MESSAGE FROM THE BOARD

Transcription

1 MESSAGE FROM THE BOARD To our Shareholders The Board of Directors of TELE NORTE LESTE PARTICIPAÇÕES, complying with legal and statutory requirements, submits to your appreciation the Annual Report, accompanied by the Financial Statements of the Company, as well as the consolidated statements including the operations of direct and indirect subsidiaries, and the reports of Independent Accountants and the Audit Committee, for the year ended December 31, CONSOLIDATING OUR STRATEGY The year of 2003 saw the further consolidation of TELE NORTE LESTE ("Telemar") as the leading Brazilian telecommunication company, by pursuing the strategic plan implemented following the acquisition of its share control in 1998, designed to turn a heterogeneous group of fixed-line basic services providers into a single corporation providing integrated telecommunication services. At the time of its privatization in 1998, Telemar engaged essentially in the local voice segment and a limited range of long-distance and data communication services, through 16 concessionary companies, within its original service region, generating consolidated gross revenues of R$ 6.9 billion and consolidated gross revenues of R$ 5.2 billion. A number of challenges identified in this early period were promptly addressed by the Company management, such as: Changing and integrating the cultural, administrative and operating patterns of the 16 operating companies controlled by Tele Norte Leste Participações; Adjusting the existing structures to the framework of a private institution seeking to maximize the return on past and future investments; Fully complying with the contractual universal service and quality improvement commitments; Expanding the product portfolio so as to meet the pent-up demand, while taking advange of potential oportunities in the market; and Preparing the organization to the forthcoming competitive environment, focusing on the quality and differentiation of products and services, as well as planning the entry in other markets and country regions. Five years later, the administrative, structural and cultural consolidation was completed, technologies, systems and process were integrated, through the reorganization of the 16 concessionaire companies into a single company, Telemar Norte Leste. Throughout this period, Telemar has made heavy investments, some of them unprofitable, in a scenario of uncertainties and high financial costs, in order to accomplish the covenants of the concession agreement. As a result of such investments, the telephone line supply was significantly enlarged and services and assistance provided to our customers were highly improved. All universal service targets were accomplished two years earlier than required; quality targets set by Anatel were also fully complied with. Main Quality Anatel target Rate in Targets for Dec/03 Dec/03 Call completion rate within 10 seconds - morning 93.00% 95.64% Dial tone within 3 seconds - morning 98.00% 99.60% Address change rate 3 days 96.00% 99.68% Network congestion rate DLD - morning 5.00% 1.88% Billing complaints (per 1000 bills issued) 3.00% 2.46% Digitalization rate 85.00% 98.52%

2 In June 2003, the Company announced its decision to renew the concession agreement under the same terms as the July, 1998 agreements. New conditions for the second concession period, beginning January 2006 for a 20-year period, shall take into account Brazil s socioeconomic scenario and the effective market demand. The economic/financial health of the incumbent companies is a sine qua non condition to enable the new technology advances required from the companies during the next agreement period. Following the accomplishment of universal service targets, in mid-2002 our operations were expanded to include the entire Brazilian territory, providing data communication and national and international long-distance services. Additionally, we started our wireless operations, through TNL-PCS, under the Oi brand. The launch of the Oi brand and the development of innovative products and services translated into significant operating results as early as in the first year of activities. Oi was the third entrant in the wireless market, in competition with global players. Despite this, it took Oi a little more than 18 months to reach over four million subscribers, proving itself a world success case and becoming the benchmark for several of its direct competitors. In certain states within its Region, Oi has become the second largest wireless provider. In 2001, our call center business unit, Contax, started operations to become, within a short period, the second largest and fastest-growing company in this segment, with approximately 28 thousand employees and 12 thousand attending positions, which is equivalent to 25% of total positions in Brazil. At the end of 2003, we had more than 19 million customers and a group of companies, which, together, provide telecommunication services and integrated solutions in accordance with regulatory limits. Our activities include local voice (wireline and wireless), long-distance (national and international), data communication, and call center services on a nationwide basis, broadband access to the Internet, as well as making our infrastructure available to other telecom companies and Internet providers. Our total consolidated annual revenues totaled R$ 19.4 billion (gross) and R$ 14 billion (net), up 175% from 1998 figures. During the year, taxes, charges and contributions paid by Tele Norte Leste subsidiaries amounted to more than R$ 5.5 billion, or 39.6% of our consolidated net revenues and 3.6 times our investments. The Company was not authorized to implement the rate increases provided for in the concession agreement, which brought about heavy losses for the Company and proved harmful to the country, as a result of the uncertainties and regulatory risks arising from this decision. We are currently seeking to enforce our contractual rights at all judiciary levels, in order to recover the losses incurred. Challenges to be faced by Telemar during 2004 are, in fact, opportunities to create value. We will continue to expand our wireless activities, while pursuing the following ongoing goals: Increasing operating and administrative efficiencies; Optimizing the existing synergies, in compliance with regulatory limits; Strengthening the management abilities of the individual business units; and Developing new market oportunities, in particular in the corporate segment. To expand our operations and grow the results of our companies, we must implement creative and innovative solutions to meet the requirements of each one of the market segments. The key drivers to accomplish such goals are the knowledge and competence of our employees and leadership team; the management style implemented over the past two years; the innovative skills of our organization; and the financial structure of our Company Economic Environment For the third consecutive year, the performance of the Brazilian economy was quite modest, with virtually no GDP growth. The strong depreciation of the local currency, as from the second half of 2002, followed by the increased inflation indices during the first half of 2003, led the economic authorities to adopt a tight monetary policy. Accordingly, the basic interest rate (Selic) reached the 26.5% annual level between February and May, with a significant adverse

