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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to __________________
Commission File Number: 001-10579
Compania de Telecomunicaciones de Chile S.A.
(Exact name of Registrant as specified in its charter)
Telecommunications Company of Chile
(Translations of Registrant's name into English)
Republic of Chile
(Jurisdiction of incorporation or organization)
Avenida Providencia 111
Santiago, Chile
(Address of principal executive offices)
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Title of each class: Name of each exchange on which registered:
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American Depositary Shares New York Stock Exchange
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Series A Common Stock New York Stock Exchange*
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* Listed not for trading, but only in connection with the registration of
American Depositary Shares, pursuant to the requirements of the Securities
and Exchange Commission.
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Series A Common Stock 873,995,447
Series B Common Stock 83,161,638
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act") during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days:
Yes X No __
-
Indicate by check mark which financial statement item the Registrant
has elected to follow:
Item 17 __ Item 18 X
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TABLE OF CONTENTS
Page
----
CERTAIN TERMS AND CONVENTIONS..................................................................ii
PRESENTATION OF FINANCIAL INFORMATION..........................................................ii
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS...............................................iii
PART I..........................................................................................1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..................................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE................................................1
ITEM 3. KEY INFORMATION........................................................................1
ITEM 4. INFORMATION ON THE COMPANY.............................................................8
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..........................................36
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES............................................61
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.....................................70
ITEM 8. FINANCIAL INFORMATION.................................................................76
ITEM 9. THE OFFER AND LISTING.................................................................80
ITEM 10. ADDITIONAL INFORMATION................................................................82
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................99
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...............................106
PART II.......................................................................................107
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................................107
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.........107
ITEM 15. CONTROLS AND PROCEDURES..............................................................107
ITEM 16. [RESERVED]...........................................................................107
PART III......................................................................................108
ITEM 17. FINANCIAL STATEMENTS.................................................................108
ITEM 18. FINANCIAL STATEMENTS.................................................................108
ITEM 19. EXHIBITS.............................................................................108
i
CERTAIN TERMS AND CONVENTIONS
All references to "Chile" or the "Republic" herein are references to the
Republic of Chile. All references to the "Government" herein are references to
the Government of Chile. Unless otherwise specified herein, all references to
"Telefonica CTC Chile" or the "Company" herein are references to Compania de
Telecomunicaciones de Chile S.A., a publicly held stock corporation (sociedad
anonima abierta) organized under the laws of Chile, and its subsidiaries. All
references to "Telefonica" herein are references to Telefonica S.A., a publicly
held stock corporation organized under the laws of the Kingdom of Spain. All
references to "Telefonica Group" herein are references to Telefonica and its
Latin American subsidiaries, including Telefonica CTC Chile.
Unless otherwise specified, all references herein to "$," "US$," "U.S.
dollars" and "dollars" are to United States dollars, references to "Chilean
pesos," "pesos" or "Ch$" are to Chilean pesos, references to "UF" are to
Unidades de Fomento, a daily indexed Chilean peso-denominated monetary unit that
takes into account the effect of the Chilean inflation rate of the previous
month, and references to "UTM" are to Unidad Tributaria Mensual, a monthly
indexed Chilean peso-denominated monetary unit that takes into account the
effect of the Chilean inflation rate of the month before the previous month. All
references to "euros" are to the common currency of the European Union. Unless
otherwise specified, all references herein to "U.S. GAAP" are to generally
accepted accounting principles in the United States, and all references herein
to "Ch GAAP" or "Chilean GAAP" are to generally accepted accounting principles
in Chile and the related rules of the Superintendencia de Valores y Seguros of
Chile, or "SVS."
PRESENTATION OF FINANCIAL INFORMATION
This Annual Report contains the audited consolidated balance sheets of
Compania de Telecomunicaciones de Chile S.A. and Subsidiaries as of December 31,
2001 and 2002 and the related consolidated statements of operations and cash
flows for each of the three years in the period ended December 31, 2002
(collectively, the "Audited Consolidated Financial Statements" or "Financial
Statements"), all of which were audited by Deloitte & Touche. The Audited
Consolidated Financial Statements have been prepared in accordance with Chilean
GAAP, which differs in certain significant respects from U.S. GAAP. See Note 34
to the Audited Consolidated Financial Statements of the Company, included
elsewhere in this Annual Report, for a description of the principal differences
between Chilean GAAP and U.S. GAAP as they relate to the Company and a
reconciliation to U.S. GAAP of net income and shareholders' equity for the
periods and as of the dates covered thereby. As required by Chilean GAAP, the
Company publishes its financial statements in Chilean pesos that are adjusted to
reflect changes in purchasing power due to inflation. Unless otherwise
specified, financial data regarding the Company is presented herein in constant
Chilean pesos of December 31, 2002 purchasing power. See Note 2(f) to the
Audited Consolidated Financial Statements of the Company.
Percentages and certain amounts contained herein have been rounded for ease
of presentation. Any discrepancies in any table between totals and the sums of
the amounts listed are due to rounding.
Merely for the convenience of the reader, translations of certain amounts
into dollars at a specified rate have been included herein. Unless otherwise
specified, or unless the context otherwise requires, the U.S. dollar equivalent
for information in Chilean pesos is based on the exchange rate (the "Observed
Exchange Rate") reported by Banco Central de Chile (the "Central Bank") that is
computed, for any date, by averaging the exchange rates of the previous business
day's transactions in Chile's Mercado Cambiario Formal (the "Formal Exchange
Market"). On January 2, 2003, the Central Bank reported that the Observed
Exchange Rate with reference to December 31, 2002, the last day in 2002 for
which an exchange rate was reported, was Ch$718.61 = US$ 1.00. Telefonica CTC
Chile does not represent that the Chilean peso or U.S. dollar amounts in this
Annual Report actually represent, could have been or could be converted into
U.S. dollars or Chilean pesos, as the case may be, at the rates indicated, at
any particular rate or at all. The Federal Reserve Bank of New York does not
report a noon buying rate for Chilean pesos. See "Item 3: Key
Information--Exchange Rates" for information regarding historical rates of
exchange in Chile from January 1, 1998. Unless otherwise specified, references
herein to the devaluation or the appreciation of the Chilean peso against the
U.S. dollar are in nominal terms (without adjusting for inflation), based on the
Observed Exchange Rates for the relevant period.
ii
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
This Annual Report contains certain "forward-looking statements" within the
meaning of Section 21E of the Exchange Act. Some of these forward-looking
statements include forward-looking phrases such as "anticipates," "believes,"
"could," "estimates," "expects," "foresees," "intends," "may," "should" or "will
continue," or similar expressions or the negatives thereof or other variations
on these expressions, or similar terminology, or discussions of strategy, plans
or intentions. These statements also include descriptions in connection with,
among other things:
o the Company's business development plans and strategies, including its
asset growth, cost-saving and financing plans;
o the effects of the Company's reorganization of its business units;
o new offerings of services and acquisitions of licenses, and
anticipated demand related to such new services and licenses;
o the future impact of competition;
o economic and political developments in Chile;
o the effects of inflation and currency volatility on the Company's
financial condition and results of operations;
o the outcome of litigation and regulatory proceedings in which the
Company is involved, including its litigation with the State of Chile;
o the Company's unionized employees;
o trends affecting the Company's financial condition or results of
operations; and
o regulations affecting the Company's business, including tariff
rulings, decrees and charges.
Such statements reflect our current views regarding future events and are
subject to certain risks, uncertainties and assumptions. Many factors could
cause actual results, performance or achievements to be materially different
from any future results, performance or achievements that forward-looking
statements may express or imply, for example:
o the Company's ability to implement its cost and expenses control plans
and its investment program, including its ability to arrange financing
where required;
o the nature and extent of future competition and technological
development;
o changes in regulations and laws;
o political, economic and demographic developments in Chile; and
o other risks and uncertainties, some of which are described in more
detail in "Item 3: Key Information--Risk Factors," "Item 4:
Information on the Company" and "Item 5: Operating and Financial
Review and Prospects."
If one or more of these risks or uncertainties affects future events and
circumstances, or if underlying assumptions did not materialize, actual results
may vary materially from those described in this Annual Report as anticipated,
believed, estimated or expected. We have no plans to update any industry
information or forward-looking statements set out in this Annual Report and have
no obligation to update any such statements.
iii
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The selected financial data presented below was prepared in accordance with
Chilean GAAP, which differs in certain significant respects from U.S. GAAP. Note
34 to the Audited Consolidated Financial Statements provides a summary of
significant differences between Chilean GAAP and U.S. GAAP as they relate to us,
including the impact of such differences on our net income and shareholders'
equity. The selected financial data should be read in conjunction with the
Audited Consolidated Financial Statements and notes thereto, "Item 5: Operating
and Financial Review and Prospects" and other financial information included
herein. Prior to this Annual Report, the Company has historically prepared the
audited consolidated financial statements to its annual reports in accordance
with U.S. GAAP. As a result, the Audited Consolidated Financial Statements, the
selected financial data presented below and other financial data contained
herein, which unless otherwise indicated have been prepared in accordance with
Chilean GAAP, may not be directly comparable to data presented in prior annual
reports.
As of or for the year ended December 31,
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1998 1999 2000 2001 2002 2002
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(In
millions
(In millions of constant Chilean pesos as of December 31, of U.S.
2002, except ratios) dollars)
Statement of Operations Data:
Chilean GAAP
Operating Revenues ...................... 863,170 945,398 899,054 920,035 863,149 1,201.1
Depreciation and Amortization ........... (194,289) (231,390) (249,347) (255,504) (261,035) (363.2)
Administrative and Selling Costs ........ (148,106) (147,113) (133,121) (131,364) (130,415) (181.5)
Other Operating Costs and
Expenses ............................. (252,169) (440,601) (447,681) (391,690) (341,201) (474.8)
Operating Income ........................ 268,606 126,294 68,905 141,477 130,498 181.6
Interest Income ......................... 11,766 15,232 12,414 18,743 16,691 23.2
Interest Expense, Net of
Capitalized Interest ................. (77,467) (97,723) (112,803) (96,255) (81,472) (113.4)
Monetary Correction (1) ................. (32,833) (62,337) (32,590) 2,131 (8,953) (12.5)
Income (loss) before Income Tax ......... 153,797 (37,290) (123,787) 20,936 9,799 13.6
Income Tax .............................. (5,062) (13,351) 5,764 (11,769) (26,717) (37.2)
Net Income (loss) ....................... 148,413 (56,107) (121,086) 4,235 (17,680) (24.6)
Dividends Paid (2) ...................... 64,696 16,009 0 0 1,356 1.9
Basic Earnings (loss) per Share (3) ..... 0.1610 (0.0586) (0.1265) 0.0044 (0.0185) (0.0)
Earnings per ADS (4) .................... 0.6440 (0.2345) (0.5060) 0.0177 (0.0739) (0.0)
Dividends per Share (5) ................. 0.0702 0.0167 0.00 0.00 0.0014 0.0
Dividends per ADS (4) ................... 0.2807 0.0669 0.00 0.00 0.0057 0.0
Weighted Average Number of
Shares Outstanding (thousands) ....... 921,829 957,157 957,157 957,157 957,157
1
As of or for the year ended December 31,
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1998 1999 2000 2001 2002 2002
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(In
millions
(In millions of constant Chilean pesos as of December 31, of U.S.
2002, except ratios) dollars)
Statement of Operations Data: (con't)
U.S. GAAP (6)
Net Income (loss) ................... 127,785 (66,896) (136,504) (36,726) 28,988 40.3
Number of Shares .................... 921,829 957,157 957,157 957,157 957,157
Earnings (losses) per Share ......... 0.1386 (0.0699) (0.1426) (0.0384) 0.0303 0.0
Diluted Earnings (losses) per
Share ................................ 0.1386 (0.0699) (0.1426) (0.0384) 0.0303 0.0
Balance Sheet Data:
Chilean GAAP
Current Assets ...................... 434,498 423,754 630,670 657,216 446,384 621.2
Property, Plant and Equipment, Net .. 1,820,809 1,770,172 2,212,891 2,124,009 1,939,044 2,698.3
Total Assets ........................ 3,052,979 3,116,676 3,170,309 3,090,301 2,688,373 3,741.1
Total Long-Term Bank Borrowings
and Debt (including Current
Maturities) ...................... 1,353,414 1,539,996 1,456,543 1,268,546 1,096,756 1,526.2
Total Shareholders' Equity .......... 1,487,983 1,422,076 1,300,815 1,305,296 1,286,690 1,790.5
U.S. GAAP (6)
Shareholders' Equity ................ 1,376,803 1,299,593 1,161,331 1,127,453 1,154,634 1,606.8
Other Data:
Capital Expenditures (7) ............ 322,317 244,855 209,205 127,427 99,306 138.2
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(1) Monetary correction is the aggregate of purchasing power gain, loss on
indexation and gain (loss) on foreign currency transactions. See "Item 5:
Operating and Financial Review and Prospects--Impact of Inflation."
(2) Dividends paid represent the amount of dividends paid in the periods
indicated.
(3) Basic earnings (loss) per share have been computed using the weighted
average number of shares outstanding during each period presented.
(4) Calculated on the basis that each ADS represents four shares of Series A
Common Stock.
(5) Represents an amount equal to the interim dividends declared for each year
and the final dividend for the preceding year declared in April of each
year. See "Item 8: Financial Information--Dividend Policy and Dividends."
(6) In 2002, net income and shareholders' equity as calculated under U.S. GAAP
for both 2001 and 2000 have been restated. Taken together, the effects of
these adjustments resulted in a change in the reported net loss of the
Company as reconciled to U.S. GAAP from a loss of Ch$16,490 million to a
loss of Ch$36,726 million in 2001, and from a reported net loss of
Ch$130,210 million to a loss of Ch$136,504 million in 2000. Accordingly,
shareholder's equity as reconciled to U.S. GAAP has been adjusted from
Ch$1,145,488 million to Ch$1,127,453 million in 2001 and from Ch$1,166,036
million to Ch$1,161,331 million in 2000. See Note 34 to the Audited
Consolidated Financial Statements.
(7) Represents the amount disbursed in each year, irrespective of the year in
which the investment was made.
Exchange Rates
Chile's Ley Organica Constitucional del Banco Central de Chile No. 18,840
(the "Central Bank Act"), enacted in 1989, liberalized the rules that govern the
purchase and sale of foreign exchange in Chile. Prior to 1989, Chilean law
authorized the purchase and sale of foreign exchange only in those cases
explicitly authorized by the Central Bank.
The Central Bank Act empowers the Central Bank to determine that certain
purchases and sales of foreign exchange must be carried out in the Formal
Exchange Market, a market formed by banks and other institutions authorized by
the Central Bank for that purpose. The Central Bank has ruled that certain
foreign exchange transactions (including those attendant to foreign investments)
may be effected only in the Formal Exchange Market. Banks and other institutions
may purchase and sell foreign exchange in the Formal Exchange Market at such
rates as they freely determine from time to time. The Central Bank reports an
Observed Exchange Rate that is computed, for any date, by averaging the exchange
rates of the previous business day's transactions in the Formal Exchange Market.
2
Since 1989, the Central Bank has also set a reference exchange rate known
as the dolar acuerdo (the "Reference Exchange Rate") that is reset monthly,
taking internal and external inflation into account, and is adjusted daily to
reflect variations in the parities between the peso and each of the U.S. dollar,
the euro and the Japanese yen. The Central Bank Act authorized the Central Bank
to carry out its transactions at rates within a specified band set around the
Reference Exchange Rate. While the band was in place, the Central Bank generally
carried out its transactions at the spot rate. When banks needed to buy or sell
U.S. dollars from or to the Central Bank, the Central Bank made such sales at
rates as high as the upper limit of the band, and such purchases at rates as low
as the lower limit of the band. Banks generally carried out authorized
transactions on the Formal Exchange Market at the spot rate, which usually
fluctuated within the range of the band.
As of September 2, 1999, in order to allow for increased exchange rate
flexibility, the Central Bank suspended its formal commitment to maintain the
exchange rate within a specified band. The Central Bank may, however, still
intervene in certain exceptional cases of exchange rate fluctuations to keep the
average exchange rate within certain limits, and must inform the market of the
reason for its intervention in each such event. Nonetheless, the Central Bank
will continue to publish the Reference Exchange Rate as a reference for the
market. Purchases and sales of foreign exchange that may be effected outside the
Formal Exchange Market can be carried out in the Mercado Cambiario Informal (the
"Informal Exchange Market"), a recognized currency market in Chile. Over the
past 5 years, there has been no substantial difference between exchange rates as
reported on the Informal Exchange Market and the Formal Exchange Market.
The following table sets forth the high, low, average and year-end Observed
Exchange Rates for U.S. dollars for each year beginning with 1998 and for each
of the past six months, as reported by the Central Bank. On May 30, 2003, the
Observed Exchange Rate was Ch$714.10 = US$ 1.00.
Observed Exchange Rates (1)
(Ch$ per US$)
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Average
Low (2) High (2) (3) Period-End
------------- --------- ------------ ---------------
Year ended December 31, 1998................ 439.18 475.41 460.32 472.41
Year ended December 31, 1999................ 468.69 550.93 508.78 530.07
Year ended December 31, 2000................ 501.04 580.37 539.90 573.65
Year ended December 31, 2001................ 557.13 716.62 634.87 654.79
Year ended December 31, 2002................ 641.75 756.56 688.24 718.61
Month ended December 31, 2002............... 692.94 712.38 701.95 718.61
Month ended January 31, 2003................ 709.22 738.87 722.48 736.15
Month ended February 28, 2003............... 733.10 755.26 745.21 750.28
Month ended March 31, 2003.................. 725.79 758.21 743.28 731.56
Month ended April 30, 2003.................. 705.32 731.56 718.25 704.42
Month ended May 30, 2003.................... 694.92 713.73 703.58 714.10
Period ended June 6, 2003................... 710.25 716.06 713.47 712.25
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Source: Central Bank
(1) Reflects nominal pesos at historical values, rather than constant pesos of
December 31, 2002 purchasing power.
(2) Exchange rates are the actual high and low for each period.
(3) Corresponds to daily average rates during the period.
Telefonica CTC Chile does not represent that the Chilean peso or U.S.
dollar amounts referred to herein actually represent the amounts that were,
could have been or could be converted into U.S. dollars or Chilean pesos, as the
case may be, at the rates indicated, at any particular rate or at all.
The Central Bank regulates the international issuance by Chilean companies
of non-peso denominated debt, including, among other things, the repatriation
and exchange for pesos of the foreign currency proceeds from such offerings. See
"Item 10: Additional Information--Exchange Controls and Other Limitations
Affecting Security Holders."
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
3
D. Risk Factors
The following discussion should be read together with the balance of this
Form 20-F, including the Audited Consolidated Financial Statements.
Tariff regulation may adversely affect revenues in certain of Telefonica
CTC Chile's businesses.
The Chilean government has historically regulated local telephony services
in Chile. The Comision Resolutiva Antimonopolios (the "Antitrust Commission"), a
Chilean government agency responsible for making certain determinations relating
to competitive conditions in the telecommunications industry, has determined
that Telefonica CTC Chile is a dominant operator of local telephony in many
areas of Chile. As a result, the Company is subject to tariff decrees that
regulate certain rates and fees the Company can charge for such local telephony
services in most of the country. The latest tariff decree, Tariff Decree No.
187, which was issued in 1999 for a five-year period, sets the maximum fixed
monthly fee, variable charge and connection fee rates that the Company can
charge for local telephony services to customers, and sets maximum rates for
public telephones. In addition, Tariff Decree No. 187 also sets maximum access
fees the Company may charge other telecommunications operators for
interconnection to its fixed network. As of the end of the first quarter of
2003, regulated services represented approximately 50% of the Company's total
consolidated revenues.
Based on the Company's estimates, the introduction of Tariff Decree No. 187
caused a reduction of approximately 25% in regulated revenue per line in the
first year, and has since continued to negatively affect the Company's results.
Since 1999, the Company has sought administrative relief to correct what it
believes are certain errors and illegalities in Tariff Decree No. 187. Upon
denial of such relief, and having exhausted the administrative recourses
available to it, in March 2002, Telefonica CTC Chile filed a civil lawsuit for
damages against the State of Chile, which is currently pending. The process for
setting the next tariff decree for local telephony services is currently in
progress and a new decree, which will regulate rates for the next five year
period from 2004 to 2009, is expected be issued in May 2004. On May 22, 2003,
the Antitrust Commission issued Resolution 686, which denied the Company's
request for tariff deregulation, and defined the services to be regulated in the
new tariff setting process. The Company can give no assurance that the new
tariff decree in its final form will not have a material adverse effect on its
results of operations or financial position. See "Item 4: Information on the
Company--Business Overview--Licenses and Tariffs--The Tariff System."
In February 1999, the government introduced the Calling Party Pays ("CPP")
system for calls to mobile telephones and published tariff decrees for each of
the mobile operators, setting the interconnection rate that these operators may
charge for access to their mobile networks for a five year period, until 2004.
Revenues from CPP for the first quarter of 2003 represented approximately 11% of
Telefonica CTC Chile's total consolidated revenue. The process for setting the
tariffs regulating mobile telephone interconnection service is currently in
progress, and new decrees for the Company's mobile subsidiary, Telefonica Movil
de Chile S.A. ("Telefonica Movil"), and other mobile operators are expected to
be issued in January 2004. The Company can give no assurance that the new tariff
decree regulating mobile telephone interconnection service will not have a
material adverse effect on its results of operations or financial position. See
"Item 4: Information on the Company--Business Overview--Licenses and
Tariffs--The Tariff System."
Telefonica CTC Chile faces intense competition.
Telefonica CTC Chile faces intense competition in every aspect of its
business. Telefonica CTC Chile, which is the largest local telephony operator,
competes in local telephony service with both mobile telephony, and other fixed
and cable telephony operators, which are not subject to the same tariff
regulations as the Company and therefore may have more flexibility in the
services and prices they can offer. For example, certain other fixed and cable
telephony operators who are not subject to tariff regulation can offer local
telephony service with flat rates, free minutes included in the monthly charge
and higher fixed monthly charges than those established in the tariff decree
regulating the Company and different time structures than those set out in that
decree.
4
In mobile services, Telefonica Movil faces competition from three
international mobile service operators, BellSouth Corporation, Telecom Italia
and Endesa S.A. ("Endesa Espana"), which has resulted in downward price pressure
on rates for mobile service. The Company is focused on improving the
profitability of its mobile communications business and expects the development
of more rational competition in the mobile communications industry in Chile.
However, the Company can give no assurance that there will not continue to be
downward pressure on mobile communications service prices or that the market for
mobile communications services will not decrease in the future.
In order to offset market decreases in fixed line long distance traffic
over the past year, which has partly resulted from the increased utilization of
mobile phones for domestic long distance service, the Company has offered
customers alternative rate structures, such as monthly fees with a discounted
price per minute, to encourage the use of fixed line long distance service and
to expand the long distance market. Some of these plans have resulted in
decreased prices for long distance service, and may result in further price
decreases in the future.
Telefonica CTC Chile also faces competition in data transmission services
and other services provided to corporate customers, as well as in broadband
services. As with any company participating in a highly competitive business
environment, Telefonica CTC Chile cannot predict the effects of increased
competition on its business, results of operations, financial condition or
prospects, or on the rates and volume of business it will generate in these, and
other areas of service.
Changes in technology could affect Telefonica CTC Chile in ways it cannot
predict.
The telecommunications industry as a whole has traditionally been, and is
likely to continue to be, subject to rapid and significant changes in technology
and the related introduction of new products and services. Although the Company
believes that for the foreseeable future existing and developing technologies,
such as voice-over-IP and powerline communications, will not materially
adversely affect the viability or competitiveness of its telecommunications
business, there can be no assurance as to the effect of such technological
changes on the Company or that the Company will not be required to expend
substantial financial resources on the development or implementation of new
competitive technologies. New services and technological advances may offer
additional opportunities to compete against the Company on the basis of cost,
quality or functionality. It may not be practicable or cost-effective for the
Company to replace or upgrade its installed technologies in response to
competitors' actions. Responding to such change may require the Company to
devote substantial financial resources to the development, procurement or
implementation of new technologies, and may be dependent upon its ability to
obtain additional financing.
If the Company chooses to purchase, or invest in the development of new
telecommunications technology, there can be no assurance that such new products
or services will not serve as a substitute to existing products and services
offered by the Company. In the past, the Company has experienced such
substitution with the introduction of mobile communications service, which has
contributed to declines in fixed line and domestic long distance traffic. As a
result, if the Company chooses to introduce any such new telephony products or
services, it can give no assurance that the benefits of such new products and
services will not be materially offset by declines in existing products and
services offered by the Company.
Labor relations may negatively impact Telefonica CTC Chile.
As of March 31, 2003, approximately 71% of the Company's employees were
union members. The last collective bargaining process between the Company and
non-executive employees of Telefonica CTC Chile and its subsidiaries -
represented by 24 unions - took place in June 2002. As a result of this process,
new labor contracts were signed with 1,661 employees (including non-unionized
personnel), for periods of two or three years, depending on union affiliation.
The remaining 3,445 employees, represented by 12 unions, implemented a legal
strike that lasted 28 days. Under Chilean labor law, strikes are considered to
be legal only if they take place within the framework of a collective bargaining
process. The strike temporarily caused certain disruptions in the Company's
service to customers. Following the strike, the unions involved in the strike
elected to invoke the provisions of Article 369 of the Chilean Labor Code,
allowing them to freeze the conditions of the previous labor contract for a
period of 18 months, without readjustment. The extension of the previous
contracts will expire in December 2003, at which time such contracts must be
renegotiated. At
5
that time, the unions may also elect to invoke the provisions of Article 369 of
the Chilean Labor Code again, thus freezing their contract conditions for
another 18 months. The Company can provide no assurance that it will be able to
successfully negotiate such new contracts on terms favorable to it, or that the
unions involved in the negotiations will not choose to implement a labor strike
or invoke Article 369 at such time.
A downturn in the Chilean economy may adversely affect Telefonica CTC Chile.
Nearly all of Telefonica CTC Chile's customers are Chilean companies or
individuals, and substantially all of Telefonica CTC Chile's operations are
located in Chile. For these reasons, the results of the Company's operations and
its financial condition are sensitive to, and dependent upon, the level of
economic activity in Chile. Historically, growth in the Chilean
telecommunication industry has been tied to the state of Chile's economy,
particularly levels of consumer spending and the growth in consumer demand,
which have been negatively affected by a weak job market in recent years. In
1999, unemployment increased to 9.7%, from 6.2% in 1998, and has since recovered
slightly to 9.0% in 2002.
Furthermore, a substantial portion of Chilean exports, which account for
approximately 30% of annual production, are dependent on demand in the United
States, the European Union and Japan, which are Chile's main trading partners.
As a result, the global economic slowdown in 2002 contributed to the suppression
of a recovery in the Chilean economy, which was reflected in a GDP growth rate
of 2.1% in 2002, compared to 2.8% in 2001 and 4.4% in 2000. The Company can give
no assurance that Chile's economy will continue to grow in the future, nor can
it give assurances that future developments in or affecting the Chilean economy
will not impair its ability to proceed with its business plan or materially
adversely affect its business, financial condition or results of operation.
Developments in other emerging markets or in the global telecommunications
market may adversely affect Telefonica CTC Chile.
Developments in the global telecommunications market and in other emerging
markets, particularly in Latin America, may adversely affect the market for
Telefonica CTC Chile's securities and the availability of foreign capital in
Chile. The Company cannot predict whether events in other markets will adversely
affect the price of, or market for, its securities.
The Series A Common Stock of Telefonica CTC Chile is one of the most liquid
stocks in Chile, as well as one of the most representative of the Chilean
market, with a 13% weight in the local IPSA stock index. Therefore, the
Company's stock price is affected more rapidly and to a higher degree than most
other Chilean stocks by upturns or downturns in the domestic and international
markets. The year 2002 was generally a negative year for the price of securities
worldwide, resulting in significant declines on most major stock exchanges. This
was particularly true in Latin America, where the biggest losses for the year in
real terms were recorded in Argentina and Brazil. Furthermore, confidence in the
global telecommunications industry was negatively affected by certain financial
scandals in the United States, particularly those involving Enron and Worldcom.
The Company can give no assurance that negative developments in Latin America or
other emerging markets, or any new financial scandals in the United States or
elsewhere will not occur or that such negative developments would not adversely
affect the securities markets in which the Company's securities trade or its
access to sources of financing.
An increase in inflation may adversely affect Telefonica CTC Chile.
Chile has experienced high levels of inflation in the past, although
Chile's inflation has moderated in recent years. High levels of inflation in
Chile could adversely affect the Chilean economy and Telefonica CTC Chile's
financial condition and results of operations. The rate of inflation as measured
by changes in the Chilean consumer price index in 1997, 1998, 1999, 2000, 2001
and 2002 was 6.0%, 4.7%, 2.3%, 4.5%, 2.6% and 2.8%, respectively.
Generally, high levels of inflation will adversely affect the Company's
financial condition to the extent that, during any given period:
6
o the Company's average domestic inflation-indexed liabilities exceed
its average domestic inflation-indexed assets,
o the Company has net liabilities denominated in a foreign currency
against which the Chilean peso is devalued or
o the Company's average monetary assets exceed its average monetary
liabilities.
Any significant increase in the level of inflation in the future may
adversely affect the performance of the Chilean economy and the operating
results of the Company.
Currency devaluations and foreign exchange fluctuations may adversely affect
Telefonica CTC Chile.
Changes in the value of the Chilean peso against the U.S. dollar could
adversely affect the Company's financial condition and results of operations.
The Chilean peso has been subject to large nominal devaluation events in the
past, including an approximate 14.1% nominal decrease against the U.S. dollar
during 2001 and a 9.7% nominal devaluation during 2002. The main drivers of the
volatility in the exchange rate in recent years have been the substantial
devaluations in other Latin American markets, mainly Argentina and Brazil, as
well as general uncertainty in global markets. The value of the Chilean peso
against the U.S. dollar may continue to fluctuate significantly in the future.
See "Item 3: Key Information--Exchange Rates."
Historically, a significant portion of the Company's indebtedness has been
denominated in U.S. dollars, while a substantial part of its revenues and
operating expenses has been denominated in pesos. If the peso's value declines
against the dollar, Telefonica CTC Chile will need more pesos to repay the same
amount of dollar-denominated debt. As a result, fluctuations in the Chilean peso
to U.S. dollar exchange rate may affect the Company's financial condition and
results of operations. As of December 31, 2002, 72% of the Company's
interest-bearing debt was denominated in U.S. dollars and was fully hedged
against exchange rate variations between the peso and the U.S. dollar. Of the
remaining 28% of the Company's interest-bearing debt, 17% is UF or peso
denominated and therefore not subject to exchange rate risk, while the remaining
11% is denominated in euros, and is also fully hedged against exchange rate
fluctuations through hedging instruments.
The Company's hedging policy against foreign exchange fluctuations is
disclosed in "Item 11: Quantitative and Qualitative Disclosures About Market
Risk--Risk of Variations in Foreign Currency Exchange Rates."
Telefonica is the controlling shareholder of Telefonica CTC Chile, and thus
may determine the outcome of actions requiring shareholder approval.
Telefonica Internacional Chile S.A. ("Telefonica Internacional Chile") owns
43.64% of all shares of Telefonica CTC Chile. Telefonica Internacional Chile is
a 99.9% owned subsidiary of Telefonica Chile Holding B.V., which in turn is
indirectly wholly owned by Telefonica. Consequently, except for certain
transactions that specifically require shareholder approval of either 2/3 or 75%
of voting shares, Telefonica may have the ability to determine the outcome of
any actions requiring shareholder approval. See "Item 10: Additional
Information--Memorandum and Articles of Association--Shareholders' Meetings and
Voting Rights." In addition, Telefonica's 43.64% equity stake in Telefonica CTC
Chile allows Telefonica to control the Company's Board of Directors. Telefonica
Internacional Chile controls 43.02% of the Company's Series A Common Stock,
which elects six of the Company's Board members, and controls 50.19% of the
Series B Common Stock, which elects one Board member. At the annual general
shareholders' meeting ("General Annual Shareholders' Meeting") held on April 26,
2001, Telefonica elected five out of seven members of the Board of Directors. In
accordance with the Company's By-laws, which call for elections of directors
every three years, as of the date hereof there has not been another election
held for the Board of Directors since April 26, 2001.
7
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
Telefonica CTC Chile is a corporation organized under the Chilean
Corporations Law. Telefonica CTC Chile was incorporated on November 18, 1930 and
has a duration through August 10, 2068. The address and telephone numbers of the
Company's registered office and the Company's agent in the United States follow:
Compania de Telecomunicaciones de Chile S.A. CT Corporation System
Avenida Providencia 111 111 Eighth Avenue
Santiago, Chile New York, New York 10011
Telephone: (562) 691-2020
Telephone service in Chile commenced in 1880 with the formation of Compania
de Telefonos Edison in Valparaiso. In 1927, the International Telephone and
Telegraph Corporation ("ITT") acquired the Chile Telephone Company, which had
26,205 telephones in operation at the time. In 1930, Telefonica CTC Chile was
formed as a stock company named Compania de Telefonos de Chile S.A. In 1971, the
Chilean Government intervened to take management control of the Company, and in
1974, the Chilean Government's Corporacion de Fomento de la Produccion ("Corfo")
acquired 80% of the total shares issued by Telefonica CTC Chile, then held by
ITT.
In August of 1987, Corfo announced that it would reduce its shareholdings
and privatize Telefonica CTC Chile by selling approximately 30% of Corfo's
shares in the Company through an international open-bidding process. The bid
specifications required the winning bidder to purchase 30% of Corfo's Telefonica
CTC Chile shares and subscribe for an additional number of shares in a
subsequent capital increase in proportion to its stake in the Company after
giving effect to its purchase of Corfo's shares. Bond Corporation Chile S.A.
