Form 6-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 6-K

 


Report of Foreign Issuer

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

the Securities Exchange Act of 1934

For the month of March, 2006

Commission File Number: 001-14475

 


TELESP HOLDING COMPANY

(Translation of registrant’s name into English)

 


Rua Martiniano de Carvalho, 851 – 21o andar

São Paulo, S.P.

Federative Republic of Brazil

(Address of principal executive office)

 


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

Form 20-F      X            Form 40-F            

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

Yes                    No       X    

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

Yes                    No       X    

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

Yes                    No       X    

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

 



Table of Contents

TELESP HOLDING COMPANY

TABLE OF CONTENTS

 

Item    
1.   Press Release entitled “Financial Statements - Telecomunicações de São Paulo S.A. – Telesp” dated on December 31, 2005.


Table of Contents
  Financial Statements
  Telecomunicações de São Paulo S.A. - TELESP
 

December 31, 2005 and 2004

with Report of Independent Auditors

  (A free translation of the original report in Portuguese containing Financial Statements prepared in accordance with the accounting practices adopted in Brazil)


Table of Contents

TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP

FINANCIAL STATEMENTS

December 31, 2005 and 2004

Contents

 

Report of Independent Auditors

   1

Audited Financial Statements

  

Balance Sheets

   2

Statements of Income

   4

Statements of Shareholders´ Equity

   5

Statements of Changes in Financial Position

   6

Notes to Financial Statements

   7


Table of Contents

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders

Telecomunicações de São Paulo S.A. - TELESP

São Paulo - SP

 

1. We have audited the accompanying individual (Company) and consolidated balance sheets of Telecomunicações de São Paulo S.A. and subsidiaries as of December 31, 2005, and the related statements of income, shareholders’ equity and changes in financial position for the year then ended. These financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on these financial statements.

 

2. We conducted our audit in accordance with generally accepted auditing standards in Brazil which comprised: (a) the planning of our work, taking into consideration the materiality of balances, the volume of transactions and the accounting and internal control systems of the Company, (b) the examination, on a test basis, of the documentary evidence and accounting records supporting the amounts and disclosures in the financial statements, and (c) an assessment of the accounting practices used and significant estimates made by management of the Company and subsidiaries, as well as an evaluation of the overall financial statement presentation.

 

3. In our opinion, the financial statements referred to above present fairly, in all material respects, the individual and consolidated financial position of Telecomunicações de São Paulo S.A. – TELESP and subsidiaries at December 31, 2005, the related result of their operations, changes in their shareholders´ equity and changes in their financial position for the year then ended, in conformity with the accounting practices adopted in Brazil.

 

4. The individual (Company) and consolidated financial statements for the year ended December 31, 2004, presented for comparison purposes, were reviewed by other independent auditors, who issued an unqualified opinion dated February 2, 2005.

São Paulo, January 31, 2006

ERNST & YOUNG

Auditores Independentes S.S.

CRC-2SP015199/O-6/S

Luiz Carlos Marques

Accountant CRC-1SP147693/O-5

 

1


Table of Contents

TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

BALANCE SHEETS

December 31, 2005 and 2004

(In thousands of reais)

 

     Company    Consolidated
     2005    2004    2005    2004

Assets

           

Current assets

   5,065,553    4,098,160    5,112,898    4,161,865
                   

Cash and cash equivalents

   440,166    172,293    463,456    238,577

Trade accounts receivable, net

   2,757,297    2,681,644    2,783,268    2,696,000

Deferred and recoverable taxes

   1,591,214    897,546    1,622,774    907,819

Inventories

   74,896    91,462    75,101    93,002

Other recoverable amounts

   46,316    91,212    47,465    92,830

Other

   155,664    164,003    120,834    133,637

Non-current assets

   948,564    703,092    1,046,075    805,119
                   

Deferred and recoverable taxes

   429,716    325,560    458,106    354,382

Escrow deposits

   481,266    333,407    481,790    333,893

Other

   37,582    44,125    106,179    116,844

Permanent assets

   12,786,496    13,884,589    12,690,169    13,784,783
                   

Investments

   479,409    509,745    253,565    284,574

Property, plant and equipment, net

   12,241,492    13,261,463    12,358,023    13,369,391

Deferred charges

   65,595    113,381    78,581    130,818
                   

Total assets

   18,800,613    18,685,841    18,849,142    18,751,767
                   

 

2


Table of Contents
     Company    Consolidated
     2005    2004    2005    2004

Liabilities and shareholders´ equity

           

Current liabilities

   5,402,917    4,138,548    5,431,401    4,163,806
                   

Loans and financing

   244,856    526,132    246,755    529,930

Trade accounts payable

   1,476,235    1,172,604    1,506,971    1,194,781

Taxes payable

   1,778,152    1,155,720    1,794,138    1,165,734

Dividends and interest on capital

   903,356    506,116    903,356    506,116

Reserve for contingencies

   67,733    52,806    67,791    52,847

Payroll and related charges

   155,627    138,628    162,161    143,312

Temporary losses on derivatives

   294,255    235,918    294,255    235,918

Other

   482,703    350,624    455,974    335,168

Non-current liabilities

   3,191,875    3,147,047    3,194,450    3,170,245
                   

Loans and financing

   2,150,853    2,205,762    2,150,853    2,226,313

Taxes payable

   22,709    26,007    22,709    26,007

Reserve for contingencies

   931,907    800,244    932,078    800,382

Other

   86,406    115,034    88,810    117,543

Deferred income

   —      —      17,470    17,470
                   

Shareholders´ equity

   10,204,207    11,398,632    10,204,207    11,398,632
                   

Capital

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

Capital reserves

   2,686,973    2,745,272    2,686,973    2,745,272

Legal reserves

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

Retained earnings

   879,604    2,015,730    879,604    2,015,730

Funds for capitalization

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

Total liabilities and shareholders´ equity

   18,800,613    18,685,841    18,849,142    18,751,767
                   

See accompanying notes.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

STATEMENTS OF INCOME

Years ended December 31, 2005 and 2004

(In thousands of reais, except earnings per share)

 

     Company     Consolidated  
     2005     2004     2005     2004  

Gross operating revenue

   20,068,302     18,327,071     20,350,920     18,425,674  
                        

Telecommunications services

   20,068,302     18,327,071     20,350,920     18,425,674  

Revenue deductions

   (5,852,413 )   (5,102,017 )   (5,955,819 )   (5,117,044 )
                        

Net operating revenue

   14,215,889     13,225,054     14,395,101     13,308,630  

Cost of services provided

   (7,600,605 )   (7,449,067 )   (7,716,723 )   (7,496,010 )
                        

Gross profit

   6,615,284     5,775,987     6,678,378     5,812,620  

Operating expenses

   (2,786,991 )   (2,511,773 )   (2,842,551 )   (2,543,294 )
                        

Selling

   (1,789,100 )   (1,528,467 )   (1,810,377 )   (1,606,645 )

General and administrative

   (814,258 )   (763,222 )   (863,920 )   (746,802 )

Equity in subsidiaries

   (32,486 )   (84,932 )   (17,829 )   (461 )

Other, net

   (151,147 )   (135,152 )   (150,425 )   (189,386 )
                        

Income from operations before financial expenses, net

   3,828,293     3,264,214     3,835,827     3,269,326  

Financial expenses, net

   (1,431,155 )   (1,285,753 )   (1,440,332 )   (1,292,808 )
                        

Operating income

   2,397,138     1,978,461     2,395,495     1,976,518  

Non-operating income, net

   37,310     39,982     37,799     40,102  
                        

Income before taxes

   2,434,448     2,018,443     2,433,294     2,016,620  

Income tax and social contribution

   (872,501 )   (725,894 )   (871,347 )   (724,071 )

Reversal of interest on capital

   980,000     888,600     980,000     888,600  
                        

Net income

   2,541,947     2,181,149     2,541,947     2,181,149  
                        

Number of shares outstanding at the balance sheet date – in thousands

   492,030     493,592,279      

Earnings per share - R$

   5.1662     0.0044      
                

See accompanying notes

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

STATEMENTS OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2005 and 2004

(In thousands of reais)

 

          Capital reserves                  
     Capital    Share
premium
   Treasury
stock
    Investment
grants
   Tax
incentives
   Legal
reserve
   Retained
earnings
   

Total shareholders’

equity

 

Balances at December 31, 2003

   5,978,074    2,737,087    —       6,756    188    550,498    2,996,457     12,269,060  

Investment grants

   —      —      —       1,241    —      —      —       1,241  

Unclaimed dividends and interest on capital, net of taxes

   —      —      —       —      —      —      45,472     45,472  

Net income for the year

   —      —      —       —      —      —      2,181,149     2,181,149  

Proposed allocation of income:

                     

Dividends

   —      —      —       —      —      —      (2,209,690 )   (2,209,690 )

Legal reserve

   —      —      —       —      —      109,058    (109,058 )   —    

Interest on capital

   —      —      —       —      —      —      (755,310 )   (755,310 )

Income tax on interest on capital

   —      —      —       —      —      —      (133,290 )   (133,290 )
                                           

Balances at December 31, 2004

   5,978,074    2,737,087    —       7,997    188    659,556    2,015,730     11,398,632  

Investment grants

   —      —      —       593    —      —      —       593  

Unclaimed dividends and interest on capital, net of taxes

   —      —      —       —            91,927     91,927  

Purchase of own shares after reverse split of shares

   —      —      (58,892 )   —      —      —      —       (58,892 )

Net income for the year

   —      —      —       —      —      —      2,541,947     2,541,947  

Proposed allocation of income:

                     

Dividends

   —      —      —       —      —      —      (2,790,000 )   (2,790,000 )

Interest on capital

   —      —      —       —      —      —      (833,000 )   (833,000 )

Income tax on interest on capital

   —      —      —       —      —      —      (147,000 )   (147,000 )
                                           

Balances at December 31, 2005

   5,978,074    2,737,087    (58,892 )   8,590    188    659,556    879,604     10,204,207  
                                           

See accompanying notes.