3 impact on economic activity, employment, income, and financial cost levels for all economic agents. The negative perception of the Brazil prevailing at the end 2002 and beginning of 2003 among investors in general and foreign investors in particular gradually improved as the direction of the economy emphasized fiscal austerity, public accounts balancing and relentless combat against inflation increases. In fact, the foreign exchange rate recoiled to levels significantly below those seen at the beginning of the year. By year-end, the U.S. dollar was valued at R$ 2.90, down from R$ 3.53 on January 1; inflation measured by IGP-DI declined from 26.4% p.a. in Dec/02 to just 7.7% p.a. in Dec/03, the lowest level since 1998, after annual fluctuations of 30.0% in May; the basic interest rate was cut to 16.5% p.a. in December, compared to 26.5% p.a. between February and May; the country risk based on EMBI- Emerging Markets Bond Index decreased from 1,446 points as of December 31, 2002 to only 468 points at the end of 2003, the lowest since May 1, 1998; Ibovespa appreciated by 97% during the year, and the trade balance surplus reached US$ 24,8 billion, the highest level ever. The environment in the beginning of 2004 is more promising, where domestic macroeconomic conditions, coupled to the international market recovery, suggest a return to normal economic levels and asset (both financial and real property) value, which experienced a significant depreciation over the past three years. While this year will certainly be even more challenging for all economic agents, opportunities for new expansion and new businesses will also be available. 3 - THE TELECOMMUNICATION SECTOR At the end of 2003, the Brazilian telephone plant reached the estimated total of 85.6 million lines in service, of which 46.4 million are wireless lines and 39.2 million are fixed lines, a 16% increase on Such growth related mainly to the wireless plant (+33%), which, as was the case in several countries, has exceeded the fixed-telephone plant, accounting for 54% of all telephones (fixed and mobile) in service in the country. The strong decline in the Brazilian economy, in particular in the past few years, directly impacting the available income, was the main reason for the modest increase (1%) in the number of fixed-line telephones in service during the year. Pent-up demand existing at the time of the Company privatization has already been fully met, considering the current economic activity level. For A and B income classes, the teledensity rate is approximately 100%, while for C class it is above 90%, and for D class it is around 52%, according IBGE estimates (PNAD 2002).

4 Wireline Business Lines in Service - Mn Over the past five years, as provided for in the related agreements, the Company made heavy investments in order to provide universal access to telecommunication services. In fact, the fixed-line plant grew from 22.0 million lines installed in 1998 to 49.8 million now, with an idle capacity of 10.6 milllion lines, or 21% of the installed plant. Public telephones increased from 580 thousand to 1.4 million during the period. The wireless platform rose by 517%, from 7.4 million lines at the end of 1998 to 46.4 million now. Any further expansion in the number of fixed-line users will have to consider the country s structural and economic characteristics, that is: (a) continental geographic size; (b) deep regional differences; (c) extensive socioeconomic differences, with income concentration; and (d) high capital cost, among others. The desirable competitive environment has been gradually implemented in all telecommunication services. This is already the case in the wireless, data communication and long-distance services, where several players, whether mirror companies or nationwide concessionaires, operate and compete for customers. Wireless Business Accesses in Millions With respect to local services, the bulk of competition comes undoubtedly from wireless companies, as a result of the recent jump in their customer base. This was confirmed by the most recent National Survey by Household Sampling (PNAD), conducted in 2002, showing that approximately 8.9% of Brazilian households use wireless lines only. The next growth stage of basic voice fixed-line services will only materialize with the resumption of economic expansion and, most importantly, the increase in income levels of those social segments yet lacking access to telecommunication services. Such stage also bears a close relationship with the increase in Internet access, as well as potential tax benefits to be granted

5 by government agencies, to allow for the access of the lower income population to these services. Low income levels and, more importantly, the high tax burden on consumers, are the main obstacles that hinder the addition of new users to the fixed-telephone market. The average density of the fixed-telephone plant, measured by the number of lines in service as a percentage of the country population, remained unaltered from the previous year, at 22%. Regarding the wireless plant, the ratio is above 26%, a level expected to be reached only by the end of Penetration Rate (%) - Brazil Wireless Business Wireline Business Estimate It is estimated that the density of the wireless plant will reach approximately 34% by 2008, with a marginal growth to around 23% density for the fixed-line plant in service. On the other hand, new services and diversified tariff plans have been launched by the telephone companies in order to meet the current consumption profile. The expansion in broadband accesses to the Internet, for example, significantly increased over the past two years, and will certainly continue to expand in the near future.

6 In mid-2002, additional wireless companies using GSM technology entered the market, giving rise to enhanced competition and a dramatic increase in the number of new customers 11.5 million in only one year. At the end of 2003, the customer base comprised 46.4 million users, compared to 34.9 million in Dec/02 Dec/03 3 CDMA 32.9% GSM 4.9% AMPS 2.3% GSM 14.8% AMPS 1.3% TDMA 60.0% CDMA 30.2% TDMA 53.7% Only 18 months after its launch, the GSM technology already accounts for 14.8% of the country s wireless plant, compared to 4.9% in the previous year. It should be noted that more than 76% of wireless customers subscribe to prepaid plans, while 24% subscribe to postpaid plans. In 2003, the ongoing concentration process in the wireless segment saw further advances, with the transfer of the share control of certain companies. At this moment, only six groups are active in this market. One of them is Oi, which is beginning to consolidate its position, holding a 18.4% share in the Region I market. Telefonia Móvel - Teledensidade Brasil Dec/03 Brazil - 26% 72 Region II - 31% 45 Region I - 22% Region III - 32% RJ MG ES AM RR PA AP PE RN SE AL CE PB BA PI MA SP DF MS MT GO PR SC RS RO AC TO