("Bond Chile") offered the highest weighted price for both the Corfo shares and
the shares to be issued in the subsequent capital increase. In January of 1988,
the bidding process was concluded, and 151 million shares of Series A Common
Stock of the Company were transferred to Bond Chile for a total price of US$
114.8 million (historic value). In April of 1988, the shareholders of Telefonica
CTC Chile approved the capital increase, and Bond Chile acquired its
proportional interest therein for an additional US$ 155.0 million (historic
value). After giving effect to the April 1988 offering and other additional
purchases of Series A Common Stock and Series B Common Stock of the Company,
Bond Chile owned approximately 50% of the then issued and outstanding capital
stock of Telefonica CTC Chile.
In April of 1990, TISA, a subsidiary of Telefonica, indirectly acquired the
stock of Bond Chile--and thus all of Bond Chile's interest in Telefonica CTC
Chile--for approximately US$ 392.0 million (historic value). Bond Chile then
changed its name to Telefonica Internacional Chile S.A.
Telefonica CTC Chile's July 1990 international offering of American
Depositary Shares ("ADSs"), each representing 17 shares of Series A Common
Stock, reduced Telefonica Internacional Chile's ownership to 44.45% of
Telefonica CTC Chile's issued and outstanding capital stock. Subsequently,
payments made by third parties for subscribed but unpaid shares further reduced
Telefonica Internacional Chile's ownership to 43.61%. On December 31, 2002,
Telefonica Internacional Chile's ownership stake in Telefonica CTC Chile was
43.64%.
In accordance with the limits set forth under Chilean Decree-Law 3,500, the
Company has amended its Estatutos ("Bylaws") to prohibit any shareholder from
owning more than 45% of Telefonica CTC Chile's capital stock in order to enable
Chilean pension fund managers ("AFPs") to invest in Telefonica CTC Chile.
In a meeting held on August 29, 1996, Telefonica CTC Chile's Board of
Directors agreed to change the ratio of Series A Common Stock per ADS from 17:1
to 4:1, effective January 2, 1997.
In 1999, the Company launched its new brand name, "Telefonica CTC Chile."
The Company's website address is www.telefonicactcchile.cl.
8
Mergers, Acquisitions and New Subsidiaries
A portion of Telefonica CTC Chile's growth in recent years has been
attributable to mergers with and acquisitions of existing businesses and related
assets as set forth below. As discussed below in "Item 5: Operating and
Financial Review and Prospects," these transactions impact the Company's
financial condition and results of operations in various ways, including through
the incurrence of debt to finance the acquisitions and the increased level of
amortization of goodwill resulting from certain of these transactions.
o In 1998, Telefonica CTC Chile acquired 99.9% of the equity securities
of VTR Larga Distancia S.A. ("VTR Larga Distancia"), which offered
data transmission and domestic and international long distance
telephone services throughout Chile, for the Chilean peso equivalent
of US$ 49.9 million (historic value). The long distance business of
VTR Larga Distancia was transferred to one of the Company's long
distance subsidiaries, Globus 120 S.A. ("Globus"), and the data
transmission business of VTR Larga Distancia was later absorbed by
Telefonica Empresas CTC Chile S.A. ("Telefonica Empresas").
o In 1998, Telefonica CTC Chile completed its acquisition of the
remaining 25% interest in Invercom, the subsidiary through which
Telefonica CTC Chile held its 40% interest in Metropolis-Intercom, for
Ch$ 23,369 million, equivalent to US$ 49.3 million (historic value).
o On January 11, 1999, Telefonica CTC Chile acquired 60% of the equity
of Sonda S.A. ("Sonda"), an information systems provider in Chile and
Latin America, for the Chilean peso equivalent of US$ 126.0 million
(historic value). Concurrent with this acquisition, Sonda purchased
Telefonica CTC Chile's information systems assets for the Chilean peso
equivalent of US$ 100 million (historic value).
o On June 11, 1999, Telefonica CTC Chile acquired 60% of Tecnonautica
S.A. ("Tecnonautica"), a company that focuses on the development of
business over the Internet. The value of the transaction was Ch$740
million, equivalent to US$ 1.6 million (historic value) plus a capital
increase of US$ 1 million.
o On June 30, 2000, Telefonica CTC Chile acquired the remaining 40% of
Tecnonautica for Ch$221 million, equivalent to US$ 500,000 (historic
value), thus reaching 100% ownership.
o On July 19, 2000, Telefonica CTC Chile acquired an additional 20%
equity stake in CTC Marketing e Informacion S.A ("CTC-Nexcom") from
Copesa for Ch$651 million, equivalent to US$ 1.2 million (historic
value), thus acquiring an 80% stake in that subsidiary.
o On September 27, 2000, Telefonica CTC Chile paid Ch$87 million
(historic value) for 140,000 common shares of Tarjetas Inteligentes
S.A., representing a 20% equity stake. This company provides smart
card-related services, including telecommunications, certifying
non-financial applications for smart cards, and conducting marketing
and promotion, training, support and international brand name-related
activities.
o On December 6, 2000, Telefonica CTC Chile acquired the remaining 49%
of Desarrollo de Servicios de Informacion S.A. ("Infoera") for Ch$17
million, equivalent to US$ 30,000 (historic value), thus attaining
100% ownership of Infoera.
o On March 28, 2001, Telefonica CTC Chile acquired a 40% interest in
Sonda Comunicaciones S.A., a subsidiary of Sonda aimed at providing
telecommunications support services to third parties, for UF72,120,
equivalent to US$ 1.9 million (historic value), thus attaining 100%
ownership of Sonda Comunicaciones S.A.
o On April 25, 2001, the Company's Board of Directors agreed to
establish a new subsidiary, named Compania de Telecomunicaciones de
Chile Inalambrica S.A., to
9
participate in the bidding process for a license to operate the
3400-3700 MHz wireless frequencies.
o On June 29, 2001, Telefonica CTC Chile and its subsidiaries CTC
Transmisiones Regionales S.A. and Telefonica Empresas acquired a 29%
equity stake in Atento Chile S.A. ("Atento Chile") for Ch$3,050
million, equivalent to US$ 4.5 million (historic value), by
contributing fixed assets, cash and shares of CTC-Nexcom.
o On August 1, 2001, Telefonica CTC Chile and its subsidiary Compania de
Telecomunicaciones de Chile--Equipos y Servicios S.A. ("CTC Equipos")
established a new subsidiary, Telefonica Gestion de Servicios
Compartidos Chile S.A. ("t-gestiona"), with relative ownership
interests of 99.9% and 0.1%, respectively. This subsidiary was formed
to provide logistics, personnel, accounting, fund administration and
general services to other business areas of the Company.
o On October 19, 2001, Telefonica Empresas S.A. acquired from Sonda its
40% stake in Administradora de Telepeajes de Chile S.A. for UF6,000,
equivalent to US$ 0.1 million (historic value).
o On November 29, 2001, Telefonica CTC Chile and its subsidiary CTC
Equipos formed another subsidiary, Telefonica Asistencia y Seguridad
S.A. ("Telemergencia"), with relative equity stakes of 99.7% and 0.3%,
respectively. This subsidiary is responsible for commercialization and
installation of alarm monitoring systems for homes and corporation.
Divestitures
In response to new challenges posed by regulation and competition, starting
in 2000, Telefonica CTC Chile has sold its participation in certain of its
non-core businesses in order to facilitate its focus on its main business areas.
o On July 3, 2000, the Company sold to its former partner in the cable
TV business, Cordillera Comunicaciones Ltda. ("Cordillera"), the
following: (i) its 40% stake in cable TV operator Metropolis Intercom;
(ii) 100% of its wholly owned subsidiary Compania de
Telecomunicaciones de Chile--Plataforma Tecnica Red Multimedia S.A.,
which provides installation and maintenance services for the cable TV
network; and (iii) 100% of the cable TV network. The sales price for
the entire transaction amounted to the Chilean peso equivalent of US$
270 million (historic value), of which the equivalent of US$ 250
million (historic value) was paid on October 2, 2000 and the remaining
equivalent of US$ 20 million is to be paid at the end of the fifth
year from the transaction date, at an annual interest rate of 6%. The
transaction put an end to the arbitration process related to the
development of Internet services for residential customers that was
being carried out between the Company and Cordillera. This arbitration
process had prevented the Company from offering Internet access
services to its customers by any means other than regular switched
access.
o On August 3, 2000, Telefonica CTC Chile sold for US$ 21 million
(historic value) its 2.6% equity stake in TBS Participacoes S.A., a
Brazilian holding company that owned 85.2% of the voting stock in CRT
Fija, a Brazilian telecommunications company that provided fixed
telephone and data transmission services in the state of Rio Grande do
Sul. The Company retained a 2.6% equity stake in TBS Celular
Participacoes S.A., a Brazilian holding company that owns 59.9% of the
voting stock in Celular CRT, a Brazilian mobile communications
company.
o On October 12, 2001, the Company signed a new Shareholders' Agreement
with its partners in the subsidiary Sonda, Inversiones Pacifico II
Limitada and Inversiones Atlantico Limitada, both companies related to
Mr. Andres Navarro, founder of Sonda.
10
Pursuant to this agreement, Telefonica CTC Chile gave both companies
a call option on its 60% stake in Sonda, and obtained a put option
on this stake.
o On September 26, 2002, Telefonica CTC Chile, through its subsidiary
Telefonica Empresas, sold a 25% equity interest in Sonda to Mr.
Navarro for approximately Ch$27,921 million, equivalent to US$ 37.5
million (historic value), thereby reducing its equity interest in
Sonda to 35%. At the same time, Telefonica CTC Chile signed an Option
Agreement in connection with its remaining 35% interest in Sonda, and
which terminated and superseded the new Shareholders' Agreement. The
Option Agreement gives the Company an option, which may be exercised
in July 2005, to put its remaining 35% interest in Sonda to Mr.
Navarro, and gives Mr. Navarro a call option on such remaining
interest, which may be exercised in July 2003, July 2004 or August
2005. Minimum prices were established for all of these transactions
and the minimum price for Telefonica CTC Chile's put option is
guaranteed by a performance bond issued by certain Chilean banks. See
"Item 10: Additional Information--Material Contracts."
Capital Expenditures
Capital expenditures carried out by the Company in 2000, 2001 and 2002
amounted, respectively, to Ch$ 199,994 million (US$ 349 million; historic value
as of December 31, 2000), Ch$ 190,438 million (US$ 291 million; historic value
as of December 31, 2001) and Ch$ 146,256 million (US$ 204 million; historic
value as of December 31, 2002). During the first quarter of 2003, Telefonica CTC
Chile made investments in the amount of Ch$ 31,056 million (US$ 42 million;
value as of March 2003). Investment during this three-year period and through
the first quarter of 2003 has been focused on increasing the utilization rate of
already installed capacity in the fixed telephony network. Since 2001,
investment has increasingly been focused on more profitable business areas with
greater growth potential, such as broadband services, through the integration of
xDSL platforms and technologies. Investment has also recently focused on the
expansion of the Company's mobile business through the acquisition of licenses
and the deployment of the Company's nationwide GSM/GPRS network, as well as the
development of an IP network aimed at providing advanced data services to the
corporate customer segment. During 2003, the Company plans to continue this
focus by making additional capital expenditures in the mobile segment and, in
particular, devoting investment resources to the development of the GSM project.
During this year, and in line with the levels of productivity it has achieved,
the Company also expects to invest in modernization of its systems and
automation of operations. All capital expenditures since January 2000 made by
the Company have been in projects located within Chile. Capital expenditures
have substantially been financed with cash flow generated from operations.
11
B. Business Overview
Telefonica CTC Chile is the largest telecommunications enterprise in Chile
and, according to Company estimates, as of December 31, 2002 owned approximately
76% of all telephone lines in the country and serviced approximately 30% of all
mobile subscribers. The Company provides a broad range of telecommunication and
other services throughout Chile, including:
o local telephone service;
o mobile telephone service;
o mobile communications services (including voice mail, short message
service, and Wireless Access Protocol, or "WAP," type services for
corporate data transmission customers);
o domestic long distance service ("DLD") and international long distance
service ("ILD");
o data transmission;
o dedicated lines (direct lines dedicated to a customer's exclusive
use);
o broadband;
o terminal equipment sales and leasing;
o public telephone service;
o interconnection services (connecting calls from long distance, mobile
and local telephone networks to Telefonica CTC Chile's local telephone
network);
o value-added services (including the sale of telephone numbers--such as
"700" numbers for toll calls--to providers of telephone-based
services, and the provision of supplementary services and direct
dialing); and
o Internet access for corporate customers.
The Company provides all of its fixed telephony services through its own
digital telecommunications network, including local telephone service and
interconnection services. Telefonica CTC Chile fully upgraded its network to
digital technology in 1993. In addition, Compania de Telefonos de
Chile--Transmisiones Regionales S.A. ("188 Telefonica Mundo") and Globus provide
substantially all of their domestic and international long distance services
with 188 Telefonica Mundo's equipment.
During the last three years, Telefonica CTC Chile's operating revenues have
been substantially generated from its operations in Chile, except for certain
revenues from Sonda, generated through that subsidiary's operations in
Argentina, Brazil, Uruguay, Ecuador and other Latin America countries, which in
2002 represented 1.4% of the Company's total operating revenues. As of September
2002, the Company no longer consolidates the results of Sonda.
Chilean law currently requires companies to obtain licenses from the
government before providing many telecommunications services. Telefonica CTC
Chile holds licenses to provide local telephone service and data transmission
services throughout Chile. The Company holds licenses to provide long distance
service throughout Chile and internationally through its subsidiaries 188
Telefonica Mundo and Globus. In addition, Telefonica CTC Chile holds licenses to
provide mobile telephony services in Chile through its subsidiary Telefonica
Movil. See "--Licenses and Tariffs--Licenses" below.
12
The Chilean government can set the maximum prices, fees and charges that
Telefonica CTC Chile and other telecommunications companies may charge for
certain services, including the following:
o local telephone service;
o public telephones;
o interconnection services and related administrative services;
o unbundled network services; and
o line connections.
In 2002, approximately 50% of Telefonica CTC Chile's total operating
revenues were generated through the provision of services subject to tariff
regulation. These services consisted of (i) local telephone service, which
accounted for 40% of total operating revenues, and primarily includes fixed
monthly charge, variable charge (excluding prepaid traffic), directory
information, line connections access charges and interconnection from long
distance and other telecom operators, and public telephones and (ii)
interconnection of calls from fixed networks to the mobile network of Telefonica
Movil, which accounted for 10% of total operating revenues.
The Chilean government does not currently regulate the prices that
Telefonica CTC Chile charges for its other products and services, including long
distance, data transmission, mobile telephone services (other than
interconnection of calls from fixed networks), broadband, value-added services,
directory advertising and sales and leasing of terminal equipment. These
activities accounted for approximately 50% of Telefonica CTC Chile's operating
revenues in 2002.
The following table provides the breakdown of those products and services
offered by Telefonica CTC Chile that are (i) regulated under the 1999-2004
tariff regime (Tariff Decree No. 187), (ii) unregulated and/ or (iii) require
licenses.
Services Subject to Tariff Regulation Activities Not Subject to Tariff Regulation
-------------------------------------------- -----------------------------------------------------------
License Required (1) License Required License Not Required
-------------------------------------------- -------------------------------- ------------------------
Local telephone service Domestic long distance service Sale of advertising in
telephone directories
Access charges and interconnections International long distance Direct marketing
service
Public telephones Mobile communications (2) Sales and leasing of
telephone and facsimile
equipment and private
exchanges ("PABX")
Line connections Broadband Supplementary services
Unbundled network services (3) Public data transmission
Unbundled network services (3)
---------------------------
(1) All services subject to tariff regulation require licenses.
(2) The interconnection fee for calls to the mobile networks is regulated
under the CPP structure. See "Item 4: Information on the Company--Business
Overview--Licenses and Tariffs--The Tariff System--Calling Party Pays."
(3) Only the unbundling of the fixed network is regulated.
Telefonica CTC Chile faces intense competition in every aspect of its
business activities. As in any highly competitive business environment, no
assurance can be given as to what effect increased competition in the Chilean
international and domestic long distance, mobile communications, local telephone
service, data transmission and public telephone markets will have on the
business, results of operations, financial condition or prospects of the Company
or on rates and the volume of business generated by the Company. Unless
13
otherwise indicated, all statements regarding the competitive position of
Telefonica CTC Chile are based on the Company's internal estimates.
Business Areas
Fixed Telephony
The fixed telephony business segment ("Fixed Telephony") primarily consists
of traditional telephone services provided by Telefonica CTC Chile. Fixed
Telephony includes the provision of telephone lines, local traffic charged at
per-minute rates and the connection and installation of telephone lines and
equipment. These services are complemented by the sale and rental of telephone
equipment and a broad range of value-added services that enhance the
communications experience of its customers, such as voice mail, call-waiting,
call-forwarding, caller-ID, outbound traffic control, CiberRing (call-waiting
notice for Internet users) and access to information and entertainment services
(600 and 700 numbers). The Company also offers new innovative technologies which
leverage the Company's existing fixed line infrastructure, such as, among other
things, broadband connections with ADSL technology, prepaid services for fixed
lines and the sale of advanced telephone equipment. In addition, Telefonica CTC
Chile provides interconnection services to domestic long distance and
international long distance providers and to other telecom operators.
Revenues from Fixed Telephony were Ch$381,227 million (US$530.5 million) in
2002, which represented 44.2% of the Company's total operating revenues. These
Fixed Telephony revenues include certain revenues from corporate customers. The
majority of Telefonica CTC Chile's Fixed Telephony revenues are subject to
tariff regulation.
During 2002, 340,419 new lines were connected, a 3.0% increase in new line
connections as compared to 2001. Lines in service under Fixed Telephony as of
December 31, 2002, totaled 2,686,695, representing a decrease of 1.3% as
compared to December 31, 2001. Of the 2,686,695 lines in service as of December
31, 2002, 71.7% were residential, 26.4% were commercial, 1.3% were public
telephone lines and 0.6% were lines principally devoted to Telefonica CTC
Chile's own internal use. All of Telefonica CTC Chile's lines in service have
direct dialing domestic and international long distance capabilities.
The following table sets forth certain fixed line performance and line
connection information for the periods indicated.
For the year ended December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
Lines installed........................ 2,772,641 2,792,663 2,990,941 3,019,416 3,023,541
Lines in service....................... 2,649,786 2,592,397 2,700,536 2,723,310 2,686,695
Lines per 100 inhabitants.............. 17.8 17.2 17.6 17.6 17.1
Lines per employee (1)................. 383 459 582 845 1,058
Number of new lines connected.......... 464,885 315,927 288,483 330,619 340,419
Applications pending................... 58,343 26,547 10,252 32,329 36,493
Defects per line (annual average) (2).. 0.54 0.41 0.26 0.30 0.35
---------------------------
(1) Lines per employee are calculated using the number of employees at
Telefonica CTC Chile (excluding its subsidiaries, which do not provide
local telephone service).
(2) Defects refer to any technical problems occurring in telephone lines and
equipment as well as in the Company's external plant and central switches.
In 2002, quality indicators were affected by the labor strike carried out
in July 2002.
Since the implementation of Tariff Decree No. 187 in 1999, which greatly
affected the profitability of the Company's fixed line business, Telefonica CTC
Chile has strategically chosen to halt investment in the expansion of its fixed
network and has focused on developing and promoting services and products that
maximize usage of its existing capacity, and on rationalizing costs in the Fixed
Telephony area. As a result, the number of lines-per-inhabitant owned by
Telefonica CTC Chile decreased from 17.6 per 100 inhabitants of Chile as of
December 31, 1998 to 17.1 per 100 inhabitants as of December 31, 2002, which
represents a 2.8% decrease during that period. Line growth has also slowed as
consumers have allocated an increasing
14
portion of their budget to mobile services, as well as due to increased
competition from other local operators. In 2002, the decrease in lines in
service was mainly a result of higher line disconnections due to non-payment.
Since 1999, the Company has also focused on improving its productivity in
the Fixed Telephony area by, among other things, increasing its number of lines
per employee (excluding its subsidiaries, which do not provide local telephone
service) from 845, as of December 31, 2001, to 1,058, as of December 31, 2002.
This improvement in productivity was achieved primarily through a 21% reduction
in Fixed Telephony personnel in 2002 as compared to 2001, which mainly resulted
from a reorganization implemented in October 2002 as part of the Company's
workforce rationalization program.
Over the past two years, Telefonica CTC Chile's fixed line traffic has been
negatively affected by the slow rate of recovery of the Chilean economy,
decreased line growth and lower rates of utilization as consumers migrate from
fixed line usage to mobile services. In addition, the composition of the
Company's fixed line traffic has changed, with an increasing proportion of
traffic from calls to mobile phones and Internet, as well as prepaid calls,
which partly offset the decline in regular fixed-to-fixed traffic.
The following table shows local telephone service traffic, by number of
calls and millions of minutes, for the periods indicated.
For the year ended December 31,
-----------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Local calls (millions)................. 6,313 6,221 6,062 5,652 5,266
Local traffic (millions of minutes) (1) 19,095 19,824 16,841 16,410 15,900
---------------------------
(1) As of February 1, 2000, per second billing was implemented. Information for
1998 and 1999 is shown in rounded minutes.
Although Telefonica CTC Chile operates approximately 76% of the local fixed
lines in service in Chile, other companies are free to apply for licenses to
operate fixed lines that may compete with the Company's Fixed Telephony
business. Currently, 10 smaller companies also provide local telephone service
and, in the aggregate, operated approximately 24% of the total number of fixed
lines in service in Chile as of December 31, 2002. In 1981, licenses to provide
local service in certain areas of the Metropolitan Region were granted to
Complejo Manufacturero de Equipos Telefonicos S.A.C.I. ("CMET") and Compania
Telefonica Manquehue Ltda. ("Manquehue Net"). Competition increased in 1995 as
local telephone service licenses were granted to Telesat S.A. ("Telesat"), VTR
Telefonica S.A. ("VTR"), which is a subsidiary of VTR GlobalCom and Entel
Telefonia Local S.A. ("Entelphone"), which is a local telephony subsidiary of
Empresa Nacional de Telecomunicaciones S.A. ("Entel"). Furthermore, two
companies, Compania Nacional de Telefonos S.A. ("Telefonica del Sur") and its
subsidiary Compania Telefonica de Coyhaique S.A. ("Telcoy"), have licenses to
provide local service in southern Chile, in Regions X and XI, respectively. The
initial licenses have been modified over the years, extending the license areas
of the local telephone service providers, mainly VTR (in Regions I, II, V and
VIII) and Telefonica del Sur (in Regions IX and VIII). Apart from Telefonica CTC
Chile, four other companies provide local telephone service in rural areas.
Telefonica CTC Chile also competes with providers of private communications
systems, particularly in areas of significant business activity.
The Fixed Telephony business area uses marketing channels owned by the
Company, such as commercial offices and retail stores that sell Telefonica CTC
Chile's products, as well as external marketing channels, such as direct
telemarketing sales by third parties, complemented by an external sales force
and specialized distributors.
In order to mitigate the adverse impact of the tariff decree and other
negative factors on fixed line revenues, in addition to its efforts to enhance
productivity and rationalize its workforce, Telefonica CTC Chile has also
focused on offering various non-regulated services over its local network
infrastructure, thus adding value to existing fixed lines and increasing revenue
per line.
For example, since 2002, the Company has sought to increase the utilization
rate of its fixed lines through offering prepaid card services ("Tarjeta Linea
Propia" or "TLP"), and has subsequently experienced a
15
sustained increase in market penetration in this area. Prepaid telephone service
serves as a consumer's virtual and portable personal telephone line, and allows
customers to more effectively control and manage their telecommunications
expenses. In 2002, the Company sold 12,216,816 TLP units of Ch$1,000 (US$ 1.39),
representing a more than 50% increase as compared to 2001. In addition, the
Company can provide prepaid services for local communications to customers whose
normal service is suspended or disconnected due to late payment but who are
willing to renegotiate their outstanding debt, by enabling the use of a
telephone line only authorized for a certain amount of prepaid traffic. In 2002,
the Subsecretaria de Telecomunicaciones (the Undersecretary of
Telecommunications or "Subtel") authorized Telefonica CTC Chile to offer prepaid
telephone services to low usage segments. This service, which was first offered
in Santiago and then expanded to the rest of the country as of October 2002,
consists of a flat fee paid through TLP cards that includes a limited number of
minutes to be used during a given month. As customers utilize traffic in excess
of the amount bought under the flat fee, they must buy additional cards for
continued usage. In 2002, revenues from prepaid traffic were Ch$11,871 million
(US$ 16.5 million), representing a growth of 106.5% as compared to 2001.
Since November 2002, the Company has been authorized to market two new
alternative plans for high usage customers: (i) "Plan Full Voz" or Full Voice
Plan, for high usage residential customers with over 2,800 minutes per month,
which consists of a flat fee for unlimited local traffic in a given month
(subject to a set traffic distribution between peak and off-peak hours defined
by the plan); and (ii) a plan for corporate customers with very high usage,
consisting of a monthly flat rate based on the historical average of traffic,
which is reviewed every 6 to 12 months. These flat rates do not include mobile
access charges, variable Internet charges collected by Internet Service
Providers ("ISPs") or surcharges for complementary and directory information
services. These new plans give the Company greater flexibility to compete on the
local market by offering customers volume discounts.
Telefonica CTC Chile has also sought to increase utilization of existing
fixed lines by offering providing for a flat monthly fee Internet access to the
Public Internet Network over analog or digital (ISDN) lines. In 2002, the
Company began offering, for a flat rate, dedicated second line service
exclusively for 24-hour a day Internet browsing. The number of customers with
flat rates Internet services in 2002 totaled 33,295, representing a growth of
93.1% as compared to 2001.
In line with the Company's strategy of increasing utilization of existing
fixed lines, the Company has also focused on the expansion of its broadband
services using ADSL technology. In 2002, this focus resulted in a 265.8%
increase in the number of ADSL connections, reaching 54,163 customers
nationwide. The Company markets its ADSL broadband services through three plans:
(i) two plans (the "Speedy" and "Speedy Business" plans, respectively) directed
towards end users, whether households or businesses, and (ii) the "Megavia"
plan, whereby the Company acts as a wholesaler offering the technology to ISPs,
who then resell it to their respective customers.
Although broadband service is currently primarily used for high speed
Internet access, it also allows the Company to offer customers other services,
such as virtual private networks ("VPNs"), security systems with remote
monitoring from anywhere in the world ("Viginet") and e-learning. In the near
future, this technology will make possible the delivery of new services, such as
high-resolution video, service portals, interactive games and domotics.
Revenues from ADSL services in 2002 were Ch$5,293 million (US$7.4 million).
Although 76% of these revenues are included in results for Fixed Telephony, the
remaining 24%, corresponding to services from the Megavia plan, are accounted
for under the Corporate Customers Communications and Data business segment (see
below).
The following table sets forth the number of ADSL connections in service as
of the dates indicated.
As of December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
ADSL in service........................ -- -- 279 14,808 54,163
16
There are six operators in the broadband market. Two of them provide
broadband service utilizing cable modems (VTR and Metropolis Intercom), three
utilizing ADSL technology (Telefonica CTC Chile, Telefonica del Sur and
Telefonica Manquehue) and one utilizing ADSL and wireless local loop technology,
know as "WLL" (Entel). The Company estimates that, as of December 31, 2002, its
ADSL service (including both the direct provision of Internet access and
wholesale provision to ISPs) accounted for approximately 30% of all broadband
access offered in Chile.
Fixed Telephony also includes certain products and services offered by
Impresora y Comercial Publiguias S.A. ("Publiguias"), an affiliate of Telefonica
CTC Chile and a subsidiary of Telefonica S.A., which publishes, distributes and
sells advertising space in telephone directories and Chilean tourism guides. As
of the second half of 2001, Telefonica CTC Chile and Publiguias signed a new
contract, which is operative until June 2006, pursuant to which Telefonica CTC
Chile provides Publiguias with billing and collection services for its sales of
advertising in the Yellow Pages and White Pages directories, and Telefonica CTC
Chile receives a percentage of the revenues generated by Publiguias through such
sales. In addition, Publiguias pays a charge per client for the permanent
updating and maintenance of the related database by Telefonica CTC Chile.
Revenues received by the Company under the terms of the new agreement are lower
than those corresponding to the previous one. In 2002, these revenues accounted
for 0.6% of the Company's total operating revenues and 1.3% of Fixed Telephony
revenues, as compared to 2.0% and 4.5%, respectively, in 2001.
Long Distance
Through its subsidiaries, 188 Telefonica Mundo and Globus, the Company
provides a broad offering of domestic and international long distance service
("Long Distance"), including public and private voice, data and video services.
The Long Distance business segment also includes the rental of 188 Telefonica
Mundo's long distance network to other telecom operators. As of December 2002,
20 companies offered long distance service in Chile, with 12 of such companies
accounting for approximately 99% of all long distance traffic. Only three of
these companies, including 188 Telefonica Mundo, operate their own long distance
networks. These three operators accounted for nearly 88% of DLD traffic and 70%
of the outgoing ILD traffic in 2002. The services and products provided by the
Company under Long Distance are not currently subject to tariff regulation. In
2002, revenues from Long Distance represented 8.7% of Telefonica CTC Chile's
total consolidated revenues.
In 2002, the substitution of mobile telephone usage for traditional fixed
line long distance service and the blocking of long distance service on fixed
lines had a negative impact on the general domestic long distance market and the
traffic of the Company's long distance subsidiaries. As a result, DLD traffic
generated by the Company's Long Distance business segment dropped 10.3% in 2002,
as compared to 2001.
The following table sets forth traffic information for domestic and
international long distance telephone traffic carried by 188 Telefonica Mundo
and Globus for the periods indicated:
Year ended December 31,
----------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------ ------ ------
Domestic long distance traffic
(millions of minutes) ............ 921 836 712 799 717
Outgoing international long distance
Traffic (millions of minutes) ..... 54 54 56 63 66
In response to the negative trend in the long distance market, the Company
has focused on offering new and innovative plans of service aimed at expanding
the domestic long distance market and the Company's share of the market. The
drop in DLD traffic was partly offset by positive results from these product
innovation initiatives, which include "CRA Movil," a long distance collect call
service from mobile telephones, and the "Papa Contento" plan, which allows a
fixed line client to assign a specified monthly amount of expense to each of the
different persons who use that fixed line for long distance calls. As of
December 31, 2002, this plan had 129,830 subscribers, of which 53,935 generated
traffic during the month of December 2002. As a result of these plans, the
Company was able to increase its share of the domestic long distance market to
38.7% in 2002 from 38.2% in 2001.
17
With the goal of continuing to meet customer needs through innovation and
expanding the international long distance market, especially from mobile phones,
in June 2002, the Company also launched its "El Mundo a Llamada Local," or "The
World at Local Rates" plan. Under The World at Local Rates plan, for a monthly
fixed charge, customers receive a certain number of minutes of ILD at a local
call rate, with a reduced price for the additional traffic in excess of such set
number of minutes. Telefonica CTC Chile's outgoing ILD traffic increased 5.2% in
2002 over the previous year, and its market share increased to 29.4% from 27.9%
in 2001.
188 Telefonica Mundo began competing with other carriers for the provision
of long distance service on August 27, 1994, shortly after the introduction of
the regulatory structure for long distance service instituted under Law No.
19,302 (the "Multicarrier System"). Under this system, users are able to select
long distance carriers on a dialed or pre-subscribed basis. See "--Licenses and
Tariffs--The Tariff System--Multicarrier System" and "Licenses and
Tariffs--Licenses." In 2002, Telefonica CTC Chile was the largest DLD operator
in Chile, and the second largest operator in the Chilean ILD market. As of
December 31, 2002, 188 Telefonica Mundo and Globus had a combined market share
of 38.7% of the DLD market and 29.4% in outgoing ILD. The Company's principal
competitor with respect to long distance services is Entel.
The main sales channels through which the Company offers its Long Distance
products and services are direct telemarketing sales campaigns conducted by
third parties. The Company also uses third-party call centers to sell domestic
and international long distance traffic plans and other products, such as
prepaid cards.
With the objective of controlling non-payment of long distance services, as
of November 2000, Telefonica CTC Chile offers all long distance carriers the
ability to suspend all telephone services, including local service, access to
mobile phones, access to "700" (toll calls) and "800" (toll-free calls) numbers
and access to all other long distance carriers, to customers who have not paid
their telephone bill in full within 27 days of the billing date. The Company
does not accept partial telephone bill payments, unless the customer has
presented a formal complaint that has been accepted by the corresponding long
distance carrier.
In order to increase the profitability of the domestic and international
network of the Long Distance business segment, 188 Telefonica Mundo also serves
other telecommunications operators' needs in voice transport and capacity,
including other long distance carriers with and without their own networks, as
well as mobile companies and ISPs. During 2002, prices for transport of voice
and data traffic continued along a downward trend. The effects of this trend,
however, were partially offset by an increase in capacity and by the
introduction of new services, such as "Nationwide IP Switched Service," which
provides access to ISPs through 188 Telefonica Mundo.
In 2002, revenues from the rental of the Company's long distance network
decreased by 7.1%, as compared to 2001, due to lower prices and lower market
traffic in general. However, such revenues as a percentage of Telefonica CTC
Chile's total consolidated operating revenues in 2002 remained unchanged from
2001, at 1.6%.
188 Telefonica Mundo, like many other long distance operators, also has a
business area dedicated to international businesses. This area is involved in
negotiating settlement rates for incoming and outgoing international traffic
with different international operators, as well as establishing agreements for
the intermediation of international traffic among long distance carriers.
During 2002, the international business areas of the long distance units of
the Telefonica Group in Chile, Argentina, Brazil, Peru, Spain, Puerto Rico, El
Salvador, Guatemala and CTI (USA) formed Telefonica International Wholesale
Services, in order to benefit from the synergies created by pooling their
international traffic volumes to improve the costs of terminating traffic in
major destinations. This has allowed for a reduction in termination costs for
international calls, increased efficiency in network usage and reduced operating
costs due to centralization of international network operations, and better
prices for international transport and access to the IP backbone in the United
States.
18
Mobile Communications
The mobile communications business segment ("Mobile Communications") offers
mobile telecommunications products and services through the Company's
subsidiary, Telefonica Movil, and principally generates revenues from outgoing
cellular traffic, interconnection fees from incoming calls from other networks
and mobile equipment sales. In 2002, the mobile communications market continued
to grow, experiencing subscriber growth of 22.0% as compared to 46.0% in 2001.