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

STATEMENTS OF CHANGES IN FINANCIAL POSITION

Years ended December 31, 2005 and 2004

(In thousands of reais)

 

     Company     Consolidated  
     2005     2004     2005     2004  

Sources of funds

        

From operations

        

Net income for the year

   2,541,947     2,181,149     2,541,947     2,181,149  

Items not affecting working capital

   2,709,789     2,907,531     2,733,321     2,884,509  
                        

Depreciation and amortization

   2,646,025     2,718,013     2,675,136     2,736,811  

Monetary and exchange variations of noncurrent receivables and payables, net

   (86,551 )   1,435     (89,811 )   1,445  

Interest on loans and financing

   12,677     6,702     18,923     12,049  

Equity pickup

   32,486     84,932     17,829     461  

Loss (income) on disposal of fixed assets and investment

   6,420     (6,372 )   6,569     (6,359 )

Reserve for contingencies

   101,937     135,006     101,995     135,170  

Tax credits

   (44,872 )   22,315     (44,439 )   5,258  

Amortization of investment goodwill

   41,355     32,043     41,355     32,043  

Provision for pension plans – Resolution CVM 371/2000

   312     (37,743 )   312     (37,658 )

Provision for losses – Barramar credits

   —       (48,800 )   5,452     5,173  

Other

   —       —       —       116  
                        

Total funds from operations

   5,251,736     5,088,680     5,275,268     5,065,658  

Increase in noncurrent liabilities

   335,332     1,738,731     336,327     1,729,399  
                        

Loans and financing

   325,683     1,738,700     325,683     1,725,635  

Related parties

   —       —       609     —    

Other liabilities

   9,649     31     10,035     3,764  

Other sources

   271,702     294,259     271,292     301,675  
                        

Investment grants

   593     1,241     593     1,241  

Transfer from noncurrent to current assets

   146,233     232,997     144,864     240,264  

Proceeds from sale of fixed assets

   28,379     14,549     29,299     14,549  

Unclaimed dividends

   91,927     45,472     91,927     45,472  

Other

   4,570     —       4,609     149  
                        

Total sources of funds

   5,858,770     7,121,670     5,882,887     7,096,732  

Uses of funds

        

Increase in noncurrent assets

   321,101     112,438     321,124     115,006  
                        

Escrow deposits

   127,516     38,187     127,539     38,337  

Recoverable ICMS (State VAT)

   189,266     62,141     189,266     62,141  

Other

   4,319     12,110     4,319     14,528  

Increase in permanent assets

   1,661,141     1,517,033     1,674,482     1,456,580  
                        

Investments

   21,055     189,824     —       115,879  

Property, plant and equipment

   1,640,086     1,327,209     1,674,482     1,340,697  

Deferred charges

   —       —       —       4  

Other uses of funds

   4,173,504     3,664,957     4,203,843     3,690,272  
                        

Interest on capital and dividends

   3,770,000     3,098,290     3,770,000     3,098,290  

Treasury stock - Capital reserve

   58,892     —       58,892     —    

Merged working capital

   —       —       —       2,944  

Transfer from noncurrent to current liabilities

   344,612     566,667     369,225     589,038  

Other

   —       —       5,726     —    
                        

Total uses of funds

   6,155,746     5,294,428     6,199,449     5,261,858  

Increase (decrease) in funds

   (296,976 )   1,827,242     (316,562 )   1,834,874  
                        

Current assets

        

At beginning of year

   4,098,160     4,053,622     4,161,865     4,121,165  

At end of year

   5,065,553     4,098,160     5,112,898     4,161,865  
   967,393     44,538     951,033     40,700  

Current liabilities

        

At beginning of year

   4,138,548     5,921,252     4,163,806     5,957,980  

At end of year

   5,402,917     4,138,548     5,431,401     4,163,806  
   1,264,369     (1,782,704 )   1,267,595     (1,794,174 )

Changes in working capital

   (296,976 )   1,827,242     (316,562 )   1,834,874  
                        

See accompanying notes.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS

December 31, 2005 and 2004

(In thousands of reais)

 

1. Operations and Background

 

  a) Ownership control and operations

Telecomunicações de São Paulo S.A. - Telesp, hereinafter referred to as the “Company” or “Telesp”, is controlled by Telefónica S.A., which, on December 31, 2005, holds directly and indirectly 84.71% of the common shares and 88.90% of the preferred shares of the Company.

The Company is registered with the Brazilian Securities Commission (CVM) as a publicly held company and its shares are traded on the São Paulo Stock Exchange (BOVESPA). The Company is also registered with the US Securities and Exchange Commission (SEC) and its American Depository Shares (ADSs - level II) are traded on the New York Stock Exchange (NYSE).

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

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

The STFC Concession Agreement expired on December 31, 2005, and was renewed on December 22, 2005 for a period of 20 years, with the possibility of being amended on December 31, 2010, 2015 and 2020. This condition enables ANATEL to establish new requirements and universalization and quality targets, based on the conditions in force at the time of the renewal.

During the twenty years of the new period, publicly-traded companies must pay a renewal fee equivalent to 2% (two percent) of STFC revenues from the year previous to the payment, net of taxes and contributions.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

1. Operations and Background (Continued)

 

  b) Telecommunications service providers and subsidiaries

A. Telecom S.A.: new corporate name of Assist Telefônica S.A., still a wholly-owned subsidiary and privately-held corporation, including in its business purpose the rendering of services related to: electronic monitoring, including sale, rent, installation, operation and maintenance; billing and collection of voice and data communication services; automated voice services, providing access to information and services through fixed telephones, mobiles or public telephones, using voice and text recognition and authentication; administration and exploration of service stores and other similar or related services, including administration of franchises; production of furniture for equipment, devices and telecommunications and IT networks in general, in addition to installation services already rendered; operation and maintenance of telephony, data and IT internal networks; value-added services, including services related to internet content, connection and access, technology services and all necessary support referring to worldwide computer network; installation, operation and maintenance of internet, intranet and extranet solutions; sale, rent and maintenance of telecommunications and IT equipment and devices in general.

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

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

Companhia ACT de Participações: on June 30, 2001, Telesp paid up an equity interest of 32% in this company. In November and December 2003, this company underwent a corporate restructuring process that increased Telesp equity interest to 50% in this company, whose business purpose is to participate in Refibra Consortium, render technical advisory services for preparation of projects for the conclusion of the Refibra Network, making the necessary studies to render them economically feasible, as well as monitoring of status of activities related to the Consortium.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

1. Operations and Background (Continued)

 

  b) Telecommunications service providers and subsidiaries (continued)

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

 

2. Presentation of the Financial Statements

The financial statements as of December 31, 2005 and 2004 were prepared in accordance with accounting practices adopted in Brazil, rules applicable to concessionaires of public telecommunications services, and accounting procedures and standards established by the Brazilian Securities Commission (CVM).

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

In consolidation, all assets, liabilities, revenues and expenses resulting from intercompany transactions have been eliminated.

Some accounts in the 2004 financial statements were reclassified for purposes of adequacy and consistency with the current year. However, the amounts of such reclassifications are not material to the financial statements and will therefore not be disclosed in detail.

 

3. Summary of Significant Accounting Practices

 

  a) Cash and cash equivalents

Cash equivalents are temporary liquid investments, recorded at cost, increased by earnings accrued to the balance sheet date.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

3. Summary of Significant Accounting Practices (Continued)

 

  b) Trade accounts receivable, net

These are stated at the tariff amounts on the date the services were provided. Services rendered to clients who had not been billed on the balance sheet date are also included. Allowance for doubtful accounts is set up in an amount considered sufficient to cover possible losses.

 

  c) Balances and transactions in foreign currency

Transactions in foreign currency were translated using the exchange rate at the transaction date. Assets and liabilities denominated in foreign currency are recorded at the exchange rate on the balance sheet date. Exchange variations resulting from operations in foreign currency were recognized in income.

 

  d) Inventories

Inventories are stated at average acquisition cost, net of adjustment to realization value, and segregated into plant expansion and inventories for consumption, maintenance or resale. Inventories for use in expansion are classified as “Construction in progress”, in property, plant and equipment, and those for consumption, maintenance or resale are classified as “Inventories” in current assets.

 

  e) Investments

In the Company, investments in subsidiaries are accounted for under the equity method. Other investments are recorded at cost, less allowance for probable losses, when considered necessary. Subsidiaries are consolidated at the base date December 31 of each year, except the subsidiary Santo Genovese, acquired in December 2004 and consolidated on the base date November 30, 2004.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

3. Summary of Significant Accounting Practices (Continued)

 

  f) Property, plant and equipment, net

Property, plant and equipment are stated at acquisition and/or construction cost, less accumulated depreciation.

Expenses incurred with maintenance and repair, when representing improvement (increase in the installed capacity or useful life), are capitalized, whereas other expenses are charged to income, observing the accrual method of accounting.

Depreciation is calculated by the straight-line method. Depreciation rates adopted are in accordance with the useful life of assets and with the Public Telecommunications Service standards. The main rates applied are shown in Note 12.

 

  g) Deferred charges

Deferred charges comprise: (i) pre-operating expenses stated at acquisition cost and amortized over a period of 5 years; (ii) goodwill on acquisition of merged investment, amortized over a period of 5 years, the last installment having been recorded in November 2005; and (iii) goodwill on acquisition of IP network, amortized over a period of 10 years (see Note 13).

 

  h) Income tax and social contribution

Corporate income tax and social contribution are accounted for on the accrual basis. Deferred taxes attributable to temporary differences and income tax and social contribution losses are recorded in assets, based on the assumption of future realization within the parameters established by CVM Ruling No. 371/02.

 

  i) Reserve for contingencies

These are recognized for those cases in which an unfavorable outcome is considered probable at the balance sheet date. Provisions were conservatively set up for claims initiated by the Company, even though liabilities for such claims have been considered possible (Note 18).

 

  j) Revenue recognition

Revenues related to services rendered are recorded on the accrual basis. Unbilled revenue from the date of the last billing to the balance sheet date is recognized in the month in which the service is rendered. Revenue from the sale of public phone cards is deferred and recognized in income as the cards are used.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

3. Summary of Significant Accounting Practices (Continued)

 

  k) Financial expenses, net

These represent interest, monetary and exchange variations arising from financial investments, debentures, loans and financing obtained and granted, as well as the results of derivative operations (hedge).

Credited/debited interest on capital is included in this item. For presentation purposes, the amounts declared in the year were reversed from the statement of income and charged to retained earnings, in shareholders´ equity.

 

  l) Post-retirement benefit plans

The Company sponsors individual and multiemployer post-retirement and health assistance plans to its employees. Actuarial liabilities were calculated using the projected unit credit method, as provided for by CVM Ruling No. 371/00. Other considerations related to such plans are described in Note 30.

 

  m) Derivatives

Gains or losses on derivatives are recorded monthly in income. Balances of derivative operations (exchange swaps) are described in Notes 25 and 32.

 

  n) Earnings per share

Earnings per share are calculated based on the number of shares outstanding at the balance sheet date.