7 In Brazil, the 26% wireless density is still very low compared to other countries with similar socioeconomic structures, as a result of regional differences. This fact also points to untapped expansion opportunities. In only three Brazilian states the Federal District, Rio de Janeiro and Rio Grande do Sul - the wireless penetration rate is above 40%. In 12 states, this rate is below 20%. Within the 16 states comprising Oi s operational area, only Rio de Janeiro has a penetration rate exceding the national average. 4 OPERATIONAL PERFORMANCE At the end of 2003, the subsidiaries of TELE NORTE LESTE PARTICIPAÇÕES had 19,040 thousand customers, 2,564 more than in Dec/2002. For the most part, such growth arises from Oi s activities, whose customer base increased by 2,492 thousand customers (+178%), while our fixed-line plant in service rose by only 72 thousand units. Despite the small rise in the customer base of TMAR, it should be noted that during the year around 140 thousand lines, including administrative, public and ISDN, were disconnected and replaced with other lines with increased value-added services, that were developed to meet our customers needs. Wireline services The fixed-line network of Telemar Norte Leste totaled 17,382 thousand installed lines in Dec/2003, a decrease by 138 thousand units compared to Dec/2002, primarily due to the withdrawal of analogic lines from our switches. The plant in service comprised 15,147 thousand lines, increasing by 72 thousand lines on the previous year figure (15,075), with a usage rate of 87.1%, a slight rise on the prior year (86.1%). Lines Installed and Lines in Service - Mn Lines in Service Lines Installed Source: Telemar In spite of the small expansion in lines in service, Telemar implemented its strategy to add value to its services, while offering new products of increased value added, designed to meet the specific needs of each market segment. Accordingly, in addition to intelligent services, such as follow me, P.O. box, call on hold, conference call, among others, the Company developed products targeted at customers requiring a stricter control over the use of their phones, including "fale 100", "fale 200",

8 enabling users to set monthly usage limits, or service restriction, for fixed-to-mobile and longdistance calls. The offer of advanced voice products was also emphasized, aiming at enhancing the loyalty and retention of large, mid-sized and small corporate customers, by reducing their expenses and, simultaneously, modernizing their infrasctructures and improving their communications with customers. The advance voice portfolio includes: VoiceNet, which enables phone contact among company branches and internal extensions, without originating telephone calls; the 0800 service, which allows for direct contact with customers seeking information from companies or institutions; Intervox, intended for closed condominiums to centrally manage telephone calls; Digitronco, an access means which replaces several external lines with a single one, with improved PBX management and reduced costs. During the year, our efforts focused on increasing our share in the corporate segment and expanding national and international long-distance services, whose revenues rose by 43.4% in the period and already account for 15% of our consolidated gross revenues ( %). Interregional and international calls exhibited the best performance, with annual revenue expansion by 412% and 443%, respectively, witnessing to our significant market share gains. As all wireline companies which migrated to SMP (Personal Wireless Services) must now use the carrier selection codes, Telemar has become leader in terms of traffic originated by wireless phone users in our Region. We have also significantly expanded our broadband access offer to our customers, through Velox (ADSL technology), the user base of which grew by 417% to reach 217,203 customers at the end of 2003, from 41,975 customers in Dec//2002. Customers using this service can access the Internet at speeds ranging from 256 Kb to 2Mb, depending on the user needs. Broadband Accesses Th % % 47% 59% 76% 86% ADSL (Velox) 63% 53% 41% 24% 14% ISDN (DVI) dec/02 mar/03 jun/03 sep/03 dec/03 Sourrce:Telema r In addition, approximately 36,001 customers used our DVI service (ISDN technology) for fast access to the Internet, at the maximum speed of 128 Kb. As a result of the acquisition of the share control of Pegasus, in Dec/2002, Telemar increased its share in the corporate market on a nationwide basis, taking part in public and private competitive bids, in particular with respect to outsourcing of private networks. This has significantly helped out Company to acquire new customers and earn additional revenues. New agreements were signed during the year, including deals with Banco ABN-Amro, TAM, GOL, Globex, Banco do Brasil, CEF - Caixa Econômica Federal and VisaNet. Of the total lines in service, 14,485 thousand were individual accesses, including 11,686 thousand residential customers and 2,799 thousand commercial customers. Our collective access

9 plant public telephones comprised 662 thousand units in service at the end of 2003, accounting for half the total of public telephones (TUP s) existing in the country in Dec/2003. Wireless Services Oi, created only eighteen months ago, has maintained its fast growth rate and ended up the year with 3,893 thousand customers, of which 2,492 thousand were acquired during 2003 (+ 178%). Customers base Evolution - Thousand 3, % 2,849 Post-paid 1,401 1,722 80% 78% 2,236 80% 80% 83% Prepaid dec/02 mar/03 jun/03 sep/03 dec/03 In Dec/2003, Oi s customer base included approximately 17% under postpaid plans and 83% under prepaid plans. At the end of 2003, Oi was present in around 592 municipalities and the main cities in the 16 states within Region I, with 3,141 radio base stations (ERBS), of which 1,604 were exclusive ones, and the remaining 1,537 were shared with other companies with operations in the region. At present, 163 international roaming agreements are in place between Oi and companies of 96 countries, enabling our customers to use their Oi handsets while travelling to those countries. Oi renders a similar service to GSM users visiting Brazil. In the course of its 18-month operations, Oi s strategy focused on: Strengthening and consolidating the Oi brand, recognized today throughout the country; Strongly expanding its customer base, while keeping acquisition costs under control; Optimizing capital expenditures in order not to subject its invested capital to heavy burdens; Continuously improving the coverage area and the service quality; Expanding the product and service portfolio so as to maintain its leadership position in the acquisition of new wireless subscribers within Region I; Optimizing the synergies with other Telemar companies, in accordance with regulatory limits; Maintaining costs and expenses under strict control, so as to become profitable as soon as possible. Market Share % - Region I % Oi 18.4% Oi 91.2% 81.6%