This rate of growth, however, represents a more moderate pace than in previous
years. Telefonica Movil has remained one of the leaders in this very competitive
market, with a cellular subscriber base that increased by 17.8% in 2002 to
1,849,283 customers. The Company estimates that penetration of mobile
communications services in Chile reached 38.8 mobile telephones per 100
inhabitants in 2002, as compared to 32.7 in 2001.
Telefonica Movil maintains a fully digitalized nationwide TDMA mobile
network of 25 MHz in the 800 MHz frequency. In 2002, it continued to make
improvements to this network's quality and coverage of voice services
nationwide. The Company also increased its range of products and services to
include plans, which are targeted at families and SMEs, that offer a set number
of minutes that can be used collectively by a group, and continued to offer
value-added services to mobile customers, including, among other things, voice
mail, SMS, WAP, Corporate Manager, 24-hour directory information, e-mail
notification and ringtones. Customers on the TDMA network also have access to
automatic roaming in Argentina, Peru, Uruguay, Paraguay, USA and Brazil, as well
as manual roaming worldwide.
In addition, in 2002, Telefonica Movil acquired through a bidding process
two nationwide bands of 10 MHz each in the 1900 MHz mobile frequency (PCS),
which it is developing with GSM/GPRS technology. The total cost for the PCS
licenses was UF 544,521 (approximately US$ 12.8 million), and the Company
expects investment related to the development of PCS service in the 2002 to 2004
period to reach approximately Ch$107,791 million (US$ 150 million). The
additional spectrum provides the Company with a significant opportunity to
further meet customer demands and provide new and better services through a more
developed and less expensive technology. Furthermore, the new technology enables
the Company to introduce into the Chilean market, a range of services that the
Telefonica Group has successfully developed and marketed outside of Chile, such
as, among other things, Mobile Internet, WAP and "movipag" (payment of domestic
bills through mobile telephones). In April 2003, Telefonica Movil launched its
GSM service, which has the benefit of operating over the only GSM/GPRS network
covering the entire length of Chile. GSM customers will also have access to
roaming in over 140 countries. With the addition of this new network the Company
expects to be able to grow its customer base and increase the usage and
profitability of its value-added services, especially among corporate customers.
New services launched under Mobile Communications in 2002 included the
interconnection among mobile operators for text messaging services,
family-oriented services (i.e., service packages for family groups) and a "full
hogar" service (full home service), which allows the family group to be linked
via mobile communications to their home phone.
The highly competitive environment and rapid growth in the availability of
mobile telephony service in recent years has caused downward pressure on pricing
and increased penetration into lower income segments, mainly through prepaid
services. Facing this challenging market, in order to improve the profitability
of Mobile Communications, Telefonica Movil has focused on a strategy of
"Profitable Growth" by substantially reducing subscriber acquisition costs,
which decreased 10.9% in 2002, as compared to 2001. In addition, during 2002,
Telefonica Movil consolidated its commercial network to 1,500 points of sale
throughout the country; divested or liquidated businesses other than its primary
Mobile Communications business (namely, paging and trunking); continued to
optimize its workforce and established a new corporate organizational structure;
and consolidated its internal control processes. All of the above contributed to
the positive net income in 2002 for the Mobile Communications business segment
compared to a net loss in 2001 and 2000.
Mobile Communications revenues accounted for 23.9% of Telefonica CTC
Chile's total operating revenues in 2002 as compared to 20.0% in 2001. The
average number of cellular subscribers increased by 22.5% in 2002 as compared to
2001. In 2002, 75.5% of this average subscriber base was composed of prepaid
subscribers, as compared to 73.5% in 2001. The average number of prepaid
subscribers increased by 25.8% in 2002.
19
The following table sets forth the number of the Company's mobile
subscribers as of the dates indicated.
As of December 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
------- --------- --------- ---------- ----------
Cellular subscribers (end of period):
Contract subscribers............... 315,880 429,105 354,481 394,240 437,378
Prepaid subscribers................ 238,345 724,689 870,039 1,175,847 1,411,905
TOTAL ............................. 554,225 1,153,794 1,224,520 1,570,087 1,849,283
Average cellular subscribers........... 354,069 845,576 1,194,825 1,393,622 1,706,986
Telefonica Movil operates in both the 800 MHz and the 1900 MHz bands. It
currently competes with BellSouth (a subsidiary of BellSouth Corporation) in the
800-megahertz band, and with Entel PCS (a subsidiary of Telecom Italia) and
Smartcom S.A. (a subsidiary of Endesa Espana), which are digital mobile
telephony operators with licenses in the 1900-megahertz band. Based on Company
estimates, Telefonica Movil had a market share of approximately 30.4% of mobile
communications customers nationwide as of December 31, 2002. In June of 1997,
three digital mobile telephony licenses were granted in the 1900-megahertz
frequency to Chilesat PCS, Entel PCS and Entel Telefonia Movil, both
subsidiaries of Entel. Entel PCS began offering its digital mobile service in
March of 1998 and Chilesat PCS launched its service in September of 1998. In
April of 1999, services offered by Chilesat PCS (now Smartcom S.A.) were
re-launched under the full ownership of Leap Wireless International. In May of
2000, Endesa Espana acquired Smartcom S.A. from Leap Wireless International. In
July 2002, a bidding for the three licenses of 10 MHz bands, each in the 1900
MHz frequency, assigned two of the 10 MHz band licenses to Telefonica Movil and
one 10 MHz band license to BellSouth.
The mobile communications business uses its own sales channels, which
consist of 16 strategically located stores and a specialized sales force serving
certain corporate customers. In addition, this business unit uses external
channels including: (i) more than 145 third-party stores exclusively selling
Telefonica Movil's products and (ii) a network of over 830 non-exclusive
distributors, including department stores, supermarkets and chain stores, which
sell mainly prepaid products. The mobile communications business also sells
services through direct telemarketing and Internet sites.
Corporate Customers Communications and Data
Telefonica CTC Chile serves the communications needs of corporate customers
and large corporations (the "Corporate Customers Communications and Data"
business segment) through its subsidiary Telefonica Empresas, which has
specialized units for customer service, product and/ or service development and
operations management. The Corporate Customers Communications and Data business
serves approximately 5,000 customers, including close to 350 large corporations,
ministries and government agencies. This business segment's activities include
the delivery of advanced telephony solutions and voice equipment, such as PABX,
videoconferencing, and point-to-point data circuits for corporate customers in
all segments. Additionally, it provides communications solutions, data
transmission and value-added services to all its customers through advanced data
connections such as, among other things, Frame Relay, ATM and the IP Network. In
2002, there was a migration by certain customers from traditional technologies,
such as Datared and Frame Relay, to more advanced solutions over its IP network.
In addition, Telefonica CTC Chile delivers advanced telecommunications solutions
to corporate customers by offering consulting, professional services and
outsourcing, and offers wholesale ADSL to ISPs, who in turn, market it to their
end-user customers. The Company also maintains, through Telefonica Empresas, a
specialized IP Solutions division whose primary goal is to develop the Data
Center and Network Outsourcing businesses, which offer customers new value-added
and integrated services based on their corporate communications needs.
Telefonica Empresas also provides post-sales services, such as installation,
maintenance, updates of products and services and integration of new solutions.
In 2002, a GPS service was rolled out with the aim of meeting the needs of
companies requiring support and management for vehicle fleets using digital maps
over the Internet. Also in 2002, Telefonica Empresas launched its National
Videoconferencing Network, the first of its type in the country, and its Contact
Center line, which provides Internet access to call centers. In addition,
Telefonica Empresas' VPN IP service commenced operations in mid-2002, expanding
business and service offerings for customers, and providing flexible and
adjustable data connection services with broad coverage and presence in over 400
locations throughout the country.
20
As of December 31, 2002, revenues from the Corporate Customers
Communications and Data business segment accounted for 10.0% of Telefonica CTC
Chile's total operating revenues, as compared to 7.9% of total operating
revenues in 2001. Revenues from Corporate Customers Communications and Data grew
19.2% in 2002 as compared to 2001, mainly as a result of the increased
connectivity services through the IP network and higher revenues from sales of
projects and complementary services to corporate customers.
The following table sets forth the number for some of the Company's data
services as of the dates indicated.
As of December 31,
--------------------------------------------------------------
1998 1999 2000 2001 2002
------ ------ ------- ------ -------
Datared (circuits)..................... 13,960 15,951 17,899 18,467 13,496
Frame Relay (points)................... 1,704 3,285 4,394 6,012 5,215
ATM (points)........................... 492 717 1,111 1,585 1,719
Dedicated IP connections............... - - 102 883 3,788
Switched IP connections (average*)..... - - 13,000 15,835 19,585
---------------------------
* Except for 2000, which is as of December 31, 2000.
Telefonica CTC Chile estimates that its share of the total revenues
generated by the market for services represented by the Corporate Customers
Communications and Data area was approximately 49%, as of December 31, 2002. Its
main competitors in this area are Entel, Teleductos S.A, AT&T Chile, Telex,
Impsat and Equant Chile S.A.
Telefonica CTC Chile provides Internet access to corporate customers
through its subsidiary ISP Empresas. In this market, the Company competes mainly
with Entel, IFX Corporation, AT&T Chile and Equant Chile S.A. The Company
estimates that it had approximately 30% of the corporate customer market for
dedicated Internet access as of December 31, 2002.
Information Systems Services (Sonda)
"Information Systems Services" refers to services provided by the Company's
information systems subsidiary, Sonda. In September 2002, Telefonica CTC Chile
sold a 25% stake in Sonda, maintaining a 35% ownership of that company. As a
result, Telefonica CTC Chile no longer has a majority holding or administrative
control of Sonda and, consequently, as of September 1, 2002, no longer
consolidates its financial results. See "Item 10: Additional Information--
Material Contracts."
Sonda is a Chilean information technology provider, and has operations in
other Latin American countries through its subsidiaries. This company offers
systems integration services and projects such as information platforms,
outsourcing, network management, hardware and software maintenance and support,
the design of computer solutions and application software, and training and
consulting services. Sonda assists Latin American corporations by providing
consultants who advise in areas of technology and how customers can best
optimize the application of such technology in their business.
Other Businesses
"Other Businesses" consists of the Company's public telephone services,
provided through its subsidiary CTC Equipos, and the businesses of certain other
subsidiaries, including Compania de Telecomunicaciones de Chile -- Isapre S.A.
("Istel"), Tecnonautica, Infoera, t-gestiona and Telemergencia.
Public Telephones. Telefonica CTC Chile offers public telephony services
through its subsidiary CTC Equipos. CTC Equipos is responsible for the
installation and operation of its own public telephones on public roadways and
in indoor areas, as well as the marketing of public telephone equipment to
private third parties. Currently, the public telephony market in Chile is made
up of seven operators and numerous private parties in which Telefonica CTC Chile
has a market share of approximately 23% of installed lines. The revenues in this
business area are generated by traffic on public phones owned by the Company,
maintenance agreements for indoor installations, and service agreements for
maintenance and commercial support provided to third parties (owners of public
telephones purchased from the Company). The Company ended 2002 with a total of
11,834 public telephones, a decrease of 8.1% compared to 2001. In addition,
Telefonica CTC Chile provides community lines for low and medium income
segments, which amounted to 23,840 lines as of December 31, 2002. CTC Equipos
also sells and provides interior installation of telephone equipment. In 2002,
revenues
21
from CTC Equipos, accounted for 4.7% of Telefonica CTC Chile's consolidated
operating revenues, a decrease of 5% as compared to 2001. This decrease was
principally a result of lower average revenue per public telephone due to mobile
traffic substitution. The Company competes in this business area mainly with
Telefonica del Sur, Telcoy, Entel, Telefonica Manquehue and other third parties
that own and operate public telephones in Chile.
Telemergencia. The Company also offers new products and services to its
customers, such as home security services and home assistance, through its
subsidiary Telemergencia. These services consist of providing monitoring and
alarm systems, which connect through the Company's fixed telephone lines to
Telemergencia's security platform. Telemergencia offers the service through a
wide variety of plans adapted to different customers' needs and budgets, ranging
from the Viginet plan, a digital video-surveillance system that can be operated
online from a broadband Internet connection, to its simplest plan, the "Boton de
Seguridad," which is essentially a "panic button" service. In 2002, the number
of customers subscribing to the Company's security services and home assistance
grew by 292.8%, reaching 31,863. Telemergencia is currently the second largest
alarm monitoring company in the Chilean market, behind ADT Chile, and the
Company believes it is the only such company to currently offer plans for all
socioeconomic segments. In 2002, the Company estimates that its share of the
market security services and home assistance was 24%.
t-gestiona. This subsidiary supports other business areas of Telefonica CTC
Chile though the provision of logistics, fund management, insurance, collection,
personnel, tax, real estate administration and general services to various areas
of the Company. T-gestiona is also responsible for cost management, quality and
timing of the services rendered, administration of its own human and technical
resources, and for establishing contractual agreements with its customers, i.e.
the business units and corporate areas of the Company. This service model gives
the Company and its multiple businesses a competitive advantage in terms of
efficiency and effectiveness and allows it to avoid duplicating support
activities. It also allows each business unit to replace fixed cost structures
with variable costs based on the volume of their respective operations.
Competition
The following chart shows the business segments in which the main Chilean
telecommunications companies operate:
Fixed Mobile Data ISP ISP
Company Telephony (1) Long Distance Communications Transmission Corporate Residential
------------ ------------- ------------- -------------- ------------ --------- -----------
Telefonica
CTC Chile |X| |X| |X| |X| |X|
Entel |X| |X| |X| |X| |X| |X|
VTR |X| (2) |X|
Operations in
this area
Bellsouth |X| |X| halted
Smartcom |X|
Chilesat (2) |X| |X| |X| |X|
Telefonica del
Sur |X| |X| |X| |X|(3) |X|
Manquehue Net |X| |X| |X| |X|(3) |X|
AT&T Latin
America |X| |X| |X| |X|(3)
Terra Networks |X|
CMET |X| |X| |X|
Transam |X| |X|
GTD |X| |X| |X| |X| |X|
---------------------------
(1) Includes broadband.
(2) Waiting for a concession.
(3) Recently in the market or not relevant to operations.
22
Business Unit Reorganization
During the fourth quarter of 2002, Telefonica CTC Chile reorganized its
business units with the objective of heightening the Company's understanding of
its consumers and achieving a structure better suited to serving customers. The
new business structure is divided into three areas based on the type of customer
served. The "Consumer and Small Business Communications" unit groups together,
for commercial and organizational purposes, all of Telefonica CTC Chile's
products and services offered to residential customers and small and
medium-sized businesses. This includes, among other things, local telephony,
broadband, public telephony, home security and the Company's long distance
subsidiaries. The "Corporate Communications" unit delivers communications
services and data solutions to companies and corporations. The "Mobile
Communications" unit provides all mobile communications services to individuals.
This reorganization is meant to foster a better understanding and a closer
relationship with the client, to the extent that each business unit can identify
customer profiles and develop products and services to satisfy each consumers'
communications needs. The new structure is focused on improving customer service
and internal efficiency, and does not change the Company's business segments for
accounting purposes.
Additionally, the Company's reorganization process defined two support
units. The first such unit is "Management of Customer Service and Sales," which
is responsible for the marketing and distribution of all the Company's products
throughout the country, billing and customer relations and service. The second
unit is "Management of Network Services," which is responsible for developing
and maintaining the Company's telecommunications infrastructure as well as
operating the networks and providing services necessary to maximize fixed
network availability and thus offer the best service possible to the end user.
The Management of Network Services unit of the Company also manages the
operation of the network, whose revenue is associated with interconnection
services for wholesale operators, and services to long distance carriers such as
measurement, charging, billing and collections. As a result of this
reorganization, Telefonica CTC Chile currently benefits from a structure that is
better adapted to support the Company's leadership position in a competitive
market and anticipate future market changes.
Development Plan and Strategic Goals
Telefonica CTC Chile has established a development plan (the "Development
Plan"), which sets forth the Company's main objectives for the four-year period
following the date of each plan and which is revised annually to incorporate new
investment projects and goals. The Company's current Development Plan includes
corporate objectives from 2003 until 2007. Over this period, the Company's
strategies and expected capital expenditures will be focused on the development
of the Company's mobile, data and broadband businesses, which are currently
expected to have the highest growth potential in the Chilean market. The fixed
telephony business, although still the principal source of Telefonica CTC
Chile's consolidated revenues, was restructured during 1999, in response to the
negative impact to that business area of Tariff Decree No. 187. See "Item 4:
Information on the Company-- Business Overview--Licenses and Tariffs--The Tariff
System." Accordingly, and assuming no change in the existing tariff regime, the
Development Plan contemplates very low investments in the expansion of its fixed
line network and limited line growth.
The Company aims at profitable growth in each of its business areas. In the
fixed line business, the Company's plans focus on generating customer loyalty
and increasing its presence among higher value customers, who are more
vulnerable to competition. The Company plans to achieve this goal through
increased market intelligence, customer segmentation and the adaptation of
business, post-sales and billing processes. For lower income segments, the
Company contemplates the expansion of prepaid products, aimed at leveraging idle
capacity of the Company's infrastructure and minimizing non-payment risks. Also
in order to increase the value of existing lines in service, Telefonica CTC
Chile's strategy focuses on promoting value-added services that leverage
customer connectivity, thus generating an increase in direct customer revenues
through services such as equipment leasing, and higher traffic generated through
services such as call waiting and voice mail, among others. An important area of
growth for the Company is the development of broadband services with ADSL
technology, which utilizes the existing copper line network, and the exploration
of the combination of ADSL with Wi-Fi technology to increase access flexibility.
The Company aims at achieving leadership in the development of broadband access
and services and at developing new
23
services that are available on the broadband network, including VPNs for small
and medium-sized businesses, videoconferencing over ADSL and Viginet.
In its long distance business area, the Company faces the generalized
market trend of decreasing long distance traffic. In this challenging
environment, 188 Telefonica Mundo's plans are based on product innovation and a
move towards flat rate plans in order to generate customer loyalty and increase
usage. The long distance business is also reorienting its focus towards the
wholesale market, where it rents its long distance network to other
telecommunications operators.
The main focus of the mobile business is the build-out of its new
nationwide network with GSM/GPRS technology. Telefonica Movil is strategically
focused towards profitable growth, based on the additional capacity offered by
the new network and on the development of new value-added services. The mobile
business also aims at segmentation of the customer portfolio in order to
identify the most profitable customers and offer them through high quality in
business and customer service processes.
The Company's strategic efforts in the corporate communications and data
area are principally aimed at positioning itself as a leader in the corporate
segment through the consolidation of outsourcing projects and IP solutions. The
Company is also focused on differentiating itself through technological
leadership with the deployment of the IP Network and of the Telefonica Data
Internet Center (TIC) and the development and implementation of multiple
customized applications.
The Company is also focused on improving customer satisfaction levels in
all its business segments, with the goal of building a customer base that will
obtain all of its telecommunications products from Telefonica CTC Chile. With
this objective, the Company is implementing a consultative type of sales
transaction, whereby the salesperson not only sells a product, but can also
obtain information from consumers regarding their telecommunications
requirements and how to address them. As a necessary part of this project,
Telefonica CTC Chile is monitoring customer satisfaction levels in the key
processes of sales, billing, collection and customer service, so as to implement
whatever improvements may be required.
Licenses and Tariffs
Licenses
Under Law No. 18,168 (as amended and together with the regulations
promulgated thereunder, the "Telecommunications Law"), companies must obtain
licenses in order to provide the following telecommunications services:
o public telecommunications services (services provided to the public,
such as local and mobile telephony, pay phones, data transmission,
paging and trunking);
o intermediate telecommunications services (services provided to
companies that are holders of telecommunications licenses, such as
domestic and international long distance services provided under the
Multicarrier System); and
o broadcasting services, such as those provided by radio and television
stations (Telefonica CTC Chile does not provide such services).
Only corporate entities may obtain licenses. Licenses specify the
conditions that the license holder must fulfill in order to install, operate and
develop the service and business that are the subject of the license. Licenses
granted for public and intermediate services generally have 30-year terms and
may be renewed indefinitely for 30-year periods at the request of the operator
(although certain licenses held by Telefonica CTC Chile have longer terms).
Holders of local telephone service licenses are required to provide service
to all parties located in the license area that have requested such service
within two years of such request. In addition, license holders must provide
service to all parties situated outside the license area who are willing to pay
for the line extensions required to reach their location from the license
holder's facilities.
24
The Telecommunications Law requires that holders of public
telecommunications service licenses interconnect their networks to other
networks providing the same type of service. This requirement is intended to
ensure that subscribers and users of public services are able to communicate
with each other, both inside the country and abroad. The same requirement
applies to holders of intermediate service licenses, who are required to
interconnect their networks to the local telephone network. Subtel sets the
tariffs applicable to services provided through the interconnection of networks,
in accordance with the procedures established in the Telecommunications Law. The
structure, level and indexing of these interconnection rates are fixed by a
tariff decree.
More than one service license may be granted for the same geographic area.
Moreover, in instances where the number of licenses to be granted is limited by
technical or other concerns, such licenses are awarded through a public bidding
process.
The Telecommunications Law specifies certain causes for which an operator
can be sanctioned through the termination of its public or intermediate service
license. A license may be terminated, after notice of noncompliance with the
applicable technical regulations, by executive decree of the Ministry of
Transport and Telecommunications, if the operator is in violation of the law or
does not comply with the terms and conditions to which the license is subject.
If the holder believes that its license has been terminated unlawfully, the
holder may appeal the termination in Chilean courts. If a license is terminated,
the holder is barred from applying for any license for a period of five years.
Licenses Held by Telefonica CTC Chile
Telefonica CTC Chile holds the following licenses for the provision of
telecommunication services:
o Local Telephony Public Service Licenses. Telefonica CTC Chile holds a
license for local telephone service in all regions of Chile for a
50-year period beginning as of December 1982. In addition, the Company
holds licenses for local telephone service in the Santiago
Metropolitan Region and in certain cities in Regions V and VIII for an
indefinite term. Telefonica CTC Chile also holds a nationwide public
service license for data transmission for a 30-year period beginning
as of July 1995.
o Multicarrier Long Distance Licenses. Under the Multicarrier System,
188 Telefonica Mundo holds 30-year licenses, for a period beginning as
of April 1993, to install and operate a nationwide fiber optic
network, a network of base stations and other transmission equipment,
and to provide domestic and international long distance services,
including voice, data and image transmission, throughout Chile. Globus
holds licenses for an indefinite term to provide domestic and
international long distance services through central switches and
cable and fiber-optic networks nationwide.
o Public Service Data Transmission. Telefonica CTC Chile, through
Telefonica Empresas, holds, as of March 1987, nationwide public
service data transmission licenses for an indefinite term.
o Public Service Mobile Telephony Licenses. Telefonica Movil holds
licenses with indefinite terms, beginning as of November 1989, to
provide public service mobile telephony services throughout Chile in
the 800 megahertz frequency range. In July 2002, Telefonica Movil was
assigned two 30-year 10 MHz licenses with nationwide coverage in the
1900 MHz frequency range.
o Public Service Paging License. The Company also holds a 30-year
license, for a period beginning as of May 1998, to provide paging
services covering all of Chile.
Development of New Telecommunications Projects in Chile
o Wireless Local Loop. On May 17, 2001, five companies participated in
the public bidding process for WLL licenses (3400 to 3700 MHz), which
enable the transmission of voice, fax, Internet and data through
switching centers to customers by antennas.
25
Three nationwide licenses of 50 MHz each were awarded to Entel, Protel
and Chilesat and three regional licenses of 50 MHz each were awarded
to Entel (in all regions), Telefonica del Sur (in Regions VIII to XI)
and to VTR (in the Metropolitan Region). Of these five companies, only
Entel is developing its project, while the others withdrew their
applications or desisted from the project. Telefonica del Sur is only
developing WLL services in rural and suburban areas of Region X. Based
on its evaluation of the project, Telefonica CTC Chile decided not to
participate in this process.
o Assignment of Bands in the 1900 MHz Frequency Range. On July 18, 2002,
Telefonica Movil and Bellsouth participated in a bidding process set
by Subtel for three 10-MHz frequencies in the 1900 MHz range. In this
bidding process, Telefonica Movil was awarded two frequencies (20 MHz)
for a total amount of UF544,521 (US$ 12.8 million). The corresponding
concession decree was published in the Official Newspaper on November
16, 2002.
o Technical Rules for Third Generation Mobile Service. On September 28,
2000, the Subtel published the technical rules for advanced mobile
digital public telephone service, known internationally as the third
generation mobile service or IMT-2000. The regulatory authority
invited companies in the sector to discuss and analyze the
implementation of this service, but to date there has been no progress
in this area. The announcement of conditions for participation in the
tender process has been postponed indefinitely.
o Powerline Communications. PLC technology uses the electricity
distribution network for voice and data transmission. In 2001, Subtel
granted Compania Americana de Multiservicios Limitada, a subsidiary of
the Enersis group, authorization to implement a pilot project based on
PLC technology, exclusively for exhibition purposes and not to be
implemented commercially. This pilot project is currently underway in
50 homes in the Santiago area. In addition, Chilectra, a subsidiary of
the Enersis group, has created a subsidiary to offer PLC service,
mainly focused on broadband connectivity for residential and small and
medium-sized businesses, for which purpose it has obtained the
necessary authorizations. In May 2003, Enersis called an open season,
inviting 30 companies to participate in the launch of PLC technology
in Chile. Seventeen companies have expressed interest in this project,
and must confirm their service requirements by June 29, 2003.
Telefonica CTC Chile is among the companies that have expressed their
interest and is currently pre-evaluating this project.
The Tariff System
Under the Telecommunications Law, maximum tariffs for telephony services
are set every five years. However, prices for telephony services in Chile are
not regulated unless the Antitrust Commission determines that, due to
insufficient competition, certain telephony services must be subject to tariff
regulation. The Antitrust Commission may subject any telephony service to price
regulation, except for mobile telephone services to the public that are
expressly exempted under the Telecommunications Law. In addition, maximum prices
for interconnection services are, as a matter of law, subject to tariff
regulation and are set in accordance with procedures established by the
Telecommunications Law.
The first five-year tariff period commenced in 1989, at which time the
Antitrust Commission determined that the conditions prevailing in the local,
domestic long distance and international long distance markets were not
conducive to free and fair price determination and that prices for such services
would therefore be subject to regulation. However, in a resolution, made in
April 1998 and contained in Resolution No. 515, the Antitrust Commission
determined that only local services, public telephone services and line
connections need be subject to tariff regulation. In addition, the 1998
resolution included unbundled network services among the services subject to
tariff regulation.
Under the Telecommunications Law, once the Antitrust Commission has
determined that tariff regulation is warranted, the structure, level and
indexing of the maximum tariffs that may be charged for tariff-regulated
26
services are fixed by a joint decree issued by the Ministry of Transport and
Telecommunications and the Ministry of Economy. These ministries determine such
maximum tariffs by applying to each regulated company an economic model
predicated on the costs, efficiency and growth rates of a hypothetical company
that provides only regulated services, and calculating a rate of return on such
services commensurate with the real company's market cost of capital. Telefonica
CTC Chile's actual rate of return, however, may vary from the predictions of the
model.
The tariffs set by the Ministry of Transport and Telecommunications and the
Ministry of Economy are maximum tariffs. Each maximum tariff takes into account
the relevant cost components associated with providing the regulated service,
and is adjusted monthly in accordance with the tariff index (the "Tariff
Index"), as contemplated in the tariff structure and described below. A distinct
Tariff Index exists for each individual regulated service that reflects the
different theoretical cost components associated with each such service.
As part of the tariff-setting process, license holders prepare studies of
each regulated service that they provide in each license area, calculating the
incremental development costs with respect to each such service for a five-year
period. The purpose of these studies is to assist the Ministry of Transport and
Telecommunications and the Ministry of Economy in determining the structure and
level of future tariffs for each regulated service in each license area.
Tariff Structure for 1999-2004
The current tariff decree, Tariff Decree No. 187, was approved and
published in the Official Gazette on August 21, 1999, effective as of May 5,
1999. Tariff Decree No. 187 incorporates a prior determination by the Antitrust
Commission that only prices charged by dominant operators in any given
geographical area would be regulated. In April of 1998, the Antitrust Commission
determined that Telefonica CTC Chile would be regulated as the dominant operator
in all regions of Chile, except in Region X and Region XI and Easter Island. As
determined by the Antitrust Commission, the dominant operator for Region X is
Telefonica del Sur, for Region XI is Telcoy and for Easter Island is Entelphone.
Accordingly, the current tariff structure regulates the prices that the Company
may charge for regulated services in those regions in which it has been
determined to be the dominant operator.
The principal differences between the current tariff decree, and the tariff
structure that was in effect until May 4, 1999, include the following
(comparisons below are made in Chilean pesos as of December 1999, including the
new tariff indices and excluding any price- or income-elasticity effects):
o An average reduction of 17.5% in the fixed monthly charge.
o A 13.1% decrease in the variable charge per minute for local telephone
service.
o Additional rate reductions applicable to the fixed monthly charge and
variable charge per minute, of approximately 1.0% per year from May 5,
2000, through May 4, 2004.
o Introduction of a local interconnection charge or local tranche for
calls terminated in mobile telephones, rural telephone companies,
complementary service providers connected directly to Telefonica CTC
Chile's central switches (including certain Internet service
providers) and telephone service platforms. The maximum rate for the
local interconnection charge of the tariff decree is equivalent to 45%
of the amended variable charge per minute. Previously, rates for these
calls were equivalent to 100% of the variable charge per minute. As a
result, the per-minute fee charged for these calls was effectively
reduced by 62.9%.
o A single rate for access charges with respect to domestic and incoming
and outgoing international long distance calls, equal to 28% of the
amended variable charge per minute. The tariff structure in effect
until May 4, 1999, provided for a single rate for domestic long
distance and outgoing international long distance access charges and a
different rate for the incoming international access charge. The
change caused a
27
reduction in access charges of 72.9% on average for these services,
consisting of a reduction of 96.8% in the incoming long distance
access charge and a reduction of 63.3% in the outgoing long distance
and domestic long distance access charge.
o Implementation of a new Tariff Index, which is different for the fixed
monthly charge and the variable charges (including the variable charge
per minute, the local interconnection charge and access charges) and
which takes into account (i) the monthly variation of the WPI for
domestic goods, (ii) the monthly variation of the WPI for imported
goods, (iii) labor costs, as measured by the monthly variation in the
labor cost index and (iv) the prevailing corporate income tax rate.
The Tariff Index for the fixed monthly charge comprises 50% of the WPI
for domestic goods, 10% of the WPI for imported goods, and 40% of the
Chilean wage and salary index, taking into account the prevailing
corporate income tax rates. The Tariff Index applicable to variable
charges, including per-minute charges, access charges and local
interconnection fees, is comprised of 53% of the WPI for domestic
goods, 20% of the WPI for imported goods, and 27% of the Chilean wage
and salary index, taking into account the prevailing corporate income
tax rates. The use of the Tariff Index permits the Company to minimize
significantly the impact of inflation on its revenues from
tariff-regulated services.
o Implementation of an adjustment factor, which was temporarily applied
from the commencement of the new tariff structure until February 1,
2000, to transform the per second rates defined in the tariff decree
into per minute rates. The objective of this adjustment factor is to
allow the Company to maintain its revenues from regulated services
constant after the introduction of per second measuring of traffic,
which occurred on February 1, 2000. The adjustment was made as
follows: per minute rate = (per second rate x 60 x 0.83).
o Implementation of specific tariffs for the provision of the following
network unbundled services: (i) last mile; (ii) connection of last
mile; (iii) housing in local switches; (iv) adaptation of pipes and
chambers for the installation of cables of other telecommunications
operators; (v) point-to-point connection between central switches;
(vi) DSL facilities; and (vii) resale of lines. As of December 31,
2002, 13 contracts had been signed with seven companies for the
provision of unbundled network services.
Based on the Company's estimates, the application of Tariff Decree No. 187
resulted in a 24.7% decrease in annual revenue derived from regulated services
per telephone line for the Company in the first year, taking into account tariff
reductions in the fixed monthly charge, the variable charge per minute and local
tranche and access charges, and assuming stable traffic per line. This decrease
includes an average reduction of 17.1% in revenues from subscribers (fixed
charge and variable charge) and of 72.9% in revenues from access charges paid by
interconnected companies, which are mainly long distance carriers.
Deregulation of Long Distance
On April 22, 1998, the Antitrust Commission excluded domestic and
international long distance services from tariff regulation. However, prices for
interconnection services between long distance carriers and local telephone
companies remain subject to tariff regulation.
Multicarrier System
On March 10, 1994, Law No. 19,302 amended the Telecommunications Law to
introduce the Multicarrier System for long distance services. Among other
things, the Multicarrier System permits local telephone service providers to
obtain licenses to supply domestic and international long distance services
through a subsidiary or affiliate using their own equipment.
The following companies offer long distance services in Chile under the
Multicarrier System: 188 Telefonica Mundo; Globus; Entel; Chilesat; BellSouth
Chile S.A.; Telefonica del Sur Carrier S.A., a subsidiary of Telefonica del Sur;
Transam Comunicaciones S.A.; Manquehue Telecomunicaciones de Larga
28
Distancia S.A.; Micarrier Telecomunicaciones S.A., a subsidiary of Entel; GTD
Larga Distancia; Sur Comunicaciones S.A.; AT&T Chile Networks; World X Change
Communications S.A.; ETSE Empresa de Transporte de Senales S.A. and Convergia
Chile S.A. In addition, the following companies have obtained long distance
service licenses, but are not currently providing long distance service: The
Telephone Company S.A.; Transfer Telecomunicaciones S.A.; E-Newcarrier.com Chile
S.A.; Heilsberger S.A.; IFX Larga Distancia; Astro S.A. and Equant Chile S.A.
Other features of the Multicarrier System as they relate to the Company are
discussed in "--Licenses" and "--Business Overview."