 

4. Cash and Cash Equivalents

 

     Company    Consolidated
     2005    2004    2005    2004

Cash and banks

   36,281    9,478    38,997    25,323

Temporary cash investments

   403,885    162,815    424,459    213,254
                   

Total

   440,166    172,293    463,456    238,577
                   

Temporary cash investments are liquid investments restated based on the Interbank Deposit Certificate (CDI) rate variation and are held with creditworthy banks.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

5. Trade Accounts Receivable, Net

 

     Company     Consolidated  
     2005     2004     2005     2004  

Billed amounts

   2,178,028     2,212,569     2,204,490     2,225,833  

Unbilled amounts

   1,146,055     1,033,315     1,153,231     1,038,304  
                        

Gross accounts receivable

   3,324,083     3,245,884     3,357,721     3,264,137  

Allowance for doubtful accounts

   (566,786 )   (564,240 )   (574,453 )   (568,137 )
                        

Total

   2,757,297     2,681,644     2,783,268     2,696,000  
                        

Current

   2,176,410     2,145,167     2,172,579     2,148,190  

Past-due – 1 to 30 days

   461,827     433,423     473,348     440,352  

Past-due – 31 to 60 days

   121,943     114,127     127,630     116,478  

Past-due – 61 to 90 days

   55,175     48,938     59,693     50,098  

Past-due – 91 to 120 days

   35,393     34,086     40,306     34,963  

Past-due – more than 120 days

   473,335     470,143     484,165     474,056  
                        

Total

   3,324,083     3,245,884     3,357,721     3,264,137  
                        

Amounts receivable from Embratel in 2004, amounting to R$68,258 were negotiated in 2005, with no effect on the Company´s result of operations.

 

6. Deferred and Recoverable Taxes

 

     Company    Consolidated
     2005    2004    2005    2004

Withholding taxes

   59,874    46,070    61,484    46,980

Prepaid income tax

   692,141    220,924    695,529    221,407

Prepaid social contribution

   255,731    85,586    256,904    85,603

Deferred taxes

   770,392    619,279    809,647    654,103
                   

Tax loss carryforwards – Income tax

   —      —      20,831    21,136

Tax loss carryforwards – Social contribution tax

   —      —      7,500    7,610

Reserve for contingencies

   326,442    276,602    326,520    276,662

Post-retirement benefit plans

   15,287    15,182    15,288    15,211

Allowance for doubtful accounts

   98,836    91,351    101,408    92,565

Allowance for reduction of inventory to market value

   38,704    51,759    38,750    54,943

Income tax on other temporary differences

   214,060    135,577    220,110    136,747

Social contribution on other temporary differences

   77,063    48,808    79,240    49,229

ICMS (state VAT) (*)

   227,694    251,054    230,859    253,360

Other

   15,098    193    26,457    748
                   

Total

   2,020,930    1,223,106    2,080,880    1,262,201
                   

Current

   1,591,214    897,546    1,622,774    907,819

Non current

   429,716    325,560    458,106    354,382
                   

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

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

6. Deferred and Recoverable Taxes (Continued)

Deferred income tax and social contribution

Considering the existence of taxable income in the last five fiscal years and the expected generation of future taxable income discounted to present value based on a technical feasibility study, approved by the Board of Directors on November 21, 2005, as provided for in CVM Instruction No. 371/2002, the Company estimates the realization of the deferred taxes as of December 31, 2005 as follows:

 

Year

   Company    Consolidated

2006

   311,199    324,457

2007

   119,165    124,716

2008

   112,682    118,360

2009

   81,243    87,487

Thereafter

   146,103    154,627
         

Total

   770,392    809,647
         

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

 

7. Other Recoverable Amounts

 

     Company    Consolidated
     2005    2004    2005    2004

Advances to employees

   5,246    5,710    5,498    6,085

Advances to suppliers

   24,632    29,344    25,144    29,881

Other recoverable amounts

   16,438    56,158    16,823    56,864
                   

Total current

   46,316    91,212    47,465    92,830
                   

The balance of other recoverable amounts in 2004 comprises the amount of R$42,597 referring to recoverable FUST – Contribution for the Fund for Universal Access to Telecommunications Services, which was reversed in 2005 according to Pronouncement No. 7 issued by Anatel on December 15, 2005.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

8. Inventories

 

     Company     Consolidated  
     2005     2004     2005     2004  

Consumption materials

   84,888     104,550     84,897     104,599  

Resale items

   90,010     129,995     90,341     140,850  

Public telephone prepaid cards

   13,200     8,510     13,200     8,510  

Scraps

   634     641     634     641  

Allowance for reduction to market value and obsolescence

   (113,836 )   (152,234 )   (113,971 )   (161,598 )
                        

Total current

   74,896     91,462     75,101     93,002  
                        

The allowance for reduction to market value and obsolescence takes into consideration timely analyses carried out by the Company.

 

9. Other Assets

 

     Company    Consolidated
     2005    2004    2005    2004

Prepaid expenses

   66,768    56,163    65,443    52,587

Receivables from Barramar S.A. (*)

   —      —      71,041    76,503

Intercompany receivables

   60,999    115,921    54,043    86,225

Onlending of foreign currency loans

   30,996    4,184    1,584    4,184

Tax incentives, net of allowance

   411    411    411    411

Amounts linked to National Treasury securities

   9,028    8,284    9,028    8,284

Receivables - sale of properties/scraps

   11,607    16,234    11,607    16,234

Other assets

   13,437    6,931    13,856    6,053
                   

Total

   193,246    208,128    227,013    250,481
                   

Current

   155,664    164,003    120,834    133,637

Non current

   37,582    44,125    106,179    116,844
                   

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

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

10. Escrow Deposits

 

     Company    Consolidated
     2005    2004    2005    2004

Civil litigation

   71,474    36,509    71,511    36,546

Tax litigation

   308,462    225,651    308,828    226,008

Labor claims

   101,330    71,247    101,451    71,339
                   

Total noncurrent

   481,266    333,407    481,790    333,893
                   

 

11. Investments

 

     Company     Consolidated  
     2005     2004     2005     2004  

Investments carried under the equity method

   297,607     313,607     —       —    
                        

Aliança Atlântica Holding B.V.

   55,583     75,704     —       —    

A. Telecom S.A.

   159,386     166,195     —       —    

Companhia AIX de Participações

   65,642     71,683     —       —    

Companhia ACT de Participações

   26     25     —       —    

Companhia Santo Genovese Participações Ltda.

   16,970     —       —      

Goodwill and negative goodwill on acquisition of investments

   90,368     102,350     107,838     119,820  
                        

Negative goodwill on acquisition of shares – Companhia AIX de Participações

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

Goodwill on acquisition – Santo Genovese Participações Ltda.

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

Amortization of goodwill – Santo Genovese Participações Ltda.

   (11,982 )   —       (11,982 )   —    

Investments carried at cost

   91,434     93,788     145,727     164,754  
                        

Portugal Telecom

   75,362     75,362     129,655     146,329  

Other companies

   26,795     29,149     26,795     29,148  

Other investments

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

Tax incentives

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

Allowance for losses

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

Total

   479,409     509,745     253,565     284,574  
                        

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

Investment acquisition – Santo Genovese Participações Ltda.

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

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

11. Investments (Continued)

Investment acquisition – Santo Genovese Participações Ltda. (Continued)

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

Such operation will allow extending the offer of higher value-added services in the domestic market, through the management of the rendering of telecommunication services.

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

 

     Amounts  

Acquisition price

   113,440  

Acquisition costs

   2,435  

(-) Book value of investment

   (3,945 )
      

Total goodwill

   119,820  
      

The goodwill is being amortized on a straight-line basis over 10 years, grounded on future profitability study.

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

 

     2005  
     Aliança
Atlântica
    A. Telecom     Companhia
AIX
    Companhia
ACT
    Santo
Genovese
 

Paid-up capital

   110,763     254,000     460,929     1     76,850  

Capital reserves

   —       —       —       —       450  

Retained earnings (accumulated deficit)

   403     (94,614 )   (329,644 )   50     (60,330 )
                              

Shareholders’ equity

   111,166     159,386     131,285     51     16,970  
                              

Shares (million)

          

Number of subscribed and paid-up shares

   88     367,977     298,562     1     51,850  

Number of common shares owned

   44     367,977     149,281     0.5     51,850  

Ownership percentage

   50 %   100 %   50 %   50 %   100 %

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

11. Investments (Continued)

 

     2004  
     Aliança
Atlântica
    A. Telecom     Companhia
AIX
    Companhia
ACT
    Santo
Genovese (a)
 

Paid-up capital

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

Capital reserves

   —       —       —       —       450  

Retained earnings (accumulated deficit)

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

Shareholders’ equity

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

Shares (million)

          

Number of subscribed and paid-up shares

   88     367,977     298,562     1     51,850  

Number of common shares owned

   44     367,977     149,281     0.5     51,850  

Ownership percentage

   50 %   100 %   50 %   50 %   100 %

(a) Balance sheet as of 11/30/2004. The Company recorded a provision for shareholders’ deficit in the amount of R$3,945, under the caption “Other liabilities”.

The Company’s equity in subsidiaries is as follows:

 

     2005     2004  

Aliança Atlântica

   (15,551 )   1,415  

A. Telecom

   (6,809 )   (26,670 )

Companhia AIX de Participações

   (6,041 )   (59,702 )

Companhia ACT de Participações

   1     25  

Santo Genovese

   (4,086 )   —    
            

Total

   (32,486 )   (84,932 )
            

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

12. Property, Plant and Equipment, Net

 

     Company
    

Annual
depreciation
rate %

   2005    2004
      Cost    Accumulated
depreciation
    Net book
value
   Cost    Accumulated
depreciation
   

Net book

value

Property, plant and equipment in service

      39,225,600    (27,289,214 )   11,936,386    37,962,793    (25,004,091 )   12,958,702
                                  

Switching and transmission equipment

   12.50    15,889,256    (12,376,889 )   3,512,367    15,589,724    (11,434,121 )   4,155,603

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

   10.00    11,544,458    (8,394,522 )   3,149,936    11,299,344    (7,786,228 )   3,513,116

Transmission equipment - modems

   20.00    577,114    (428,013 )   149,101    540,040    (375,265 )   164,775

Underground and undersea cables, poles and towers

   5.00 to 6.67    394,124    (214,528 )   179,596    387,765    (199,272 )   188,493

Subscriber, public and booth equipment

   12.50    1,951,363    (1,184,643 )   766,720    1,804,641    (994,303 )   810,338

IT equipment

   20.00    507,769    (419,646 )   88,123    466,266    (386,296 )   79,970

Buildings and underground cables

   4.00    6,429,365    (3,392,523 )   3,036,842    6,313,571    (3,178,563 )   3,135,008

Vehicles

   20.00    55,669    (35,736 )   19,933    49,465    (36,623 )   12,842

Land

   —      253,802    —       253,802    257,530    —       257,530

Other

   10.00 to 20.00    1,622,680    (842,714 )   779,966    1,254,447    (613,420 )   641,027

Property, plant and equipment in progress

   —      305,106    —       305,106    302,761    —       302,761
                                  

Total

      39,530,706    (27,289,214 )   12,241,492    38,265,554    (25,004,091 )   13,261,463
                                  

Average annual depreciation rates - %

      10,57         10,49     
                      

Assets fully depreciated

      14.248.626         12,223,036     
                      

 

     Consolidated
    

Annual
depreciation
rate %

   2005    2004
        Cost    Accumulated
depreciation
    Net book
value
   Cost    Accumulated
depreciation
   

Net book

value

Property, plant and equipment in service

      39,399,562    (27,358,785 )   12,040,777    38,106,748    (25,047,625 )   13,059,123
                                  