10 With a history of only 18 months, Oi was able to gain a market share of approximately 18.4%, considering all Region I companies, compared to 8.8% in Dec/2002. Oi s customer base already accounts for 8.4% of the country s wireless platform. Contact Center Services Contax s activities include the entire Brazilian territory, with 12 sites and 28,032 employees in December of This company was formed to: (a) improve the quality of services provided to Telemar and Oi customers, offering a single, focused structure; (b) reduce customer service costs for other Tele Norte Leste subsidiaries; (c) tap the promising call center market; and (d) provide integrated services, moving to the next stage in the corporate market value chain. In addition to its associated companies Telemar and Oi, Contax has currently 27 clients engaged in a wide-ranging economic activity spectrum, from financial institutions, utilities, insurance companies, cable TV, retail chains, to post office companies. Contax has performed extremely well. It has been the fastest-growing call center company almost since its inception in January 2001, capturing more than 50% of all new deals in the sector. 42 M MM Minutes/month e ,924 2 MM 43 MM , , MM , ,907 Employees , ,947 PAs 331 At the end of 2003, Contax had 12,907 attending positions (PAs), compared to 7,337 in the previous year, handling approximately 50 million calls/month. The company recorded net revenues of R$ 421 million in 2003, increasing by 99% compared to R$ 212 million in the prior year. Contax was responsible for the greatest number of new jobs created in the country over the past three years and is currently one of the 15 largest employers in Brazil. Approximately 72% of its employees are women aged 26 years on average. Contax is also important as a developer of talented youth: the company is the first employer for over 7,000 thousand employees, and its investments in skill-building programs amount to more than R$ 35 million. All operators receive training in information technology and call handling techniques. More than 7,200 employees were promoted over the three past years, as part of an agressive internal development program. Contax has recently been chosen by the ATENDER BEM site as the best industry sector to work for.

11 5 ECONOMIC AND FINANCIAL PERFORMANCE - (CONSOLIDATED) Revenues In 2003, consolidated gross revenues reached R$ 19,427 million, a 20.7% increase on the amount of R$ 16,091 million in the prior year. Significant contributors to such rise were revenues from wireless services (+180.2%), national and international long-distance (+43.4%), including fixed-to-mobile (VC2 and VC3), and data communication (+30.6%), the latter boosted by the acquisition of the share control of Pegasus, which enabled Telemar to operate on a countrywide basis in this market segment. As a result of the strong economic downturn in Brazil, virtually all measured services showed a traffic volume decrease compared to the previous year. The volume of traffic increased only in connection with wireless and long-distance services, on account of continuous market share gains. Gross Revenue x Net Revenue (R$ Bn) Gross Rev. Net Revenue For the first time since privatization, the Company was not authorized to adjust local and longdistance service rates in accordance with the IGP-DI index, as set forth in the concession agreements, although Anatel had approved the new rates exactly as provided for in the agreements. A number of temporary injunctions granted by courts in several country states prevented the application of the index (IGP-DI) as established in the concession agreement. Bearing in mind the best interests of its shareholders and employees, and in full compliance with the decision of the Incumbent Federal Judge of the 2 nd Federal Court, determining that the IPC-A be used as index for tariff adjustments, Telemar management, confident in the fairness of Brazilian justice, continues to try to reverse this situation by availing itself of judicial remedies. The failure to apply the wireline tariff reajustment index agreed-upon at the time of the privatization had material adverse impacts on the Company s revenues and profitability in 2003, and prompted management to review its short- and mid-term strategies and investment plans. As a result primarily of the growth in wireless operations, as well as the exploration of national long-distance services, the relative position of the Company revenues was significantly altered when compared to 2002, as shown in the graph below:

12 Consolidated Gross Revenue - Breakdown % 8% 4% 6% 11% 11% 8% 3% 4% 6% 9% 13% 8% 7% 4% 6% 6% 15% Others* Mobile PT Data Network Usage Long Distânce (IncludesVC2/3) Local (Includes VC1) 64% 61% 57% The share of revenues from local services decreased from 64% to 57% in the course of two years. These revenues include local fixed-to-mobile calls (VC1), while long-distance revenues, which include intrastate, intraregional, interregional, international and fixed-to-mobile calls (VC2 and VC3), increased its share in gross revenues to 15% (from 11% in 2001). Revenues from wireless telecommunications, with only two years operations, already account for 7% of total revenues (3% in 2002). Although revenues from data maintained its share (6%) over the past three hears, it should be noted that the industrial dedicated line (EILD) services have continuously decreased (-22% in 2003) over the past few years. On the other hand, revenues from other services have significantly increased: ADSL (+287%), IP services (+123%), switch package and Frame Relay (+54%). Net of taxes and other deductions, consolidated Net Revenues amounted to R$ 14,003 million, a 17.9% growtn on The less significant growth in net against gross revenues is attributable to ICMS tax increases introduced by certain states in our Region, as well as the PIS tax accruing on a number of operating income accounts, including sales of handsets, infrastructure services and value-added services, among others. Considering the individual operations of the main companies, Oi recorded the highest growth (232%) among all direct and indirect Tele Norte Leste subsidiaries, accounting for 9.4% of consolidated revenues, compared to 3.3% in Gross Revenues - R$ Mn 2001 % 2002 % 2003 % 03/02 (%) TMAR Parent Co. 13, % 15,605 97% 17,845 92% 14% Oi 550 3% 1,826 9% 232% Contax 159 1% 228 1% 459 2% 101% Other* 105 1% 158 1% 415 2% 163% Subtotal % Interco. revenues (285) -2% (451) -3% (1,118) -6% Total % % 19, % 21% *includes: Pegasus, TNL Acesso, TNL Trading, AIX, HiCorp Source: Telemar In fact, parent company Telemar Norte Leste - TMAR recorded a 14.2% increase in gross revenues, chiefly due to the expanded offer of new services (long distance, data communication and ADSL accesses), and the tariff adjustment. TMAR revenues still account for the largest share (92%) in consolidated gross revenues ( %).

