative
contracts as accounting hedges as defined SFAS No. 133, and consequently, the
Companys derivative contracts are recorded at fair value with resulting
changes in fair value recorded through earnings. The effect of adopting SFAS No. 133 as of January 1, 2001 was a gain of
R$2,081 (net of income tax effects of R$1,025), and is presented as Cumulative
effect of a change in accounting principle in the reconciliation of net income
for the year ended December 31, 2001.  o.
    
    Purchase Accounting On November 30, 2000, in connection with the corporate restructuring
described in Note 27, the Holding Company acquired the minority interests in
the Subsidiaries in a transaction involving the exchange of shares. Under BR
CL, this transaction was recorded at the book value of the minority interests
acquired. Under US GAAP, the acquisition of minority interests was recorded
using the purchase method of accounting pursuant to APB 16, Business
Combinations, and the related interpretations. Under US GAAP, the purchase
price was determined based on the market price of the Holding Companys shares
for a reasonable period before and after the date the terms of the acquisition
were agreed to and announced publicly. The excess purchase price over the book
value of the minority interests acquired was recorded based on managements
estimate of the fair values of the underlying assets and liabilities as
follows: F-45
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Fixed
assets
    
    
    31,522Subscriber base intangible
asset
    
    
    135,518Concession
    
    
    216,648Deferred income tax
effect
    
    
    (126,617
    )Excess purchase price under US
GAAP
    
    
    257,071
 The subscriber base intangible asset is being amortized over the estimated
contractual relationship with subscribers, representing a period of 48 months. Concession is being amortized over the remaining concession period of each
operating Company (until November 2005 for Telerj Celular S.A. and November
2008 for Telest Celular S.A.).  r.
    
    Stock compensation - Telefónica Móviles Stock Plan As described in Note 34, in May, 2001, Telefónica Móviles, S.A.
(Telefónica Móviles) launched a stock option plan based on Telefónica
Móviles stock (the Plan) that covered the employees of the Company. Pursuant
to the Plan, between May 20 and July 20, 2002, Telefónica Móviles granted a
total of 231,016 stock options to the Companys employees, vesting over a
four-year period. The options were granted in Series A, B and C, with strike
prices of 11.00 Euros, 16.50 Euros and 7.23 Euros, respectively. The total
options granted to each employee consisted of 25% Series A options, 25% Series
B options, and 50% Series C options. The market price of Telefónica Móviles
stock as traded at the Madrid Stock Exchange was 8.28 Euros on December
31,2003. The Plan also gives the Companys employees the option to receive in
cash, the appreciation in the market price of Telefónica Móviles stock over
the respective strike price. In accordance with the Plan terms, the existing options are required to be
settled in the event of a change in control of the Company. In December 2002,
control of the Company was transferred to Brasilcel N.V. and consequently, on
December 31, 2003, the options were settled. The settlement amount was calculated for 50% of the Series C options based
on the final bid price of Telefonica Moviles, S.A. stock on January 2, 2004,
converted using the average exchange rate at the date of payment. Under BR CL, the Company does not account for the effect of the Plan.
Under US GAAP, equity instruments granted to an employee by a principal
stockholder are accounted for by the employer company. Consequently,
compensation expense was recorded under US GAAP for this settlement. F-46
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Reconciliation of the income differences between US GAAP and BR CL 2003
    
    2002
    
    2001Consolidated net income under BR CL
    
    
    156,237
    
    
    
    140,376
    
    
    
    162,914Add (deduct):Different accounting criteria for:Amortization of monetary restatement of 1996 and 1997
    
    
    (19,115
    )
    
    
    (22,918
    )
    
    
    (23,527
    )Loss on disposal of assets monetarily restated in 1996 and 1997
    
    
    (31
    )
    

    
    (12
    )
    
    
    (31
    )Capitalized interest
    
    
    (26,582
    )
    
    
    (14,363
    )
    
    
    25,970Amortization of capitalized interest
    
    
    (3,823
    )
    
    
    (9,005
    )
    
    
    (5,762
    )Purchase accounting:Depreciation of fixed assets adjustment
    
    
    (7,274
    )
    