Switching and transmission equipment

   12.50    15,893,532    (12,377,428 )   3,516,104    15,589,724    (11,434,120 )   4,155,604

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

   10.00    11,569,647    (8,397,114 )   3,172,533    11,329,039    (7,795,144 )   3,533,895

Transmission equipment - modems

   20.00    597,184    (439,597 )   157,587    540,040    (375,265 )   164,775

Underground and undersea cables, poles and towers

   5.00 to 6.67    407,157    (215,923 )   191,234    400,797    (199,737 )   201,060

Subscriber, public and booth equipment

   12.50    1,951,370    (1,184,646 )   766,724    1,804,647    (994,305 )   810,342

IT equipment

   20.00    519,422    (423,607 )   95,815    469,549    (388,256 )   81,293

Buildings and underground cables

   4.00    6,429,416    (3,392,543 )   3,036,873    6,313,622    (3,178,578 )   3,135,044

Vehicles

   20.00    56,154    (35,884 )   20,270    49,731    (36,716 )   13,015

Land

   —      253,802    —       253,802    257,530      257,530

Other

   10.00 to 20.00    1,721,878    (892,043 )   829,835    1,352,069    (645,504 )   706,565

Property, plant and equipment in progress

   —      317,246    —       317,246    310,268    —       310,268
                                  

Total

      39,716,808    (27,358,785 )   12,358,023    38,417,016    (25,047,625 )   13,369,391
                                  

Average annual depreciation rates - %

      10,61         10,57     
                      

Assets fully depreciated

      14.254.336         12,223,036     
                      

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

12. Property, Plant and Equipment, Net (Continued)

Returnable assets

Pursuant to the Concession Agreement, all assets pertaining to the Company’s equity and indispensable to the provision of the services described in said agreement are considered returnable and are part of the concession assets. These assets will be automatically returned to ANATEL upon expiration of the Concession Agreement. As of December 31, 2005, the net book value of such returnable assets is estimated at R$9,129,592 (R$10,295,779 in 2004), comprised of switching and transmission equipment, public use terminals, external network equipment, energy equipment, and system and operation support equipment.

 

13. Deferred Charges

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

 

     Company     Consolidated  
     2005     2004     2005     2004  

Pre-operating expenses

   14,877     26,034     20,416     32,527  
                        

Cost

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

Accumulated amortization

   (40,911 )   (29,754 )   (44,863 )   (32,752 )

Merged goodwill – Ceterp S.A.

   —       29,298     —       29,298  
                        

Cost

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

Accumulated amortization

   (187,951 )   (158,653 )   (187,951 )   (158,653 )

Goodwill on acquisition of the IP network

   50,718     58,049     50,718     58,049  
                        

Cost

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

Accumulated amortization

   (21,843 )   (14,512 )   (21,843 )   (14,512 )

Other

   —       —       7,447     10,944  
                        

Cost

   —       —       12,059     14,243  

Accumulated amortization

   —       —       (4,612 )   (3,299 )
                        

Total

   65,595     113,381     78,581     130,818  
                        

Pre-operating expenses refer to costs incurred in the pre-operating stage of long-distance services; amortization began in May 2002, over a period of 60 months.

The goodwill paid on the acquisition of Ceterp S.A. is presented in deferred charges due to that company’s merger on November 30, 2000. This goodwill, based on the expectation of future profitability, was amortized over 60 months, having been concluded in November 2005.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

13. Deferred Charges (Continued)

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

 

14. Loans and Financing

 

Consolidated

   Balance in 2005
     Currency   

Annual

interest rate

   Maturity    Current    Noncurrent    Total

Mediocrédito

   US$    1.75%    2014    7,471    52,802    60,273

Loans in local currency

   R$    6% + 3.75%
spread
   through 2006    1,898    —      1,898

Loans in foreign currency

         through 2009    215,642    598,051    813,693

Debentures

   R$    103.50% of
CDI
   through 2007    21,744    1,500,000    1,521,744
                       

Total

            246,755    2,150,853    2,397,608
                       

 

Consolidated

   Balance in 2004
      Currency   

Annual

interest rate

   Maturity    Current    Noncurrent    Total

Mediocrédito

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

CIDA

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

Loans in local currency

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

Loans in foreign currency

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

Debentures

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

Total

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

Loans in foreign currency are as follows:

 

Consolidated

   Currency    Interest rate   Principal    Interest    Balance
in 2005

Resolution 2770

   US$    5.70% to 6,90%   105,523    9,451    114,974

Resolution 2770

   US$    4.80%   292,928    9,983    302,911

Untied Loan – JBIC

   JPY    Libor + 1.25%   393,520    2,288    395,808
                   

Total

        791,971    21,722    813,693
                   

 

Consolidated

   Currency    Interest rate    Principal    Interest    Balance in
2004

Resolution 2770

   US$    2.00% to 6.90%    310,640    10,415    321,055

Resolution 2770

   JPY    1.40%    79,736    34    79,770

Debt assumption

   US$    8.62% to 27.50%    61,119    23,081    84,200

Untied Loan – JBIC

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

DEG – Deutsche Investitions

   US$    Libor + 6%    18,432    199    18,631
                    

Total

         1,113,169    37,442    1,150,611
                    

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

14. Loans and Financing (Continued)

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

The loan from Japan Bank for International Cooperation - JBIC includes restrictive covenants related to the maintenance of certain financial indices, which to date have been met.

Consolidated long-term debt maturities

 

Year

   Amounts

2007

   1,605,420

2008

   408,332

2009

   105,420

Thereafter

   31,681
    

Total

   2,150,853
    

Debentures

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

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

The Offering consisted of the issue of 150,000 simple nonconvertible unsecured debentures, with a face value of R$10 (ten thousand reais), in the total amount of R$1,500,000 (one billion, five million reais), of a single series, maturing on September 1, 2010 (six years). The debentures bear interest with quarterly payments, equivalent to 103.5% of the DI (interbank deposit) average daily rate calculated and published by the CETIP (Clearing House for the Custody and Financial Settlement of Securities).

The adjustment to the interest rate of debentures is estimated for September 1, 2007. On a conservative basis, the Company included, in the consolidated schedule of long-term debt maturities shown above, the principal of the debentures in the year 2007, date of adjustment of interest rates.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

15. Taxes Payable

 

     Company    Consolidated
     2005    2004    2005    2004

Taxes on income

           

Income tax

   709,079    330,756    711,037    330,886

Social contribution

   257,569    120,685    258,288    120,738

Deferred taxes

           

Income tax

   62,907    20,875    62,907    20,875

Social contribution

   22,645    7,513    22,645    7,513

Indirect taxes

           

ICMS (state VAT)

   659,649    612,047    665,993    616,786

PIS and COFINS (taxes on revenue)

   68,470    72,910    72,944    76,277

Other

   20,542    16,941    23,033    18,666
                   

Total

   1,800,861    1,181,727    1,816,847    1,191,741
                   

Current

   1,778,152    1,155,720    1,794,138    1,165,734

Noncurrent

   22,709    26,007    22,709    26,007
                   

 

16. Payroll and Related Charges

 

     Company    Consolidated
     2005    2004    2005    2004

Salaries and fees

   19,722    16,247    22,385    16,836

Payroll charges

   68,234    58,681    71,313    61,605

Accrued benefits

   5,166    4,853    5,221    5,277

Employee profit sharing

   62,505    58,847    63,242    59,594
                   

Total

   155,627    138,628    162,161    143,312
                   

 

17. Dividends and Interest on Capital

 

     Company/Consolidated
     2005    2004

Interest on capital

   473,912    200,300
         

Telefónica Internacional S.A.

   216,403    —  

SP Telecomunicações Holding Ltda.

   67,342    —  

Minority shareholders

   190,167    200,300

Dividends

   429,444    305,816
         

Minority shareholders

   429,444    305,816
         

Total

   903,356    506,116
         

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

17. Dividends and Interest on Capital (Continued)

Most of the interest on own shareholders’ equity and total dividends payable to minority shareholders refer to declared but unclaimed amounts.

 

18. Reserve for Contingencies

The Company, as an entity and also as the successor to the merged companies, and its subsidiaries are involved in labor, tax and civil lawsuits filed with different courts. The Company’s management, based on the opinion of its legal counsel, recognized reserves for those cases in which an unfavorable outcome is considered probable. The table below shows the breakdown of reserves by nature and activities during 2005:

 

      Nature    

Total

 

Consolidated

   Labor     Tax     Civil    

Balances at 12/31/2004

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

Additions

   59,768     23,421     26,952     110,141  

Write-offs

   (43,065 )   (5,704 )   (14,464 )   (63,233 )

Monetary restatement

   54,988     42,459     2,285     99,732  
                        

Balances as of 12/31/2005

   343,530     599,770     56,569     999,869  
                        

Current

   34,462     20,847     12,482     67,791  

Noncurrent

   309,068     578,923     44,087     932,078  
                        

 

18.1. Labor Contingencies

The Company has various labor contingencies and recorded a provision of R$343,530, consolidated, to cover probable losses. The amounts involved and respective risk levels are as follows:

 

     Amount involved

Risk

   Telesp    A. Telecom    Total

Remote

   2,003,548    4,469    2,008,017

Possible

   101,628    —      101,628

Probable

   343,315    215    343,530
              

Total

   2,448,491    4,684    2,453,175
              

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

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.2. Tax Contingencies

 

     Amount involved

Risk

   Telesp    A. Telecom    Total

Remote

   1,963,936    1,287    1,965,223

Possible

   2,099,012    12,083    2,111,095

Probable

   599,770    —      599,770
              

Total

   4,662,718    13,370    4,676,088
              

Based on the assessment of the Company’s legal counsel and management, a reserve for tax contingencies amounting to R$599,770 was recorded on December 31, 2005. The principal tax contingencies, assessed as remote, possible and probable risk, are as follows:

 

    Claims by the National Institute of Social Security (INSS) referring to:

 

  a) Legal proceedings for the collection of Workers’ Compensation Insurance (SAT) and joint liability of the Company for payment of social security contributions allegedly not made by contractors, considered possible risk, in the amount of R$274,442. Based on a partially unfavorable court decision, management decided to provide for R$99,818, relating to the portion of the total amount for which the likelihood of loss is probable.

 

  b) Discussion regarding social security contribution on certain amounts paid for compensation of salary losses resulting from economic plans (“Plano Verão” and “Plano Bresser”), in the approximate amount of R$131,643 for which an unfavorable outcome is considered possible. Based on higher court decisions and an unfavorable court decision in a similar case involving another company of the group, the Company’s management decided to provide for R$92,004, to cover potential losses.