13 Operating Costs and Expenses (ex-depreciation and amortization) Consolidated operating costs and expenses increased by 19.3%, from R$ 6,521 million in 2002 to R$ 7,782 million in SMP handsets posted the highest growth (78.6%), due to the expansion in the sales volume of wireless lines in 2003 compared to the prior year. Interconnection costs, totaling R$ 2,531 million, up 6.8% from 2002 levels, is still the most important item, chiefly because of the wireless network usage rate increase determined by Anatel in Feb/2003. Interconnection costs accounted for 33% of total operating costs ( %). Operating Costs and Expenses (%) Interconnection 16% 26% 36% 36% 36% 33% Third-party services 43% 27% 22% 20% 25% 26% Provision for doubtful accounts (PDA) 6% 6% 5% 12% 9% 8% Personnel 26% 24% 18% 14% 12% 12% Handset cost 6% 10% Rental and Insurance 3% 3% 5% 4% 7% 6% Other 6% 14% 15% 14% 4% 6% Total 100% 100% 100% 100% 100% 100% Total (R$ Mn) 3,473 3,522 4,537 6,545 6,521 7,782 Source: Telemar Personnel expenses increased by 14.2%, as a result of the increased number of Contax employees arising from the expansion in PAs to service new contact center clients. The Provision for doubtful accounts (PDA) totaled R$ 598 million, decreasing by 3% compared to 2002 and accounting for 3.1% of gross revenues for the year. PBD - % from Gross Revenue 5.7% 1.6% 2.5% 2.0% 3.8% 3.1% It should be pointed out that this provision had been reduced by 20.8% in the previous year, as a result of measures taken by management at the beginning of the year aimed at bringing down the delinquency levels. Operating Resultss Consolidated EBITDA - earnings before interest, taxes, depreciation and amortization amounted to R$ 6,221 million, up 16.2% on prior year levels. The EBITDA margin was 44.4% of Net revenues, in line with 2002 (45.1%).

14 EBITDA Consolidated (R$ Mn) 29.8%aa 6,221 5,353 4,032 3,558 2,735 1, Source: Telemar As to the individual performance of subsidiaries, for the first time Oi s EDIBTDA was positive, at R$ 107 million, primarily as a result of non-recurring income recorded during the year, compared to the negative EBITDA of R$ 303 million in the prior year. Telemar Norte Leste, the parent company, recorded a R$ 5,921 million EBITDA, up 4.4% from the previous year, chiefly due to the growth in income from new services, and EBITDA margin of 46.2%, in spite of tariffs having been risen by lower rates than those provided for in the concession agreement. Contax continue to maintain the good performance shown in its first year of operations, with a consolidated EBITDA of R$ 54 million, a 184% increase on 2002, and margin of 15.6% in 2003 ( %). EBITDA - R$ Mn Companies /02 (%) TMAR parent company 3,463 5,674 5, % Oi1 (303) 107 TNL-Contax % Other companies 2 (40) (37) 139 Total - consolidated 3,440 5,353 6, % 1 Start-up in Jun/02 2 Includes Pegasus, TNL Acesso, TNL Trading, AIX, HiCorp. Financial Income Although the average net debt was below the previous year figure, financial results were strongly affected by the high interest rates prevailing in Consolidated financial expenses, net, amounted to R$ 2,106 million, a 4.0% increase from the prior year (R$ 2,024 million). During 2003, the appreciation of the Real against the U.S. dollar led to modest financial gains, as almost 100% of the debt denominated in foreign currency was hedged by swap contracts, and therefore converted into local currency and subject to CDI-based interest rates. Net Results Consolidated net results for the year, after taxes, contributions, minority interests and profit sharing, amounted to R$ 213 million, compared to a R$ 416 million loss in 2002, and corresponding to a net income of R$ 0.56 per thousand shares. Consolidated results for 2003 arise from the maturity of investments made in previous year to settle contractual commitments, including the entry in the wireless market, as well as the successful strategy implemented by the Company, that ensured the growth in revenues, primarily from new services offered from mid-2002 onwards, coupled to a strict operating costs and expenses reduction program.