    
    (7,274
    )
    
    
    (7,274
    )Amortization of subscriber base intangible asset
    
    
    (33,880
    )
    
    
    (33,880
    )
    
    
    (33,880
    )Amortization of
concession
    
    
    (40,288
    )
    
    
    (40,288
    )
    
    
    (40,288
    )Deferred Fistel tax on activation fee
    
    
    2,698
    
    
    
    5,943
    
    
    
    12,675Pension and other postretirement benefits
    
    
    (312
    )
    
    
    2,858
    
    
    
    (999
    )Derivative instruments
    
    
    73,546
    
    
    
    (87,527
    )
    
    
    21,522Stock option compensation (Plan MOS)
    
    
    (2,028
    )
    
    
    
    
    
    
    Items posted directly to shareholders equity:Tax incentive investment credits
    
    
    288
    
    
    
    106
    
    
    
    584Pension plan, net of income tax
    
    
    
    
    
    
    
    
    
    
    839Deferred tax effect on GAAP adjustments
    
    
    17,387
    
    
    
    68,134
    
    
    
    17,026Reversal of deferred social contribution tax
    
    
    
    
    
    
    1,871
    
    
    
    91US GAAP net income (loss) before cumulative effect of adoption of accounting
principle
    
    
    116,823
    
    
    
    4,021
    
    
    
    129,860Cumulative effect of adoption of accounting principle (SFAS 133), net of income and
social contribution effects of R$1,025
    
    
    
    
    
    
    
    
    
    
    2,081US GAAP net income (loss)
    
    
    116,823
    
    
    
    4,021
    
    
    
    131,941
 F-47
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Net income per thousand shares in accordance
with US GAAP (in thousands) 2003
    
    2002
    
    2001Common sharesBasicBefore cumulative effect of adoption of
accounting principle
    
    
    0.26
    
    
    
    
    
    
    
    0.33Cumulative effect of adoption of
accounting principle
    
    
    
    
    
    
    
    
    
    
    US GAAP net income
    
    
    0.26
    
    
    
    
    
    
    
    0.33Weighted average common shares outstanding
    
    
    168,375,242
    
    
    
    148,443,147
    
    
    
    136,479,679Common sharesDiluted.Before cumulative effect of adoption of
accounting principle
    
    
    0.23
    
    
    
    
    
    
    
    0.25Cumulative effect of adoption of
accounting principle
    
    
    
    
    
    
    
    
    
    
    US GAAP net income
    
    
    0.23
    
    
    
    
    
    
    
    0.25Weighted average (thousand) common shares
outstanding
    
    
    227,501,934
    
    
    
    222,297,796
    
    
    
    225,110,055Preferred sharesBasicBefore cumulative effect of adoption of
accounting principle
    
    
    0.28
    
    
    
    0.01
    
    
    
    0.33Cumulative effect of adoption of
accounting principle
    
    
    
    
    
    
    
    
    
    
    US GAAP net income
    
    
    0.28
    
    
    
    0.01
    
    
    
    0.33Weighted average (thousand) preferred
shares outstanding
    
    
    259,575,036
    
    
    
    259,575,037
    
    
    
    259,587,240Preferred sharesDiluted.Before cumulative effect of adoption of
accounting principle
    
    
    0.25
    
    
    
    0.01
    
    
    
    0.29Cumulative effect of adoption of
accounting principle
    
    
    
    
    
    
    
    
    
    
    US GAAP net income
    
    
    0.25
    
    
    
    0.01
    
    
    
    0.29Weighted average (thousand) preferred
shares outstanding
    
    
    259,575,036
    
    
    
    259,575,037
    
    
    
    259,587,240
 Reconciliation of the shareholders equity differences between US GAAP and BR CL 2003
    
    2002Total shareholders equity under BR CL
    
    
    1,903,363
    
    
    
    1,779,685Add (deduct):Different accounting criteria for:Monetary restatement of 1996 and 1997
    
    
    162,145
    
    
    
    162,176Amortization of monetary restatement of 1996 and 1997
    
    
    (155,334
    )
    
    
    (136,219
    )Capitalized interest
    
    
    17,657
    
    
    