 

  c) Notification demanding social security contributions, SAT and amounts for third parties (National Institute for Agrarian Reform and Colonization (INCRA) and Brazilian Mini and Small Business Support Agency (SEBRAE)) on the payment of various salary amounts for the period from January 1999 to December 2000, in the amount of approximately R$54,861, considered as possible risk. These lawsuits are in the 1st lower court and at the last administrative level, respectively. No provision was recorded based on the risk classification of this matter.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.2. Tax Contingencies (continued)

 

    Claims by the National Institute of Social Security (INSS) referring to: (Continued)

 

  d) Notification demanding social security contributions for joint liability in 1993, in the amount of approximately R$179,301, for which the risk is considered possible. This process is at 2nd administrative level. No provision was made based on the risk classification of this matter.

 

  e) Legal proceedings imposing fines of R$161,982 for payment of dividends when the Company had allegedly a debt to the INSS. No provision was made for the balance, for which the likelihood of loss is deemed possible. This process is at 2nd administrative level. No provision was made based on the risk classification of this matter.

 

  f) On December 20, 2005 notices were drawn concerning the period from May 1995 to December 1998 demanding the payment of social security contributions amounts, assessed under an estimated tax base and considering the existence of joint liability between the Company, general service providers and civil construction companies. The amounts of R$224,825, which refers to the use of inadequate criteria for calculation of the arbitrated tax base, and of R$ 169,642, corresponding to the wrong definition of civil construction for arbitration, as will be shown by means of technical reports requested to Engineering Institutes, were assessed as of remote risk of loss by the legal counsel. The amount of R$750,722 is classified as of possible risk due to the existing judicial arguments that support the procedure adopted by the Company and the removal of the joint liability. The process is at the first lower court. No provision was made based on the risk classification of this matter.

 

  g) On December 20, 2005, notices were drawn concerning the period from January 1995 to December 1998, requiring the payment of social security contributions on amounts paid for Labor Claims of CETERP and CTBC, using the provision recorded in the Company´s balance sheet as calculation base. As per legal counsel, the risk is classified as possible in view of the lack of legal grounds for arbitration of the contributions based on accounting provision. An administrative defense was presented, and the amount totals R$5,053. No provision was made based on the risk classification of this matter.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.2. Tax Contingencies (continued)

 

    Claims by the Finance Secretary of the State of São Paulo referring to:

 

  h) Tax assessments on October 31 and December 13, 2001, related to ICMS (state VAT) allegedly due on international long-distance calls, amounting to approximately R$19,475 for November and December 1996 and amounting to R$145.252 from January 1997 to March 1998, at the 2nd administrative level, assessed as possible risk, and R$178,015 for the period from April 1998 to December 1999, at the 2nd administrative level, assessed as remote risk. No provision was recorded based on the risk classification of these matters.

 

  i) Tax assessment on February 29, 2000 demanding payment of the ICMS allegedly due on cell phone activation tariff in the period from January 1995 to December 1997, plus fines and interest, amounting to approximately R$278,899, assessed as remote risk. The claim is at the 1st administrative level. No provision was recorded based on the risk classification of this matter.

 

  j) Tax assessment on July 2, 2001 demanding the difference in ICMS paid without late-payment fine, amounting to R$5,771, assessed as possible risk. The claim is at the higher court. No provision was recorded based on the risk classification of this matter.

 

  k) Tax assessment notice related to the untimely used credits in the period from January to April 2002, in the amount of R$29,816, for which the risk is considered possible. The claim is at 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

  l) Tax assessment notice related to the use of ICMS credits on acquisition of consumption materials, in the amount of R$10,841, for which the risk is considered possible. The claim is at 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.2. Tax Contingencies (continued)

 

    Claims by the Finance Secretary of the State of São Paulo referring to: (Continued)

 

  m) Tax assessment notices related to the non-reversal of ICMS credits in proportion to tax-exempt and non-taxed sales and services in the period from January 1999 to June 2000 and July 2000 to December 2003, in addition to an ICMS credit unduly taken in March 1999. The total amount involved is R$102,267. The risk is considered possible by legal counsel. The claims are at the 2nd and 1st administrative level, respectively. No provision was recorded based on the risk classification of this matter.

 

  n) Notifications of around R$7,962 regarding the former Ceterp’s loss of the tax benefit established by State Decree No. 48237/03, due to underpayment for an error in the calculation of the debt, assessed as possible risk. The claim is at the 2nd administrative level. No provision was recorded based on the risk classification of this matter.

 

  o) Tax collection lawsuits demanding about R$4,307 of ICMS differences for the period from May 1999 to June 2003. The Company is gathering the documents to prove that the amounts have been effectively paid. Guarantee is being provided and defense is being prepared for presentation in the lower court. The risk is assessed as possible. No provision was recorded based on the risk classification of this matter.

 

    Litigation at the Federal and Municipal levels referring to:

 

  p) The Company filed a lawsuit challenging the increase in the COFINS and PIS (taxes on gross revenue) tax bases (COFINS until February 2004 tax basis and PIS until November 2002 tax basis), requiring the inclusion of financial and securitization income and exchange gains, instead of only operating revenues. Despite the injunction obtained suspending the change in the calculation method, the recent precedent from the Federal Supreme Court regarding unconstitutionality of the tax base increase and the risk being assessed as possible, the Company maintained the provision of R$260,536, in case the outcome is unfavorable.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.2. Tax Contingencies (Continued)

 

    Litigation at the Federal and Municipal levels referring to: (Continued)

 

  q) FINSOCIAL, currently COFINS, was a tax on gross operating revenues, originally established at a rate of 0.5% and gradually and subsequently raised to 2.0%. Such rate increases were judicially challenged with success by several companies, which resulted in tax credits from overpayments. These credits were offset by CTBC (company merged into the Company in November 1999) against current amounts of COFINS due. Claiming that those offsets made by CTBC were improper, the Federal Government made an assessment in the amount of R$16,237, considered as a possible loss. The claim is at the higher court. No provision was recorded based on the risk classification.

 

  r) Litigation contesting the levy of corporate income tax, social contribution tax, PASEP and COFINS on telecommunications services of Centrais Telefônicas de Ribeirão Preto S.A. - CETERP, merged in November 2000, based on paragraph 3 of Article 155 of the Federal Constitution, according to which, with the exception of ICMS (state VAT) and taxes on exports and imports, no other taxation applies to services. The Company assesses this case as probable loss and has recorded a reserve of R$70,882. The claim is in the higher court.

 

  s) Lawsuit seeking a court decision declaring the nonexistence of a legal tax relationship between Telesp and the Federal Government, the defendant, that would require the Company to pay the Federal Economic Intervention Contribution (CIDE) on remittances to be made based on contracts with foreign residents, since the unconstitutionality of said tax is clear. The lawsuit also seeks offset against other taxes payable, in the amount of R$2,190, monetarily restated, related to the CIDE payment made in March 2002. The Company made an escrow deposit of R$2,178 related to the remittance made on October 18, 2002. Despite the risk considered to be possible, the Company recognized a reserve for the unpaid amounts, in the amount of R$14,043. The claim is at the lower court.

 

  t) Tax collection claim demanding differences regarding income tax, based on DCTF’s (Federal Tax Debt and Credit Returns) for the first half of 1999, amounting to approximately R$5,082, assessed as possible risk. These claims are at the 1st administrative level and no provision was recorded based on the risk classification.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.2. Tax Contingencies (Continued)

 

    Litigation at the Federal and Municipal levels referring to: (Continued)

 

  u) At the municipal level, the Company has contingencies related to the IPTU (municipal real estate tax), ISS (municipal service tax), fine and interest in the amount of R$863, which have all been accrued due to the existence of favorable and unfavorable decisions regarding this matter.

 

  v) The Company filed an annulment action in order to obtain decision that fully annuls the tax credits resulting from tax delinquency notices drawn up by the São Paulo Municipal Government, alleging differences in the payment of the ISS (municipal service tax), a fine of 20% not paid in the amount of R$18,426. No reserve has been recorded for this contingency, since the attorneys responsible for this case believe that the risk is possible. The claim is at the first lower court level.

 

  x) On December 15, 2005, ANATEL edited Pronouncement No. 1 (subsequently renumbered to Pronouncement No. 7), through which it confirmed the understanding that interconnection expenses are not excluded from the FUST basis, thus changing the previous position by which such exclusion was provided for. The Pronouncement is applied retroactively to January 2001. Thus, through ABRAFIX (Brazilian Association of Fixed Telephony Companies), on January 9, 2006, the Company petitioned a Security Mandate in order to ensuring the possibility of excluding interconnection expenses from the FUST calculation base. The process is at the first lower court level and the contingency was classified as of possible risk by the Company´s legal advisors. The amount involved totals R$88,067. No provision was recorded based on the risk classification.

There are other contingencies that have also been accrued, in the amount of R$50.783, for which the risk is assessed by management as probable.

 

  18.3. Civil Contingencies

 

     Amount involved

Risk

   Telesp    A. Telecom    Total

Remote

   862,092    11,828    873,920

Possible

   791,714    156    791,870

Probable

   56,554    15    56,569
              

Total

   1,710,360    11,999    1,722,359
              

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

18. Reserve for Contingencies (Continued)

 

  18.3. Civil Contingencies (Continued)

The contingencies assessed as possible risk involve various matters: unacknowledged title to telephone line, indemnity for material and personal damages, and other, in the amount of approximately R$369,166.

In addition, the Company is also involved in civil class actions related to the Community Telephone Plan (PCT), where the telephone expansion plan buyers who did not receive shares in return for their financial investments seek an indemnity, in the municipalities of Diadema, São Caetano do Sul, São Bernardo do Campo, Ribeirão Pires and Mauá, involving a total amount of approximately R$283,856. The risks involved were assessed as possible by legal counsel. The claims are in the higher court level.

The Association of the Participants of the Sistel in the State of São Paulo - ASTEL moved against the Company, Fundação Sistel de Seguridade Social and others, a class action questioning subjects related to the Plan of Medical Assistance for Retirees - PAMA, considering in synthesis: (i) prohibition of the collection of contribution of the retirees included in the PAMA; (ii) the registration in the PAMA of the retirees and assisted people whose registrations were suspended for insolvency; (iii) reevaluation of the economic necessities of the PAMA; (iv) restoration of the basis of incidence of the contributions on the total and gross amount of the payroll of all the employees of the company; (v) reaccreditation of all the hospitals, clinics, laboratories and doctors disaccredited by Sistel and (vi) review of the accounting distribution of shareholders´ equity. Company Management, based on the opinion of its legal council, assess this suit as a possible risk, and the amount involved is estimated at R$131,882. Based on the risk classification, no provision was recorded.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

19. Other Liabilities

 

     Company    Consolidated
     2005    2004    2005    2004

Consignments on behalf of third parties

   194,405    177,690    182,622    168,637

Deposit collaterals

   1,848    6,296    1,848    6,296

Amounts collected from users

   102,298    101,833    89,712    92,117

Retentions

   88,922    67,987    89,725    68,651

Other consignments

   1,337    1,574    1,337    1,573

Provision for post-retirement benefit plans (Note 30)

   44,963    44,651    44,963    44,738

Payables to related parties

   97,543    95,622    76,048    87,192

Advances from clients

   58,868    55,403    58,868    55,403

Amounts to be refunded to subscribers

   41,212    39,294    39,874    37,904

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

   —      20,772    —      20,772

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

   —      3,945    —      —  

Accounts payable – sale of share fractions after the reverse split process (Note 20)

   99,860    —      99,860    —  

Other

   32,258    28,281    42,549    38,065
                   

Total

   569,109    465,658    544,784    452,711
                   

Current

   482,703    350,624    455,974    335,168

Noncurrent

   86,406    115,034    88,810    117,543
                   

(i) According to the “Contract for Purchase and Sale of Units of Interest” of Santo Genovese Participações Ltda. (Atrium Telecomunicações Ltda.), the Company paid the installments resulting from the acquisition on December 24, 2005.