Calling Party Pays Structure
Calling Party Pays was implemented on February 23, 1999. Under this tariff
structure, local telephone companies pay to mobile telephone companies an
interconnection charge for calls placed from the fixed network to the mobile
network. The local telephone companies may pass this interconnection charge on
to their subscribers. Under CPP, therefore, a fixed network customer calling a
mobile telephone pays the local telephone company a rate comprised of the local
interconnection charge that is part of Primary Service plus the fixed-to-mobile
interconnection charge.
Tariff Decree No. 97, in effect since February 12, 1999, provides the
maximum tariffs that Telefonica Movil may charge for interconnection services
for a period of five years, ending February 12, 2004. The fixed-to-mobile
interconnection charges permitted by Subtel for the five-year period of
1999-2003 are as follows:
Year Peak hours Off-peak hours
----------------------- ------------------------------------- --------------------------------------
(In Chilean pesos as of January 1999, per second, including value-added tax)
1999................ Ch$1.7158 Ch$1.2011
2000................ Ch$1.7067 Ch$1.1948
2001................ Ch$1.6980 Ch$1.1885
2002................ Ch$1.6894 Ch$1.1826
2003................ Ch$1.6806 Ch$1.1764
Mobile telephone customers can choose not to have the CPP tariff structure
apply to their mobile-telephone accounts, and thus continue to pay for incoming
calls. Furthermore, fixed network subscribers can choose to block the ability to
make calls to mobile telephones from their phones.
On February 24, 2003, Subtel approved the technical bases for a new tariff
setting process for mobile interconnection rates to be in effect from 2004 to
2009. These technical bases will apply to the tariff study to be presented by
Telefonica Movil in August 2003.
Regulatory Initiatives
Request for Deregulation of Local Rates
On January 18, 2001, Telefonica CTC Chile filed a petition before the
Antitrust Commission to deregulate local telephone rates charged to the public,
based on the following arguments: (i) mobile telephony has wider coverage and
more users than local telephony; (ii) local telephony had dropped from 57% of
the average amount spent per consumer on telecommunications services in 1998 to
40% in 2000, lower than the 43% spent on average on mobile services; (iii) the
cable TV network had at the time of the request, over 3 million homes passed
(more than 100,000 cable TV clients in 2000); (iv) the WLL licenses and
additional mobile telephony spectrum to be awarded during 2001 would result in
increased competition; and (v) the rigid tariff structure imposed by Tariff
Decree No. 187 does not allow Telefonica CTC Chile to offer the same tariff
plans as its competitors. Under Article 29 of the Telecommunications Law, the
Antitrust Commission has the authority to determine which telephony services are
regulated and can change any such qualification when it considers that the
conditions warrant such deregulation.
On July 11, 2001, by Resolution No. 611, the Antitrust Commission rejected
the Company's petition, stating, in its opinion, that the then existing market
conditions had not yet warranted deregulation throughout
29
the country. This resolution notwithstanding, the Commission asked the National
Economic Attorney General's Office to monitor the evolution of the market in
order to detect changes as they occur that could lead to the deregulation of
certain services in certain geographic areas.
The Antitrust Commission also decided that Telefonica CTC Chile could
present alternative tariff plans and request the authority to issue
complementary resolutions to Tariff Decree No. 187, which would allow for
differentiated rates within each tariff area, based on costs and according to
volume. In accordance with this decision, in the second half of 2001, the
Company presented to Subtel a proposal for alternative tariff plans for
different customer categories.
In this regard, on May 24, 2002, the Company was notified that Subtel had
approved its proposal to offer prepaid service for fixed line customers. This
service allows customers to pay the equivalent of a monthly fixed charge
(approximately Ch$6,000 in Santiago and Ch$8,000 in regional areas), which is
charged to the telephone line through prepaid cards. By paying this charge, a
customer has the right to generate local traffic equivalent to Ch$1,100 (at
prepaid card rates of Ch$38 and Ch$24 per minute in peak and off-peak hours,
respectively). After this amount has been used up, the line can still be used
with prepaid cards. Previously, a similar service could only be offered to
customers who had defaulted on their payments. The Company's ability to offer
prepaid service for fixed line customers enables the Company to eliminate any
related bad debt risk because it collects the payment for such services in
advance, and increase utilization of vacant network capacity in the low-income
clients segment.
Moreover, on August 24, 2002, the Ministry of Transport and
Telecommunications and the Ministry of Economy issued Decree No. 455, which
approved a high usage plan oriented toward residential customers and a very high
usage plan oriented toward corporate customers, which are based on a flat
monthly fee. Furthermore, Subtel approved the standard contracts to be signed by
customers selecting such plans. Telefonica CTC Chile began marketing the high
usage plan oriented toward residential customers in December 2002.
Request for Access Charge Review
On March 30, 2001, the Company filed a petition requesting a review of
access charges before the Antitrust Commission. The relief requested under the
petition was based on (i) the wide variation in access charges prevailing in the
market and (ii) the fact that only Telefonica CTC Chile, Telefonica del Sur and
Telefonica Coyhaique were subject to access charges set by a tariff decree. The
Company requested that the access charges of local companies be symmetrical and
be set simultaneously for all companies. On April 3, 2001, the Antitrust
Commission dismissed the petition on the grounds that it lay outside of its
jurisdiction. On April 10, 2001, the Company presented the same petition before
Subtel, which has yet to formally respond to the petition. Subsequently, by
Decree No. 26 published in June 2002, access charge rates were set for VTR, and
Telesat S.A., CMET SACI and Manquehue Net have each begun negotiations for the
setting of their applicable tariffs. According to Subtel, these tariffs will be
set simultaneously with Telefonica CTC Chile's new tariff setting.
Request for Administrative Action to Modify Tariff Decree No. 187
On October 31, 2001, Telefonica CTC Chile filed an administrative motion
for reconsideration with the Ministry of Transportation and Telecommunications
and the Ministry of Economy (collectively referred to below as the
"Ministries"), to correct the following errors in the issuance of Tariff Decree
No. 187: a mathematical error in determining the fixed monthly charge for
telephone line service; unlawful application of the depreciation method; failure
to consider the costs of telephone directories; incorrectly assuming lower
investments related to the location of switching centers; erroneous application
of the same local telephone service non-payment rate to the Calling Party Pays
service; and failure to scale access charges and local tranche charges.
On November 16, 2001, the respective Ministers asked the Office of the
General Controller of the Republic of Chile to rule on the lawfulness of, and
need for, correcting such errors if confirmed, pursuant to
30
the relevant technical-economic and legal criteria, and any administrative
measures that should be dictated for such purpose.
In its response dated December 10, 2001, the Office of the General
Controller noted that the Ministries have the authority and the duty to correct
the Tariff Decree No. 187, subject to the following conditions:
o That legal defects exist or that the provisions are based on erroneous
estimates;
o That any defects or irregularities are so significant or relevant that
they warrant the nullification and subsequent correction of the tariff
decree;
o These defects or irregularities must be evidenced so that there is no
doubt as to their existence. For this purpose, the Ministries must
conduct a thorough study of the background information;
o That any potential correction may not affect the rights which were
previously unequivocally incorporated into third party assets in good
faith; and
o Said correction would have to be enacted via a decree subject to
review and approval.
On January 29, 2002, the Ministries issued a joint response rejecting the
administrative motion filed by Telefonica CTC Chile. The Ministries maintained
in their response that the rejection was predicated upon a careful evaluation
limited solely to the viability and timeliness of the request, and having
considered the contributing circumstances and the prudence that should guide
public action. The Company, however, believes that the rejection by the
Ministries fails to respect the criteria established by the Office of the
General Controller.
Lawsuit Against the State of Chile
Upon exhausting the administrative recourses available to correct what the
Company believes are illegal actions taken in the tariff setting process
discussed above, in March 2002, Telefonica CTC Chile filed a lawsuit for damages
against the State of Chile. This legal action seeks damages in the amount of
Ch$181,038 million (US$ 274 million, historical value as of the date of the
lawsuit), plus adjustments and interests, covering past and prospective losses
through May 2004 arising from errors incurred in Tariff Decree No. 187.
For further information regarding the lawsuit filed by the Company against
the State of Chile, see "Item 8: Financial Information--Consolidated Statements
and Other Financial Information--Legal Proceedings."
Tariff Setting Process for Telefonica CTC Chile's Services for 2004 - 2009
On January 13, 2003, Telefonica CTC Chile requested that the Antitrust
Commission, on the basis that market conditions are sufficient to guarantee
healthy competition, rule in favor of tariff deregulation in specific
geographical areas and allow the Company flexibility to offer tariff plans
different from the regulated rates without previous authorization. The Company
also requested that, in cases where conditions are not sufficient to guarantee
competition, the Antitrust Commission define the services that will be subject
to tariff regulation by the corresponding Ministries.
On May 22, 2003, the Antitrust Commission issued Resolution 686. This
Resolution ruled against deregulation of rates charged by Telefonica CTC Chile
for services to the public. Although the Ministries, as part of the Antitrust
Commission's resolutory process, issued opinions that were favorable to
providing tariff flexibility to the Company, the Antitrust Commission did not
issue a specific pronouncement regarding such tariff flexibility. Resolution 686
also defined the services subject to tariff regulation by the Ministries for the
2004 - 2009 tariff decree, which are substantially similar to the services
regulated in Tariff Decree No. 187.
In accordance with the requirements of the tariff setting process, on April
30, 2003, Telefonica CTC Chile presented to Subtel its proposal for the
technical-economic bases upon which tariffs for the 2004-2009 period will be
determined. The Company's proposed criteria addresses all necessary aspects to
be defined previous to the tariff study, such as, among other things, the
analysis period, tariff areas, tariff projections criteria and network design
criteria. On May 30, 2003, Subtel provided the Company with the text of a
31
proposal of the technical-economic bases. Subsequently, the Company presented
arguments against such text and, as provided for in the tariff setting process,
requested the formation of a panel of experts, which was constituted in June
2003. The panel, whose final opinion is not binding upon Subtel, consists of
three experts, one designated by the Company, one by Subtel and the third by
mutual agreement between both parties. Once these issues are resolved, Subtel
must issue the final technical-economic bases, which will define the conditions
that will govern the "Tariff Study," which is the document that sets the tariff
structure and the tariff level, as well as the indexation formula for each
regulated service. The period for Telefonica CTC Chile to present its Tariff
Study to the Ministries expires on November 5, 2003.
The Company cannot at this time predict the results of the tariff studies
currently in progress and any consequent changes in the tariff structure for
2004 to 2009 and, therefore, can give no assurances as to the effect any such
changes may have on the operating results or financial condition of the Company.
C. Organizational Structure
Telefonica Internacional Chile owns 43.64% of all shares of Telefonica CTC
Chile. Telefonica Internacional Chile is a 99.9% owned subsidiary of Telefonica
Chile Holding B.V., which in turn is an indirectly wholly owned subsidiary of
Telefonica S.A.
The organizational chart of Telefonica CTC Chile is presented on the
following page.
32
Subsidiaries and Certain Affiliates of Telefonica CTC Chile
The following chart sets forth the organization of Telefonica CTC Chile's
subsidiaries and affiliates, all of which are Chilean corporations, except for
TBS Celular Participacoes S.A., which is a Brazilian corporation. Percentage
ownership information is as of December 31, 2002.
|---------------------------------------|
__| 99.9% Telefonica Movil de Chile S.A. |
| | ("Telefonica Movil")(1) |
| |---------------------------------------| |---------------------------|
| |---------------------------------------| | 1.1% Terra Networks S.A. |
| | 99.2% Compania de Telefonos de Chile |____| ("Terra Networks") |
|__| --Transmisiones Regionales S.A. | |---------------------------|
| | ("188 Telefonica Mundo") |
| |---------------------------------------|
| |---------------------------------------| |---------------------------|
|__| 99.9% Telefonica Empresas CTC Chile | | 99.9% Telefonica Data |
| | S.A. ("Telefonica Empresas")(1)(2) |____| Chile S.A. ("Telefonica |
| |---------------------------------------| | | Data")(1)(2) |
| |---------------------------------------| | |---------------------------|
| | 99.9% Compania de | | |---------------------------|
|__| Telecomunicaciones de Chile-- Isapre | | | 99.7% Comunicaciones |
| | S.A. ("Istel")(1) | |__| Mundiales S.A. |
| |---------------------------------------| | | ("Comunicaciones |
| |---------------------------------------| | | Mundiales") |
|__| 99.9% Globus 120 S.A. ("Globus")(1) | | |---------------------------|
| |---------------------------------------| |__| 35.0% Sonda S.A. ("Sonda")|
| |---------------------------------------| | |---------------------------|
| | 99.9% Compania de Telecomunicaciones | | |---------------------------|
|__| de Chile-- Equipos y Servicios S.A | | | 80.0% Administradora de |
| | ("CTC Equipos")(1) | |__| Sistemas de Telepeajes de |
| |---------------------------------------| | | Chile S.A. ("Telepeajes") |
| |---------------------------------------| | |---------------------------|
|__| 100.0% CTC Internacional S.A. | | |---------------------------|
| | ("CTC Internacional")(3) | | | 99.9% Desarrollo de | |-------------------------|
|----------------| | |---------------------------------------| |__| Servicios de Informacion | _| 99.9% Infochile S.A. |
| Telefonica CTC |___| |---------------------------------------| | | S.A. ("Infoera")(1) | | | ("Infochile")(1) |
| Chile | | | 99.9% Telefonica Gestion de Servicios | | |---------------------------| | |-------------------------|
|----------------| |__| Compartidos Chile S.A. | | |---------------------------| | |-------------------------|
| | ("t-gestiona")(1) | |__| 99.9% Tecnonautica S.A. |--| | 90.0% Portal de Pagos |
| |---------------------------------------| | ("Tecnonautica")(1) | | | Informacion S.A. |
| |---------------------------------------| |---------------------------| |_|("Todocuenta")(1) |
|__| 99.7% Telefonica Asistencia y | |-------------------------|
| | Seguridad S.A. ("Telemergencia")(1) |
| |---------------------------------------|
| |---------------------------------------|
|__| 50.0% Fundacion Telefonica Chile |
| | ("Fundacion Telefonica") |
| |---------------------------------------|
| |---------------------------------------|
|__| 20.0% Empresa de Tarjetas Inteligentes|
| | S.A. ("Tarjetas Inteligentes") |
| |---------------------------------------|
| |---------------------------------------|
|__| 27.4% Atento Chile S.A. ("Atento |
| | Chile")(4) |
| |---------------------------------------|
| |---------------------------------------|
|__| 9.0% Impresora y Comercial Publiguias |
| | S.A. ("Publiguias") |
| |---------------------------------------|
| |---------------------------------------|
|__| 2.6% TBS Celular Participacoes S.A. |
| ("TBS Celular") |
|---------------------------------------|
-------------------------------
(1) The remaining interest in these companies is also indirectly held by
Telefonica CTC Chile.
(2) On January 28, 2003, the merger of Telefonica Data Chile S.A. into
Telefonica Empresas CTC Chile S.A. was approved by the Board of Directors
of Telefonica Empresas.
(3) In December 2002, CTC Internacional S.A. ceased operations.
(4) Telefonica CTC Chile controls 28.84% of Atento Chile through additional
participations of its subsidiaries 188 Telefonica Mundo and Telefonica
Empresas.
33
While Telefonica CTC Chile itself operates the Company's local telephone
service activities--the Company's core business area--Telefonica CTC Chile's
other business activities are managed through the following operating
subsidiaries:
188 Telefonica Mundo and Globus
Formed in 1989, 188 Telefonica Mundo (formerly known as CTC Mundo) is one
of the Company's domestic and international long distance subsidiary carriers.
The Government granted 188 Telefonica Mundo licenses to provide domestic and
international long distance services with its own equipment effective August 27,
1994. See "--Business Overview--Licenses and Tariffs--The Tariff
System--Multicarrier System" and "--Business Overview--Licenses
and Tariffs--Licenses."
On October 14, 1998, Telefonica CTC Chile completed its acquisition of
99.9% of the equity securities of VTR Larga Distancia, a telecommunications
company offering data transmission and domestic and international long distance
services throughout Chile, for a total cost of the Chilean peso equivalent of
US$ 49.9 million (historic value). The long distance business of VTR Larga
Distancia was transferred to one of the Company's long distance subsidiaries,
Globus, and the data transmission business of VTR Larga Distancia was later
absorbed by Telefonica Empresas, the subsidiary which largely forms the
Company's Corporate Customers Communications and Data business area.
188 Telefonica Mundo currently operates the most extensive fiber optic
network in the country, stretching from Region I (the Peruvian border) to Region
X (Puerto Montt), including connections to Peru and Argentina. 188 Telefonica
Mundo also operates digital satellite and microwave links in areas not covered
by the fiber optic network. In addition, 188 Telefonica Mundo participates
actively in the development and use of submarine fiber optic networks such as
Unisur, Americas I, Americas II, Atlantis II, Columbus II, Panamericano, Maya I,
TPC-5 and Emergia, and in the Intelsat, Nahuelsat and Panamsat satellite
systems.
Telefonica Movil
Telefonica Movil (formerly known as CTC Startel) is Telefonica CTC Chile's
mobile communications company. Telefonica Movil provides cellular communications
throughout Chile. In 1996, Telefonica CTC Chile and VTR merged their mobile
communications operations to form Telefonica Movil. After the merger, Telefonica
CTC Chile owned 55% of Telefonica Movil, and VTR owned 45%. All licenses
belonging to the mobile communications operations of Telefonica CTC Chile and
VTR were transferred to Telefonica Movil, which began operations on June 1,
1996. In December 1997, Telefonica CTC Chile purchased VTR's 45% participation
in Telefonica Movil, whereby it obtained a 100% direct and indirect ownership of
Telefonica Movil.
Telefonica Empresas
In 1992, Telefonica Empresas (formerly known as CTC-Corp) began operating
Telefonica CTC Chile's private telecommunications services (including data
transmission, and sale and rental of networks and equipment) and managing the
Company's large business and institutional customer accounts. The corporate
objective of this subsidiary is to provide integrated telecommunications
solutions to corporate customers, including the sale of telephone lines,
telephone traffic, and telecommunications equipment, as well as advanced
telephone, Internet and data services.
On January 28, 2003, the Board of Directors of Telefonica Empresas approved
the merger of Telefonica Data Chile S.A. into Telefonica Empresas CTC Chile S.A.
CTC-Equipos
CTC-Equipos operates Telefonica CTC Chile's public and rural telephone
operations and provides home telephone installations, mainly for residential
customers.
34
t-gestiona
On August 1, 2001, t-gestiona officially began operations as a wholly owned
subsidiary of Telefonica CTC Chile. This subsidiary is responsible for the
provision of support services to other business areas of the Company, including:
delivering logistics, fund management, insurance, collection, personnel, tax,
real estate administration and general services.
Publiguias
Publiguias is an affiliate of Telefonica CTC Chile and a subsidiary of
Telefonica S.A. in charge of the publication, distribution and sale of
advertising space in telephone directories, as well as the sale of Chilean
tourism guides.
Atento Chile
On May 5, 1999, Atento Chile was incorporated under the laws of Chile.
Atento Chile is currently 28.84% owned by Telefonica CTC Chile (27.41% directly
and 1.43% indirectly) and 70% owned by Atento Holding Chile S.A. Atento Holding
Chile S.A. is 99.9% owned by Atento Holding Inc., and 99.9% of the latter is
controlled by the Telefonica Group. Through Atento Holding Inc., the Telefonica
Group operates an integrated global call-center business platform among its
members. A new outsourcing agreement between Telefonica CTC Chile and Atento
Chile became effective on May 22, 2001, for a term of up to July 31, 2004.
Pursuant to the agreement, Atento Chile offers Telefonica CTC Chile directory
assistance, technical assistance and customer complaint management, as well as
general commercial and sales information. Similar agreements, involving all of
the Company's subsidiaries, are also in effect.
D. Property, Plants and Equipment
The principal plant and equipment of the Company consists of outside plant
and switching equipment and operating units that are located throughout the
country. The Company's land and buildings principally consist of its telephone
exchanges and other technical, administrative and commercial properties. As of
December 31, 2002, the Company's telephone plants and equipment represented
84.3% of its gross fixed assets (including depreciation); construction in
progress represented 3.5%, land and buildings represented 5.4%, and furniture,
office equipment and other assets represented 6.8%. Substantially all of
Telefonica CTC Chile's telephone exchanges are situated within buildings owned
by the Company. Telefonica CTC Chile also owns its corporate headquarters
located at Avenida Providencia 111 in Santiago. This building, which houses the
Company's principal offices, was completed in October of 1996 and currently
provides office space for the majority of the administrative and technical staff
of Telefonica CTC Chile and its subsidiaries. The assets of Telefonica CTC Chile
and its subsidiaries are insured, subject to standard deductibles and other
terms and conditions, for all events of physical damage and loss of revenue
resulting from service outages. As of December 31, 2002, the assets and
operating revenue insured totaled approximately Ch$ 2,166,511million (US$ 3,015
million), which consisted of Ch$ 1,438,558 million (US$ 2,002 million) in
insured assets and Ch$ 727,953 million (US$ 1,013 million) in insured revenues.
35
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The information in this Item 5 should be read in conjunction with the
Company's Audited Consolidated Financial Statements and the notes thereto
included elsewhere in this Annual Report. The Audited Consolidated Financial
Statements have been prepared in accordance with Chilean GAAP, which differs in
some significant respects from U.S. GAAP. See Note 34 of the Company's Audited
Consolidated Financial Statements for a description of the main differences
between Chilean GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of net
income and total shareholders' equity. Prior to this Annual Report, the Company
has historically prepared the audited consolidated financial statements to its
annual reports in U.S. GAAP. As a result, the Audited Consolidated Financial
Statements, the financial data presented below and other financial data
contained in this Annual Report, which unless otherwise indicated has been
prepared in accordance with Chilean GAAP, may not be directly comparable to
similar data presented in prior annual reports.
Overview
Telefonica CTC Chile is the largest telecommunications enterprise in Chile.
The Company provides a broad range of telecommunications services throughout
Chile, including local telephone service, mobile communications services,
domestic and international long distance service, data transmission, broadband
access and services, dedicated lines, terminal equipment sales and leasing,
public telephone service, interconnection services, certain value-added
services, and Internet access for corporate customers.
The Tariff Decree
The Company's results from operations have been significantly affected by
the regulatory changes introduced in 1999 with the publication of Tariff Decree
No. 187. The tariff structure, which regulates, among other things, the maximum
rates and fees that the Company can charge for certain traditional fixed line
local telephony services, does not equally apply to certain other local
telephony operators, mobile phone service providers and cable telephony
operators with which the Company competes. The introduction of the tariff decree
caused a reduction of approximately 25% in regulated revenue per line in the
first year, and has since continued to negatively affect the Company's results
for its Fixed Telephony segment. The Company has sought administrative relief to
correct what it believes are errors and illegalities committed in the previous
tariff setting process, which has been denied, and has filed a civil lawsuit
against the State of Chile for damages resulting from such errors and
illegalities. A new tariff decree covering local telephone service is scheduled
to be issued in May 2004. Since 1999, the Company has also been affected by
increased competition, especially in fixed and mobile telephony, as well as by a
slowdown in the Chilean economy, which has been reflected in decreases in local
and long distance traffic and an increase in customer non-payment.
The Chilean Economy
Nearly all of the Company's customers are Chilean individuals or companies,
and substantially all of the Company's operations are located in Chile. As a
result, the Company's operating and financial performance is sensitive to, and
dependent upon, the level of economic activity in Chile. Since experiencing a
drop in GDP of 1.0% in 1999, the Chilean economy has returned to growth with GDP
expanding at rates of 4.4% in 2000, 2.8% in 2001 and 2.1% in 2002. However,
these growth rates are relatively low in comparison to historical rates. The
Central Bank has continued to pursue a policy aimed at restraining inflation,
which was 2.8% in 2002, and maintaining a low current account deficit, which was
0.8% of GDP in 2002. Unemployment has shown some improvement, declining from
9.7% in 1999 to 9.2% in 2000 and 2001 and reaching 9.0% in 2002, but remains at
a high enough level to result in cautious consumer spending, which has impacted
demand for telecommunications services.
Due to the importance of the level of economic activity and other
macroeconomic variables to the Company's businesses, Telefonica CTC Chile
monitors and analyzes Chilean and related foreign economic indicators.
Accordingly, the Company has established a "Risk Monitor Index" for internal
use, aimed at anticipating possible crises. This indicator is currently at low
to neutral risk levels.
36
Company Strategy
As a result of the above, in 1999 the Company was forced to reevaluate its
rapid expansion strategy, which had resulted in a 17% compound annual growth
rate for fixed lines between 1989 and 1998, in order to realign the Company's
operations and financial situation to the new economic, regulatory and
competitive environment. The basis of this new strategy, which is aimed at
recovering cash flow, is a focus on the Company's core business areas, which are
its local and long distance businesses, mobile communications and corporate
customer communications (including data transmission). In line with this focus,
the Company has sold certain non-core assets, the most significant of which were
its cable TV network and related assets in July 2000 and a 25% stake in its
information systems subsidiary, Sonda, in September 2002, although the Company
still maintains a 35% stake in this subsidiary.
In addition, since 1999 Telefonica CTC Chile has implemented major cost
reduction initiatives and strict cost control measures, with a focus on reducing
much of the fixed costs associated with the expansion of the local telephony
network and controlling general and administrative expenses. To this end, the
Company and its subsidiaries have implemented early retirement and personnel
reduction plans which have resulted in a net consolidated personnel reduction of
49.1% between 1998 and 2002.
Telefonica CTC Chile continues to rationalize its capital expenditures
plans, substantially reducing investments in less profitable areas such as local
telephony and assigning most of its capital expenditures to higher growth
businesses such as mobile communications, data transmission and broadband. As a
result, the Company's capital expenditures have dropped from an annual average
of Ch$290,251 million in the five years prior to the tariff decree (1995 - 1999)
to an average of Ch$178,896 million per year between 2000 and 2002, reaching
Ch$146,256 million in 2002
Since the second half of 1999, the Company has applied substantially all of
its net cash flow from operations, together with the net cash flow generated
from the sale of non-core assets, to the reduction of debt. This has allowed
Telefonica CTC Chile to reduce its total interest-bearing debt from levels of
Ch$1,534,795 million in December 1999 to Ch$1,130,422 million as of December
2002, reaching a leverage ratio of 1.09 times in December 2002, as compared to
1.36 times in December 1999. The leverage ratio is calculated as total
liabilities over shareholders' equity.
In order to ensure future growth and increase profitability and cash flow,
as of 2000 the Company has also focused on providing innovative products and
services. Some of the most significant new products introduced by the Company
have been its broadband service with ADSL technology, home security and
surveillance systems, prepaid services for fixed telephony and alternative
tariff plans for long distance services. All these products have experienced
significant growth rates and, since they utilize the Company's extensive
nationwide fixed line infrastructure, require relatively low levels of
investment and serve to increase the average revenue per customer. In mobile
communications, the Company's most significant new project has been the
deployment of a new nationwide GSM/GPRS network in the 1900 MHz frequency (PCS).
Recent Developments and Trends
During the first half of 2003, the Chilean economy has remained stable and
has shown moderate signs of recovery. GDP growth in 2003 is projected to be
between 3.0% and 4.0%, and approximately 4.0% in 2004, together with
expectations of an increase in domestic demand. Projections for economic growth
in Chile continue to be significantly better than in most other Latin American
countries. The Chilean peso to U.S. dollar exchange rate is not expected to
depreciate substantially during the remainder of 2003 and in fact, has
appreciated by 1.4% between December 31, 2002 and May 23, 2003. Additionally,
inflation for the first half of 2003 has remained under control, within the 2%
to 4% limit established by the Central Bank, and is estimated to reach 3.2% for
the entire year.
The processes for setting the next tariff decrees for both mobile and fixed
line telephony are already underway. The Company does not foresee significant
changes to its business strategy, operations or capital expenditures plans until
both of these regulatory issues are resolved in February and May of 2004,
respectively.
37
The Company estimates that its capital expenditure plan for 2003 will be
approximately Ch$150,000 million. The Company also expects to continue with a
conservative financial strategy, using free net cash flow to reduce debt. During
2003, Telefonica CTC Chile expects to maintain strict cost controls, while at
the same time continuing to focus most of its efforts on revenue generation and
on increasing the revenue per user in each business segment.
In each of its core business areas, Telefonica CTC Chile expects that
trends will continue in line with what was observed during 2002 and the first
quarter of 2003. The Company does not expect significant fixed line growth,
although the Company expects to continue marketing additional services that add
value to existing fixed lines. In line with this goal, Telefonica CTC Chile's
commercial efforts will be focused mainly on the expansion of ADSL, as well as
Telemergencia (home security) and prepaid services for fixed lines.
The Company expects the long distance market to continue to be affected by
the slowdown in the Chilean economy, as well as by the substitution of mobile
and Internet traffic for traditional fixed line use. To offset these effects,
the Company will continue its commercial efforts to expand the usage of long
distance services through alternative service and payment plans, such as flat
fee rate structures.
The focus of the mobile business will continue to be the development of
Telefonica Movil's nationwide GSM/GPRS network. The Company expects mobile
subscriber growth to continue during 2003, although the mobile telephony market
may be substantially impacted in ways that the Company cannot now predict with
the issuance of a new tariff decree setting CPP rates in 2004. The Company
anticipates that the growth of mobile subscribers may slow in the future, as
mobile phone market penetration has reached levels of approximately 40 mobile
lines per 100 inhabitants, which is relatively high for Chile, especially in
light of the fact that fixed line penetration is only 22.5 lines per 100
inhabitants and per capita GDP in Chile was only US$ 4,261 in 2002
The Company expects to see further growth in the corporate customer and
data transmission market, mainly driven by increased connectivity of data links
for medium businesses, as well as advanced services over IP for large corporate
customers who have satisfied their data transmission requirements.
In December 2003, Telefonica CTC Chile expects to renegotiate the
collective labor contracts of those employees whose contracts were frozen in the
previous collective negotiation process in June of 2002, in accordance with
Article 369 of the Chilean Labor Code. At that time, the Company signed new
labor contracts with 1,661 employees, while the remaining 3,445 employees,
represented by 12 unions, implemented a legal strike that lasted 28 days.
Following the strike, the unions involved in the strike elected to invoke
Article 369 of the Chilean Labor Code, thus freezing their existing contracts
for a period of 18 months, without readjustment. The Company can provide no
assurance that it will be able to successfully negotiate such new contracts on
terms favorable to it, or that the unions involved in the negotiations will not
choose to implement a labor strike at such time.
Critical Accounting Policies
The preparation of the Audited Consolidated Financial Statements, which are
included in this Annual Report, requires the Company to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities as of
the date of such financial statements. Actual results may differ from these
estimates under different assumptions or conditions. Critical accounting
policies are defined as those that involve significant judgments and
uncertainties and which would potentially result in materially different results
under different assumptions and conditions. The Company believes that its
critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see the notes to the Audited Consolidated Financial Statements.
Goodwill. Under Chilean GAAP, assets acquired and liabilities assumed
are recorded at their carrying value, and the excess of the purchase price over
the carrying value is recorded as goodwill. Circular No.1358, issued by the SVS
and dated December 3, 1997, extended the maximum amortization period of goodwill
to 20 years from the previous 10 years. The Company is using the maximum life of
20 years to amortize goodwill under Chilean GAAP, with the exception of the
goodwill related to Sonda. See "Item 10: Additional Information--Material
Contracts" for a description of the Company's material contracts.
38
For U.S. GAAP purposes, effective January 1, 2002, the Company adopted
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
supercedes Accounting Principle Board ("APB") Opinion No. 17, "Intangible
Assets," and changes the accounting for goodwill and other intangible assets
acquired individually or with a group of other assets, and those acquired in a
business combination, by eliminating prospectively the amortization of all
existing and newly acquired goodwill and other intangible assets with indefinite
lives. SFAS No. 142 requires goodwill and other intangible assets to be tested
at least annually for impairment based on the fair value of the reporting unit
associated with the goodwill. Separable other intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. SFAS No. 142 also requires that the Company complete a
transitional goodwill impairment test within six months from the date of
adoption. The amortization provisions of SFAS No. 142 applied immediately to
goodwill and intangible assets acquired after June 30, 2001.
In accordance with the transitional guidance and the adoption of SFAS No.
142, the Company completed a transitional impairment test and determined that
there was no goodwill impairment.
In addition to its transitional goodwill impairment test, the Company
performed its annual goodwill impairment test required under SFAS No. 142 on
December 31, 2002. The results of that test indicated no impairment of goodwill.
The Company will perform its annual goodwill impairment test on a going-forward
basis on December 31 of each year.
Most of the existing goodwill was generated in our mobile telephone
segment. See "Item 4: Information on the Company--Business Overview--Business
Areas--Mobile Communications" for a description of the Company's mobile
telephony business.
Deferred Income Taxes. Under Chilean GAAP, until December 31, 1999,
deferred income taxes were recorded based on non-recurring timing differences
between the recognition of income and expense items for financial statement and
tax purposes. Chilean GAAP also permitted not providing for deferred income
taxes where a deferred tax asset or liability is not expected to be realized.
Starting January 1, 2000, the Company recorded income taxes in accordance with
Technical Bulletin No. 60 of the Chilean Association of Accountants dated May
26, 1998, recognizing, using the liability method, the deferred tax effects of
temporary differences between the financial reporting basis and the tax basis of
assets and liabilities. As a transitional provision, a contra asset or liability
has been recorded for the effects of the deferred tax assets and liabilities not
recorded prior to January 1, 2000. Such contra asset or liability must be
amortized to income over the estimated average reversal periods corresponding to
the underlying temporary differences to which the deferred tax asset or
liability related. Deferred tax assets recorded as the result of tax loss
carry-forwards are reversed as utilized.
Under U.S. GAAP, companies must account for deferred taxes in accordance
with SFAS No. 109, which requires an asset and liability approach for financial
accounting and reporting of income taxes, under the following basic principles:
(i) a deferred tax liability or asset is recognized for the estimated future tax
effects attributable to temporary differences and tax loss carry forwards; (ii)
the measurement of deferred tax liabilities and assets is based on the
provisions of the enacted tax law and the effects of future changes in tax laws
or rates are not taken into effect until such rates or laws are enacted; and
(iii) the measurement of deferred tax assets is reduced by a valuation
allowance, if based on the weight of available evidence, it is more likely than
not that some portion of the deferred tax assets will not be realized.