    44,239Amortization of capitalized interest
    
    
    (9,987
    )
    
    
    (6,164
    )Purchase accounting:Fixed assets adjustment
    
    
    31,522
    
    
    
    31,522Accumulated depreciation
    
    
    (22,428
    )
    
    
    (15,154
    )Intangible assets
    
    
    352,166
    
    
    
    352,166Accumulated amortization of intangible assets
    
    
    (228,684
    )
    
    
    (154,516
    )Deferred tax (Fistel) on activation fees
    
    
    (9,553
    )
    
    
    (12,251
    )Pension and other postretirement benefits
    
    
    (821
    )
    
    
    (509
    )Derivative instruments
    
    
    10,647
    
    
    
    (62,899
    )Reversal of proposed dividends
    
    
    1,145
    
    
    
    6,009Deferred tax effects of GAAP adjustments
    
    
    (50,092
    )
    
    
    (66,789
    )Total shareholders equity under US GAAP
    
    
    2,001,746
    
    
    
    1,921,296
 F-48
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Changes in shareholders equity under US GAAP 2003
    
    2002
    
    2001Opening
Balance
    
    
    1,921,296
    
    
    
    2,007,812
    
    
    
    1,935,512Acquisition of treasury
shares
    
    
    
    
    
    
    
    
    
    
    (764
    )Adjustment on premium
reserve
    
    
    8,872
    
    
    
    
    
    
    
    Unclaimed dividends at holding
Company
    
    
    1,525
    
    
    
    4,187
    
    
    
    Consolidation adjustments -
unclaimed dividends at
subsidiaries
    
    
    401
    
    
    
    3,146
    
    
    
    Stock option compensation (MOS
Plan)
    
    
    1,338
    
    
    
    
    
    
    
    Net income for the
year
    
    
    116,823
    
    
    
    4,021
    
    
    
    131,941Net income allocationDividends
paid
    
    
    (6,009
    )
    
    
    (84,370
    )
    
    
    (8,580
    )Interest on shareholders
equity
    
    
    (42,500
    )
    
    
    (13,500
    )
    
    
    (50,297
    )Balance at December
31
    
    
    2,001,746
    
    
    
    1,921,296
    
    
    
    2,007,812
 US GAAP supplementary information- Reconciliation of operating income under BR CL
    to operating income under US GAAP- 2003
    
    2002
    
    2001BR CL operating income as reported
    
    
    226,382
    
    
    
    211,395
    
    
    
    221,309Reversal of financial expense, net
    
    
    15,017
    
    
    
    15,112
    
    
    
    83,222US GAAP adjustmentsAmortization of monetary restatement of 1996 and 1997
    
    
    (19,134
    )
    
    
    (22,918
    )
    
    
    (23,527
    )Loss on disposal of assets monetarily restated in 1996 and 1997
    
    
    (12
    )
    
    
    (12
    )
    
    
    (31
    )Amortization on capitalized interest
    
    
    (3,823
    )
    
    
    (9,005
    )
    
    
    (5,762
    )Purchase accountingDepreciation of fixed assets adjustment
    
    
    (7,274
    )
    
    
    (7,274
    )
    
    
    (7,274
    )Amortization of subscriber base intangible asset
    
    
    (33,880
    )
    
    
    (33,880
    )
    
    
    (33,880
    )Amortization of concession
    
    
    (40,288
    )
    
    
    (40,288
    )
    
    
    (40,288
    )Deferred tax (Fistel) on activation fees
    
    
    2,698
    
    
    
    5,943
    
    
    
    12,675Stock compensation plan  MOS Plan
    
    
    (2,028
    )
    
    
    
    
    
    
    Pension and other postretirement benefits
    
    
    (312
    )
    
    
    2,858
    
    
    
    254US GAAP operating income
    
    
    137,346
    
    
    
    121,931
    
    
    
    206,284
 F-49
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Reconciliation of net revenue and costs under BR CL
   to revenue and costs under US GAAP- 2003
    
    2002
    
    2001BR CL net revenue
    
    
    1,892,451
    
    
    
    1,847,631
    
    
    