 

20. Shareholders’ Equity

 

  a) Capital

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

 

Common shares

   165,320,206

Preferred shares

   328,272,072
    

Total shares

   493,592,278
    

Book value per share in R$

   20.67
    

Preferred shares are nonvoting but have priority in the reimbursement of capital and are entitled to dividends 10% higher than those paid on common shares, as per article 7 of the Company’s articles of incorporation and clause II, paragraph 1, article 17, of Law No. 6404/76, with wording of Law No. 10303/01.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

20. Shareholders’ Equity (Continued)

 

  a) Capital (Continued)

Grouping of shares

On February 22, 2005, the Company, represented by the Board of Directors, following Instruction CVM 358 dated January 3, 2002, published a significant event notice and on May 11, 2005, submitted a proposal for grouping the totality of the shares representing the Company’s capital at the Extraordinary Shareholders’ Meeting, as provided for in article 12 of Law No. 6404, dated December 15, 1976.

The proposal for grouping the totality of the former 165,320,206,602 (one hundred and sixty-five billion, three hundred and twenty million, two hundred and six thousand, six hundred and two) common shares and 328,272,072,739 (three hundred and twenty-eight billion, two hundred and seventy-two million, seventy-two thousand, seven hundred and thirty-nine) preferred shares representing the Company’s capital was unanimously approved in voting, as provided for in article 12 of Law No. 6404/76, at a ratio of 1,000 (one thousand) existing shares to 1 (one) of the related type, with no capital reduction, resulting in 493,592,278 shares, 165,320,206 of which are common and 328,272,072 preferred. The authorized capital limit will now be of 700,000,000 common or preferred shares.

The Company shareholders were granted the period from May 12, 2005 to June 24, 2005 to adjust, at their free and exclusive discretion, their shareholding positions, by type, in multiple lots of 1,000 (one thousand) shares, by means of negotiation via brokerage firms authorized to operate on the São Paulo Stock Exchange (BOVESPA), as well as so that the measures with the Securities and Exchange Commission – SEC may be taken. As from June 27, 2005, the representative shares of the Company’s capital are being traded exclusively by group and by unit quotation.

The shares of the remaining fractions of the grouping were sold in their entirety in a BOVESPA auction on July 15, 2005. The net value obtained with the sale of shares in the auction was made available to the related shareholder, after the conclusion of the auction, as per significant event notice published on July 21, 2005, and is recorded in other liabilities in the balance sheet.

As from June 27, 2005 each ADR represents 1 (one) preferred share.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

20. Shareholders’ Equity (Continued)

 

  b) Capital reserves

Share premium

This reserve represents the amount exceeding book value of the shares arising from the issuance or capitalization on the date of issue.

Donations and investment grants

These represent amounts received as donations of property resulting from expansion of the telecommunications services plant.

Tax incentives

These are represented by tax incentive investments.

Treasury stocks

Treasury stocks result from the Company’s participation in the auction of shares, through which the Company acquired 1,258,508 common and 303,879 preferred shares in the amount of R$58,892, acquisition which allowed the necessary liquidity to pay shareholders. The average cost of acquisition was R$37.68. At December 31, 2005, the market value of treasury stocks was R$61.752.

 

  c) Profit reserves

Legal reserve

According to article 193 of Law No. 6404/76, the Company chose not to set up the legal reserve, as such balance added to the capital reserve balance exceeded capital by 30%, as provided for in paragraph 1 of the referred to article.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

20. Shareholders’ Equity (Continued)

 

  d) Retained earnings

Net income for the year was fully allocated to dividends and interest on capital. As a result of such allocation, part of retained earnings from prior years, amounting to R$1,228,053 was used.

Pursuant to Law No. 10303/01, net income for the year shall be fully allocated under the situations prescribed by Law No. 6404/76, which will be decided in shareholders’ meetings.

 

  e) Dividends

According to the Articles of Incoporation, the Company is required to pay dividends at each year ending December 31, of a minimum of 25% of adjusted net income, provided earnings are available for distribution.

Dividends are calculated in accordance with the Company’s articles of incorporation and with the Brazilian Corporation Law. Below you will find the calculation of dividends and interest on capital for 2005 and 2004:

 

     2005    2004  

Minimum mandatory dividends calculated based on adjusted net income

     

Net income for the year

   2,541,947    2,181,149  

Allocation to legal reserve

   —      (109,058 )
           

Adjusted net income

   2,541,947    2,072,091  
           

Minimum mandatory dividends – 25% of adjusted net income

   635,487    518,023  
           

Interest on capital, net on income tax on minimum dividends

   833,000    755,310  

Ínterim/supplementary dividends

   2,790,000    2,209,690  
           

Total dividends declared

   3,623,000    2,965,000  
           

 

     2005    2004

Amounts in R$

   Gross    Net    Gross    Net

Interest on capital - common

   1.865213    1.585431    1.688007    1.434806

Interest on capital - preferred

   2.051734    1.743974    1.856808    1.578286

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

20. Shareholders’ Equity (Continued)

 

  e) Dividends (Continued)

 

     2005

Amounts in R$

   Common    Preferred

Interest on capital – net of income tax

   1.585431    1.743974

Ínterim dividends declared in April 2005

   2.849439    3.134382

Ínterim dividends declared in September 2005

   2.457954    2.703750
         
   6.892824    7.582106
         
     2004

Amounts in R$

   Common    Preferred

Interest on capital – net of income tax

   1.434806    1.578286

Ínterim dividends declared in April 2004

   1.165553    1.282108

Ínterim dividends declared in October 2004

   3.032030    3.335233
         
   5.632389    6.195627
         
     2005    2004

Number of outstanding shares at the year end (in thousands)

   492,029    493,592,279
         

Common shares

   164,061    165,320,206

Preferred shares

   327,968    328,272,073

 

  f) Interest on capital

As proposed by management in December 2005 and 2004, interest on capital fully attributed to mandatory minimum dividends was credited, pursuant to Article 9 of Law No. 9249/95, net of withholding income tax.

The proposed interest on capital was determined as follows:

 

     2005     2004  

Gross interest on capital

   980,000     888,600  
            

Common shares

   306,868     279,062  

Preferred shares

   673,132     609,538  

Withholding income tax

   (147,000 )   (133,290 )
            

Net interest on capital included in dividends

   833,000     755,310  
            

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

20. Shareholders’ Equity (Continued)

 

  f) Interest on capital (Continued)

Tax-exempt shareholders received interest on capital in full, not subject to withholding tax.

Dividends and interest on capital credited in 2005 and 2004 are higher than the minimum mandatory dividend established by the Company’s Articles of Incorporation and Article 202 of Law No. 6404/76. Additional dividends of 10% more than common shares are credited to preferred shareholders, as prescribed by Article 17 of Law No. 6404/76, amended by Law No. 10303/01.

 

  g) Payment of dividends and interest on capital

On April 1, 2005, the Board of Directors approved the distribution of interim dividends in the amount of R$1,500,000 based on retained earnings as of December 31, 2004 to shareholders included in the Company records at the end of April 1st, 2005, and interest on shareholders of R$359,000 (R$305,150 net of withholding income tax), referring to the financial year 2005, to shareholders included in the Company records at the end of the 29th April, 2005. Dividends were paid as from April 20, 2005 and interest on capital was paid as from October 24, 2005.

On September 19, 2005, the Board of Directors approved the payment of interim dividends based on the June 30, 2005 financial statements, in the amount of R$1,290,000, and interest on capital referring to the financial year 2005 of R$241,000 (R$204,850 net of withholding income tax), to shareholders included in the Company records on September 19, 2005, which started being paid on October 24, 2005.

On December 12, 2005, the Board of Directors, following the General Shareholders’ Meeting, approved the credit of interest on capital referring to the financial year 2005, in the amount of R$ 380,000 (R$ 323,000 net of withholding income tax). The payment will be made on a date to be decided in the General Shareholders’ Meeting.

 

  h) Unclaimed dividends

Dividends and interest on capital unclaimed by shareholders within three years from the beginning of payment, are expired and reversed to retained earnings, in conformity with article 287, item II, subitem “a” of Law No. 6404 dated December 15, 1976.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

21. Net Operating Revenue

 

     Company     Consolidated  
     2005     2004     2005     2004  

Subscription (i)

   5,691,717     4,978,923     5,691,344     4,978,923  

Installation fees

   97,681     68,783     97,681     68,783  

Local service

   3,224,180     3,064,637     3,247,830     3,064,637  

Domestic long distance

   3,211,877     3,059,331     3,238,818     3,059,331  
                        

Intraregional

   2,177,679     2,327,057     2,194,168     2,327,057  

Interregional

   1,034,198     732,274     1,044,650     732,274  

International long distance

   155,782     112,620     158,886     112,620  

Network services

   4,190,572     4,039,139     4,220,250     4,039,139  

Use of network (i)

   754,492     809,170     754,492     809,170  

Public telephones

   443,166     367,107     443,166     367,107  

Business communication

   1,321,189     909,255     1,313,020     909,255  

Cession of transmission network (i)

   414,508     392,503     414,508     392,503  

Other (i)

   563,138     525,603     770,925     624,206  
                        

Gross operating revenue

   20,068,302     18,327,071     20,350,920     18,425,674  

Taxes on gross revenue

   (5,275,524 )   (4,872,406 )   (5,371,979 )   (4,901,797 )
                        

ICMS (state VAT)

   (4,508,532 )   (4,187,171 )   (4,574,420 )   (4,198,420 )

PIS and COFINS

   (740,919 )   (680,197 )   (767,494 )   (694,454 )

ISS (municipal service tax)

   (26,073 )   (5,038 )   (30,041 )   (8,918 )

IPI (federal VAT)

   —       —       (24 )   (5 )

Discounts

   (576,889 )   (229,611 )   (583,840 )   (215,247 )
                        

Net operating revenue

   14,215,889     13,225,054     14,395,101     13,308,630  
                        

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

Occurrence of tariff adjustments affecting recorded revenue

On June 30, 2005, through Official Announcements No. 51300 and 51301, ANATEL approved tariff adjustment percentages for fixed-switch telephone service (STFC), based on the criteria established in the local and domestic long-distance concession contracts, effective July 3, 2005. Average increases were as follows:

Local: 7.27%

Long distance: 2.94%

Network usage fee for local interconnection (TU-RL): (-13.32%)

Network usage fee for long distance interconnection (TU-RIU): 2.94%

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

21. Net Operating Revenue (Continued)

On June 29, 2004, through Official Announcements No. 45011 and 45012, ANATEL approved tariff adjustment percentages for fixed-switch telephone service (STFC), based on the criteria established in the local and domestic long-distance concession contracts, effective July 2, 2004, except for Region 32 (former CETERP), effective July 3, 2004. On July 2, approved percentages were applied on tariff bases determined by injunction. Average adjustments were the following:

Local: 6.89%

Long-distance: 3.20%

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

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

On June 26, 2003, through Official Announcements No. 37166 and 37167, ANATEL approved tariff adjustments for fixed-switch telephone service (STFC), based on the criteria established in the local and domestic long-distance concession contracts, effective June 30, 2003 and for the former CETERP’s Region 33, July 3, 2003. The local basic plan had an average increase of 28.75%, including a productivity gain of 1%, while the net tariffs for the long-distance services basic plan had an average increase of 24.84%, including a productivity gain of 4%, as established in the concession contract. Net charges for other STFC services and products were increased by 30.05% on average, However, a preliminary court order annulled ANATEL’s resolutions and stipulated the IPC-A (Extended Consumer Price Index), of approximately 17%, in lieu of the IGP-DI (General Price Index - Internal Availability) for the calculation set forth in clauses 11.1 and 11.2 of the public telephone service concession contracts.