Temporary differences are defined as any difference between the financial
reporting basis and the tax basis of an asset and liability that at some future
date will reverse, thereby resulting in taxable income or expense. Temporary
differences ordinarily become taxable or deductible when the related asset is
recovered or the related liability is settled. A deferred tax liability or asset
represents the amount of taxes payable or refundable in future years under
currently enacted tax rates as a result of temporary differences at the end of
the current year. The effects of the differences, primarily related to the
amortization of the complementary account which, does not exist in U.S. GAAP,
are discussed in Note 34(r) to the Audited Consolidated Financial Statements
of the Company.
39
Property, Plant and Equipment. The Company believes that the accounting
estimate related to the establishment of asset depreciable lives is a "critical
accounting estimate" because: (1) it requires management to make assumptions
about technology evolution and competitive uses of assets and (2) the impact of
changes in these assumptions could be material to our financial position, as
well as our results of operations. Management's assumptions about technology and
its future development require significant judgment because the timing and
impacts of technology advances are difficult to predict.
Derivative Contracts. The Company enters into hedging activities using
contracts defined as "derivatives" under both Chilean and U.S. GAAP for the
following reasons:
o The Company is exposed to interest rate risk associated with its debt
borrowings. In order to hedge the risk associated with fixed/variable
rate debt, the Company enter into interest rate swap, forward rate
agreements and collar agreements to cover its exposure.
o The Company is exposed to foreign currency risk arising from long-term
debt denominated in foreign currencies, the major portion of which is
the U.S. dollar and the euro. Exchange rate fluctuations between the
Chilean peso and the U.S. dollar / euro, are managed through the use
of U.S. dollar or euro /UF forward foreign exchange contracts.
Under Chilean GAAP, the Company must account for these derivatives under
Technical Bulletin No. 57 of the SVS. See Note 2 (u) and Note 2 (v) of the
Audited Consolidated Financial Statements.
Under U.S. GAAP, these derivatives are accounted for under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (as amended by
SFAS No. 138) which requires recognition of the assets or liabilities associated
with these derivative contracts in the statement of financial position and that
these derivatives be measured at fair value. Certain conditions must be met in
order to designate these derivatives as "hedges" under this pronouncement.
Historically, these conditions have been met and the Company, therefore, adopted
the specified accounting treatment for these defined "hedges." See Note 34 of
the Audited Consolidated Financial Statements.
Allowance for Doubtful Accounts. The Company establishes an allowance for
doubtful accounts on our accounts receivable based on a combination of the
following factors:
The Company records a valuation allowance for 100% of its aged accounts
receivable that are more than 120 days overdue.
In circumstances where the Company is aware of a specific customer's
inability to meet its financial obligations, a specific reserve for bad debts is
recorded for amounts due in order to reduce the receivable to the amount the
Company reasonably believes will be collected.
Severance Indemnity. Under the Company's employment contracts, it has
committed to provide a lump sum payment to each employee at the end of their
employment, whether due to death, termination, resignation or retirement,
subject to the exceptions established in Article No. 160 of the Chilean Labor
Law. The Company has elected to use the actuarial method of accounting for this
liability under Chilean GAAP. Therefore, these obligations are recorded at the
present value of the liability determined at each year-end based on the current
salary and average service life of each employee. The Company uses a real
discount rate of 7% and assumes an average service life, which varies, based
upon years of service with the Company. The 7% real annual discount rate does
not include a projection of inflation, nor do the actuarial assumptions include
a projection of future salary increases. All such future salary increases are
expected to approximate the increase in inflation over a long-term period. For
U.S. GAAP purposes, the severance indemnity described above may be determined
based on the vested benefits to which the employees are entitled if their
employment terminated immediately (settlement basis) per Emerging Issues Task
Force ("EITF") Issue No. 88-1 or in accordance with SFAS No. 87. The Company has
adopted SFAS No. 87, "Employer's Accounting for Pensions" accounting for U.S.
GAAP purposes.
40
Revenue and cost recognition
Chilean GAAP
Revenues and expenses are recognized on the accrual basis, when the goods
and services are actually provided.
Revenues:
o Since invoices are issued on dates other than accounting cut-off
dates, as of the date of preparation of the financial statements,
services rendered and not invoiced have been accrued as revenue, and
determined on the basis of the contracts and traffic at the
agreed-upon prices and conditions.
o Revenue from sales of pre-paid service cards are only recognized in
the period in which the service is provided or when the card expires,
whichever happens first.
o Sales of hardware and software licenses are recorded when the
equipment and/or software are delivered. Revenues from projects are
recorded on a percentage completion basis according to the degree of
completion of the projects.
Expenses:
o The subsidies on sale of cellular telephones represent the difference
between the cost at which the cellular equipment is acquired from
suppliers and their resale value to customers. These differences are
recognized at sale.
o For accommodation contracts, where the Company lends the phone to the
customer over the life of the associated service agreement, these
phones are amortized over the average life of such service contract.
o Commissions on sales of phones and service are recognized at sale.
U.S. GAAP
Under U. S. GAAP, with the exception of the treatment of commissions on
service contracts that are amortized over the average life of the contract,
revenues and expenses are recognized in the same manner as Chilean GAAP.
Until 2000, under Chilean GAAP, sale commission costs were deferred and
expensed over a period from 6 to 24 months. On January 1, 2001, the Company
changed its Chilean GAAP accounting policy from recognition of the full costs of
sales commissions on all new sales at the time of sale, with the exception of
one new product line for which commission costs are partially deferred and
expensed over 24 months. Under U.S. GAAP, as the minimal contractual revenue
does not exceed the direct costs, sales commission expenses are recognized at
sale.
Reconciliation to U.S. GAAP
Prior to this Annual Report, the Company has historically prepared the
audited consolidated financial statements to its annual reports filed with the
Securities and Exchange Commission (the "SEC") on Form 20-F in U.S. GAAP. The
Company has prepared its Audited Consolidated Financial Statements included in
this Annual Report in conformity with Chilean GAAP, with a reconciliation to
U.S. GAAP of net income and shareholders' equity for the periods and as of the
dates covered thereby. Chilean GAAP differs in some significant respects from
U.S. GAAP. The Company has provided in Note 34 to the Audited Consolidated
Financial Statements a description of the principal differences between Chilean
GAAP and U.S. GAAP, as they relate to the Company, in accordance with Item
17(c)(4)(a)(i) of the SEC Rules and Regulations.
In previous years, management of Telefonica CTC Chile, in consultation with
the Company's prior auditors, considered that certain accounting principles it
applied were correct and in accordance with U.S. GAAP. Upon reconsideration,
management has determined that it is appropriate to make certain restatements to
the 2000 and 2001 amounts previously reported under U.S. GAAP. Accordingly, net
income and shareholders' equity under U.S. GAAP for both 2000 and 2001 have been
restated. The effects of the adjustments under the restatement have resulted in
a change in the reported net loss of the Company under
41
U.S. GAAP from a loss of Ch$16,490 million to a loss of Ch$36,726 million in
2001, and from a reported net loss of Ch$130,210 million to a loss of Ch$136,504
million in 2000. As a result, shareholders' equity in accordance with U.S. GAAP
has been adjusted from Ch$1,145,488 million to Ch$1,127,453 million in 2001 and
from Ch$1,166,036 million to Ch$1,161,331 million in 2000. The Company has
provided a more detailed discussion of the restatement in Note 34(s) to the
Audited Consolidated Financial Statements.
A. Operating Results
Net Income and Operating Revenues for 2000, 2001 and 2002
The following table presents historical information regarding the
contribution, by amount and as a percentage of total operating revenues, of each
of the Company's business segments to the Company's total operating revenues
during the periods indicated below, calculated in accordance with Chilean GAAP.
OPERATING REVENUES
Year ended December 31,
--------------------------------------------------------------------------------
% of Total % of Total % of Total
Operating Operating Operating
2000 Revenues 2001 Revenues 2002 Revenues
------------ ---------- -------- ----------- -------- -------------
(in millions of constant Ch$ as of December 31, 2002, except percentage amounts)
FIXED TELEPHONY .................................. 429,099 47.7% 412,469 44.8% 381,227 44.2%
Primary Service ................................. 388,003 43.2% 370,070 40.2% 353,118 40.9%
Fixed monthly charge ......................... 169,694 18.9% 164,094 17.8% 158,733 18.4%
Variable charge .............................. 174,137 19.4% 167,464 18.2% 156,447 18.1%
Connections & Installations .................. 8,886 1.0% 8,021 0.9% 6,960 0.8%
Value-added services ......................... 17,720 2.0% 17,473 1.9% 17,163 2.0%
Terminal equipment marketing ................. 8,498 0.9% 7,388 0.8% 4,967 0.6%
Other fixed telephony revenues ............... 9,068 1.0% 5,630 0.6% 8,848 1.0%
Access charges and Interconnections ............. 26,379 2.9% 24,267 2.6% 23,265 2.7%
Interconnections to LD carriers .............. 12,686 1.4% 13,617 1.5% 12,949 1.5%
Other interconnection services ............... 13,693 1.5% 10,650 1.2% 10,316 1.2%
Directory advertising ........................... 14,717 1.6% 18,132 2.0% 4,844 0.6%
LONG DISTANCE (1) ................................ 76,328 8.5% 81,902 8.9% 74,731 8.7%
MOBILE COMMUNICATIONS ............................ 183,147 20.4% 184,172 20.0% 206,931 23.9%
Outgoing traffic, equipment sales and
other revenues ............................... 105,657 11.8% 102,954 11.2% 120,894 14.0%
Interconnection from CPP (2) .................... 77,490 8.6% 81,218 8.8% 86,037 9.9%
CORPORATE CUSTOMERS
COMMUNICATIONS AND DATA .......................... 59,711 6.6% 72,334 7.9% 86,207 10.0%
INFORMATION SYSTEM SERVICES
(SONDA) (3) ...................................... 96,826 10.8% 112,828 12.3% 62.322 7.2%
OTHER BUSINESSES ................................. 53,944 6.0% 56,330 6.1% 51,731 6.0%
Public telephones ............................... 19,761 2.2% 16,056 1.7% 12,078 1.4%
Interior installation and
equipment marketing ............................. 26,842 3.0% 26,371 2.9% 28,243 3.3%
Other operating revenues ......................... 7,341 0.8% 13,903 1.5% 11,410 1.3%
TOTAL OPERATING REVENUES ......................... 899,055 100% 920,035 100% 863,149 100%
------------------------------------
(1) Revenues from long distance service include revenues from long distance
traffic and the rental of the long distance network to other
telecommunications operators.
(2) CPP was implemented for mobile communications as of February 23, 1999. CPP
interconnection revenues represent the revenues generated by incoming
calls to Telefonica Movil from all fixed line networks and other mobile
operators.
(3) For the years 2000 and 2001, and for the months of January through August
of 2002, revenues from the Company's information systems services
provider, Sonda, are presented on a fully consolidated basis in accordance
with Telefonica CTC Chile's 60% stake in Sonda during such periods. On
September 26, 2002, the Company signed an agreement to sell 25% of Sonda,
reducing the Company's interest to 35% of the subsidiary. As a result, as
of and including September 2002, the Company now recognizes the
corresponding percentage of Sonda's net income through the equity method.
42
Results of Operations for the Year Ended December 31, 2002 Compared to the Year
Ended December 31, 2001
Since the acquisition of a 60% stake of the Company's information systems
subsidiary, Sonda, on January 11, 1999, and for the months of January through
August of 2002, Telefonica CTC Chile fully consolidated the financial results of
Sonda. On September 26, 2002, the Company entered into an agreement to sell 25%
of Sonda, resulting in the transfer of its previous controlling interest in
Sonda and control over the administration of that company to a third party.
Consequently, as of September 2002, 35% of Sonda's net income is recognized
under the equity method.
Operating Revenues
Operating revenues decreased by 6.2% to Ch$863,149 million (US$ 1,201.1
million) in 2002 from Ch$920,035 million in 2001. Fixed Telephony revenues,
which accounted for 44.2% of the Company's operating revenues in 2002, decreased
by 7.6% to Ch$381,227 million (US$ 530.5 million) as compared to Ch$412,469 in
2001. Revenues from the Long Distance business segment, which accounted for 8.7%
of total revenues in 2002, decreased by 8.8% to Ch$ 74,731 million (US$ 104.0
million) as compared to Ch$81,902 million in 2001. Revenues from the Mobile
Communications business segment, which accounted for 23.9% of the Company's
revenues in 2002, increased by 12.4% to Ch$206,931 million (US$288.0 million) as
compared to Ch$184,172 million in 2001. Revenues from the Corporate Customers
Communications and Data business segment, which accounted for 10.0% of the
Company's revenues in 2002, increased by 19.2% to Ch$86,207 million (US$ 120.0
million) as compared to Ch$72,334 in 2001. Revenues from the Information System
Services business segment, which accounted for 7.2% of the Company's revenues in
2002, decreased by 44.8% to Ch$62,322 million (US$ 86.7 million) as compared to
Ch$112,828 million in 2001. As mentioned above, Sonda revenues in 2002 were only
consolidated for the months of January through August. Revenues from Other
Businesses, which accounted for 6.0% of the Company's revenues in 2002,
decreased by 8.2% to Ch$51,731 million (US$ 72.0 million) as compared to
Ch$56,330 million in 2001.
Revenues from Fixed Telephony Services
The Fixed Telephony business segment consists of traditional telephone
service (which includes the sale and rental of telephone equipment and certain
value added services), network interconnection services provided to other
telecom operators, directory advertising and new services that the Company
offers using the fixed line infrastructure. Results for the Fixed Telephony
segment are recorded under its three components units: primary service; access
charges and interconnections; and directory advertising.
Fixed Telephony revenues decreased 7.6% to Ch$381,227 million (US$ 530.5
million) from Ch$412,469 million in 2001. The decrease, which is in line with a
downward trend in Fixed Telephony revenues since 1999, is mainly attributable to
the ongoing negative effects on the Company's traditional local telephony
business of Tariff Decree No. 187, increased competition from local, mobile and
cable TV operators and a decrease in traffic levels resulting from slower than
expected economic growth in Chile. The larger decrease in revenues in 2002 as
compared to 2001 was primarily the result of lower revenues from directory
advertising due to the terms of a new agreement signed with Publiguias, a Yellow
Pages provider, in the second half of 2001. The decrease in Fixed Telephony
revenues was partly offset by growth in various new offerings by the Company of
non-regulated services which utilize the existing fixed line network capacity,
such as prepaid services, broad band services through ADSL and flat fee tariff
plans for Internet access, among others.
Most of the Company's Fixed Telephony revenues are subject to tariff
regulation, including its fixed monthly charge, variable charge, line
connections, directory assistance and interconnection services. The maximum
tariff that Telefonica CTC Chile is permitted to charge for each
tariff-regulated service is linked to a Tariff Index which is based on the WPI
for domestic goods, the WPI for imported goods, and the Chilean wage and salary
index, that permits Telefonica CTC Chile to automatically adjust the maximum
tariff for such service. See "Item 4: Information on the Company--Business
Overview--Licenses and Tariffs--The Tariff System" for a description of the
process of adjustment.
43
The following table sets forth the general WPI, the WPI for domestic goods,
the WPI for imported goods, and the Chilean wage and salary index for the years
ended December 31, 2000, 2001 and 2002:
Year ended December 31,
-----------------------------------
2000 2001 2002
------- ------- --------
WPI ................................... 7.90% 3.13% 10.43%
WPI for domestic goods................. 8.20% 2.73% 10.81%
WPI for imported goods................. 7.03% 13.33% 9.39%
Chilean wage and salary index.......... 0.70% 2.56% 1.19%
As a consequence of the lower profitability of fixed lines caused by the
1999 tariff decree, Telefonica CTC Chile has substantially frozen investments in
new lines and focused on utilization of its installed capacity. The
implementation of this policy, together with the effect of increased line
disconnections of customers with 120 days past due accounts in 2002, resulted in
lines in service growth of 0.8% in 2001, and a decrease of 1.3% in 2002.
Primary service. Revenues from primary service, which includes, among other
things, fixed monthly charges, variable charges, connections and other
installations, value added services and equipment marketing, decreased by 4.6%
in 2002 to Ch$353,118 million (US$ 491.4 million) from Ch$370,070 million in
2001. Primary Service represented 92.6% of all revenues from fixed telephony
services in 2002.
Revenues from fixed monthly charges decreased by 3.3% in 2002 to Ch$158,733
million (US$ 220.9 million) from Ch$164,094 million in 2001. This decrease was
mainly attributable to a 1.0% additional tariff reduction applied in May of 2001
and 2002, pursuant to Tariff Decree No. 187. Also contributing to this decline
was the 0.2% drop in average lines in service in 2002, which resulted from
increased disconnections of lines suspended for over 120 days.
Revenues from variable charges decreased by 6.6% in 2002 to Ch$156,447
million (US$ 217.7 million) from Ch$167,464 million in 2001, as a result of (i)
a 0.2% reduction in average lines in service, (ii) a 0.5% decrease in traffic
per line per day, (iii) an increase in the proportion of Internet traffic to
total local traffic, which is charged at lower rates than regular local calls
and (iv) a 1.0% additional tariff reduction applied to the per-minute rate in
May of 2001 and 2002, pursuant to Tariff Decree No. 187.
Revenues from installations and connections decreased by 13.2% in 2002 to
Ch$6,960 million (US$ 9.7 million) from Ch$8,021 million in 2001, principally
due to a 22.9% drop in other installations, such as cut-off and replacement of
lines and charges for transferring and moving fixed lines, partially offset by a
12% increase in revenues from connections to the public network as a result of a
3.0% increase in the number of lines connected in 2002.
Value-added services revenues include revenues generated from (i) dedicated
lines and (ii) revenues from value-added services for residential customers
including, among other things, change of phone number, voice mail, detailed
invoice call waiting and call transfer. Revenues from value-added services
decreased by 1.8% in 2002 to Ch$17,163 million (US$ 23.9 million) from Ch$17,473
million in 2001, due primarily to an 11.0% decrease in revenues from dedicated
lines, which are increasingly being replaced by more advanced products such as
ADSL lines. This was partly offset by an increase in revenues from detailed
billing services and monthly charges for supplementary services, as a result of
higher customer usage of these services.
Revenues from terminal equipment marketing decreased by 32.8% in 2002 to
Ch$4,967 million (US$ 6.9 million) from Ch$7,388 million in 2001, primarily due
to a decrease in the volume of terminal equipment rentals. These revenues
include the sale and leasing to residential customers of telecommunications
equipment such as, among other things, telephones, facsimiles and multiple
lines.
Other fixed telephony revenues include revenues from, among other things,
operator services, rural telephony and flat fee lines for Internet access. These
revenues increased 57.2% in 2002 to Ch$8,848 million
44
as compared to Ch$5,630 million in 2001, mainly due to increased revenues from
flat fee plans for Internet access.
Access charges and interconnection. Access charge and interconnection
revenues decreased by 4.1% to Ch$23,265 million (US$ 32.4 million) in 2002 from
Ch$24,267 million in 2001, due to a 9.3 % and 0.2% decrease in DLD market
traffic and ILD market traffic, respectively.
Directory advertising. Revenues from directory advertising decreased by
73.3% in 2002 to Ch$4,844 million (US$ 6.7 million) from Ch$18,132 million in
2001, due to lower revenues under a new contract entered into by Telefonica CTC
Chile and Publiguias as of the second half of 2001. Pursuant to this agreement,
Telefonica CTC Chile receives a percentage of the revenues generated by the sale
of advertisements in the Yellow Pages and the White Pages, published by
Publiguias.
Revenues from Long Distance Services
188 Telefonica Mundo, a 99.2%-owned subsidiary of Telefonica CTC Chile, and
Globus, a 99.99%-owned subsidiary of Telefonica CTC Chile, hold concession
rights to provide domestic and international long distance services throughout
Chile. The Long Distance business segment includes revenues from domestic and
international long distance traffic carried by the Company's two long distance
subsidiaries as well as revenues from the rental of 188 Telefonica Mundo's long
distance network to other telecom operators. The long distance market is a very
competitive environment, and the Company has experienced lower volumes of
traffic in 2002 due to lower than expected economic growth and the substitution
of mobile telephones and Internet communications for traditional fixed line
usage. In 2002, total revenues from the Long Distance business segment were
Ch$74,731 million (US$ 104.0 million), as compared to Ch$81,902 million in 2001,
a decrease of 8.8%. The decrease was mainly attributable to (i) a 8.6% decrease
in revenues from DLD services to Ch$32,936 million from Ch$36,017 million in
2001, which reflected a 10.3% decrease in DLD traffic resulting from the slower
than expected economic recovery and the substitution effect, as mentioned above,
(ii) a 9.8% decrease in revenues from outgoing ILD services to Ch$28,048 million
from Ch$31,088 million in 2001, attributable to a lower average price per
outgoing minute as a result of increased competition, offset by a 5.2% increase
in outgoing ILD traffic carried by 188 Telefonica Mundo and Globus, and (iii) a
7.1% decrease in revenues from the rental of the long distance network due to
decreased pricing for these services and lower market traffic in general. The
decrease in Long Distance revenues was partially offset by the development of
new products and services by Telefonica Mundo, which have allowed the Company to
expand the long distance market, generate traffic and increase customer loyalty
and brand recognition.
Revenues from Mobile Communications
The Mobile Communications business receives revenues from outgoing cellular
traffic, interconnection fees from incoming calls from other networks and mobile
equipment sales. The Chilean mobile market is highly competitive and shows
relatively high levels of penetration resulting from substantial growth during
the previous five years. The rate of mobile market penetration has increased
from 3% at the end of 1997 to 38.8% as of year-end 2002.
Total revenues from mobile communications increased by 12.4% to Ch$206,931
million (US$ 288.0 million) in 2002, as compared to Ch$184,172 million in 2001.
This increase can be primarily explained by (i) a 17.4% increase in outgoing
traffic and equipment sales revenues to Ch$120,894 million in 2002 from
Ch$102,954 million in 2001 and (ii) a 5.9% increase in revenues from
interconnections associated with incoming calls from other networks to Ch$86,037
million as compared to Ch$81,218 million in 2001. The increased revenues noted
above are primarily attributable to a 22.5% growth in the average size of the
subscriber base in 2002, and, as of December 31, 2002, the Company had 1,849,283
mobile telephony customers, a 17.8% increase over the year end number for 2001.
This increase was offset by a decrease in the average monthly revenue per
customer, or "ARPU," directly associated with the growth in the proportion of
prepaid service customers, who have a lower ARPU than subscribed service clients
with contracts. Prepaid service customers represented 76.3% of the total average
of subscribed service clients at the end of 2002, as compared to 74.9% at the
end of 2001.
45
Revenues from Corporate Customers Communications and Data
Corporate Customers Communications and Data include revenues from (i) the
sale and rental of telecommunications equipment to corporate customers of mainly
voice equipment (i.e. fax, PABX, etc.), (ii) complementary telephone services,
such as 600, 700 and 800 numbers and digital communication services, (iii) data
services, including ATM, Frame Relay, data equipment and services related to the
IP network and (iv) dedicated links and other services, including
videoconference, Datared, E1 Links and VSAT, Internet access, housing, hosting
and consulting services to corporate customers.
Revenues from Corporate Customers Communications and Data increased by
19.2% to Ch$86,207 million (US$ 120.0 million) in 2002, as compared to Ch$72,334
million in 2001. This increase was mainly due to (i) a 25.1% increase in
revenues from the sale and rental of equipment to Ch$24,501 million from
Ch$19,579 million in 2001, mainly as a result of increased sales of projects to
corporate customers; (ii) a 53.4% increase in complementary services to
Ch$12,383 million from Ch$8,070 million in 2001, mainly due to increased sales
of digital lines for business clients and value added services; (iii) a 12.3%
increase in data service revenues to Ch$18,232 million from Ch$16,231 million in
2001, mainly as a result of increased demand for data connectivity services,
which led to an increase of 8.5% in the number of ATM links during 2002, and an
increase of 32.0% in the number of IP network connections; and (iv) a 9.3%
increase in revenues from dedicated links and others to Ch$31,090 million from
Ch$28,455 million in 2001, due in part to increased Broad Band and ISP services,
which grew 266% and 181%, respectively.
The growth in these services reflects the Company's continuing focus on the
deployment of new technologies based on the IP network and broadband
technologies that have allowed for market expansion and the provision of
advanced services to business clients, as well as the Company's efforts to
increase the number of data connections, especially ATM, dedicated Internet
access and IP network customers. The growth in Corporate Customers
Communications and Data revenues was partially offset by a decrease in Frame
Relay connections in 2002, as corporate customers migrated from traditional
technologies to new services provided by the Company over the IP network.
Revenues from Information Systems Services
Information Systems Services refers to the Company's information systems
subsidiary, Sonda. In September 2002, Telefonica CTC Chile sold a 25% stake in
Sonda, maintaining a 35% ownership of that company. As a result, Telefonica CTC
Chile no longer has a majority holding or administrative control of Sonda and,
consequently, no longer consolidates its financial results. The financial
statements of the Company reflect the consolidation of Sonda's results until
August 31, 2002 and, as of September 1, 2002, 35% of Sonda's net income, as
recognized through the equity value method.
Revenues from the Information Systems Services (Sonda) business segment
decreased 44.8% in 2002 to Ch$62,322 million (US$ 86.7 million) from Ch$112,828
million in 2001, primarily due to the fact that Sonda's results were
consolidated only through August 2002 following the sale of the Company's
controlling interest in September 2002, as discussed above. Information Systems
Services (were also negatively impacted in 2002 by lower revenues from Sonda's
operations abroad, which were impacted by the economic and financial instability
in Argentina and Brazil and the resultant devaluation of their currencies.
Revenues from Other Businesses
Revenues from Other Businesses include revenues from CTC Equipos, a
subsidiary that mainly provides public telephone services, terminal equipment
sales and interior installations maintenance, and from other subsidiaries
including Istel, Tecnonautica, Infoera, t-gestiona and Telemergencia. Revenues
from Other Businesses decreased by 8.2% to Ch$51,731 million (US$ 72.0 million)
in 2002, as compared to Ch$56,330 million in 2001.
Public telephone services revenues decreased by 24.8% in 2002 to Ch$12,078
million (US$ 16.8 million) from Ch$16,056 million in 2001, mainly as a result of
lower average revenue per public telephone due to decreased traffic, which in
turn was attributable to the substitution of mobile phone usage for traditional
public telephone traffic. This decrease was partly offset by a 7.1% increase in
revenues from interior
46
installations of telephone equipment and maintenance, which reached Ch$28,243
million (US$ 39.3 million) as of December 31, 2002 as compared to Ch$26,371
million in 2001.
Other operating revenues include revenues from subsidiaries t-gestiona,
Telemergencia, Istel and others. Other operating revenues decreased 17.9% in
2002 to Ch$11,410 million from Ch$13,903 million in 2001, mainly as a result of
no longer including the revenues of Comunicaciones Empresariales, a provider of
telecommunications services and network solutions to corporate customers, in
this item following its transfer to the Corporate Customers Communications and
Data segment. This decrease was partly offset by an increase in revenues
attributable to the Company's new security and surveillance systems subsidiary,
Telemergencia. Beginning in 2001, Telemergencia, began offering home security
services and home assistance through fixed networks connected to the
Telemergencia security platform.
Operating Costs and Administration and Selling Expenses
Operating costs and expenses decreased by 5.9% to Ch$732,651 million (US$
1,019.5 million) in 2002, as compared to Ch$778,559 million in 2001.
Operating salaries and related cost. Operating salaries and related costs,
which represented 10.9% of total operating costs and expenses during 2002,
decreased by 21.3% to Ch$79,566 million (US$ 110.7 million) from Ch$101,150
million in 2001. The decrease was mainly the result of cost savings related to
personnel reductions which occurred in June 2001 (a reduction of approximately
1,600 persons) and in October 2002 (a reduction of approximately 1,070 persons),
and because the operating salary expense attributable to Sonda's employees
ceased to be consolidated in the Company's results as of September 2002.
Depreciation and amortization. Depreciation and amortization, which
accounted for 35.6% of total operating costs and expenses during 2002, rose by
2.2% to Ch$261,035 million (US$ 363.2 million) from Ch$255,504 million in 2001.
This increase resulted from an increase in depreciable assets due to the
completion of projects in the Mobile Communications business segment and the
Corporate Customers Communications and Data businesses.
Other operating costs. Other operating costs, which represented 35.7% of
total operating costs and expenses in 2002, decreased by 9.9% to Ch$261,635
million (US$ 364.1 million) from Ch$290,541 million in 2001, mainly as a result
of (i) a 28.4% decrease in the costs of telecommunications equipment sold to
Ch$53,853 million (US$ 74.9 million) from Ch$75,261 million in 2001, which was
mainly the result of lower costs of sales of mobile equipment, as well the
exclusion of amortization of historical mobile subscriber acquisition costs
starting in 2002, (ii) a 43.7% decrease in cost of sales of information
development due to the deconsolidation of Sonda's operating costs as of
September 2002, (iii) a 24.4% decrease in the costs of third-party contracts to
Ch$44,822 million (US$ 62.4 million) from Ch$59,148 million in 2001 due mainly
to the Company's reduction initiatives, as well as the deconsolidation of Sonda
since September 2002 and (iv) a decrease of 5.1% in other costs associated with,
among other things, rental of cars and offices, materials and directory
advertising printing. These decreases were in part offset by a 43.0% increase in
the costs of long-distance service and interconnections to Ch$71,641 million
(US$ 99.7 million), from Ch$50,088 million in 2001, on higher interconnection
costs paid by Telefonica Movil to other mobile companies resulting from
increased mobile traffic, as well as by a 26.6% increase in bad debt expenses,
mainly in the local telephony business, which reached Ch$26,001 million (US$
36.2 million) in 2002. The increase in uncollectables was in turn mainly
attributable to the slow rate of recovery of the Chilean economy and of
increased competition for fixed line telephony services.
Administrative and selling expenses, which accounted for 17.8% of total
operating costs and expenses in 2002, decreased by 0.7% to Ch$130,415 million
(US$ 181.5 million) from Ch$131,364 million in 2001, due to savings associated
with the Company's cost control plans and personnel reductions, as well as the
fact that salary expense for Sonda's sales and administrative personnel were no
longer consolidated as of September 2002. These decreases were partly offset by
the cost of a new information systems outsourcing contract entered into with IBM
as of the fourth quarter of 2001. Previously, these services were provided by
Sonda.
47
Operating Income
Operating income decreased by 7.8% to Ch$130,498 million (US$ 181.6
million) during 2002 from Ch$141,476 million in 2001, due to a 6.2% decrease in
operating revenues and a 5.9% decrease in operating expenses, as explained
above.
Other Income (Expenses)
Interest income. Interest income decreased by 10.9% to Ch$16,691 million
(US$ 23.2 million) in 2002 from Ch$18,742 million in 2001, mainly due to lower
domestic and international interest rates and a decrease in the cash and cash
equivalents and time deposits of the Company, as the Company redirected cash to
the reduction of debt.
Interest expense. Interest expense net of capitalized interest decreased by
15.4% to Ch$81,472 million (US$ 113.4 million) in 2002 from Ch$96,255 million in
2001, mainly attributable to a 26% decrease in the Company's average
interest-bearing debt, as well as lower interest rates resulting from the
renegotiation of spreads on outstanding loans and a decrease in local and
international interest rates. This was partly offset by lower capitalization of
interest in 2002 as compared to 2001.
Price level restatement and exchange differences, net. Price level
restatement and exchange differences, net, recorded a loss in the amount of
Ch$8,953 million (US$ 12.5 million) in 2002, as compared to a gain of Ch$2,132
million in 2001.
Price level restatement registered a loss of Ch$6,165 million (US$ 8.6
million) in 2002, as compared to a gain of Ch$303 million in 2001. The price
level restatement reflects the net impact on the Company's accounts of
purchasing power gain and loss on indexation. To the extent that the Company's
average monetary liabilities for a given period during which inflation occurs
(determined monthly) exceed its average monetary assets, the Company will
recognize a purchasing power gain on its statement of operations. The gain
reflects the erosion that inflation has on the Company's obligation to repay a
fixed amount of principal. As is customary in Chile, almost all of the Company's
Chilean peso-denominated marketable securities and indebtedness for borrowed
money bear interest at rates indexed to the rate of Chilean inflation. The
principal inflation index-linked unit used in Chile is the UF, a rate that is
set monthly for each day of the coming month to reflect the prior month's change
in the Chilean CPI. As of December 31, 2002, one UF was equal to Ch$16,744.12
(US$ 23.3). In general, to the extent that the Company's average UF liabilities
exceed its average UF assets during any month, which was the case for the years
2000, 2001 and 2002, an increase in the UF index will result in a net loss on
indexation for the Company for that month.
Exchange rate differences registered a loss of Ch$2,788 million (US$ 3.9
million) from exchange rate differences in 2002, as compared to a gain of
Ch$1,828 million in 2001. The 2002 results partially reflect the effects of a
devaluation of Sonda's investments in Argentina and Brazil and the cost of
forward hedging contracts acquired during the period. To the extent that, during
any given period, the Company has net liabilities denominated in a foreign
currency (such as the U.S. dollar or euros) and the Chilean peso devalues in
nominal terms against that currency, the Company will recognize a foreign
exchange loss for that period. The differential in the annual rates of inflation
between Chile and the United States (in conjunction with other factors) has
contributed to gradual nominal devaluation in the exchange rate of the Chilean
peso against the United States dollar. The impact of the 6.6% depreciation in
the inflation-adjusted Chilean peso against the U.S. dollar during 2002 was
substantially neutralized by the conservative hedging policy of the Company for
foreign currency denominated interest-bearing debt.