    1,703,299Reclassification to cost of services and goodsTaxes on sales
    
    
    511,437
    
    
    
    417,648
    
    
    
    394,517Increase in roaming revenue
    
    
    14,130
    
    
    
    
    
    
    
    US GAAP adjustmentsDeferred revenues on handset sales, net of amortization
    
    
    28,118
    
    
    
    (44,788
    )
    
    
    (80,172
    )US GAAP net revenue
    
    
    2,446,136
    
    
    
    2,220,491
    
    
    
    2,017,644BR CL cost of services and goods
    
    
    (1,052,487
    )
    
    
    (981,741
    )
    
    
    (877,284
    )Reclassification to cost of services and goodsTaxes on sales
    
    
    (511,437
    )
    
    
    (417,648
    )
    
    
    (394,517
    )Increase in roaming cost
    
    
    (14,130
    )
    
    
    
    
    
    
    Reclassification from sales expenseRewards program expense
    
    
    (2,429
    )
    
    
    (14,127
    )
    
    
    (10,625
    )US GAAP adjustmentsAmortization of monetary restatement of 1996 and 1997
    
    
    (19,134
    )
    
    
    (22,918
    )
    
    
    (23,527
    )Loss on disposal of assets monetarily restated in 1996 and 1997
    
    
    (12
    )
    
    
    (12
    )
    
    
    (31
    )Amortization on capitalized interest
    
    
    (3,823
    )
    
    
    (9,005
    )
    
    
    (5,762
    )Purchase accountingDepreciation of fixed assets adjustment
    
    
    (7,274
    )
    
    
    (7,274
    )
    
    
    (7,274
    )Amortization of subscriber base intangible asset
    
    
    (33,880
    )
    
    
    (33,880
    )
    
    
    (33,880
    )Amortization of concession
    
    
    (40,288
    )
    
    
    (40,288
    )
    
    
    (40,288
    )Deferred tax (Fistel) on activation fees
    
    
    2,698
    
    
    
    5,943
    
    
    
    5,943Pension and other postretirement benefits
    
    
    (2,028
    )
    
    
    
    
    
    
    Stock option compensation  MOS Plan
    
    
    (312
    )
    
    
    2,858
    
    
    
    (160
    )Deferred costs on handset sales, including taxes on sales, net of
amortization during the year
    
    
    (28,118
    )
    
    
    44,788
    
    
    
    80,172US GAAP cost of services and goods
    
    
    (1,712,654
    )
    
    
    (1,473,304
    )
    
    
    (1,307,233
    )US GAAP gross profit
    
    
    733,482
    
    
    
    747,187
    
    
    
    710,411
 2003
    
    2002Total assets as of December 31
    
    
    2,960,940
    
    
    
    2,996,686Property, plant and equipment
    
    
    3,145,620
    
    
    
    2,977,186Accumulated depreciation
    
    
    (1,887,326
    )
    
    
    (1,466,026
    )Net property, plant and equipment
    
    
    1,267,294
    
    
    
    1,511,160
 F-50
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  36.
    
    Additional disclosures required by US GAAP  a.
    
    Pension and postretirement benefits A summary of the liability as of December 31, 2003 and 2002 for the
Companys active employees defined benefit pension plan (PBS-Tele Sudeste) is
as follows: Reconciliation of Funded Status Reconciliation of Funded Status PBS  Tele Sudeste 2003
    
    2002Accumulated benefit obligation:Vested
    
    
    7,726
    
    
    
    4,842Nonvested
    
    
    2,264
    
    
    
    4,748Total
    
    
    9,990
    
    
    
    9,590Projected benefit obligation
    
    
    11,022
    
    
    
    10,955Fair value of plan assets
    
    
    14,109
    
    
    
    10,549Funded status
    
    
    (3,087
    )
    
    
    406Unrecognized gains
    
    
    4,943
    
    
    
    1,401Unrecognized net transition obligation
    
    
    (142
    )
    
    
    (165
    )Net amount recognized
    
    
    1,714
    
    
    
    1,642
 Disclosure of net periodic pension cost for 2003 and 2002 2003
    
    2002Service cost (net of employee
contributions)
    