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

Pulse: on average 3.22%;

Domestic Long-distance service: on average 5.22%;

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

Residential subscription charges: 3.14%;

Activation: on average14.14%

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

21. Net Operating Revenue (Continued)

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

Pulse: on average 3.13%;

Domestic long-distance service: on average 4.97%;

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

Residential subscription: 3.05%;

Activation: on average 12.40%

On July 6, 2003, wireless operators implemented the Carriers Selection Code (CSP) by which the client chooses the local (VP2 and VP3) and international long distance operator, according to Personal Mobile Service (SMP) rules. The Company began recognizing revenues from such services and is, in turn, paying the wireless operators for the use of their networks.

 

22. Cost of Services Provided

 

     Company     Consolidated  
     2005     2004     2005     2004  

Depreciation and amortization

   (2,380,380 )   (2,481,974 )   (2,396,179 )   (2,495,647 )

Personnel

   (201,674 )   (185,603 )   (207,997 )   (188,186 )

Materials

   (48,559 )   (41,062 )   (49,249 )   (41,347 )

Network interconnection

   (3,566,615 )   (3,511,690 )   (3,578,977 )   (3,511,690 )

Outside services

   (1,126,081 )   (1,028,199 )   (1,198,734 )   (1,059,384 )

Other

   (277,296 )   (200,539 )   (285,587 )   (199,756 )
                        

Total

   (7,600,605 )   (7,449,067 )   (7,716,723 )   (7,496,010 )
                        

 

23. Selling Expenses

 

     Company     Consolidated  
     2005     2004     2005     2004  

Depreciation and amortization

   (7,862 )   (7,509 )   (7,862 )   (7,509 )

Personnel

   (239,068 )   (199,011 )   (246,910 )   (204,014 )

Materials

   (71,715 )   (55,620 )   (71,851 )   (55,725 )

Outside services

   (1,013,353 )   (820,357 )   (1,016,120 )   (886,346 )

Allowance for doubtful accounts

   (405,130 )   (422,068 )   (415,273 )   (428,911 )

Other

   (51,972 )   (23,902 )   (52,361 )   (24,140 )
                        

Total

   (1,789,100 )   (1,528,467 )   (1,810,377 )   (1,606,645 )
                        

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

24. General and Administrative Expenses

 

     Company     Consolidated  
     2005     2004     2005     2004  

Depreciation and amortization

   (257,783 )   (228,530 )   (271,095 )   (233,655 )

Personnel

   (135,440 )   (144,419 )   (153,904 )   (147,568 )

Materials

   (7,780 )   (13,391 )   (8,225 )   (13,487 )

Outside services

   (411,736 )   (343,653 )   (426,838 )   (318,225 )

Other

   (1,519 )   (33,229 )   (3,858 )   (33,867 )
                        

Total

   (814,258 )   (763,222 )   (863,920 )   (746,802 )
                        

 

25. Financial Expenses, Net

 

     Company     Consolidated  
     2005     2004     2005     2004  

Financial income

   717,402     459,945     722,191     457,895  
                        

Income from temporary cash investments

   100,595     97,792     106,774     99,663  

Gains on derivative transactions

   222,870     169,938     222,870     169,938  

Interests

   72,797     65,391     67,395     60,810  

Monetary/exchange variations

   315,636     123,227     319,044     123,230  

Other

   5,504     3,597     6,108     4,254  

Financial expenses

   (2,148,557 )   (1,745,698 )   (2,162,523 )   (1,750,703 )
                        

Interest on capital

   (980,000 )   (888,600 )   (980,000 )   (888,600 )

Interests

   (418,473 )   (295,196 )   (425,357 )   (299,424 )

Losses on derivative transactions

   (632,315 )   (468,259 )   (637,591 )   (468,259 )

Expenses on financial transactions

   (85,871 )   (87,640 )   (87,555 )   (88,418 )

Monetary/exchange variations

   (31,898 )   (6,003 )   (32,020 )   (6,002 )
                        

Total

   (1,431,155 )   (1,285,753 )   (1,440,332 )   (1,292,808 )
                        

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

26. Other Operating Expenses, Net

 

     Company     Consolidated  
     2005     2004     2005     2004  

Income

   395,792     492,795     401,756     444,617  

Technical and administrative services

   43,527     59,367     40,643     56,418  

Income from supplies

   29,842     29,506     29,842     29,512  

Dividends

   10,351     5,915     12,675     7,825  

Fines on telecommunication services

   114,625     102,681     114,625     102,735  

Recovered expenses

   83,043     95,095     88,921     95,392  

Reversal of reserve for contingencies

   45,267     54,213     45,450     55,492  

Reversal of provision for post-retirement benefit plan

   3,877     37,743     3,964     37,743  

Other

   65,260     108,275     65,636     59,500  

Expenses

   (546,939 )   (627,947 )   (552,181 )   (634,003 )
                        

Write-offs and adjustments to realizable value of supplies

   (7,164 )   (9,607 )   (7,518 )   (9,626 )

Goodwill amortization – Ceterp and Santo Genovese

   (41,355 )   (32,043 )   (41,355 )   (32,043 )

Donations and sponsorships

   (14,567 )   (16,670 )   (14,634 )   (16,677 )

Taxes (except income tax and social contribution)

   (220,572 )   (223,293 )   (220,464 )   (223,196 )

Reserve for contingencies

   (98,588 )   (134,409 )   (98,632 )   (134,469 )

Commissions on voice and data communication services(a)

   —       (95,289 )   —       (95,289 )

Other

   (164,693 )   (116,636 )   (169,578 )   (122,703 )
                        

Total

   (151,147 )   (135,152 )   (150,425 )   (189,386 )
                        

(a) Refers basically to commissions to Telefônica Empresas S.A., which, in 2005, are recorded as selling expenses for a better presentation of the information.

 

27. Non-Operating Income, Net

 

     Company     Consolidated  
     2005     2004     2005     2004  

Income

   72,209     48,202     73,807     48,328  
                        

Proceeds from sale of property, plant and equipment and investments

   28,379     14,556     29,322     14,556  

Unidentified revenue

   32,776     28,628     32,838     28,628  

Fines

   11,054     5,018     11,647     5,144  

Expenses

   (34,899 )   (8,220 )   (36,008 )   (8,226 )
                        

Cost of sale of property, plant and equipment and investments

   (34,799 )   (8,178 )   (35,908 )   (8,184 )

Other

   (100 )   (42 )   (100 )   (42 )
                        

Total

   37,310     39,982     37,799     40,102  
                        

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

28. Income Tax and Social Contribution

The Company recognizes income tax and social contribution monthly on the accrual basis and pays the taxes on an estimated basis, in accordance with the trial balance for suspension or reduction. The taxes calculated on income until the month of the financial statements are recorded in liabilities or assets, as applicable. Income tax and social contribution prepayments are recorded as deferred and recoverable taxes.

Reconciliation of tax expenses and standard rates

Reconciliation of the reported tax expenses and the amounts calculated by applying the total tax rate of 34% (25% income tax and 9% social contribution) 2005 and 2004 is shown in the table below.

 

     Company     Consolidated  
     2005     2004     2005     2004  

Income before taxes

   2,434,448     2,018,443     2,433,294     2,016,620  
                        

Social contribution

        

Social contribution expense

   (219,100 )   (181,660 )   (218,997 )   (181,496 )

Permanent differences:

        

Equity pick-up

   (2,924 )   (7,644 )   (1,605 )   (42 )

Unclaimed interest on capital

   (6,557 )   (4,054 )   (6,557 )   (4,054 )

Tax rate difference in transferred tax credit (Note 6)

     6,657       6,657  

Tax credit on social contribution loss not set up by subsidiaries

     —         (5,237 )

Nondeductible expenses, gifts, incentives and dividends received

   (4,119 )   (1,930 )   (5,251 )   (3,981 )
                        

Social contribution expense in the statement of income

   (232,700 )   (188,631 )   (232,410 )   (188,153 )
                        

Income tax

        

Income tax expense

   (608,612 )   (504,611 )   (608,324 )   (504,155 )

Permanent differences:

        

Equity pick-up

   (8,121 )   (21,233 )   (4,457 )   (115 )

Unclaimed interest on capital

   (18,215 )   (11,263 )   (18,215 )   (11,263 )

Tax credit on income tax loss not set up by subsidiaries

   —       —       —       (14,549 )

Nondeductible expenses, gifts, incentives and dividends received

   (11,417 )   (5,086 )   (14,505 )   (10,766 )

Other items

        

Incentives (cultural, meals and transportation)

   6,564     4,930     6,564     4,930  
                        

Corporate income tax expense in the statement of income

   (639,801 )   (537,263 )   (638,937 )   (535,918 )
                        

Total (corporate income tax + social contribution)

   (872,501 )   (725,894 )   (871,347 )   (724,071 )
                        

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

28. Income Tax and Social Contribution (Continued)

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

 

29. Related-Party Transactions

The principal balances with related parties are as follows:

 

Consolidated

   Atento
Brasil S.A.
    Grupo
Brasilcel
(VIVO)
    Telefônica
Public.
Inform.
Ltda.
    Energia
Brasil Ltda.
    Telefônica
S.A.
   Cia
Telecomun.
de Chile
Transm.
Regionales
S.A.
    Telefónica
de Argentina
S.A.
    Telefónica
de España
S.A.
    Telefônica
Empresas
S.A.
 