15 Consolidated Results - R$ Mn Gross revenues 13,659 16,091 19,427 Net revenues 10,103 11,874 14,003 EBITDA 3,558 5,353 6,221 Net income (loss) 140 (416) 213 Dividends Total assets 26,766 27,398 29,104 Stockholders equity 10,023 9,120 8,545 Source: Telemar Telemar Norte Leste posted consolidated net income of R$ 761 million in 2003 (vs. R$ 687 million in 2002), or a net income of R$ 2.31 per thousand shares. During the same 12-month period, Oi recorded a R$ 840 million loss (R$ 728 million loss for the six-month period of 2002), chiefly due to financial expenses and depreciation charges. 6 - EMPLOYEES At the end of 2003 the Company had a total staff comprising 37,690 people, a 32.9% increase on the previous year, mainly attributable to the expansion in Contax (formed in 2001) operating activities. The number of employees of the other group companies (TMAR, Oi, and TNL) was reduced by 6.1%, as a result of administrative efficiency improvements. Headcount Evolution 37.7 Total Contax TMAR + TNL + Oi Over the past five years, investments made only by Telemar in employee training amounted to R$ 80 million, of which R$ 34 million in During the year, Telemar continued to expand to all group companies its Management Model, developed in Results from a number process management and quality tools can already be seen in the improved customer satisfaction levels, captured in opinion surveys, and improved operating and financial indicators for our companies. The Company created the Leadership Academy, a project designed to develop its leaders ability to mobilize people and teams to implement transforming solutions. The mission of the Leadership Academy is to ensure that Telemar has the right people to lead its businesses today and in the future, by promoting the full development of the 4 dimensions of leadership, namely: Me, People, Management, and External Environment. These dimensions will enable the Telemar Leader to be a facilitator, a talent coordinator, an expert in people and creativity. During the year, this skill-building program covered 1,000 managers who are aligned with Corporate Values and the Organization Management Model, by developing specific competences to accomplish their goals and targets. To improve our managers skills, the Academy uses proprietary tools structured around pillars, such as the Center for Monitoring of Executive Performance (CAPE).

16 This is an integrated performance management system which allows for the consolidation of competences and the ongoing updating of leadership practices at Telemar, by identifying the executives potential, assessing their performance, as well as implementing programs aimed at the acquisition of individual and group abilities. The rationale behind CAPE s activities is an educational strategy designed to build leaders capable of assessing, guiding and developing new leaders. This program has been developed in partnership with the Dom Cabral Foundation. TMAR Lines in Service per Employee 1,604 1, In 2003, the fixed-line company productivity ratio improved to 1,747 lines in service per employee, from 1,604 lines in The wireless company productivity ratio was 3,673 subscribers per employee, compared to 1,656 in CASH FLOWS Consolidated cash flow from operations reached R$ 5,609.5 million, a 21.2% increase on Net of investment activities for the period, the cash flow amounted to R$ 4,025.2 million, a year-on-year increase by 74.9%. R$ Million (i) Cash flow from operations 4, ,609.5 Net income (loss) for the period (415.6) Minority interests Adjustment to reconcile income (loss) with cash 6.586, ,6 Interest and currency and exchange var. on loans and financing 2.083, ,1 Depreciation/Amortization 3, ,757.1 Provision for contingencies Other Changes in working capital (1,674.4) (1,308.3) (ii) Cash flow used in investment activities (2.326,6) (1.584,3) Cash flow after investment activities 2, ,025.2 (iii) Cash flow from financing activities (1,636.9) (647.0) Cash flow after financing activities ,378.2 Dividends/Interest on capital (IOC) (386.6) (565.4) Increase in cash ,812.8

17 Cash at the beginning of the year 1, ,512.7 Cash at the end of the year 1, ,325.5 Cash flow from investment activities includes the actual disbursements for the acquisition of fixed assets (equipment, wireless network, infrastructure), as well as the payment of the last installment relating to the acquisition of Pegasus. Cash Flow - Consolidated R$ Mn 4,025 1, (5,906) At the end of the year, the Company recorded net cash of R$ 4,325.5 million, an increase by R$2,812.8 million in Free Cash Flow, or a 185.9% increase on 2002, net of interest, dividends/ioc payments and investments made in INDEBTEDNESS At the end of 2003, the company total consolidated debt amounted to R$ 12,160 million, of which 74.7% in foreign currency. Considering the cash available at the end of the year, the Company net debt reached R$ 7,835 million, down 14.1% from the end of The generation of cash from operations, coupled to the strict cost and expense control and the execution of the capital expenditure plan within the limits set in the capital budget, were the main drivers of the significant reduction in the Company net debt in It should be stressed that at the end of the 1 st quarter of 2003, as a result of the payment of dividends and the last installment relating to the acquisit ;ion of Pegasus, the net debt had reached R$ 10,005 million, reflecting the Company efforts in order to decrease its total indebtedness. Indebtedness - R$ Mn Dec/01 Dec/02 Dec/03 Local currency (a) 3,556 40% 3,363 31% 3,111 26% Foreign currency (b) 5,382 60% 7,411 69% 9,049 74% Total debt (c)=(a)+(b)=(d+e) 8, % 10, % 12, % Short-term (d) 1,389 16% 1,769 16% 2,662 22% Long-term (e) 7,549 84% 9,006 84% 9,498 78% ( ) Cash (f) (1,234) (14%) (1,654) (15%) (4,325) (36%) Net debt = (c+f) 7,704 86% 9,121 85% 7,835 64% Source: Telemar