    
    478
    
    
    
    532Interest cost on PBO
    
    
    1,079
    
    
    
    927Expected return on assets
    
    
    (1,079
    )
    
    
    (1,161
    )Amortization of initial transition
obligation
    
    
    23
    
    
    
    23Amortization of gains
    
    
    18
    
    
    
    (182
    )Net periodic pension cost
    
    
    519
    
    
    
    139
 Change in accrued pension cost as of December 31, 2003 and 2002 2003
    
    2002Accrued pension cost at beginning of
year
    
    
    1,642
    
    
    
    2,115Net periodic pension cost519
    
    
    
    139Actual
contributions
    
    
    (447
    )
    
    
    (612
    )Accrued pension cost at end of
year
    
    
    1,714
    
    
    
    1,642
 F-51
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) Change in benefit obligation ProjectBenefitObligation -PBO
    
    Unrec. G/(L)
    
    Unrec. ITOBenefit obligation at December 31, 2001
    
    
    9,351
    
    
    
    4,267
    
    
    
    (188
    )Service cost
    
    
    643
    
    
    
    
    
    
    
    Interest cost
    
    
    927
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    (182
    )
    
    
    23Benefits payments and expenses
    
    
    (158
    )
    
    
    
    
    
    
    Actuarial losses on PBO
    
    
    192
    
    
    
    (192
    )
    
    
    Actuarial losses on plan assets
    
    
    
    
    
    
    (2,492
    )
    
    
    Benefit obligation at December 31, 2002
    
    
    10,955
    
    
    
    1,401
    
    
    
    (165
    )Service cost
    
    
    632
    
    
    
    
    
    
    
    Interest cost
    
    
    1,079
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    18
    
    
    
    23Benefits payments and expenses
    
    
    (595
    )
    
    
    
    
    
    
    Actuarial gains on PBO
    
    
    (1,049
    )
    
    
    1,049
    
    
    
    Actuarial gains on plan assets
    
    
    
    
    
    
    2,475
    
    
    
    Benefit obligation at December 31, 2003
    
    
    11,022
    
    
    
    4,943
    
    
    
    (142
    )
 Expected Cash Flows The expected employer contributions for 2004 totalize R$32. Change in plan assets 2003
    
    2002Plan assets at beginning of year
    
    
    10,549
    
    
    
    11,315Actual contributions
    
    
    519
    
    
    
    716Actual distributions and expenses
    
    
    (595
    )
    
    
    (158
    )Actual return on plan assets
    
    
    3,636
    
    
    
    (1,324
    )Plan assets at end of year
    
    
    14,109
    
    
    
    10,549
 Employer contributions and benefits paid in the above table include only
those amounts contributed directly to, or paid directly from, plan assets. Asset allocation The asset allocation for the Companys pension plans at the end of 2003
and 2002, and the target allocation for 2004, by asset category, are as
follows. Asset category Target Allocation
    
    Percentage of Plan Assets atfor
    
    Year End2004
    
    2003
    
    2002Equity securities
    
    
    4
    %
    
    
    19
    %
    
    
    12
    %Loans
    
    
    2
    %
    
    
    1
    %
    
    
    1
    %Fixed income
    
    
    94
    %
    
    
    80
    %
    
    
    87
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 F-52
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) The plan investment strategy is based on a long-term macroeconomic
scenario. This scenario presents low Brazils risk, moderate economic growth,
stable inflation and exchange rates, and moderate interest rates. The devised asset mix is the same for both plans (PBS and Visão) and is
composed by fixed income, equities and loans. The fixed income target
allocation ranges form 65% to 100%, equities target allocation is up to 35% and
loans, up to 5%. The 2004 expected return for this mix is around 6.3% and 6.5%. The expected return on plan assets is the average after-tax return of each
asset category weighted by target allocations. Asset categories returns are
based on long-term macroeconomic scenarios. The actuarial assumptions used in 2003 and 2002 were as follows: 2003
    