Assets

                   

Current assets

   11,549     151,283     6,087     172     2,844    1,025     2,009     2,005     16,796  
                                                     

Trade accounts receivable, net

   6,777     149,857     279     60     —      836     2,009     2,005     14,273  

Other recoverable amounts

   —       —       —       —       —      —       —       —       —    

Other

   4,772     1,426     5,808     112     2,844    189     —       —       2,523  

Noncurrent assets

   —       —       4     30     256    —       —       —       3,181  

Other

   —       —       4     30     256    —       —       —       3,181  
                                                     

Total assets

   11,549     151,283     6,091     202     3,100    1,025     2,009     2,005     19,977  
                                                     

Liabilities

                   

Current liabilities

   41,860     201,410     2,046     7     —      886     2,125     3,829     20,077  
                                                     

Trade accounts payable

   41,858     201,410     230     —       —      886     2,125     3,829     20,058  

Interest on capital

   —       —       —       —       —      —       —       —       —    

Consignments on behalf of third parties

   —       —       665     —       —      —       —       —       —    

Other

   2     —       1,151     7     —      —       —       —       19  

Noncurrent liabilities

   —       —       3     3,324     —      —       —       —       12,818  
                                                     

Other

   —       —       3     3,324     —      —       —       —       12,818  
                                                     

Total liabilities

   41,860     201,410     2,049     3,331     —      886     2,125     3,829     32,895  
                                                     

Statements of income

                   

Revenue

   10,121     202,077     485     527     —      594     3,343     —       120,365  
                                                     

Telecommunications services

   10,121     164,204     485     312     —      594     3,343     —       120,365  

Financial income

   —       —       —       —       —      —       —       —       —    

Other operating revenue

   —       37,873     —       215     —      —       —       —       —    

Costs and expenses

   (238,140 )   (1,755,319 )   (833 )   (235 )   —      (447 )   (4,047 )   (3,783 )   (234,241 )
                                                     

Cost of services provided

   (56,960 )   (1,718,652 )   —       (235 )   —      (447 )   (4,047 )   (3,783 )   (123,677 )

Selling

   (180,383 )   (36,043 )   (833 )   —       —      —       —       —       (107,384 )

General and administrative

   (797 )   (624 )   —       —       —      —       —       —       (3,180 )

Other operating expenses

   —       —       —       —       —      —       —       —       —    

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

29. Related-Party Transactions (Continued)

 

Consolidated

   Terra
Networks
Brasil S.A.
    Telefônica
Gestão de Serv.
Comp. do Brasil
Ltda.
    Telefónica
Internacional
S.A.
    SP
Telecom.
   Telefônica
Pesquisa e
Desenv. Ltda.
    Other     Total 2005     2004  

Assets

                 

Current assets

   6,512     12,662     18,318     —      173     1,225     232,660     363,993  
                                               

Trade accounts receivable

   5,571     14     —       —      —       233     181,914     283,101  

Other recoverable amounts

   —       6,500     —       —      —       —       6,500     10,609  

Other

   941     6,148     18,318     —      173     992     44,246     70,283  

Noncurrent assets

   22     2,129     187     —      97     3,893     9,799     15,942  

Other

   22     2,129     187     —      97     3,893     9,799     15,942  
                                               

Total assets

   6,534     14,791     18,505     —      270     5,118     242,459     379,935  
                                               

Liabilities

                 

Current liabilities

   17,707     8,682     277,436     67,342    28,491     4,276     676,174     277,056  
                                               

Trade accounts payable

   17,689     8,682     —       —      28,482     3,910     329,159     239,326  

Interest on capital

   —       —       216,404     67,342    —       —       283,746     —    

Consignments on behalf of third parties

   —       —       —       —      —       —       665     1,020  

Other

   18     —       61,032     —      9     366     62,604     36,710  

Noncurrent liabilities

   8     124     —       —      1     489     16,767     54,042  
                                               

Other

   8     124     —       —      1     489     16,767     54,042  
                                               

Total liabilities

   17,715     8,806     277,436     67,342    28,492     4,765     692,941     331,098  
                                               

Statements of income

                 

Revenue

   80,428     2,552     —       —      —       3,259     423,751     378,101  
                                               

Telecommunications services

   80,428     902     —       —      —       3,259     384,013     332,361  

Financial income

   —       798     —       —      —       —       798     427  

Other operating revenue

   —       852     —       —      —       —       38,940     45,313  

Costs and expenses

   (69,879 )   (67,415 )   (25,835 )   —      (8,654 )   (3,648 )   (2,412,476 )   (2,533,976 )
                                               

Cost of services provided

   (44,740 )   (172 )   —       —      (3,538 )   (2,387 )   (1,958,638 )   (2,044,841 )

Selling

   (24,700 )   (374 )   —       —      (4,376 )   (876 )   (354,969 )   (296,487 )

General and administrative

   (439 )   (66,869 )   (25,835 )   —      (740 )   (385 )   (98,869 )   (104,830 )

Other operating expenses

   —       —       —       —      —       —       —       (87,818 )

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

29. Related-Party Transactions (Continued)

 

    Revenue from telecommunications services comprise mainly billings to Telefônica Empresas S.A. for subscriptions, rent of infrastructure and traffic payment; to Atento Brasil S.A. for subscriptions and others; to Terra Networks Brasil S.A. for subscriptions and Speedy; to Brasilcel Group companies (VIVO) for services related to subscriptions, use of network and others. Most of telecommunications services are subject to tariffs and conditions regulated by ANATEL. For services not subject to a regulated tariff, prices equivalent to those available to third parties are applied.

 

    Other operating income includes principally IP Network and Speedy Link equipment rented to Telefônica Empresas S.A. since January 2004 and network infrastructure rented to Telesp Celular S.A.

 

    Cost of services provided and selling expenses refer mainly to services provided by Atento Brasil S.A. for call center services related to client calls and sale of products and services, retention and collection of past due bills, etc.; by Telefônica Gestão de Serviços Compartilhados do Brasil Ltda., related to management of assets, logistics and transportation; and by Terra Networks Brasil S.A., related to placement of ads, sales commissions and others. Also worth mentioning are traffic services (mobile terminal) and commissions provided to Brasilcel Group companies (VIVO). Inputs related to telecommunications services are governed by ANATEL. Other inputs are acquired under conditions equivalent to those practiced by other companies in the respective sectors.

 

    General and administrative expenses refer to management services provided by Telefônica Gestão de Serviços Compartilhados do Brasil Ltda. in the accounting, financial, human resources, IT, assets and logistics areas; and management fees calculated up to the limit of 0.2% on net revenue, payable to Telefónica Internacional S.A. The contracts and conditions related to management fees were negotiated on occasion of the Company’s privatization auction.

 

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

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

30. Post-Retirement Benefit Plans

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

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

The process of transfer of the Telesp Visão and Telesp PBS plans was approved by the Social Security and Supplementary Benefits Office through publication of Official Letters No. 49/DEPAT/SPC and 50/DEPAT/SPC, dated January 12, 2005, respectively.

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

Telesp individually sponsors a defined retirement benefit plan (PBS Telesp Plan), which covers less than 1% (0.92%) of the Company’s employees. In addition to the supplemental pension benefit, health care (PAMA) is provided to retired employees and their dependents, at shared costs. Contributions to the PBS Telesp Plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. Costing is determined by the capitalization method and the sponsor’s contribution is 6.93% of payroll of employees covered by the plan, of which 5.43% is allocated to fund the PBS Telesp Plan and 1.5% to the PAMA Plan.

In view of the favorable results from Telesp´s PBS Plan, exceptionally in 2006 there will be not contributions for Past Service.

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

30. Post-Retirement Benefit Plans (Continued)

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

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

During 2005, the Company made contributions to the BPS Telesp Plan in the amount of R$444 (R$285 in 2004) and to the Visão Telesp Plan in the amount of R$23,585 (R$20,657 in 2004).

A. Telecom individually sponsors a defined contribution plan similar to that of Telesp, the Visão Assist Benefit Plan, which covers about 49% of its employees. A. Telecom total contributions to this plan was R$312 (R$225 in 2004).

The actuarial valuation of the plans was made in December 2005 and 2004 based on the employees’ data as of November 2005 and September 2004, respectively, and the projected unit credit method was adopted. Actuarial gains or losses for each year were immediately recognized in each of the periods. The plans assets relate to November 30, 2005 and 2004. For multiemployer plans (PAMA and PSB-A), apportionment of the plan assets was made based on the sponsoring entity’s actuarial liabilities in relation to the plans’ total actuarial liabilities.

The status of the plans as of December 31, 2005 and 2004, whose liabilities are recorded in the caption “Other Liabilities” (Note 19), is as follows:

 

Plan

   2005    2004

PBS / Visão Telesp / CTB

   21,857    25,734

PAMA

   23,106    18,917
         

Total Company

   44,963    44,651

Liabilities - Visão Assist

   —      87
         

Total Consolidated

   44,963    44,738
         

 

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TELECOMUNICAÇÕES DE SÃO PAULO S.A. – TELESP

NOTES TO FINANCIAL STATEMENTS (Continued)

December 31, 2005 and 2004

(In thousands of reais)

 

30. Post-Retirement Benefit Plans (Continued)

 

  a) Reconciliation between assets and liabilities

 

     2005  
     PBS/Visão-
Telesp/CTB
    PAMA
(i)
  

PBS-A

(i) (ii)

    Visão
Assist
 

Total actuarial liabilities

   108,323     77,961    831,651     195  

Fair value of assets

   109,948     54,855    1,077,350     341  
                       

Liabilities (assets), net

   (1,625 )   23,106    (245,699 )   (146 )
                       

Unrecorded surplus

   23,482     —      245,699     146  
                       

Liabilities recorded in the balance sheet

   21,857     23,106    —       —    
                       
     2004  
     PBS/Visão-
Telesp/CTB
    PAMA
(i)
  

PBS-A

(i) (ii)

    Visão
Assist
 

Total actuarial liabilities

   114,700     75,388    768,752     257  

Fair value of assets

   98,606     56,471    999,710     170  
                       

Liabilities (assets), net

   16,094     18,917    (230,958 )   87  
                       

Unrecorded surplus

   9,640     —      230,958     —    
                       

Liabilities recorded in the balance sheet

   25,734     18,917    —       87  
                       

(i) Refers to the proportional share of Telesp in the assets and liabilities of the PAMA and PBS-A multiemployer plans.
(ii) Despite the surplus of PBS-A as of December 31, 2005 and 2004, no asset was recognized by the sponsor in view of the legal impossibility of reimbursement of such surplus, in addition to the fact that this is a noncontributory plan, which does not enable reduction of the sponsor´s contributions in the future.

 

  b) Total expenses recognized in income

 

     2005  
     PBS /Visão
Telesp/CTB
    PAMA    

Visão –

Assist

 

Current service cost

   120     41     32  

Interest cost

   8,875     8,321     26