Other expenses, net. Other expenses, net, for 2002, totaled a loss of
Ch$46,965 million (US$ 65.4 million), as compared to a loss of Ch$45,159 million
for 2001. The item was particularly impacted by an extraordinary charge of
Ch$15,224 million (US$ 21.2 million), resulting from severance payments related
to the personnel reductions implemented in October 2002, as well as by the lower
market value of the investment in Terra Networks shares, which represented a
charge of Ch$7,567 million (US$ 10.5 million) in 2002. The Company also
recognized a net loss of Ch$1,010 million (US$ 1.4 million) from the sale of 25%
of Sonda in September 2002. This transaction generated an extraordinary gain of
Ch$7,874 million (US$ 11.0 million), which was offset by an extraordinary charge
of Ch$8,884 million (US$ 12.4 million)
48
corresponding to the write-off of goodwill related to the 25% stake in Sonda,
which was being amortized over a 7-year period.
Income Taxes
The Company recorded an income tax charge in the amount of Ch$26,717
million (US$ 37.2 million) in 2002, as compared to an income tax charge of Ch$
11,769 million in 2001.
Income taxes includes current income tax expenses - taxes paid during the
period - as well as deferred taxes from the period and from previous periods
(complementary accounts), as shown in Note 7(c) to the Audited Consolidated
Financial Statements. The Company's income tax charge of Ch$26,717 million (US$
37.2 million) in 2002 was composed of a Ch$2,782 million (US$ 3.9 million)
current income tax expense, a Ch$8,722 million (US$ 12.1 million) charge for
deferred taxes from the period and a Ch$15,213 million (US$ 21.2 million) charge
for amortization of deferred taxes from previous periods (complementary
accounts). The income tax charge in 2002 represented a 127.0% increase over the
Ch$11,769 million tax charge recorded in 2001, mainly due to the increase in
2002 of deferred taxes from previous years (complementary accounts).
Net Income (Loss)
As a result of the above, Telefonica CTC Chile's net results amounted to a
loss of Ch$17,680 million (US$ 24.6 million) in 2002, as compared to a net
income of Ch$4,235 million recorded in 2001. For 2002, the contribution to the
consolidated net loss by business segment was as follows: a loss of Ch$52,119
million in Fixed Telephony, net income of Ch$19,344 million in Long Distance,
net income of Ch$3,898 million in Mobile Communications, net income of Ch$16,790
million in Corporate Customers Communications and Data, net income of Ch$657
million in Information Systems Services (Sonda), and a net loss of Ch$6,250
million in Other Businesses.
Results of Operations for the Year Ended December 31, 2001, Compared to the Year
Ended December 31, 2000
Operating Revenues
During 2001, the Company's operating revenues increased by 2.3% to
Ch$920,035 million, as compared to Ch$899,055 million in 2000. Revenues from the
Fixed Telephony business segment, which accounted for 44.8% of the Company's
operating revenues in 2001, decreased by 3.9% to Ch$412,469 million from
Ch$429,099 million in 2000. Revenues from the Long Distance business segment,
which accounted for 8.9% of the Company's revenues in 2001, increased by 7.3% to
Ch$81,902 million from Ch$76,328 million in 2000. Revenues from the Mobile
Communications business segment, which accounted for 20.0% of the Company's
revenues in 2001, increased by 0.6% to Ch$184,172 million from Ch$183,147
million in 2000. Revenues from the Corporate Customers Communications and Data
business segment, which accounted for 7.9% of the Company's revenues in 2001,
increased by 21.1% to Ch$72,334 million from Ch$59,711 million in 2000. Revenues
from the Information System Services (Sonda) business segment, which accounted
for 12.3% of the Company's revenues in 2001, increased by 16.5% to Ch$112,828
million from Ch$96,826 million in 2000. Revenues from Other Businesses, which
accounted for 6.1% of the Company's revenues in 2001, increased by 4.4% to Ch$
56,330 million from Ch$53,944 million in 2000.
Revenues from Fixed Telephony Services
Fixed Telephony revenues decreased 3.9% to Ch$412,469 million from
Ch$429,099million in 2000. Fixed Telephony revenues include revenues from
primary services, access charges and interconnections and directory advertising.
Primary service. Primary service revenues, which represents 89.7% of all
revenues from Fixed Telephony services, decreased by 4.6% in 2001 to Ch$370,070
million from Ch$388,003 million in 2000. Primary services include, among other
things, fixed monthly charges, variable charges, connections and other
installations, value added services and equipment marketing.
49
Revenues from the fixed monthly charge decreased by 3.3% in 2001 to
Ch$164,094 million from Ch$169,694 million in 2000. The 3.9% increase in the
average number of lines in service in 2001 was offset by the 1.0% additional
tariff reduction in fixed charges, which was applied in May 2000 and again in
May 2001, pursuant to Tariff Decree No. 187.
Revenues from the variable charge decreased by 3.8% in 2001 to Ch$167,464
million from Ch$174,137 million in 2000, as a result of (i) a 4.2% decrease in
traffic per line, (ii) an increase in the proportion of Internet and
fixed-to-mobile traffic, which is charged at lower rates than regular local
calls and (iii) the 1.0% additional tariff reductions applied to the per-minute
rate in May of 2000 and 2001, pursuant to Tariff Decree No. 187.
Revenues from installations and connections decreased by 9.7% to Ch$8,021
million from Ch$8,886 million in 2000, principally due to a 20.4% decrease in
other installations such as cut-off and replacement of lines and charges for
transferring and moving fixed lines, partially offset by a 24.5% increase in
revenues from connections to the public network.
Revenues from value-added services include such services as, among other
things, change of phone number, voice mail, direct-dialing, 700-numbers (toll
calls), 800-numbers, call waiting and call transfer, as well as revenues from
dedicated lines. These revenues decreased by 1.4% to Ch$17,473 million, as
compared to Ch$17,720 million in 2000. The decrease was mainly attributable to a
17.8% decrease in revenues from dedicated lines, resulting from customers
migrating to new data transmission services offered by the Company, offset by a
2.5% increase in revenues from valued-added services, such as detailed billing
and monthly charges for supplementary services.
Revenues from terminal equipment marketing decreased by 13.1% to Ch$7,388
million, as compared to Ch$8,498 million in 2000, due mainly to a 9.6% decrease
in the volume of terminal equipment rentals. These revenues include the sale and
leasing of telecommunications equipment, such as, among other things,
telephones, facsimiles, multi-line equipment and private central switches.
Other fixed telephony revenues decreased by 37.9% to Ch$5,630 million from
Ch$9,068 million in 2000. Other fixed telephony revenues include, among other
things, revenues from operator services, rural telephony and flat fee lines for
Internet access.
Access charges and interconnection. Access charges and interconnection
revenues, which represented 2.6% of all revenues from fixed telephony services,
decreased by 8.0% to Ch$24,267 million in 2001, as compared to Ch$26,379 million
in 2000, primarily due to a 10.7% increase in DLD market traffic and a 13.8%
increase in ILD market traffic, as measured over Telefonica CTC Chile's fixed
network.
Revenues from directory advertising. Revenues from directory advertising,
which accounted for 4.4% of revenues from fixed telephony services in 2001,
increased by 23.2% to Ch$18,132 million from Ch$14,717 million in 2000, due
mainly to the revenues obtained in accordance with the new agreement with
Publiguias implemented in the third quarter of 2001. Pursuant to this agreement,
Telefonica CTC Chile receives a percentage of the revenues generated by
Publiguias in the sale of advertisements in the Yellow Pages and the White
Pages.
Revenues from Long Distance Services
188 Telefonica Mundo, a 99.2%-owned subsidiary of Telefonica CTC Chile, and
Globus, a 99.99%-owned subsidiary of Telefonica CTC Chile, hold concession
rights to provide domestic and international long distance services throughout
Chile.
Long Distance revenues include revenues from domestic and international
long distance multicarrier traffic, as well as revenues from the rental of 188
Telefonica Mundo's long distance network to other telecommunications operators.
50
In 2001, total revenues from the long distance business segment increased
by 7.3% to Ch$81,902 million from Ch$76,328 million in 2000, due mainly to
higher revenues from DLD and ILD services as a result of increased traffic. In
2001, DLD traffic carried by 188 Telefonica Mundo and Globus increased by 12.2%,
and outgoing ILD traffic increased by 11.7%, mainly as a result of the
implementation of alternative tariff plans for both DLD and ILD during 2001.
This increase was partially offset by decreased revenues from the rental of the
long distance network to other telecommunications operators as a result of
decreased rates for this service.
Revenues from Mobile Communications
The Mobile Communications business segment receives revenues from outgoing
cellular traffic, interconnection fees from incoming calls from other networks
and mobile equipment sales.
Total revenues from Mobile Communications increased by 0.6% to Ch$184,172
million in 2001 from Ch$183,147 million in 2000. This increase was mainly the
result of a 16.6% growth in the average size of the subscriber base. This
increase was offset by a decrease in ARPU directly associated with the growth in
the proportion of prepaid service customers, who have lower ARPUs than
subscribed service clients who have contracts. Prepaid service customers
represented 74.9% of the total average number of subscribers at the end of 2001,
as compared to 67.6% at the end of 2000.
Revenues from Corporate Customers Communications and Data
Corporate Customers Communications and Data include revenues from (i) the
sale and rental of telecommunications equipment to corporate customers, mainly
voice equipment (ie. fax, PABX, etc.), (ii) complementary telephone services,
such as 600, 700 and 800 numbers and digital communication services, (iii) data
services, including ATM, Frame Relay, data equipment and services related to the
IP network and (iv) dedicated links and other services, including
videoconference, Datared, E1 Links and VSAT, Internet access, housing, hosting
and consulting services to corporate customers.
Revenues from Corporate Customers Communications and Data increased by
21.1% in 2001 to Ch$72,334 million from Ch$59,711million in 2000, mainly due to
a 53.6% increase in data service revenues. DATARED, ATM and Frame Relay
connections grew at rates of 3.2%, 42.7% and 36.8%, respectively, in the year
2001. Additionally, broadband, dedicated and dial-up Internet access services
and IP network services contributed positively to the revenue growth in this
business segment. The contribution of revenues from Corporate Customers
Communications and Data to total operating revenues was 7.9% in 2001.
Revenues from Information Systems Services
Revenues from the Information Systems Services business segment (Sonda)
grew 16.5% to Ch$112,828 millon in 2001 from Ch$96,826 million in 2000, mainly
as a result of the consolidation by Sonda of its subsidiary Tecnopolis S.A. as
of December 2001, when Sonda increased its ownership in Tecnopolis S.A. to over
50%. Tecnopolis S.A. is a computer equipment sales company operating in Chile.
As of December 2001, Telefonica CTC Chile held a 60% stake in information
systems subsidiary Sonda.
Other Businesses
Revenues from Other Businesses include revenues from CTC Equipos, the
Company's subsidiary that provides public telephone services, terminal
equipments sales and interior installations maintenance, and from other
subsidiaries, including Istel, Tecnonautica and Infoera. Revenues from Other
Businesses increased by 4.4% in 2001 as compared to 2000, to Ch$56,330 million.
Public telephone revenues decreased by 18.7% to Ch$16,056 million in 2001
from Ch$19,761 million in 2000, mainly as a result of lower average revenue per
public telephone due to a decrease in traffic attributable to substitution by
mobile calls. Revenues from interior installations of telephone equipment and
maintenance decreased 1.8% in 2001, reaching Ch$26,371 million as of December
31, 2001 as compared to Ch$26,842 million at year-end 2000. These decreases were
offset by an 89.4% increase in other operating revenues,
51
which include revenues from the subsidiaries Istel, Tecnonautica, and Infoera,
as well as from the subsidiary Comunicaciones Empresariales, a provider of
telecommunications services and network solutions to corporate customers, which
was acquired from Sonda in 2001.
Operating Costs and Administration and Selling Expenses
Operating costs and expenses decreased by 6.2% to Ch$778,559 million in
2001, as compared to Ch$830,149 million in 2000.
Operating salaries and related costs. Operating salaries and related costs,
which represented 13.0% of total operating costs and expenses during 2001,
decreased by 2.2% to Ch$101,150 million from Ch$103,372 million in 2000, as a
result of the cost savings related to the personnel reduction process which
occurred in June 2001. This was partially offset by a 4% salary increase in June
of 2000, pursuant to the collective bargaining agreements signed in 1998.
Depreciation and amortization. Depreciation and amortization, which
accounted for 32.8% of total operating costs and expenses during 2001, rose by
2.5% to Ch$255,504 million, as compared to Ch$249,347 million in 2000. This
increase resulted from an increase in depreciable assets due to the completion
of projects in the mobile communications business, partially offset by the sale
of the cable network assets in July 2000 and lower investments during the year
2001.
Other operating cost. Other operating costs, which represented 37.3% of
total operating cost and expenses during 2001, decreased to Ch$290,541 million
in 2001 from Ch$344,309 million in 2000. This decrease was primarily
attributable to (i) a decrease of 8.5% in the cost of long-distance service and
interconnections as compared to 2000 and (ii) a 74.1% decrease in uncollectable
costs (provision for doubtful accounts) as compared to 2000, which amounted to
Ch$20,536 million in 2001 as compared to Ch$70,077 in 2000. This decrease was
mainly a consequence of the change in the allowance for uncollectables
implemented in the fourth quarter of 2000, which involved making a provision
equal to 100% of the amounts of uncollectable accounts that remain unpaid 120
days after the due date. A one-time charge of Ch$57,479 million had been
included in 2000 as a result of this change in the policy for uncollectable
accounts and (iii) a 33.0 % decrease in costs of telecommunications equipment
sold, which reached Ch$75,060 million, mainly due to lower costs of mobile
equipment sales. All of the above were partially offset by higher building and
equipment rental expenses and higher expenses in third party contracts, which
increased 5.6% in 2001 due to higher maintenance expenses of the mobile network
and higher telemarketing expenses.
Administration and selling expenses. Administration and selling expenses
decreased by 1.3% to Ch$131,364 million, as compared to Ch$133,121 million in
2000, due to savings associated with the cost control plan and the personnel
reduction process implemented by the Company. This decrease was partly offset by
higher advertising and promotion expenses.
Operating Income
Operating income increased by 105.3% to Ch$141,476 million from Ch$68,905
million in 2000, due to a 2.3% increase in operating revenues and a 6.2%
decrease in operating expenses, as explained above.
Other Income (Expenses)
Interest income. Interest Income increased by 51.0% to Ch$18,742 million in
2001, as compared to Ch$12,414 millions in 2000, mainly due to increased
interest income from available cash invested in financial securities during
2001. Part of this available cash was used to reduce debt in the fourth quarter
of 2001.
Interest expense. Interest expense net of capitalized interest decreased
13.4% to Ch$96,255 million in 2001, as compared to Ch$112,803 million in 2000,
mainly due to a 6.4% decrease in the Company's average interest-bearing debt
during this period, as well as renegotiations of the spreads on outstanding
loans and the decrease in local and international interest rates, partly offset
by lower capitalization of interest in 2001 as compared to 2000.
52
Price level restatement and exchange differences, net. Price level
restatement and exchange differences, net, produced a gain of Ch$2,131 million
in 2001, compared to a loss of Ch$32,591 million in 2000. The impact of the
depreciation of the inflation-adjusted Chilean peso against the U.S. dollar
during 2001 was minimized by the Company's policy of conservative hedging of
currency denominated interest-bearing debt.
Other expenses, net. Other expenses, net, for 2001 totaled a loss of
Ch$45,159 million, as compared to a loss of Ch$53,713 million for 2000. This
variation was mainly explained by a net loss of Ch$3,656 million recorded in
2000 in connection with the sale of cable TV operator Metropolis-Intercom S.A.
The transaction resulted in a net gain of Ch$39,611 million from the sale of the
Company's 40% equity participation in Metropolis-Intercom, offset by the
write-off of the associated goodwill, which amounted to Ch$43,164 million. In
addition, in 2001 the Company recorded one-time extraordinary income of
Ch$11,389 million as compensation for the early termination of the agreement
with Publiguias. This was offset by higher expenses in 2001, as compared to
2000, associated with the personnel reduction process carried out in June 2001
and an increase in the goodwill amortization of Sonda, as the term to amortize
its goodwill was shortened due to an agreement signed in 2001 that gave the
Company's partners an option to purchase the remaining 60% ownership interest in
Sonda.
Income Taxes
The Company recorded an income tax charge in the amount of Ch$11,769
million (US$ 16.4 million) in 2001, as compared to an income tax credit of
Ch$5,764 million in 2000.
Income Taxes includes current income tax expenses - taxes paid during the
period - as well as deferred taxes from the period and from previous periods
(complementary accounts), as shown in Note 7(c) to the Audited Consolidated
Financial Statements. The Company recorded an income tax charge in the amount of
Ch$11,769 million in 2001, composed of a Ch$3,866 million current income tax
expense, a Ch$25,114 million charge for deferred taxes for the period and a
Ch$1,456 million charge for amortization of deferred taxes from previous periods
(complementary accounts), offset by a Ch$18,667 million benefit resulting from
tax loss. In 2000, the Company's income tax expenses were offset by a Ch$24,239
million benefit resulting from tax loss carry forward, resulting in a tax credit
of Ch$5,764 million for the year.
Net Income (Loss)
As a result of the above, the Company's net income amounted to a gain of
Ch$4,235 million in 2001, as compared to a net loss of Ch$121,085 million in
2000. For 2001, the contribution to the consolidated net income by business
segment was as follows: a loss of Ch$18,559 million in Fixed Telephony, net
income of Ch$31,258 million in Long Distance, a net loss of Ch$26,542 million in
Mobile Communications, net income of Ch$11,660 million in Corporate Customers
Communications and Data, net income of Ch$6,981 million in Information Systems
Services (Sonda), and a net loss of Ch$561 million in Other Businesses.
53
B. Liquidity and Capital Resources
Sources of Liquidity
The Company's main historical sources of liquidity have been its cash flows
from operations, proceeds from borrowings and the issuance of equity. Although
in the past Telefonica CTC Chile has relied substantially on public debt issues
to meet its financing requirements, since 2001 its main sources of liquidity
have been cash flow generated from operations and free cash resulting from
savings associated with the refinancing of certain loans. During 2002,
Telefonica CTC Chile continued to pursue its strategy of improving its financial
structure through reduction in investments and capital expenditures, promoting
cash flow generation and debt reduction.
Cash flow from operations in 2002 decreased to Ch$324,595 million (US$
451.7 million) from Ch$356,286 million in 2001. The decrease in cash flow from
operations was primarily due to the net loss of Ch$17,680 million (US$ 24.6
million) recorded in 2002, as compared to a net income of Ch$4,235 million
registered in 2001. Results in 2002 decreased as compared to 2001 mainly due to
lower operating revenues attributable to the deconsolidation of Sonda as of
September 2002, as well as to the effect of the new contract with Publiguias,
which generated a one-time payment from this company in 2001. Other effects on
cash flow from operations were (i) a decrease of Ch$49,408 million (US$ 68.8
million) in accounts payable related to operating activities in 2002, as
compared to an increase of Ch$37,887 million in 2001, mainly due to the fact
that as of 2002 the accounts payable of Telefonica Mundo for its long distance
settlement rates are shown net of its accounts receivable, and (ii) a decrease
of Ch$50,427 million (US$ 70.2 million) in other accounts payable related to
non-operating activities in 2002, as compared to a decrease of Ch$11,353 million
in 2001 which is mainly attributable to a smaller amount of exchange rate
hedging contracts during 2002 as a result of a reduction in the Company's total
U.S. dollar denominated debt, as well as decreased short term financing in the
form of fixed income securities sold with repurchase agreements. The decrease in
cash flow from operations was offset in part by a smaller increase in trade
accounts receivable in 2002 as compared to 2001, partly due to an increased
bad-debt provision in 2002, which is shown net of trade accounts receivable.
The Company's shareholders' equity as of December 31, 2001 and 2002 was
Ch$1,305,296 million (US$ 1,816.4 million) and Ch$1,286,690 million (US$ 1,790.5
million), respectively. The decrease in shareholders' equity as of December 31,
2002, was primarily attributable to the net loss in the amount of Ch$17,680
million (US$ 24.6 million) recorded in 2002, as compared to a net income in the
amount of Ch$4,235 million (US$ 5.9 million) recorded in 2001.
Outstanding Indebtedness
Following its privatization in 1988, the Company pursued an aggressive
development plan to expand its then existing fixed line network and develop
other telecommunication services, such as long distance service, mobile
telephony and data transmission services. To fund the capital expenditures
associated with this expansion, the has raised capital by issuing debt through
domestic and international offerings, including the issuance of Yankee and Euro
Bonds, and has borrowed funds from commercial banks in the form of syndicated
and bilateral loans. The Company has also accessed the local Chilean capital
markets, through the issuance of medium and long-term bonds, primarily sold to
pension funds, insurance companies and other institutional investors, and though
borrowing from commercial banks.
54
The following table sets forth the Company's outstanding debt as of
December 31, 2002:
As of December 31, 2002
-----------------------------------------------------------------------------------------------------
Original
Short Long Principal
Total Debt Term Term Type Date Amounts
Outstanding Portion Portion of Debt Incurred Borrowed (1)(2) Interest Rate Maturity
----------- ------- ------- ------- -------- --------------- ------------- --------
(In millions of constant Chilean Pesos as of December 31, 2002, except as indicated)
Short Term Obligations with Banks:
Local bank
Banco Estado......... 9,191 9,191 - borrowing 1993 UF 548,140 0.78% 2003
Local bank
Santander Bank....... 9,841 9,841 borrowing 1998 UF 580,000 0.51% 2003
Total short term
obligations........ 19,032 19,032 -
Long Term Obligations with Banks:
Bilateral Libor +
Banco BBVA........... 18,148 18,148 - loan 1998 US$ 25 mm 0.35 2003
Syndicated Libor +
JP Morgan Chase...... 86,608 375 86,233 loan 2001 US$ 120 mm 0.75 2004
ABN-BBVA and Syndicated Libor +
Others............. 253,059 1,545 251,514 loan 2001 US$ 200 mm 1.125 2005
Libor +
2002 US$ 150 mm 1.0 2006
Syndicated Libor +
Citibank............. 135,676 116,381 19,295 loan 1996 US$ 150 mm 0.725 2003
Libor +
2000 US$ 37.6 mm 0.57 2006
Bilateral TAB +
Santander............ 59,525 - 59,525 loan 2001 UF 3,555,000 0.95 2004
Total long term
obligations........ 553,016 136,449 416,567
Bond and Debentures
Series E............. 2,648 2,648 - Local bond 1991 UF 2,500,000 6.00% 2003
Series F............. 16,343 1,393 14,950 Local bond 1991 UF 1,500,000 6.00% 2016
Series I............. 26,339 2,269 54,070 Local bond 1994 UF 2,000,000 5.50% 2015
Series K............. 68,637 1,661 66,976 Local bond 1998 UF 4,000,000 6.75% 2020
1st tranche
Yankee
Yankee Bonds......... 149,752 6,030 143,722 Bond 1996 US$ 200 mm 7.63% 2006
2nd tranche
Yankee
Yankee Bonds......... 148,802 5,080 143,722 Bond 1998 US$ 200 mm 8.38% 2006
Eurobonds............ 121,375 2,623 118,752 Eurobond 1999 Euros 200 mm 5.38% 2004
Total Bond and
Debentures .......... 533,896 21,704 512,192
Notes and Accounts Payables to Related Companies:
Telefonica Current
Internacional Chile.. 24,475 261 24,214 Account 1996 US$ 33 mm 3.00% 2004
----------------------------------------------------------------------------------------------------
Total Debt
Outstanding.......... 1,130,420
---------------
(1) In original currency of debt as incurred.
(2) U.S. dollar and euro amounts expressed in millions.
55
Certain of the debt incurred by the Company is governed by instruments and
agreements that contain restrictive covenants with which the Company is
obligated to comply. Under the terms of the loan with Santander Bank, the
Company must maintain a leverage ratio (as defined in the loan agreement) equal
to or lower than 1.8 and a financial expenses coverage ratio (as defined in the
loan agreement) equal to or higher than 2.5. Under terms of Company's syndicated
loan agreements and local bond agreements, the Company must maintain a leverage
ratio (as defined in each respective agreement) equal to or lower than 1.6 and a
financial expenses coverage ratio (as defined in each respective loan agreement)
equal to or higher than 3.0. Additionally, under the syndicated loans, the
Company must maintain a ratio of cash flow over financial liabilities equal to
or higher than 0.166. As of December 31, 2002, the Company was in compliance
with all financial covenants ratio requirements as set forth under the
agreements governing its debt obligations. In April 2003, a US$ 150 million
syndicated loan incurred in 1996, was amended to extend its maturity from
December 2003 to April 2008. The new agreement defined a covenant related to the
Subsidiaries Financial debt. Total Subsidiary Financial debt shall be less than
the greater of (i) US$ 300 million or (ii) 20% of Consolidated Financial Debt.
Additionally, at the General Annual Shareholders' Meeting held in April of
2003, the Investment and Financing Policy for 2003 was approved by Telefonica
CTC Chile's shareholders, which specifies that the maximum consolidated debt to
equity ratio may not exceed 1.6.
In 2002, the Company's efforts to improve its financial position have been
recognized by certain credit rating agencies in the domestic Chilean and
international markets. In November 2002, Standard & Poor's, upgraded Telefonica
CTC Chile's international debt rating outlook from "stable" to "positive," while
maintaining its rating at BBB. The Company's comparable rating from Moody's has
remained at Baa2 with stable outlook. However, although the Company's rating
with Fitch remains at BBB+, that rating agency has maintained its rating outlook
as negative. In December 2002, Clasificadora De Riesgo Humphreys Limitada, a
local Chilean rating agency, improved Telefonica CTC Chile's local bond rating
outlook from "stable" to "favorable" while maintaining its rating A+ on the
Company's long term debt.
Capital Expenditures and other Liquidity Requirements
Debt Prepayment
In line with the Company's debt reduction strategy, the principal use of
liquidity, other than in connection with ongoing operations in 2002, 2001 and
2000, was for the reduction of debt. As a result, the Company has recently
dedicated a substantial portion of free cash to the reduction of
interest-bearing debt through the prepayment of bank loans, the repurchase of
bonds in the national and international markets and the renegotiation of loans,
obtaining reduced interest rates and extended maturities. During 2002 the
Company amortized a total amount of Ch$50,303 million (US$ 70 million) of its
debt, and prepaid Ch$223,190 million (US$ 331 million) of debt. Debt prepayments
consisted of Ch$75,454 million (US$ 105 million) prepayment of syndicated loans,
Ch$66,831 million (US$ 93 million) repurchase of local bonds, Ch$29,463 million
(US$ 41 million) repurchase of Eurobonds and Ch$51,740 million (US$ 72 million)
repayment of bilateral loans.
Debt Renegotiation
In July 2002, the Company's US$ 180 million syndicated loan was
renegotiated with a resultant (i) reduction in the loan amount to US$ 150
million by prepayment of US$ 30 million, (ii) extension of the maturity from
February 2003 to April 2007 and (iii) decrease in the annual interest rate from
LIBOR + 1.375% to LIBOR + 1.0%, subject to changes in the risk rating of the
Company's long term foreign currency debt.
As a result of all these actions, as of December 31, 2002, the Company's
interest-bearing debt totaled Ch$1,130,420 million (US$ 1,573 million), a
reduction of 14.5% as compared to the Ch$1,321,730 million of debt outstanding
at year-end 2001.
56
Capital Expenditures
Capital expenditures have decreased steadily between 2000 and 2002,
amounting to Ch$146,256 million (US$ 204 million) in 2002 as compared to
Ch$190,438 million in 2001 and Ch$199,994 million in 2000. Capital expenditures
have been realigned and targeted primarily at those business areas presenting
the greatest potential for growth and development, especially the mobile,
corporate communications and broadband businesses. Investments for 2002 totaled
Ch$146,256 million (US$ 204 million), of which 35% were destined to the mobile
business, as compared to average annual investments of Ch$260,893 million
(historic) in the last 5 years.
Foreign Exchange and Interest Rate Risk Management
The Company is exposed to financial risks related to fluctuations in
exchange and/or interest rates, since a significant portion of its indebtedness
comes from abroad and is therefore foreign currency-denominated and/or subject
to floating interest rates. See "Item 3: Key Information--Risk Factors."
Currency devaluations and foreign exchange fluctuations may adversely affect
Telefonica CTC Chile."
Of the Company's total long-term debt (including current maturities) of
Ch$1,125,471 million (US$ 1,566.1 million) as of December 31, 2002, 16.7% was
denominated in Chilean pesos and 83.3% was denominated in foreign currencies,
87.1% of which is U.S. dollar-denominated and 12.9% is euro-denominated. Of the
Company's long-term interest-bearing debt denominated in foreign currencies as
of December 31, 2002, 50% was fixed-rate debt and 50% was floating-rate debt.
Virtually all of the Company's Chilean peso-denominated debt is indexed to
inflation.
The Company periodically reviews its exposure to risks arising from
fluctuations in foreign exchange rates and interest rates and its senior
management then determines how to hedge such risks. Subject to this review
process, the Company manages foreign currency risks through hedging transactions
in the Chilean and foreign derivative markets and through other mechanisms, such
as purchasing in the Chilean capital markets of dollar-denominated securities
with floating interest rates based on the London Interbank Offered Rate
("LIBOR").
In 2002, the value of the dollar was highly volatile, and ended the year
with a depreciation of the peso against the U.S. dollar in real terms of 6.6% as
compared to year-end 2001. Consequently, amid uncertainty regarding exchange
rates the Company continued to pursue a conservative foreign-currency debt
hedging policy, hedging 100% of its interest-bearing debt in order to neutralize
the impact of exchange-rate fluctuations. Furthermore, hedging against interest
rate fluctuations reached 80.6% of total interest-bearing debt. As a result, the
Company has entered into currency and interest rate swaps and foreign currency
futures contracts with respect to a portion of its borrowings. At December 31,
2002, Telefonica CTC Chile had entered into foreign currency forward contracts
covering dollar denominated liabilities in the amount of Ch$816,261 million. In
addition, the Company maintained Ch$411,469 million (US$ 572.6 million) in
collars in order to hedge against interest rate (LIBOR) fluctuations certain
obligations subject to floating interest rates. Additionally, in December 2002,
the Company entered into a forward rate agreement covering Ch$179,653 million
(US$ 250 million) to hedge against interest rate fluctuations in 2003. See "Item
11: Quantitative and Qualitative Disclosures about Market Risk."
Impact of Inflation
The Company is required under Ch GAAP to restate its non-monetary assets,
UF and foreign-currency denominated monetary assets and liabilities,
shareholders' equity, and income and expense accounts to reflect the effect of
variations in the purchasing power of the Chilean peso. However, Chilean
peso-denominated monetary assets and liabilities are typically not restated. See
Note 22 of the Audited Consolidated Financial Statements.
Non-monetary assets, UF-denominated monetary assets and liabilities,
shareholders' equity, and income and expense accounts are generally restated
using the Chilean CPI, based on the "prior month rule," in which inflation
adjustments are based on the Chilean CPI at the end of the month preceding the
period end.
57
Inflation, as measured by the Chilean CPI, was 4.7%, 3.1%, and 3.0% for the
twelve-month periods ended November 30, 2000, 2001 and 2002, respectively.
Monetary assets and liabilities in foreign currency are restated at period-end
exchange rates. The amount of monetary correction for any period will depend
primarily on the amount of foreign currency-denominated monetary assets and
liabilities and the effect of the inflation and the foreign exchange rate on
such assets and liabilities.
The following table sets forth the accounting treatment of the effect of
inflation on Telefonica CTC Chile's statement of operations for the periods
indicated:
Year ended December 31,
---------------------------------------------------------
2000 2001 2002 2002
---------- --------- --------- ---------
(in millions of constant Ch$ as of (US$ millions)
December 31, 2002)
Purchasing power gain..................... 55,667 37,404 23,840 32.6
Loss on indexation........................ (46,997) (37,100) (30,005) (41.0)
Gain (loss) on foreign currency
transactions....................... (41,260) 1,828 (2,788) (3.8)
Monetary correction....................... (32,590) 2,132 (8,953) (12.2)
Recently Issued Accounting Pronouncements
In January 2003, the Chilean Association of Accountants issued Technical
Bulletin No. 72, "Combinacion de Negocios, Inversiones Permanentes y
Consolidacion de Estados Financieros." This standard complements or replaces
existing accounting literature for business combinations under Chilean GAAP, and
requires all acquisitions initiated after January 1, 2003 to be accounted for
using the purchase method based on fair values of assets acquired and
liabilities assumed. In addition, in exceptional cases the pooling-of-interest
method may be used in reorganizations between related parties or for those
transactions, where there is no clear acquirer. Technical Bulletin No. 72
continues to require the amortization of goodwill, and specifies the requirement
for an impairment test. Notwithstanding any future transactions, the adoption of
Technical Bulletin No. 72 is not expected to have a significant effect on the
results of operations, financial position or cash flows of the Company.
In June 2001, the U.S. FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimated of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and depreciated over the life of the associated fixed
asset. An entity shall measure changes in the liability for an asset retirement
obligation due to passage of time by applying an interest method of allocation
to the amount of the liability at the beginning of the period. The interest rate
used to measure that change shall be the credit-adjusted risk-free rate that
existed when the liability was initially measured. That amount shall be
recognized as an increase in the carrying amount of the liability and as an
expense classified as an operating item in the statement of operations. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002. The Company
determined that the adoption of SFAS No. 143 will not have any impact on its
results of operations, its financial position and its cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred and indicates that an entity's commitment to an
exit plan does not by itself create a present obligation to others that meets
the definition of a liability. This statement nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit and Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company will apply the provisions
of SFAS No. 146 to all exit and disposal activities after December 31, 2002.
58
In November 2002, EITF Issue No. 02-16, "Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor" was
issued, which is applicable for all arrangements of this nature entered into
after December 15, 2002. This EITF expanded the scope of Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)," to (a) include resellers that sell goods or
services to a vendor (that is, resellers and vendors that sell goods or services
to each other), (b) include end-users that receive cash consideration from a
vendor and (c) provide guidance on the recognition and measurement of cash
consideration (including up-front nonrefundable cash consideration) received
from a vendor. The Company believes that the issuance of this EITF will have no
impact on its statements of financial condition, its statements of operations or
cash flows.