18 Local currency debt amounted to R$ 3,111 million in December of 2003, at an average cost of 16.0% p.a., calculated based on the CDI rate of 16.8% p.a. Foreign currency debt, net of hedging, R$ 9,049 million, at an average cost of Libor +5% p.a., for U.S.dollar-denominated contracts; 1.5% p.a. for Yen-denominated contracts; and 11% for the portion based on a basket of currencies. Approximately 96% of the foreign currency debt was hedged, as a protection against any sharp foreign currency fluctuations, thus becoming subject to the CDI variations. Total indebtedness also includes financing from BNDES (R$ 2,458 million), private banks (R$3,415 million), suppliers (R$ 224 million), and debentures (R$1,223 million) Placement of notes on the international market worth US$ 300 million, and other placements R$868 million. It should be pointed out that the amount of cash available in Dec/2003, of R$ 4,325, is 61.5% in excess of the short-term debt (maturing within 12 months). 9 - ISSUANCE OF NOTES ON FOREIGN MARKETS Tele Norte Leste Participações carried out its first, and successful, issuance of Notes worth US$ 300 million, placed on foreign markets. These Notes have a 10-year term, prepayment option as of the 5 th year, 8.25% yield per year, and coupon of 8% per year. They are also insured against political risk for 18 interest payment months, and accordingly the issue was priced at 25 base points below Brazilian government securities with similar maturity term. This successful placement reinforces the solid image built by Telemar in international markets, as the demand for the Notes was far in excess of the offer, mainly by reputed institutional investors from the United States and Europe CAPITAL EXPENDITURES During 2003, the subsidiaries of Tele Norte Leste Participações made consolidated capital expenditures totaling R$ 1,682 million, an R$ 349 million (-17%) decrease on the prior year. Such expenditures were appropriated to the expansion in the wireless network, data communication services and plant improvement and maintenance programs. Capex R$Mn 10,060 2,500 2,244 2,804 2,031 1,

19 Capex/Net Revenue % 100% 49% 36% 35% 17% 12% The Company carried out its full capex program as originally planned (R$ 1,800 million) for the whole year of 2003, reduced by R$ 118 million, as a result of reviews made during the period bearing in mind the uncertainties surrounding the economic environment. Total Capex as a percentage of net income was equal to 12% (17% in 2002), the lowest level since privatization. Of this total, R$ 1,086 million was allocated to fixed-line operations, a 5.8% increase on 2002 (R$ 1,026 million). Consolidated Telemar Norte Leste Capex amounted to only 12% of the consolidated net revenues for Contax Capex amounted to R$ 43 million, compared to R$ 60 million in 2002 (-28,3%), while the remaining R$ 554 million was appropriated to Oi, essentially for network expansion purposes, to meet the requirements of its increased customer base. Since its privatization, that is, over a five-year period, Tele Norte Leste Capex, through its subsidiaries, totaled R$ 21,321 million, or over US$10 billion at historical values. This is no doubt one of the largest capital expenditure programs ever carried out by a non-government Brazilian company EQUITY MARKETS After a long downturn lasting for almost three years, the Brazilian equity market, as was the case with most stock exchanges worldwide, partly recovered prior losses and appreciated by 97% on average during 2003, boosted by the performance of export and petrochemical companies, and most importantly by the improved perception of Brazilian and foreign investors of the direction of the country s economy. R$/per thousand shares Dec/01 Dec/02 Dec/03 Income/ (loss) per share 0.38 (1.11) 0.56 Book value Stock Price Preferred shares (TNLP4) Stock Price Common shares (TNLP3) ADR (1=1000 PN) at NYSE (US$) Performance of Telemar shares

20 At the end of 2003, Tele Norte Leste Participações preferred shares (TNLP4) were quoted at R$ per thousand shares, a 75% increase compared to 2002, and below the Bovespa index (Ibovespa) increase in Such relatively lower performance stems from regulatory uncertainties arising from the non implementation of the tariff adjustment indices set forth in the concession agreement. Common shares appreciated by 76% during the period and were traded at R$ per thousand shares at the end of It should be noted that in February of 2003, shareholders received R$ 1.35 per thousand shares as IOC interest on capital, in lieu of 200 TNL ibovespa Dec2002 = ' TNLP4 = +75% 80 dec 02 jan 03 feb 03 mar 03 apr 03 may 03 jun 03 jul 03 aug 03 sep 03 oct 03 nov /03 dec 03 dividends. In 2003, the average daily volume preferred shares (TNLP4) amounted to 3,301.7 shares, equivalent to R$ million. In Dec/2003, our ADRs American Depositary Receipts were traded at US$15.43 on the New York Stock Exchange (NYSE), a 110% appreciation year-on-year, outperforming the Brazilian market due to the strengthening of the Real against the U.S. Dollar. During the year, the average daily total volume of preferred shares traded amounted to US$ 53.4 million, of which 70% on Bovespa and 30% on NYSE. In 2002, the daily average was US$ 40.2 million (Bovespa 64%; NYSE 36%). As a result of the share performance on stock exchanges, reflecting general market trends, the Company market capitalization was in excess of US$ 6 billion in 2003, with a 113% increase over the prior year. TNL Market Value* - R$ Million 16,023 15,520 13,481 17,270 9,739 5,

21 Preferred shares (TNLP4) maintained the leadership position reached in 2001 in the IBOVESPA, as a result of the high liquidity in the Brazilian equity market. These shares now correspond to 13.66% of IBOVESPA for the period beginning on January 1, Similarly, the Company ADRs were also among the most liquid Latin American securities traded on the NYSE. 12 CORPORATE GOVERNANCE Distribution to Shareholders - Dividends and IOC In Dec/03, Tele Norte Leste Participações announced the distribution of R$ 458 million as "IOC Interest on Capital, equivalent to R$ 1.20 per thousand shares, applied to dividends for the year. Furthermore, management will also submit to the General Shareholders Meeting a resolution to distribute an additional amount of R$ 342 million as dividends, equivalent to approximatley R$ 0.90 per thousand shares. The total amount distributed to shareholders will thus reach R$ 800 million. The actual payment of dividends and interest on capital will be made after the General Shareholders Meeting where the financial statements and distribution of earnings are approved. Earning/Net Loss x Dividends/IOC R$ Million Earning/Loss Dividends/IOC (373) Capital Increase At a meeting held in April 2003, the Company Board of Directors approved a capital increase by R$ 167,606 thousand, as a result of the incorporation of a portion of the special goodwill reserve recorded in Dec/99, in accordance with CVM Instruction no. 318/99. Accordingly, the Company capital is equal to R$ 4,644,415 thousand, divided into 390,557,065 thousand shares, of which 33.3% are common and 66.67% are preferred shares. In December 2003, the Company held in treasury 4,156,100 thousand common and 4,624,337 thousand preferred shares. Considering that the controlling shareholder owns 69,415,601 thousand shares, the Company free float corresponds to 81.1% of total shares issued, net of treasury stock one of the most significant free floats among Brazilian companies. Of this total, in Dec/2003 the percentage of