    2002Discount rate for determining projected benefit
obligations
    
    
    11.30
    %
    
    
    10.24
    %Rate of increase in compensation levels
    
    
    7.10
    %
    
    
    6.08
    %Benefit adjustments
    
    
    5.00
    %
    
    
    4.00
    %Expected long-term rate of return on plan assets
    
    
    11.83
    %
    
    
    10.24
    %Inflation
    
    
    5.00
    %
    
    
    4.00
    %Number of active participants  PBS  Tele Sudeste
    
    
    14
    
    
    
    14Number of retirees and beneficiaries  PBS  Tele Sudeste
    
    
    14
    
    
    
    20
 A summary of the Sistel pension plan as of December 31, 2003 and 2002 for
the multiemployer portion (inactive employees pension plan)  PBS-A, is as
follows: Pension benefit plan  PBS-A 2003
    
    2002Funded status:Accumulated benefit obligationVested
    
    
    3,484,245
    
    
    
    2,922,542Projected benefit obligation
    
    
    3,484,245
    
    
    
    2,922,542Fair value of plan assets
    
    
    4,163,102
    
    
    
    3,650,789Funded status
    
    
    (678,857
    )
    
    
    (728,247
    )
 A summary of the postretirement benefits plan (health care plan  PAMA),
which remains as multiemployer plan, is as follows: Health Care Plan  PAMA 2003
    
    2002Funded Status:Accumulated postretirement benefit obligation:Active participants
    
    
    25,678
    
    
    
    46,107Inactive participants
    
    
    783,525
    
    
    
    867,041809,203
    
    
    
    913,148Fair value of plan assets
    
    
    456,509
    
    
    
    405,732Obligations in excess of plan assets
    
    
    352,694
    
    
    
    507,416
 F-53
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)  b.
    
    Intangible assets subject to amortization Following is a summary of the Companys intangible assets subject to
amortization under US GAAP: 2003
    
    2002Subscriber
    
    
    
    
    
    
    
    
    
    SubscriberSoftware
    
    Concession
    
    base
    
    Software
    
    Concession
    
    baseGross
    
    
    261,210
    
    
    
    216,648
    
    
    
    135,518
    
    
    
    209,267
    
    
    
    216,648
    
    
    
    135,518Accumulated
amortization
    
    
    (106,300
    )
    
    
    (124,221
    )
    
    
    (104,463
    )
    
    
    (54,970
    )
    
    
    (83,933
    )
    
    
    (70,583
    )Net
    
    
    154,910
    
    
    
    92,427
    
    
    
    31,055
    
    
    
    154,297
    
    
    
    132,715
    
    
    
    64,935
 Aggregate amortization expense for the above intangible assets amounted to
R$125,929, R$105,137 and R$89,216 for the years ended December 31, 2003, 2002
and 2001, respectively. The estimated aggregate amortization expense for the next years is as
follows: Amount2004
    
    
    133,2932005
    
    
    94,6732006
    
    
    50,426
  c.
    
    Concentration of risks The credit risk with respect to trade accounts receivable is diversified.
The Companies continually monitor the level of trade accounts receivable and
limit the exposure to bad debts by cutting access to the handset network if any
invoice is 15 days past due. Exceptions comprise handset services that must be
maintained for reasons of safety or national security. In conducting their businesses, Telerj Celular S.A. and Telest Celular
S.A. are fully dependent upon the cellular telecommunications concession as
granted by the Federal Government. Approximately 46% of all employees are members of state labor unions
associated with either the Federação Nacional dos Trabalhadores em
Telecomunicações(Fenattel), or with the Federação Interestadual dos
Trabalhadores em Telecomunicações(Fittel). The Companies negotiate new
collective labor agreements every year with the local union. The collective
agreements currently in force expire December 2004. There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that could, if
suddenly eliminated, severely impact the Companies operations.  d.
    