In November 2002, the FASB issued FASB Interpretation No 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." ("FIN 45"). FIN 45 requires additional
disclosures by guarantors about obligations under guarantees that it has issued.
This statement also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of obligations
undertaken in issuing guarantees. The disclosure requirements for FIN 45 are
effective for financial statements of interim and annual periods ending after
December 15, 2002. The initial recognition and initial measurement requirements
are applicable on a prospective basis for guarantees issued or modified after
December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities," ("FIN 46") an interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements" ("ARB 51"). FIN 46
addresses consolidation by business enterprises of variable interest entities,
which are entities subject to consolidation according to the provisions of FIN
46. For interests acquired on or after February 1, 2003, FIN 46 applies
immediately. For existing interests as of January 31, 2003, FIN 46 is effective
on July 1, 2003. The Company does not believe that the adoption of FIN 46 will
affect its accounting.
In January 2003, EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables," was issued, which is applicable for all revenue arrangements of
this nature entered into after June 15, 2003. This EITF issue applies to all
deliverables within contractually binding arrangements in all industries in
which a vendor will perform multiple revenue-generating activities, with certain
exceptions. The application guidance contains guidance on (a) how these
arrangements should be measured, (b) whether the arrangement should be divided
into separate units of accounting and (c) how the arrangement consideration
should be allocated among the separate units of accounting. The Company believes
that the issuance of EITF Issue No. 00-21 will have no impact on its statements
of financial condition, its statements of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is applied prospectively and is effective for contracts
entered into or modified after June 30, 2003, except for SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, and certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet exist. The
Company does not believe that SFAS No. 149 will affect its consolidated
financial statements.
In May 2003, the FASB issued Statement of SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity and will require an issuer to classify as a liability certain
instruments currently classified as equity. The Company does not expect SFAS No.
150 to have a material impact on its consolidated financial statements.
59
C. Research and Development, Patents and Licenses, etc.
The Company does not incur any material research and development expenses.
The Company has a Technological Development Unit, responsible for developing
solutions to satisfy technical needs of different business units of the Company.
No separate investment budget is allocated to that unit's activities, which are
based on specific project tasks.
The Company holds no material patents and does not grant to others material
licenses on its intellectual property. In connection with its provision of
telecommunication services, the Company plans infrastructure development based
upon present and projected future demand for such services. The Company acquires
the necessary technology, including equipment, from third parties.
D. Trend Information
See "- Recent Developments and Trends," which appears above in this Item 5.
E. Off-Balance Sheet Arrangements
Telefonica CTC Chile and its subsidiaries had no material off-balance sheet
arrangements for the years 2002, 2001 and 2000.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes the Company's contractual cash obligations
and commercial commitments as of December 31, 2002, and the liquidity
requirements for such obligations in the future periods specified.
Payments due by period
(in millions of constant Ch$ as of December 31, 2002)
------------------------------------------------------------------
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
---------- ---------- --------- ----------- ---------
Contractual Obligation:
Long-term debt, including current
maturities .......................... 1,096,755 167,995 431,008 408,463 89,288
Capital (Finance) Lease Obligations . 4,327 490 854 1,108 1,876
Operating Lease Obligations..........
Purchase Obligations ................ 149,887 149,887 - - -
Other Long-Term Liabilities Reflected
on the Company's Balance Sheet under
the GAAP of the primary financial
statements ...................... 113,382 49,073 22,192 4,931 37,185
Other accounts payable and due to
related company ................. 36,190 11,976 24,214 - -
--------- --------- --------- --------- ---------
Total contractual obligations........ 1,400,541 379,421 478,268 414,502 128,349
60
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The Company is managed by its Board of Directors, which in accordance with
the Company's Estatutos, or Bylaws, must consist of seven directors and their
respective alternate directors. Six of the directors, together with their
respective alternate directors, are elected by holders of the Series A Common
Stock, each for a three-year term, at the General Annual Shareholders' Meeting.
Holders of the Series B Common Stock elect one director and one alternate
director for a three-year term at the General Annual Shareholders' Meeting.
If a vacancy occurs on the Board of Directors during the course of any
three-year term (for example, upon resignation of a director), the alternate
director corresponding to the vacant position serves as director for the balance
of the term. If such alternate director resigns, dies or by virtue of law
becomes unable to serve as a director, the Board of Directors then appoints a
new alternate director to serve until the date of the next General Annual
Shareholders' Meeting, when an election of the entire Board of Directors must
take place.
The Board of Directors is elected every three years. The current Board of
Directors was elected for a term expiring in 2004 at the General Annual
Shareholders' Meeting held on April 26, 2001.
Alternate directors participate in discussions at the Board meetings but
are entitled to vote only when their respective principal directors are absent.
The Bylaws also require that the directors and alternate directors elected by
the holders of Series B Common Stock be shareholders of the Company.
The Board of Directors appoints a General Manager (also known as the Chief
Executive Officer) and such other executive officers as are deemed appropriate
to implement the Board's policies and decisions. The Chief Executive Officer of
a public Chilean corporation cannot also serve as a director of such
corporation.
As of June 15, 2003, the Company's directors and executive officers were:
Name Position
---- --------
Directors
Bruno Philippi................... Chairman of the Board of Directors and Director Series A Common Stock
Jose Maria Alvarez- Pallete (1).. Deputy Chairman of the Board of Directors and Director Series A Common
Stock
Andres Concha.................... Director Series A Common Stock
Fernando Bustamante.............. Director Series A Common Stock
Nicolas Majluf................... Director Series A Common Stock
Felipe Montt..................... Director Series A Common Stock
Luis Cid......................... Director Series B Common Stock
Antonio Viana-Baptista........... Alternate-- Director Series A Common Stock
Juan Claro....................... Alternate-- Director Series A Common Stock
Juan Carlos Ros.................. Alternate-- Director Series A Common Stock
Guillermo Fernandez.............. Alternate-- Director Series A Common Stock
Augusto Iglesias................. Alternate-- Director Series A Common Stock
Sergio Badiola................... Alternate-- Director Series A Common Stock
Alfonso Ferrari.................. Alternate-- Director Series B Common Stock
Executive Officers
Claudio Munoz.................... General Manager and Chief Executive Officer
Business Areas (2)
Velko Petric..................... Corporate Manager -- Consumer and Small
Business Communications and General Manager
of CTC Equipos
Oliver Flogel.................... General Manager-- Telefonica Movil
Ricardo Majluf................... General Manager-- Telefonica Empresas
61
Name Position
---- --------
Management Areas
Cristian Aninat.................. Secretary of the Board of Directors and General Counsel
Julio Covarrubias ............... Corporate Manager--Chief Financial Officer and General Manager of
t-gestiona
Humberto Soto.................... Corporate Manager-- Regulation
Rafael Zamora.................... Corporate Manager-- Planning and Control and Chief Accounting Officer
Oscar Marquez.................... Corporate Manager-- Systems and Chief Information Officer
Marcel Mancilla.................. Corporate Manager-- Internal Auditing
Mauricio Malbran................. Corporate Manager-- Human Resources
Support Areas (2)
Franco Faccilongo................ Corporate Manager-- Network Services
Diego Barros..................... Corporate Manager-- Customer Service and Sales
----------------------
(1) On April 22, 2003, Mr. Jacinto Diaz Sanchez presented his resignation to
his position of Deputy Chairman of the Board of Directors and Director
Series A Common Stock of Telefonica CTC Chile, and was replaced by Mr.
Jose Maria Alvarez-Pallete. The rest of the Board of Directors was the
same as of December 31, 2001.
(2) On October 28, 2002, Telefonica CTC Chile implemented certain changes to
its business operations and organizational structure that it believes will
enable it to enhance the services delivered to its customers. Telefonica
CTC Chile will operate through three main business units: Consumer and
Small Businesses Communications (including the long distance business),
Corporate Communications (including the businesses of the Company's
subsidiary, TelefonicaEmpresas) and Mobile Communications. In addition,
two areas have been created to support these business units: Management of
Customer Service and Sales, in charge of sales and distribution throughout
the country, and Management of Network Services, in charge of
infrastructure and technical network maintenance.
Certain of the Company's directors also serve as directors or officers of
other companies, including related companies (where noted below) and other
companies in the Chilean telecommunications industry. See "Item 7:
Major Shareholders and Related Party Transactions."
Set forth below is a brief biographical description of the directors and
executive officers of the Company. All ages of directors and executive officers
are expressed as of December 31, 2002.
Directors
Bruno Philippi, 58, became a Series A Director and Chairman of the Board in
March 2001. Mr. Philippi also acts as an active member of the board of the
Sociedad de Fomento Fabril ("Sofofa," the Chilean Manufacturing and Services
Companies Association), Instituto Chileno de Administracion Racional de Empresas
("ICARE," the Chilean Institute for Corporate Management) and the Centro de
Estudios Publicos ("CEP," the Center for Public Studies). He holds a civil
engineering degree from the Universidad Catolica de Chile, a master's degree in
science in operations research and a Ph.D. in engineering economic systems from
Stanford University.
Jose Maria Alvarez-Pallete, 39, became a Series A Director and Deputy
Chairman on April 22, 2003. He also held the positions of Chairman and Chief
Executive Officer of Telefonica Internacional since July 2002. Mr.
Alvarez-Pallette is member of the following boards of administrations:
Telefonica de Espana, Telefonica Moviles, Telefonica Data, Telefonica
Internacional, Telefonica Publicidad e Informacion, Inmobiliaria Telefonica,
Telefonica Argentina, Telefonica Peru, Cointel and Telesp. He holds a degree in
economics from the Universidad Complutense of Madrid.
Andres Concha, 59, became a Series A Director on April 26, 2001. He holds a
position as General Secretary of the Sofofa. He is also board member of Grupo
Security. He holds a commercial engineering degree from the Universidad de
Chile.
Fernando Bustamante, 63, became a Series A Director on April 26, 2001. He
is the chairman of the respective boards of directors of Metro S.A., Textiles
Pollak S.A. and of Tricot S.A. He is member of the board of directors of S&B
Farmaceutica S.A. Additionally, he is General Manager and Partner of Inversiones
El Olivar Ltda. He holds an accounting degree from the Universidad de Chile.
62
Nicolas Majluf, 57, became a Series A Director in 1988. He holds
directorship positions in Euroamerica S.A. and Falabella S.A. and acts as
consultant to the board of directors of Inchalam and its related companies. He
is a professor at the Engineering School of the Universidad Catolica de Chile.
He is the brother of the General Manager of Telefonica Empresas, Ricardo Majluf.
He holds a civil industrial engineering degree from the Universidad Catolica de
Chile, a MSC in operations research from Stanford University and a Ph.D. in
management from the Massachusetts Institute of Technology.
Felipe Montt, 50, became an alternate Director in 1988 and a Series A
Director in 1996. He holds directorship positions on the respective boards of
directors of Dimacofi S.A., Compania Chilena de Fosforos S.A., Forestal Copihue
S.A., Bosques de Chile S.A. and is the main partner of Montt y Asociados Ltda.,
which provides financial advisory services. He holds a commercial engineering
degree from the Universidad Catolica de Chile and both a master's degree in arts
and a doctorate in economics from the University of Minnesota.
Luis Cid, 54, became an alternate Series B Director in May 1995 and a
Series B Director in December 1998. He is the Chairman of Iede, OTIC, and Camara
Oficial Espanola de Comercio de Chile. He holds directorship positions on the
respective boards of directors of Aenor Chile, Fundacion Eurochile, Iansa,
Campos Chilenos and Rutas del Pacifico.
Antonio Viana-Baptista, 45, became an alternate Series A Director in
December 1998. He is the Chairman and Chief Executive Officer of Telefonica
Movil, and Director of Telefonica Internacional, S.A. He holds a bachelor degree
in economics from the Universidad Catolica de Lisboa and a masters's degree in
business administration from INSEAD.
Juan Claro, 52, became a Series A Director on April 26, 2001. He was a
professor of modern physics and electrodynamics. He serves as chairman of the
board of Emel S.A., and is also chairman of the board of Sofofa and the Chilean
Confederation of Commerce and Production. He is an entrepreneur who studied
civil engineering at the Universidad Catolica de Chile. He also holds a master's
degree in physics from the Universidad Catolica de Chile.
Juan Carlos Ros, 41, became an alternate Series A Director in February
2000. He holds a position as General Secretary of Telefonica Internacional, S.A.
He also holds positions as a Director of Telefonica de Argentina S.A., Telesp
S.A. and Telefonica Internacional S.A. He holds a law degree from the
Universidad Central de Barcelona.
Guillermo Fernandez, 56, became an alternate Series A Deputy Director in
June 1997. He holds a position as a General Manager of Telefonica S.A. He holds
a doctorate in industrial engineering and a degree in computer science from the
Universidad de Madrid.
Augusto Iglesias, 47, became an alternate Series A Director in April 1996.
He holds a position as partner and director of PrimAmerica Consultores, which
provides consulting services. He holds a commercial engineering degree from the
Universidad Catolica de Chile and a master's degree in economics from the
University of California, Los Angeles.
Sergio Badiola, 72, became a Series A Director in 1987 and an alternate
Series A Director in June 1993. He also held the positions of Chairman and
Deputy Chairman of the Company's Board of Directors in 1988 and 1989,
respectively. He is a member of the councils of several educational
organizations, including Sociedad Educacional el Valle de Casablanca,
Universidad Mayor and Universidad Bernardo O'Higgins. He is a general
accountant, as well as a Major General (Ret.) of the telecommunications branch
of the Chilean Army. He served as General Secretary of the Chilean Government in
1980, was Sports Director of Chile from 1982 to 1985 and was the Intendent for
the Region of Santiago between 1987 and 1988.
Alfonso Ferrari, 61, became an alternate Series B Director on April 26,
2001. He is a Director of Telefonica del Peru and Chairman of the Commission of
Appointments and Payments of the Corporate Governance Council of Telefonica de
Espana. He holds an industrial engineering degree from the
63
Universidad Politecnica de Madrid and a master's degree in business
administration from Harvard University.
Executive Officers
Claudio Munoz, 40, the current Chief Executive Officer and former Vice
President General Controller and Chief Accounting Officer, joined Telefonica CTC
Chile in 1986. He holds a degree in civil industrial engineering and a master's
degree in industrial engineering from the Universidad de Chile.
Velko Petric, 39, Corporate Manager of Consumer and Small Business
Communications and General Manager of CTC Equipos, joined Telefonica CTC Chile
in 1994. He has served as director of Fundacion Telefonica since 1999. His
experience at the Company also includes positions as Chief Executive Officer of
CTC-Nexcom, Vice President of Small and Medium Corporate Customers and Chief
Executive Officer of 188 Telefonica Mundo. He holds a civil industrial
engineering degree from the Universidad Catolica de Chile.
Oliver Flogel, 31, was appointed General Manager of Telefonica Movil in
February 2003. He was nominated for this position by Telefonica, and his
appointment was consequently approved by the Company's Board of Directors. Mr.
Flogel joined the Telefonica Group in 1995, and since then has held various
management positions in Spain and Latin America. He has a bachelor's degree in
business administration from the European University of Belgium and a master's
degree in corporate finance from the Universidad del Cema of Argentina.
Ricardo Majluf, 57, General Manager of Telefonica Empresas, joined Sonda in
June 1979 and was its General Manager from 1991 until June 2000. He joined
Telefonica CTC Chile in June 2000. He is the brother of Series A Director,
Nicolas Majluf. He holds a degree in civil industrial engineering from the
Universidad Catolica de Chile.
Cristian Aninat, 47, Secretary of the Board of Directors since 1997 and
current Attorney General of Telefonica CTC Chile, joined the Company in 1994. He
holds a law degree from the Universidad Catolica de Chile.
Julio Covarrubias, 45, the Chief Financial Officer of Telefonica CTC Chile,
General Manager of t-gestiona, an alternate Director of Telefonica Movil and
Director of Istel, joined Telefonica CTC Chile in May 1995. He holds an
industrial civil engineering degree from the Universidad Catolica de Chile and a
master's in business administration from Cornell University.
Humberto Soto, 44, Corporate Manager of Regulation, joined Telefonica CTC
Chile in July 2002. He holds an electrical civil engineering degree from the
Universidad de Chile.
Rafael Zamora, 38, Corporate Manager of Planning and Control and Chief
Accounting Officer, joined Telefonica CTC Chile in 1991. His experience at the
Company includes head positions in the control area and in strategic planning.
He holds a degree in civil industrial engineering and a master's degree in
industrial engineering from the Universidad de Chile.
Oscar Marquez, 49, Corporate Manager of Systems and Chief Information
Officer, joined Telefonica CTC Chile in 1983. His experience at the Company
includes head positions in strategic planning, finance, and business
interconnections. He is an electronic engineer and he holds a master's degree in
electronic engineering from the Universidad Federico Santa Maria. He also has
undertaken post-graduate studies in finance and project evaluation at the
Fundacion Adolfo Ibanez and the Universidad Catolica de Chile.
Marcel Mancilla, 43, Corporate Manager of Internal Auditing, joined 188
Telefonica Mundo in 1993, Terra Networks Chile (formerly Telefonica Net) in 1997
and Telefonica CTC Chile in 1999. His experience at the Company includes
positions in administration, finance, control and auditing. He holds a degree in
accounting from the Universidad de Chile.
64
Mauricio Malbran, 48, Corporate Manager of Human Resources, joined the
Company in August 2001. He holds a civil electrical engineering degree from the
Universidad de Chile.
Franco Faccilongo, 47, Corporate Manager of Network Services, joined
Telefonica CTC Chile in 1981. His experience at the Company includes executive
positions in the technical department and in customer service departments. He
holds a degree in electronic civil engineering from the Universidad Tecnica
Federico Santa Maria and a master's of science degree from the Imperial College
of London University.
Diego Barros, 49, Corporate Manager of Customers Service and Sales, joined
Telefonica CTC Chile in 1980. His experience at the Company includes head
positions in the following departments: operating and technical assistance,
post-sales management, customer attention centers, maintenance of external
plants and Telefonica Residencial. He holds a degree in electrical civil
engineering from the Universidad Catolica de Chile and a master's degree from
the Universidad de Chile.
B. Compensation of Directors and Officers
Each Director and alternate Director, except for the Chairman of the Board
and the Deputy Chairman of the Board, receives compensation equal to 120 UTMs
(US$ 4,907.6, as of December 31, 2002) per month for attending Board meetings
and for expenses, provided they have attended at least one Board meeting in the
month.
The Chairman of the Board of Directors receives twice the compensation
received by other Directors. The Deputy Chairman of the Board of Directors
receives 1.5 times the compensation received by other Directors.
The compensation for Board members and their alternate Directors are
assigned at the General Annual Shareholders' Meeting. For the year ended
December 31, 2002, the compensation paid to directors and executive officers of
the Company was as follows:
Name Position Thousands of Ch$
---- -------- ----------------
Bruno Philippi (1)............... Chairman of the Board 84,201
Jacinto Diaz (2)................. Deputy Chairman of the Board 62,965
Andres Concha Series A Director 38,574
Fernando Bustamante.............. Series A Director 42,101
Nicolas Majluf .................. Series A Director 42,101
Felipe Montt .................... Series A Director 42,101
Luis Cid ........................ Series B Director 42,101
Antonio Viana-Baptista........... Alternate Series A Director 10,444
Juan Claro....................... Alternate Series A Director 31,582
Juan Carlos Ros.................. Alternate Series A Director 38,508
Guillermo Fernandez.............. Alternate Series A Director 35,015
Augusto Iglesias Alternate Series A Director 42,101
Sergio Badiola Alternate Series A Director 42,101
Alfonso Ferrari.................. Alternate Series B Director 34,902
Sub-total (Directors)..... 588,794
---------
Executive Officers (123 persons). 7,937,570
Total............................ 8,526,364
=========
--------------------
(1) Mr. Bruno Philippi was designated as Series A Director and Chairman of the
Board on March 29, 2001.
(2) Mr. Jose Maria Alvarez-Pallete was designated Series A Director and Deputy
Chairman of the Board on April 22, 2003
As of April 2001, it was resolved at shareholders' meetings for each of the
Company's significant subsidiaries (i.e., subsidiaries in which the Company had
a more than 50% stake) to eliminate directors' fees. Consequently, during 2002
no fees were paid to directors of subsidiaries. In the case of each subsidiary,
the decision to eliminate directors' fees was adopted by the board of directors
and approved by its shareholders.
65
The Company does not compensate directors by other means such us: bonus or
profit sharing plan; stock option plan; or pension, retirement or similar
benefits.
C. Board Practices
The Company's Directors are elected for a three-year term at the General
Annual Shareholders' Meeting. The current Board of Directors was elected at the
General Annual Shareholders' Meeting held on April 26, 2001, and its term
expires in 2004. The Company has no service contracts with its directors.
Directors' Committee
According to Law 19,705, effective as of December 20, 2000, all limited
liability public companies with a market capitalization greater than
approximately UF1,500,000 (equivalent to approximately US$ 35 million as of
December 31, 2002) must appoint a directors' committee composed of three
directors, the majority of whom must be independent from the controlling
shareholder.
The Company's directors' committee (the "Directors' Committee") was created
by the Company's Board on April 26, 2001. The budget for this committee and the
monthly compensation of the committee members and alternate committee members
for the year 2002 was approved at the General Annual Shareholders' Meeting of
the Company held on April 5, 2002.
The main functions of the Directors' Committee are (i) to review the
account inspectors' report and the external auditors' report, (ii) to propose to
the Company's Board of Directors whom to designate as external auditors and
local credit rating agencies, (iii) to examine all applicable transactions
involving directors and related parties under Articles 44 and 89 of the Chilean
Corporations law and (iv) to review the salaries and bonuses of the Company's
senior executives. In addition, Telefonica CTC Chile's Directors' Committee
examines all transaction involving the Company's CEO and other senior executive
officers. The Director's Committee examines, proposes and makes recommendations
to the Board of Directors that are not binding upon the board.
Each member and alternate member of the Directors' Committee will receive
compensation equal to UF30 (approximately US$ 745) per month for attending
Directors' Committee meetings, provided they have attended at least one
Directors' Committee meeting in such month. The annual budget of the Director's
Committee amounts to Ch$75 million (approximately US$ 115,000).
The Directors Committee is comprised of the following persons:
Regular Member Alternate Member
-------------- ----------------
Bruno Philippi Antonio Viana-Baptista
Nicolas Majluf Augusto Iglesias
Felipe Montt Sergio Badiola
For the year ended December 31, 2002, the compensation paid to the
Directors' Committee was as follows:
Directors Position Total Compensation
--------- -------- ------------------
(In thousands of constant
Ch$ as of December 31, 2002)
Bruno Philippi.......................... Series A Director 4,504
Nicolas Majluf.......................... Series A Director 5,007
Felipe Montt............................ Series A Director 5,007
Antonio Viana-Baptista ................. Alternate Series A Director -
Augusto Iglesias........................ Alternate Series A Director 5,007
Sergio Badiola.......................... Alternate Series A Director 5,007
66
D. Employees
As of December 31, 2002, Telefonica CTC Chile (excluding its subsidiaries)
employed 2,540 persons. The number of lines in service per employee of the
Company (excluding employees of Telefonica CTC Chile's subsidiaries) at that
time was 1,058. Telefonica CTC Chile's subsidiaries employed 2,031 persons as of
December 31, 2002. Of the Company's 4,571 total employees, 71% were affiliated
with one of 24 labor unions existing as of December 31, 2002.
The table below sets forth the total number of employees as of December 31
of each year indicated, and its variation as compared to December 31 of the
precedent year.
2000.................... 9,250 - 6.9%
2001.................... 7,720 - 16.5%
2002 (*)................ 4,571 - 40.8%
------------------------
(*) See note to table below.
As of December 31, 2002, the breakdown of the Company's employees by
subsidiary, and its variation as compared to December 31, 2001, was as follows:
% Variation between
Company Number of employees 2002 and 2001
------- ------------------- --------------------
Telefonica CTC Chile....................... 2,540 -21.2%
T-gestiona................................. 194 -30.7%
Telefonica Empresas........................ 397 -23.1%
Telefonica Data............................ 261 -8.4%
Telefonica Movil........................... 791 -6.1%
188 Telefonica Mundo....................... 292 -4.6%
CTC-Equipos 36 -25.0%
Istel...................................... 39 -20.4%
Globus..................................... 21 0.0%
Total................................. 4,571 -40.8% (*)
---------------------
(*) On September 26, 2002, Telefonica CTC Chile, through its subsidiary
Telefonica Empresas, sold 25% of its then existing equity interest in
Sonda to Inversiones Pacifico II Limitada ("Inversiones Pacifico") and
Inversiones Santa Isabel Limitada ("Santa Isabel"), both companies related
to Mr. Andres Navarro (founder of Sonda), leaving the Company with a
remaining 35% interest, while the remaining 65% is controlled by Mr.
Andres Navarro, through his related companies. As a result the Company no
longer owns a majority interest in or exercises management control of
Sonda and, consequently, as of September 30, 2002, the Company will not
show Sonda's employees as part of its corporate workforce.
On October 28, 2002, Telefonica CTC Chile implemented certain changes to
its business operations and organizational structure that it believes will
enable it to enhance the services delivered to its customers. In connection with
these changes, there was a reduction of personnel totaling 1,070 employees from
both the parent company and the subsidiaries.
As of December 31, 2002, the breakdown of the Company's employees by
function and its variation as compared to December 31, 2001 was as follows:
% Variation between
Company Number of employees 2002 and 2001
------- ------------------- --------------------
Executive officers and managers............ 286 -26.7%
Direct supervision......................... 968 -25.4%
Professionals.............................. 1,738 -33.4%
Technical and operative execution.......... 1,579 -53.9%
Total................................. 4,571 -40.8%
67
The Company's workforce was reduced by approximately 6.9% in 2000 due to an
early retirement plan applied in January of 2000, voluntary resignations and
other reasons. Under the early retirement plan applied in January of 2000, 512
employees retired from the Company. However, the Company experienced a personnel
increase at the subsidiary level resulting from the transfer of 477 employees
from Telefonica CTC Chile to Telefonica Empresas in February of 2000. In 2001,
during the months of January and February, the Company implemented a new early
retirement plan as part of the corporate restructuring process initiated during
the second half of 1999, which was accepted by 59 employees. Furthermore, in
June of 2001, as part of the Company's workforce rationalization program, 1,608
employees were dismissed. In November of 2001, the Company began an outsourcing
process in its Information Systems Services area, which involved the transfer of
86 employees to an external company. In September 2002, with the sale of 25% of
Sonda, this company ceased to be a subsidiary of Telefonica CTC Chile and,
consequently, Sonda's 2,347 employees were removed from the Company's payroll.
This reduction, when combined with the reduction of 1,070 employees as part of
the restructuring process in October 2002, resulted in a 41% decrease in Company
personnel in 2002 compared to the previous year.
In June 2002, the Company conducted its collective bargaining process with
non -executive employees of Telefonica CTC Chile and its subsidiaries. An
agreement was reached with 1,330 employees as of the June 30, 2002 deadline.
Subsequent agreements were reached with an additional 331 employees yielding a
total of 1,661 employees operating under new collective labor agreements. These
collective labor contracts were signed for a period of either two or three
years, depending on union affiliation, and included clauses providing for
greater flexibility and ease of adaptation to the labor market. However,
following a legal strike lasting 28 days, a total of 3,445 employees elected to
invoke the provisions of Article 369 of the Chilean Labor Code, which allowed
such employees to freeze the conditions of their previous labor contracts for a
period of 18 months. The principal proposals of the Company in the negotiations
with the employees who have invoked Article 369 include: adjustment of severance
indemnities in accordance with market conditions, application of differentiated
salary readjustments on a case-by-case basis, in line with market conditions,
and application of variable incentives and bonus payments based on the Company's
performance.
In addition to base salaries, some employees of the Company receive certain
monthly cash bonuses, including bonuses for vacations and holidays, and a
productivity bonus payable upon the fulfillment of certain operating targets
that exceed the Company's internal budget projections. Telefonica CTC Chile's
employees are also entitled to accrued severance payments upon an employee's
voluntary resignation or retirement from the Company. Under the Company's
severance indemnity plan, as to employees who have invoked Article 369 in order
to freeze the conditions of their previous labor contracts, any such employees
with at least one continuous year of service with the Company are entitled to
receive a payment equal to 40 days' salary for each full year of service and
each partial year of service exceeding six months. As of December 31, 2002, the
Company's severance indemnity provisions reached Ch$15,513 million (US$ 21.6
million).
In accordance with Chilean law, Telefonica CTC Chile allows female
employees to retire at age 60 and male employees to retire at age 65. The
benefits of the early retirement plan offered in 2000 and 2001 included a
payment equal to a maximum of eight-months' salary and six-months' salary,
respectively. This plan was not offered in 2002.
Under the law enacted in November 1980 that privatized the Chilean social
security system, the Company is obliged to deduct from employees' monthly wages
a contribution to a personal pension fund owned by each employee, managed by
AFPs individually selected by the employee. Compulsory contribution, which
currently amounts to approximately 13% of monthly taxable income ("MTI") (up to
a maximum MTI of UF60, equivalent to approximately US$ 1,353 per month),
includes the costs of life insurance and disability insurance coverage. The
Company's statutory social security obligation is fully discharged by the
deduction and delivery to the corresponding AFP of such monthly contributions on
behalf of the respective employees.
In June of 1987, the Company formed a 99.9%-owned subsidiary, Istel, to
manage Telefonica CTC Chile's health programs for its employees, former
employees and their family members, and to make temporary disability payments to
its employees. The benefits provided by Istel include medical assistance and
dental assistance at special rates. Istel is principally funded by payments from
Telefonica CTC Chile's
68
employees who are affiliated with Istel in the amount of 7% of their MTI (up to
a maximum MTI of UF60, equivalent to approximately US$ 1,353 per month), which
amount is defined by Chilean law.
As of May 30, 2003, 170 non-executive employees of the Company owned
469,999 shares of Series A Common Stock and 55 non-executive employees of the
Company owned 168,961 shares of Series B Common Stock, collectively representing
0.1% of the Company's outstanding shares.
E. Share Ownership
As of May 30, 2003, 18,755 shares of Series A Common Stock and 1,063 shares
of Series B Common Stock were owned by the persons listed in subsection 6.A
above as directors and officers, including those who held their positions as of
December 31, 2002 and who are no longer officers or members of Telefonica CTC
Chile's Board of Directors. None of these persons owns more than 1% of any class
of the Company's outstanding shares. In addition, the persons listed in
subsection 6.A above as directors and officers, including those directors who
held their positions as of December 31, 2002 and who are no longer officers or
members of Telefonica CTC Chile's Board of Directors, own 280 shares of 188
Telefonica Mundo.
69
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth certain information, on a subscribed share
basis, as of May 30, 2003, with respect to each shareholder known to the Company
to own beneficially 5% or more of any class of the Company's shares of common
stock and all directors and executive officers of the Company as a group:
Series of Number of Shares % %
Name and Address of Beneficial Owner Common Stock Beneficially Owned of Series of Total
------------------------------------ ------------ ------------------ --------- --------
Telefonica Internacional Chile......... A 375,993,524 43.02 39.28
Avenida Santa Maria 0792, 4 Piso
Santiago, Chile.................. B 41,739,487 50.19 4.36
Citibank, N.A., as depositary (1)
(68 registered holders)
111 Wall Street
New York, NY 10043, USA.......... A 192,008,811 21.96 20.06
AFP Provida S.A........................ A 61,068,075 6.99 6.38
Avenida Pedro de Valdivia 100
Santiago, Chile.................. B 5,726,260 6.89 0.60
AFP Habitat S.A........................ A 59,740,463 6.84 6.24
Avenida Providencia 1909
Santiago, Chile.................. B 4,715,985 5.67 0.49
All directors and executive officers, as
a group (12 persons)............... A 18,755 * *
B 1,063 * *
------------------------------
(1) Pursuant to the requirements of Chilean law, all shares of Series A Common
Stock represented by ADSs are owned of record since January 2, 1997 by
Citibank, N.A., as depositary (the "Depositary").
* Represents less than 1%.
The table below sets forth certain information, as of December 31, 2002,
with respect to twelve largest shareholders of Series A Common Stock.
% of Series A %
Number of Shares Common Shares of Total
---------------- ------------- --------
Telefonica Internacional Chile......... 375,993,524 43.0 39.3
Citibank N.A. (1) ..................... 193,472,387 22.1 20.2
AFP Provida S.A. (2) .................. 59,673,747 6.8 6.2
AFP Habitat S.A. (2) .................. 50,855,651 5.8 5.3
AFP Cuprum S.A. (2) ................... 38,692,407 4.4 4.0
AFP Summa Bansander S.A. (2) .......... 29,374,450 3.4 3.1
AFP Santa Maria S.A. (2)............... 28,219,686 3.2 2.9
AFP Plan Vital S.A. (2) ............... 5,923,139 0.7 0.6
The Chile Fund Inc. ................... 4,869,151 0.6 0.5
AFP Magister S.A. (2) ................. 3,455,000 0.4 0.4
Consorcio Nacional de Seguros S.A. .... 3,075,912 0.4 0.3
Genesis Chile Fund Limited ............ 2,842,316 0.3 0.3
Subtotal ........................ 796,447,370 91.1 83.2
--------------------------------------------------------------------
Other shareholders .................... 77,548,077 8.9 8.1
Total ................................. 873,995,447 100.0 91.3
====================================================================
----------------------------
(1) Depositary Bank acting on behalf of the Company's ADS holders.
(2) Pension fund investor.
70
The table below sets forth certain information, as of December 31, 2002,
with respect to the twelve largest shareholders of Series B Common Stock.