22 35% was represented by ADRs traded on the New York Stock Exchange. ADRs represent 43% of the total preference shares outstanding. Corporate Structure With the transfer of the share control of TNL PCS (Oi) to Telemar Norte Leste (TMAR), Tele Norte Leste proceeded with its program to align interests and pursue its coordinated, overall strategy for the two telecommunicatin companies, while simultaneously improving their structures, within the regulatory limits, in order to optimize operating, financial and administrative synergies and create value for the Company, for the benefit of all shareholders. Corporate Structure Tele Norte Leste Participações (TNL) 100% 80,9% Call Center (TMAR) Wireline Business 100% 100% Data Transmission Mobile Business The TNL-PCS share control transfer transaction was carried out on 5/30/2003, upon approval of the respective Board of Directors of the companies involved, and based on an appraisal report issued by Ernst & Young Auditores, including the opinion of three reputed lawyers and structured by the law firm Barbosa, Müssnich & Aragão. Investor Relations As part of our fair disclosure policy implemented in 2001, we proceeded with our investor relation activities, by taking part in the most important telecommunication conferences held and outside Brazil, including the Brazil Day organized in New York. Additionally, we ran three roadshows in the U.S. and Europe, to familiarize investors with Telemar. In the course of the year, we held four conference calls with analysts and investors, to discuss quarterly results and the transfer of Oi s control to Telemar Norte Leste. We held a meeting with ANIMEC and an annual meeting with APIMEC members, transmitted simultaneously via Webcast and teleconference, providing for online interactions by any individual, both from Brazil and abroad. Disclosure Committee As part of the corporate governance tools implemented in prior years, including the fair disclosure policy and the Code of Conduct and Transparency, in 2003 the Disclosure Committee was established, to conform the Company structure to the recommendations set forth in the

23 Sarbanes-Oxley Act, which aims at adjusting our policy and administrative procedures in connection with the disclosure of information on the Company and its subsidiaries to the equity markets inspection and control bodies (CVM, Bovespa, SEC, NYSE), participants of these markets and, most importantly, our shareholders. The Disclosure Committee, comprised by the Legal, Controller, Internal Audit, Finance and Investor Relations Officers, complies with articles 302 and 906 of the above mentioned Act, in particular regarding the internal discipline to give effect and ensure the certifications and ancillary certifications by those executives responsible for the information included in the Form 20-F Annual Report, the consistency and materiality of the information flow to the market and regulatory bodies, as well as the compliance with the Code of Conduct and Transparency, among others. A working party group was created in order to review internal procedures and control, as well as key processes with direct impact on the Company s results. This group, made up of employees of several Company areas and supported by external consultants, assesses potential risks and control activities to identify any non conformities, which are addressed to in specific action plans developed to solve the problems and improve internal processes TELEMAR CITIZEN CORPORATION Telemar has turned social responsibility into a daily activity, involving, in addition to voluntary participants, several operating and administrative areas to implement concrete, comprehensive actions. This activity is carried out through two-year old Instituto Telemar, which develops and implements its own programs, gives suppport to NGO projects and encourages volunteer work by employees. During 2003, our employees took part in important initiatives, such as No Hunger at Christmas, in partnership with NGO Ação da Cidadania contra a Fome, a Miséria e pela Vida. Together, Instituto Telemar, TNL companies and their employees donated 444 tons of food. In 2003, Telemar was one of the three largest donators in the country. Also during the year, our employees were encouraged to participate in a campaign designed to reduce the number of people who drop out of school, by paying unscheduled visits to public schools in all 16 states comprising the Telemar Region. In addition to this campaign, carried out in partnership with NGO Junior Achievement, we implemented a program entitled Introduction to the Business World. These two initiatives involved 900 voluntary participants, 7,000 work hours and benefitted 18,000 people and 72 public schools in 9 Brazilian states. Instituto Telemar and the Telemar companies carried on their own projects: Telemar Education Project, remodeling of the Telecommunications Museum, and Art and Technology Schools - KABUM!. The total number of beneficiaries of these educatinal, cultural and technology projects currently amounts to 75 thousand children and teenagers. The Telemar Education Project, whose primary object is to improve public school levels, created the largest virtual schooling community in Brazil, by interconnecting 67 schools of the 16 states within the Telemar Region. The Project results have been recognized by the leading Brazilian publication on corporate social responsibility, and were highlighted in the 2003 Corporate Citizenship Guide of Exame magazine. Also in 2003 the first KABUM! School was launched. This is one of most advanced social initiatives in Brazil, intended to teach computer layout, design, photography and video to young people living in underprivileged urban areas. The Rio de Janeiro Art and Technology School is being replicated in Recife and Salvador, in partnership with local NGOs, and two new shcools will be fully operational by the end of the first half of The remodeling work of the old Telephone Museum of Rio de Janeiro is now in its completion stage. This new cultural center will host the Telecommunications Museum, providing an adequate location for the largest pool of historical material of the sector in Brazil, comprising photographs, documents and rare objects. This center, scheduled to be innaugurated in the second half of 2004, will feature a quality programming on contemporary theater, video, music and art.