    New accounting pronouncements Amendment of Statement 133 on Derivative Instruments and Hedging
Activities In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The F-54
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) provisions of this statement are effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of SFAS 149 did not result in any impact
to the Companys financial statements. Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity In April 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the
current definition of liabilities in FASB Concepts Statement No. 6, Elements
of Financial Statements. The adoption of SFAS 150 did not result in any
impact to the Companys financial statements. FIN No. 46 - Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51 In December 2003, the FASB issued a revision to Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51 (FIN 46R or the Interpretation). FIN 46R clarifies the application
of ARB No. 51, Consolidated Financial Statements, to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial
support. FIN 46R requires the consolidation of these entities, known as
variable interest entities (VIEs), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that will absorb a
majority of the entitys expected losses, receive a majority of the entitys
expected residual returns, or both. Among other changes, the revisions of FIN 46R (a) clarified some
requirements of the original FIN 46, which had been issued in January 2003,
(b) eased some implementation problems, and (c) added new scope exceptions.
FIN 46R deferred the effective date of the Interpretation for public
companies, to the end of the first reporting period ending after March 15,
2004, except that all public companies must at a minimum apply the
provisions of the Interpretation to entities that were previously considered
special-purpose entities under the FASB literature prior to the issuance
of FIN 46R by the end of the first reporting period ending after December
15, 2003. The Company does not anticipate that the adoption of FIN 46R will
have a material impact on its financial position, cash flows and results of
operations. SFAS No. 132 (Revised 2003) - Employers Disclosures about Pensions and
Other Postretirement Benefits In December 2003, the FASB issued SFAS No. 132, Revised 2003, (SFAS
132R), which requires an entity to make additional disclosures about
pensions and other postretirement benefits. These disclosures include
information describing the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows and components of net
periodic benefit cost. SFAS 132R would be effective for any domestic plans
beginning with fiscal years ending after December 15, 2003 and any foreign
plans beginning with fiscal years ending after June 15, 2004. The Company
has adopted these additional disclosures for the year ended December 31,
2003 (See Note 38.a). SAB No. 104  Revenue Recognition In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin
(SAB) No. 104, Revenue Recognition. SAB 104 updates portions of the
interpretive guidance included in Topic 13 of the codification of Staff
Accounting Bulletins in order to make this interpretive guidance consistent F-55
    Table of Contents  TELE SUDESTE CELULAR PARTICIPAÇÕES S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of Brazilian reais, unless otherwise indicated) with current authoritative accounting and auditing guidance and SEC rules
and regulations. The company believes it is currently following the guidance
of SAB 104. EITF 00-21 - Accounting for Revenue Arrangements with Multiple Element
Deliverables In November 2002, the Emerging Issues Task Force (EITF), of the FASB
reached a consensus on EITF 00-21. EITF 00-21 provides guidance on how to
account for arrangements that may involve multiple revenue-generating
activities, for example, the delivery of products or performance of
services, and/or rights to use other assets. The requirements of EITF 00-21
will be applicable to agreements entered into for periods beginning after 15
June 2003 and will therefore first apply to the Company for any arrangements
entered into from 1 April 2004. The adoption of this EITF had no impact on
the Companys financial position or results of operations. EITF Issue No. 01-08 - Determining Whether an Arrangement Contains a Lease In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to
clarify the requirements of identifying whether an arrangement should be
accounted for as a lease at its inception. The guidance in the consensus is
designed to mandate reporting revenue as rental or leasing income that
otherwise would be reported as part of product sales or service revenue.
EITF Issue No. 01-08 requires both parties to an arrangement to determine
whether a service contract or similar arrangement is, or includes, a lease
within the scope of SFAS No. 13, Accounting for Leases. The Company does
not anticipate that the adoption of EITF Issue No. 01-08 will have a
material effect on its consolidated results of operations, cash flows or
financial position. EITF Issue No. 03-11 - Reporting Realized Gains and Losses on Derivative
Instruments That Are Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for Trading
Purposes In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that
determining whether realized gains and losses on derivative contracts not
held for trading purposes should be reported on a net or gross basis is a
matter of judgment that depends on the relevant facts and circumstances and
the economic substance of the transaction. In analyzing the facts and
circumstances, EITF Issue No. 99-19, and Opinion No. 29, Accounting for
Nonmonetary Transactions, should be considered. EITF Issue No. 03-11 is
effective for transactions or arrangements entered into after September 30,
2003. The Company does not anticipate that the adoption of EITF Issue No.
03-11 will have a material effect on its consolidated results of operations,
cash flows or financial position. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * F-56