% of Series B %
Number of Shares Common Shares of Total
---------------- ------------- --------
Telefonica Internacional Chile ........ 41,739,487 50.2 4.4
AFP Provida S.A. (1) .................. 5,647,260 6.8 0.6
AFP Habitat S.A. (1) .................. 4,715,985 5.7 0.5
AFP Cuprum S.A. (1) ................... 3,878,246 4.7 0.4
AFP Santa Maria S.A. (1) .............. 2,425,691 2.9 0.3
AFP Summa Bansander S.A. (1) .......... 2,217,399 2.7 0.2
Moneda S.A. A.F.I P/Pionero F.I.M. .... 1,750,812 2.1 0.2
Petrizzio Monserrat, Luisa Gloria ..... 903,452 1.1 0.1
Bancard S.A. .......................... 764,446 0.9 0.1
Ballarin Lopez, Miguel ................ 627,417 0.8 0.1
Fundacion Arturo Irarrazabal Correa ... 626,072 0.8 0.1
Compania de Inversiones La Espanola S.A. 616,873 0.7 0.1
Subtotal ........................ 65,913,140 79.3 6.9
-------------------------------------------------------------------
Other shareholders .................... 17,248,498 20.7 1.8
-------------------------------------------------------------------
Total ................................. 83,161,638 100.0 8.7
===================================================================
---------------------
(1) Pension fund investor.
There were no material changes in the percentage ownership held by major
shareholders during the past three years. Telefonica Internacional Chile has
maintained its 43.64% ownership of the Company's shares during the past three
years. As of December 31, 2000, 2001, and 2002, Citibank, N.A., as Depositary
for the Company's American Depositary Receipts ("ADRs"), owned 24.50%, 22.04%
and 20.21% of the Company's shares, respectively. AFP Provida, a Chilean pension
fund, had an ownership of 6.54%, 6.94% and 6.82% as of December 31, 2000, 2001,
and 2002, respectively. AFP Habitat, a Chilean pension fund, had an ownership of
4.43%, 5.54% and 5.81% as of December 31, 2000, 2001, and 2002, respectively.
As of May 30, 2003, ADRs holders (through the Depositary) held 20.06% of
CTC's total shares, and the Company had 68 registered shareholders.
All of the Company's shareholders have identical voting rights.
Controlling Shareholder
Telefonica Internacional Chile owns 43.64% of all shares of the Company.
Telefonica Internacional Chile is a 99.9% owned subsidiary of Telefonica Chile
Holding B.V., which is indirectly wholly owned by Telefonica, through its
subsidiary TISA.
B. Related Party Transactions
In the ordinary course of its business, the Company engages in a variety of
transactions with certain of its affiliates, primarily for the purchase, at fair
market prices negotiated on an arm's-length basis, of goods or services that may
also be provided by other suppliers. The Directors' Committee is informed of all
such transactions in advance, and such transactions are approved by the Board of
Directors. Below are descriptions of such transactions with affiliates that are
material. Financial information concerning these transactions is also set forth
in Note 6 to the Audited Consolidated Financial Statements.
71
Transactions with Telefonica
Since June 30, 1992, the Company, through its subsidiary 188 Telefonica
Mundo, has had a correspondence agreement with Telefonica providing for the
exchange of international long distance traffic between Chile and Spain. This
agreement, which has an indefinite term subject to cancellation by either party
on six-months' notice, generated an income to the Company of Ch$4,239 million
for the year ended December 31, 2000. The outstanding balances under the
agreement in favor of the Company, as of December 31, 2001 and 2002, were Ch$749
million and Ch$787 million (US$ 1.1 million), respectively. There were no
balances payable by the Company as of December 31, 2001 and 2002.
Transactions with Telefonica Internacional Chile
In 1997, the Company entered into an agreement with Telefonica
Internacional Chile through which Telefonica Internacional Chile coordinates
certain joint activities among the members of the Telefonica Group on behalf of
the Company. Under the agreement, the Company incurred expenses of Ch$54 million
in 2000, Ch$522 million in 2001 and Ch$522 million (US$ 0.7 million) in 2002.
There were no outstanding balances in favor of the Company as of December 31,
2001 and 2002. There were no balances payable for 2001 and there was a balance
payable amounting to Ch$ 261 million (US$ 0.4 million) for 2002.
In December of 1996, the Company received a short-term loan in the amount
of US$ 48 million (historic value) from Telefonica Internacional Chile to
finance the Company's investment in Compania Riograndense de Telecomunicaciones.
In 1997, this loan and accrued interest thereunder were refinanced through a
three-year loan from Telefonica Internacional Chile that matured and was repaid
in full by the Company on June 15, 2000. In addition, on December 20, 1996, the
Company entered into a current account agreement with Telefonica Internacional
Chile, which provides for transfer of funds between the two parties. These
transactions with Telefonica Internacional Chile generated expenses of Ch$3,747
million, Ch$2,230 million, and Ch$839 million (US$ 1.2 million) in 2000, 2001
and 2002, respectively. The outstanding balance payable by the Company,
including accrued interest, was Ch$32,297million and Ch$24,214 million (US$ 33.7
million) as of December 31, 2001 and 2002, respectively. There was no
outstanding balance in favor of Telefonica CTC Chile as of December 31, 2001 and
2002.
Transactions with Publiguias
Effective as of January 1993, the Company entered into an agreement with
Publiguias, an affiliate of the Company, pursuant to which the Company invoiced
and collected payments due from the sale of advertising space in, and
distribution of, the telephone directory published by Publiguias. In return for
these services, the Company received a percentage of the revenues generated by
Publiguias through these sales. In August of 2001, this agreement was
terminated, thereby generating extraordinary revenue in the amount of Ch$11,389
million (US$ 15.8 million) as compensation in connection with the termination of
the contract. A new agreement for the provision of similar services was signed
in the third quarter of 2001. The new agreement will remain in effect until June
2006. As a result of its participation in this agreement, the Company accrued
net income of Ch$12,040 million and Ch$25,884 million for the years ended
December 31, 2000 and 2001, respectively, and a net expense of Ch$204 million
(US$ 0.3 million) for the year ended December 31, 2002. Under the agreement, the
Company had a balance payable to Publiguias in the amount of Ch$332 million (US$
0.5 million) in 2002, and had balances receivable from Publiguias of Ch$ 452
million and Ch$843 million (US$ 1.2 million) in 2001 and 2002, respectively.
Transactions with Terra Networks
On October 4, 1999, the Company entered into an agreement with Terra
Networks, an affiliate of the Company, pursuant to which the Company sold its
subsidiary, Telefonica Net, to Terra Networks for US$ 40 million (historic
value) and the transfer to Terra Networks of the debt that Telefonica Net owed
to the Company and its subsidiaries as of the closing date of the transaction.
At the time of the closing, this debt amounted to US$ 9.7 million (historic
value). As part of this transaction, 188 Telefonica Mundo, the long-distance
subsidiary through which the Company held its participation in Telefonica Net,
obtained a
72
preferential option to subscribe to shares of Terra Networks for an amount not
exceeding US$ 40 million (historic value), at the price that these shares were
placed in Terra Networks' initial public offering. In addition, as part of this
transaction, the parties entered into commercial agreements aimed at jointly
developing the Internet business in Chile through the preferential use of each
company's respective services at fair market prices. On November 17, 1999, the
Company exercised its option to purchase shares of Terra Networks and subscribed
to 2,984,986 shares at a price of US$ 13.40 per share (historic value), which
gave the Company a 1.1% equity interest in Terra Networks as of that date. The
Company had balances receivable from Terra Networks of Ch$121 million as of
December 31, 2001 and Ch$ 9 million (US$ 0.01 million) as of December 31, 2002,
which related to financial interest receivable in connection with the sale of
Telefonica Net. There were no outstanding balances payable by the Company in
favor of Terra Networks as of December 31, 2001 and 2002.
Transactions with Terra Networks Chile S.A.
On April 30, 1998, the Company entered into an agreement with Terra
Networks Chile S.A. ("Terra Networks Chile"), a current affiliate of the Company
and formerly its subsidiary, Telefonica Net, pursuant to which the Company
provides collection services to Terra Networks Chile. Furthermore, on June 1,
1999, the Company entered into an agreement with Terra Networks Chile pursuant
to which Terra Networks Chile provides Internet access to certain Chilean
schools, the cost of which are to be paid by the Company to Terra Networks
Chile. Telefonica CTC Chile also has an agreement to purchase on-line
advertising from Terra Networks Chile for itself and its subsidiaries for the
five years between 1999-2004. The Company recorded a net income of Ch$ 168
million, Ch$1,905 million and Ch$1,537 million (US$ 2.1 million) in the years
2000, 2001 and 2002 under these agreements. The Company had balances receivable
from Terra Networks Chile of Ch$2,228 million as of December 31, 2001 and Ch$
957 million (US$ 1.3 million) as of December 31, 2002. Balances payable to Terra
Networks Chile from the Company under these agreements amounted to Ch$1,754
million and Ch$3,090 million (US$ 4.3 million) as of December 31, 2001 and 2002,
respectively.
Transactions with Atento Chile
On September 1, 1999, the Company and Atento Chile, an affiliate of the
Company, signed a five-year outsourcing agreement, pursuant to which Atento
Chile provided its telephone service platforms to the Company's business units
and customers. Such services included: (i) directory-information assistance,
(ii) technical assistance and management of customer complaints, and (iii)
corporate commercial information and sales. On May 22, 2001, this agreement was
replaced by a new outsourcing agreement between the Company and Atento Chile,
which expires on July 31, 2004 unless earlier terminated. Under the agreement,
Atento Chile provides to the Company directory assistance, technical assistance
and customer complaint management, as well as general commercial and sales
information. Similar agreements, involving all of the Company's subsidiaries,
are also in effect. In addition, on June 28, 1999, the Company entered into a
current account agreement with Atento Chile, which allows for transfer of funds
between the parties with the balances paid periodically on established dates.
Pursuant to all of the agreements discussed above, the Company recorded a
total net income of Ch$17,697 million in 2001, and incurred a total net expense
of Ch$11,618 million and Ch$11,295 million (US$ 15.7 million) in 2000 and 2002,
respectively. The outstanding balances payable to Atento Chile were Ch$4,785
million and Ch$4,755 million (US$ 6.6 million) as of December 31, 2001 and 2002,
respectively. The outstanding balances payable in favor of the Company as of
December 31, 2001 and 2002 were Ch$878 million and Ch$616 million (US$ 0.9
million), respectively.
Transactions with Emergia Chile S.A.
Effective as of October 10, 2000, the Company (through its subsidiary, 188
Telefonica Mundo) has entered into an agreement with Emergia Chile S.A., an
affiliate of the Company, for the rental of capacity for international long
distance traffic delivery and data transmission for a term of 25 years. In
addition, Emergia Chile uses parts of 188 Telefonica Mundo's long distance
infrastructure in Chile, paying 188 Telefonica Mundo for its maintenance and
operation. This agreement generated a net expense to the Company of Ch$44
million for the year ended December 31, 2001 and a net income of Ch$1,241
million (US$ 1.7 million) for the
73
year ended December 31, 2002. The outstanding balances payable by the Company as
of December 31, 2001 and 2002 were Ch$2,400 million and Ch$43 million (US$ 0.1
million), respectively. The outstanding balances in favor of the Company, as of
December 31, 2001 and 2002, were Ch$178 million and Ch$22 million (US$ 0.03
million), respectively.
Transaction with Telefonica Procesos de Tecnologia de Informacion S.A.
During 2002, the Company sold to Telefonica Procesos de Tecnologia de
Informacion S.A. ("TPTI"), an affiliate of the Company, certain billing and
customer care relationships applications that were developed and used by
Telefonica CTC Chile. TPTI then granted Telefonica CTC Chile a license to use
these applications, and will continue to improve and develop them in order to
provide them to the Company and to other members of the Telefonica Group. This
transaction generated an income to the Company of Ch$413 million (US$ 0.6
million) for the year ended December 31, 2002. The outstanding balance in favor
of the Company as of December 31, 2002, was Ch$11,779 million (US$ 16.4
million). There was no balance payable by the Company as of December 31, 2002.
Transactions with Telefonica Data Corp
During the year 2002, Telefonica Data Corp ("T-Data Corp"), an affiliate of
the Company, entered into an agreement with Telefonica CTC Chile, pursuant to
which the Company provides administrative outsourcing services to T-Data Corp.
T-Data Corp also rendered international connectivity services to Telefonica CTC
Chile. These transactions generated an expense to the Company of Ch$1,321
million (US$ 1.8 million) for the year ended December 31, 2002. The accumulated
balance payable by the Company as of December 31, 2002, was Ch$1,321 million
(US$ 1.8 million). There was no balance receivable by the Company as of December
31, 2002.
Transactions with Telefonica Movil Soluciones y Aplicaciones S.A.
In 2002, Telefonica Movil, a wholly owned subsidiary of Telefonica CTC
Chile, entered into a contract with Telefonica Movil Soluciones y Aplicaciones
S.A., an affiliate of the Company, pursuant to which Telefonica Movil licensed
the use of the 2002 version of that company's SCL software, which is a customer
care and billing application. The use of the SCL software will allow the
complete migration of Telefonica Movil's TDMA commercial systems to a
multi-technology commercial system. This agreement generated an expense to
Telefonica Movil of Ch$5.8 million (US$ 8,042) for the year ended December 31,
2002. The outstanding balance under the agreement in favor of Telefonica Movil
as of December 31, 2002, was Ch$3.3 million (US$ 4,595), and Telefonica Movil
had a balance payable of Ch$1,368 million (US$ 1.9 million) in 2002.
Transactions with Sonda
On January 11, 1999, concurrent with its acquisition of a 60% interest in
Sonda, Telefonica CTC Chile entered into certain agreements with Sonda for the
outsourcing of the Company's information systems and processes, such as billing
and customer services, as well as for the usage of information systems assets,
including computers and software. As of October 2001, the Company terminated its
service agreements with Sonda and signed a full outsourcing agreement for the
operation, support and maintenance of its information systems infrastructure
with IBM. Following the Company's sale of 25% of its interest in Sonda, the
Company no longer consolidates the financial results of that company and, as a
result, as of September 2002 the outstanding balances with Sonda under the
terminated agreements appear in the Company's Audited Consolidated Financial
Statements. See "Item 10: Additional Information--Material Contracts." As of
December 31, 2002, Telefonica CTC Chile had a balance receivable from Sonda in
the amount of Ch$1,964 million (US$ 2.7 million) and a balance payable to Sonda
in the amount of Ch$2,149 million (US$ 3.0 million).
74
Transactions with Executive Officers
As of May 15, 2003, Mr. Julio Covarrubias, Chief Financial Officer of the
Company, had an outstanding personal loan from the Company in the amount of
UF1,391.69 (approximately US$ 33,938). The largest amount outstanding during
2002 was UF2,558.40 (approximately US$ 62,390). The applicable interest rate on
this loan is 0.0%, although the principal amount is adjusted according to
Chilean inflation. This loan matures in December 2003.
As of May 15, 2003, Mr. Oscar Marquez, Corporate Manager of Information
Systems of the Company, had an outstanding personal loan, granted to him by the
Company, in the amount of UF1,311.69 (approximately US$ 31,987). The largest
amount outstanding during 2002 was UF1,947.65 (approximately US$ 47,496). The
applicable interest rate on this loan is 0.0%, although the principal amount is
adjusted according to Chilean inflation. This loan matures in February 2006.
During the course of 2002, all other loans to executive officers, in an
aggregate amount of UF4,440 (US$ 105,181) were paid in full. All such loans were
entered into previous to July 30, 2002. In accordance with Section 402 of the
Sarbanes-Oxley Act of 2002, since July 2002 the Company has not and will not
extend any loans to Directors and Officers.
Article 89 of the Chilean Corporations Law requires that a company's
transactions with related parties (defined as entities that belong to the same
group of companies) be on terms similar to those customarily prevailing in the
market. Directors and executive officers of companies that violate Article 89
are liable for losses or damages resulting from such violations. In addition,
Article 44 of the Chilean Corporations Law provides that any transaction in
which a director has a personal interest or is acting on behalf of a third party
may be approved in advance by the board of directors only if the board of
directors is informed of such director's interest and if the terms of such
transaction are similar to those prevailing in the market. If a transaction
involves an amount greater than UF 20,000 (approximately US$ 500,000), the board
of directors must be presented with a report as to whether the terms of the
proposed transaction are comparable to those prevailing in the market before
such transaction takes effect. If it is impossible for the board of directors to
determine the prevailing market terms, the board can appoint two independent
appraisers and make a decision regarding the transaction in question only after
the reports of both appraisers are received. If the opinions of two independent
appraisers significantly differ, or if the terms and conditions of the action or
contract in question are unfavorable to the shareholders of the company,
shareholders representing at least five percent of the issued voting stock may
request that the board of directors summon a special meeting of shareholders to
approve such transaction. Two-thirds of the issued voting stock must approve the
transaction at such meeting. Resolutions approving such transactions must be
reported to the company's shareholders at the next shareholders' meeting.
Violation of Article 44 may result in imposition of administrative or criminal
sanctions upon responsible parties, and the company, its shareholders, or
interested third parties who suffer losses as a result of such violation have
the right to receive compensation in certain situations.
C. Interest of Experts and Counsels
Not applicable.
75
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 18 for a listing of the Company's Audited Consolidated Financial
Statements, included in this Annual Report.
Legal Proceedings
Unless expressly stated otherwise in this section, the amounts of judgments
and claims for damages, as stated in Chilean pesos, do not include readjustment
for inflation, interest and costs, which may be required at final judgment. When
a judgment or claim is stated in a readjusting unit of currency, such as the UF,
no further inflation readjustment is required.
Lawsuit with Protempore Ltda.
Beginning in 1994, Telefonica CTC Chile had contracted with Protempore
Ltda. ("Protempore") for temporary personnel services. In 1997, Chilean labor
authorities discovered that approximately 200 of Protempore's employees were
working for that entity without a formal contract. This discovery led the labor
authorities to fine Telefonica CTC Chile and placed Telefonica CTC Chile at risk
of having to undertake additional obligations with respect to such employees,
such as funding their pensions and benefits. Telefonica CTC Chile viewed these
events as a breach by Protempore of the contract for temporary personnel
services and as a result terminated the contract. On January 2, 1998, Protempore
filed a civil complaint against Telefonica CTC Chile for cancellation of the
contract with damages in the amount of Ch$7,886 million, and Telefonica CTC
Chile counter-sued for cancellation of the contract and indemnification of its
related liabilities.
In June 2002, the First Instance Trial Court rejected Protempore's lawsuit
and accepted Telefonica CTC Chile's counterclaim, declaring cancellation of the
contracts due to non-compliance by Protempore and ordering them to indemnify all
payments made by the Company as a consequence of Protempore's non-compliance.
Protempore has filed a motion to vacate and appeal the judgment, which is
underway.
VTR Telefonica lawsuit against the Company
On June 30, 2000, VTR presented a claim in the amount of Ch$2,203 million
as part of an ordinary lawsuit against the Company based on discrepancies
related to access charge payments following the new tariff decree.
On July 11, 2002, the court issued an initial ruling, which determined that
Telefonica CTC Chile is obligated to pay access charges since November 1999, and
that such payment must be net of amounts invoiced by Telefonica CTC Chile to
VTR. Telefonica CTC Chile has appealed this decision before the Appeals Court of
Santiago, which is currently pending.
Lawsuit against the State of Chile
On March 12, 2002, Telefonica CTC Chile filed a civil lawsuit against the
State of Chile, which is represented by the Consejo de Defensa del Estado (the
"National Defense Counsel"). The lawsuit, initiated with the unanimous approval
of the Board of Directors of the Company, disputes the application of Tariff
Decree No. 187, which sets the maximum tariffs that the Company may charge for
local telephony and interconnection services during the period between May of
1999 and May of 2004. The lawsuit alleges that the State of Chile improperly
applied economic concepts and made errors in calculations underlying the
established maximum rates under Tariff Decree No. 187. This legal action seeks
damages in the amount of Ch$181,038 million, equivalent to US$ 274 million
(historical value as of the date of the lawsuit), plus adjustments and interest,
covering past and prospective losses through May 2004 arising from such errors.
The lawsuit is currently in the evidentiary phase of litigation.
76
Lawsuits by Unions against the Company
In June 2002, certain unions associated with employees of the Company
instituted five separate labor lawsuits against the Company. The lawsuits
claimed damages as a result of an alleged non-payment of goals-based incentives
under the collective labor agreements that were applicable until June 2002. The
First Instance Trial Court, and subsequently the Appeals Court of Santiago,
rejected all claims for damages made by the unions under their lawsuit.
The unions appealed this rejection to the Supreme Court of Santiago. On May
6, 2003, the Supreme Court of Santiago rejected the appeal and therefore this
lawsuit has been definitively resolved in favor of the Company.
Administrative Proceeding by the Office of Customs Management for the
Metropolitan Region against the Company
In 1997, the Direccion Regional de Aduanas Metropolitanas, or the "Office
of Customs Management for the Metropolitan Region," instituted an administrative
proceeding against Telefonica Movil, a subsidiary of the Company, for an
estimated total amount of US$ 5,070,649.44, for alleged regulatory infractions
involving the importation of certain mobile telecommunications equipment. In
December 2002, the administrative proceeding of the regional customs office
resulted in a determination against the Company. The Company appealed this
determination to the Direccion Nacional de Aduanas, or the "Office of Customs
Management of Chile." In June 2003, the national customs office rejected the
administrative determination of the regional customs office, and made a final
ruling in favor of the Company's appeal and against any finding of liability on
the part of the Company.
Other Proceedings
Telefonica CTC Chile is also party to various other lawsuits arising in the
ordinary course of its business.
Management considers it unlikely that any losses associated with any of the
pending lawsuits described above will significantly affect Telefonica CTC
Chile's results of operations, financial position and cash flow, although no
assurances can be given to such effect. Accordingly, Telefonica CTC Chile has
not created any reserve for these lawsuits.
Dividend Policy and Dividends
Dividend Policy
Telefonica CTC Chile's dividend policy (including the policy set by the
Board of Directors with respect to the payment of interim dividends for each
year) is announced at the General Annual Shareholders' Meetings of the Company.
At such meetings, the Board of Directors presents for the shareholders'
consideration and approval its proposals for a final dividend for the preceding
year.
Beginning in 1999, the Company instituted a policy of paying three interim
dividends and one final dividend for each year. The first interim dividend for
1999, in an amount equal to Ch$2.0 (historical) per share, was paid in August of
that year in the aggregate amount equal to 34.8% of the Company's net income for
the first quarter of 1999 calculated in accordance with Ch GAAP. Due to net
losses sustained in fiscal year 1999, calculated in accordance with Ch GAAP, the
interim dividend paid in August of 1999 was charged against retained earnings,
which decision was approved by the shareholders at the General Annual
Shareholders' Meeting held on March 15, 2000. No other dividends were paid by
the Company with respect to fiscal year 1999.
As a result of a net loss sustained by the Company, the Company did not
distribute any dividends with respect to the year 2000.
As a result of accumulated losses in the first half of 2001, no interim
dividends were paid in 2001. However, at the Company's General Annual
Shareholders' Meeting on April 5, 2002, the Board of Directors
77
proposed for shareholders' approval the payment of a final dividend in the
aggregate amount of Ch$1,233,497,420 (historic value), which represented 30% of
the Company's net income for 2001. The dividend was paid in May 2002 and
amounted to Ch$1.29 per share and Ch$5.16 per ADS, based on the assumption that
957,157,085 shares were outstanding as of December 31, 2001, and the ratio of
common stock to ADRs equaled 1:4.
As a result of a net loss sustained by the Company, the Company did not
distribute any dividends with respect to the year 2002.
The Company implements its dividend policy in compliance with Chilean law,
pursuant to which the Company's Bylaws provide that the Company must distribute
a cash dividend in an amount at least equal to 30% of its net income for the
relevant year, unless otherwise decided by unanimous vote of the holders of the
issued and subscribed shares.
The Company's dividend policy for 2003 contemplates the distribution of 30%
of net income through the payment of a single dividend to be paid in May 2004.
The dividend policy for future years will be in line with the objectives set
forth in the Company's "Financial Plan," which focuses primarily on a gradual
increase in the rate of self-financing, so as to adjust the financial structure
of the Company to the requirements of the Development Plan. However, the
implementation of this dividend policy in years ahead will depend on several
factors, including the actual amount of net income generated by the Company each
year, economic projections that may periodically be made by the Company, or the
occurrence of certain other events that may affect the Company's ability to
distribute dividends. The availability of funds will also determine the degree
of compliance with the dividend policy with respect to future interim dividends.
Dividends
Dividends are paid to shareholders of record on the fifth business day
(including Saturdays) following the established record date. The following table
sets forth the amounts per share of annual dividends paid out of the Company's
earnings in years 1998 through 2002. These amounts represent, for each given
year, a sum of the interim dividends plus the final dividend paid with respect
to such year. No dividends were paid in 1999 (the dividend paid in August of
1999 was charged against retained earnings) and 2000.
Per Share (1) Per ADS
----------------------------- ---------
Fiscal Year (Ch$) (2) (US$) (3) (US$) (3)
----------- --------- --------- ---------
1998................................... 40.8 0.086 0.344
1999................................... 2.0(4) 0.003 0.012
2000................................... 0.0 0.000 0.000
2001................................... 1.3 0.002 0.008
2002................................... 0.0 0.000 0.000
-------------------
(1) Represents dividend amounts paid with respect to Series A and B Common
Stock. Per-share information does not take into account any Chilean
withholding tax.
(2) Amounts shown are presented in Chilean nominal pesos.
(3) Translated into U.S. dollars at the Observed Exchange Rates as of December
31 of the respective year. Per ADS information is based on four underlying
shares of Series A Common Stock per one ADS, and does not take into
account any Chilean or U.S. withholding tax.
(4) Charged to prior retained earnings.
Dividends received by the Company's shareholders that are not Chilean
residents, including holders of ADS, are subject to Chilean withholding tax. See
"Item 10: Additional Information--Taxation--Chilean Tax Considerations."
Following the August 1994 ruling from the Chilean Internal Revenue Service,
which permitted the Company to accelerate depreciation of fixed assets for tax
purposes, the effective withholding tax rate on such dividends was 35%, the
maximum permitted by law.
As a general requirement, shareholders who are not residents of Chile must
register with the Central Bank to have dividends, sale proceeds, or other
amounts with respect to their shares remitted outside of Chile through the
formal currency market.
78
Under the Foreign Investment Contract (as defined below in "Item 10:
Additional Information--Exchange Controls and Other Limitations Affecting
Security Holders"), the Depositary has been granted access to the Formal
Exchange Market to convert cash dividends from pesos to dollars and to pay such
dollars to ADR holders outside of Chile.
B. Significant Changes
A discussion of the significant changes in our business since December 31,
2002 can be found in Item 4 under the caption "--Development Plan and Strategic
Goals" and in Item 5 under the caption "--Overview--Recent Developments and
Trends."
79
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Common Stock Prices and Related Matters
Shares of Series A Common Stock and Series B Common Stock are currently
traded in Chile on the Bolsa de Comercio de Santiago (the "Santiago Stock
Exchange"). While such shares are also listed on the Bolsa de Corredores-Bolsa
de Valores (the "Valparaiso Stock Exchange") and on the Bolsa Electronica de
Chile-Bolsa de Valores (the "Electronic Stock Exchange"), shares listed on the
Santiago Stock Exchange accounted for approximately 62% of the trading volume of
the shares of the Company in Chile during 2002. The Santiago Stock Exchange is
Chile's principal exchange accounting for approximately 72.5% of all equity
traded in Chile during 2002. Approximately 26.3% of equity trading in Chile
during 2002 was conducted on the Electronic Stock Exchange, an electronic
trading market that was created by banks and non-member brokerage houses, while
the remaining 1.2% of equity was traded on the Valparaiso Stock Exchange.
Since July 20, 1990, shares of Series A Common Stock are traded in the
United States on the New York Stock Exchange ("NYSE") in the form of ADSs, which
are evidenced by ADRs. Originally, each ADS represented 17 shares of Series A
Common Stock. Effective January 2, 1997, this ratio was changed to four shares
of Series A Common Stock per ADS. Pursuant to the requirements of Chilean law,
all shares of Series A Common Stock represented by ADSs are owned of record by
Citibank, N.A., as Depositary, which replaced The Bank of New York as depositary
with respect to such ADSs on January 2, 1997.
The table below sets forth, for the periods indicated, the reported high
and low closing sales prices for the shares of the Company's Series A Common
Stock and Series B Common Stock on the Santiago Stock Exchange and the high and
low sales prices of the ADSs as reported by the NYSE.
Santiago Stock Exchange NYSE
Ch$ per Share (1) US$ per ADS (2)
---------------------------------------- -------------------
High Low High Low
------------------- ------------------- --------- -------
Series A Series B Series A Series B
--------- -------- -------- --------
1998.................................... 3,200 2,350 1,505 1,370 29.75 12.63
1999.................................... 3,500 2,200 2,000 1,375 27.31 15.25
2000.................................... 2,980 2,500 1,830 1,470 23.88 13.00
2001.................................... 2,390 1,850 1,590 1,250 15.88 8.92
2002.................................... 2,620 1,855 1,450 1,100 15.75 7.90
2001:
First quarter......................... 2,215 1,850 1,875 1,500 15.88 12.52
Second quarter........................ 2,390 1,850 1,881 1,510 15.60 12.54
Third quarter......................... 2,190 1,699 1,710 1,350 13.84 9.76
Fourth quarter........................ 2,220 1,630 1,590 1,250 13.46 8.92
2002:
First quarter........................ 2,620 1,855 2,170 1,550 15.75 12.95
Second quarter....................... 2,480 1,800 2,010 1,590 15.24 11.68
Third quarter........................ 2,035 1,575 1,620 1,200 11.66 8.67
Fourth quarter....................... 1,795 1,330 1,450 1,100 10.27 7.90
2003:
First quarter ......................... 2,015 1,415 1,610 1,200 11.47 8.81
Second quarter (up to June 6).......... 2,260 1,600 1,730 1,290 12.60 9.59
January 2003.......................... 1,840 1,320 1,610 1,200 10.30 8.81
February 2003......................... 1,750 1,275 1,700 1,200 9.48 9.04
March 2003............................ 1,810 1,350 1,710 1,220 9.86 9.25
April 2003............................ 2,015 1,415 1,730 1,290 11.47 9.59
May 2003.............................. 2,150 1,530 1,965 1,420 12.33 11.15
June 1 through June 6................. 2,260 1,600 2,140 1,550 12.60 11.70
------------------------------------
(1) Chilean pesos are reflected at historical values rather than as of
December 31, 2002 purchasing power.
(2) 1 ADS = 4 shares of Series A Common Stock.
80
On December 31, 2002, there were 48,368,097 ADSs (equivalent to 193,472,387
shares of Series A Common Stock) outstanding, held by approximately 68 holders
of record. On that date, such ADSs represented 20.21% of the total number of
issued and outstanding shares of the Company's common stock.
Debt Securities
Trading in the Company's 7 5/8% Notes due July 15, 2006, 83/8% Notes due
January 1, 2006 and 53/8% Notes due August 4, 2004 (together, the "Debt
Securities") takes place primarily in the over-the-counter market. Accordingly,
the Company has been unable to obtain reliable information on the trading of the
Debt Securities.
B. Plan of Distribution
Not applicable.
C. Markets
See "Item 9: The Offer and Listing--Offer and Listing Details--Common Stock
Prices and Related Matters."
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
81
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Set forth below is certain information concerning Telefonica CTC Chile's
capital stock and a brief summary of certain significant provisions of the
Company's Bylaws and Chilean law. This description does not purport to be
complete and is qualified in its entirety by reference to the Bylaws, which have
been attached as an exhibit to this Annual Report.
Organization and Register
Telefonica CTC Chile is a publicly held stock corporation (sociedad anonima
abierta) organized under the laws of Chile. Telefonica CTC Chile was
incorporated on November 18, 1930, as recorded on page 426 No 158 of the
Commercial Record of Santiago of the year 1931, and has a duration through
August 10, 2068. The purpose of the Company is to provide a broad range of
telecommunications and related broadcasting services, as more fully set forth in
Article Four of the Bylaws.
Shareholders' Rights
Shareholders' rights in Chilean companies are governed generally by a
company's bylaws (which effectively serve the purpose of both the articles, or
certificate, of incorporation and the bylaws of a corporation in the United
States). Additionally, the Corporations Law and the Chilean Corporations Law
Regulations, Supreme Decree 587 (the "Regulations on Corporations") govern the
operation of Chilean companies and provide for certain shareholder rights.
Finally, Decree-Law 3500, which permits the investment by pension funds in stock
of qualified companies, indirectly affects corporate governance and prescribes
certain rights of shareholders.
The Chilean securities markets are principally regulated by the SVS under
the Securities Market Law and the Chilean Corporations Law. These two laws
contain disclosure requirements, impose restrictions on insider trading and
price manipulation, and provide protection of minority investors. The Chilean
Corporations Law clarifies rules and requirements for establishing "open"
corporations while eliminating government supervision of "closed" companies.
Open corporations are those which: (i) have 500 or more shareholders, (ii) have
100 or more shareholders who own as a group together at least 10% of the
subscribed capital (excluding those whose individual holdings exceed such
percentage), or (iii) register in the securities record on a voluntary basis or
in compliance with a legal requirement. Telefonica CTC Chile is an open
corporation. The Securities Market Law establishes requirements for public
offerings, stock exchanges and brokers and outlines disclosure requirements for
companies that issue publicly offered securities.
Under Articles 12 and 54 and Title XV of the Securities Market Law, certain
information regarding transactions in shares of open corporations must be
reported to the SVS and the Chilean exchanges on which such shares are listed.
Holders of shares of open corporations are required to report the following to
the SVS and the Chilean exchanges:
(i) any acquisition or sale of shares that results in the holder's
acquiring or disposing of 10% or more of an open corporation's capital; and
(ii) any acquisition or sale of shares or options to buy or sell shares, in
any amount, if made by a holder of 10% or more of an open corporation's capital
or if made by a director, liquidator, main officer, general manager or manager
of such corporation.
82
Persons or entities intending to acquire control of an open corporation are
also required to inform the public in advance through a notice published in a
Chilean newspaper. The notice must disclose the price and conditions of any
negotiations. Prior to such publication, a written communication to such effect
must be sent to the SVS and the Chilean exchanges.
The Company's Bylaws (Article 5), as well as Decree-Law 3500 (Article 112)
establish rules regarding limits of concentration of the Company's share
capital. According to the law, the maximum amount of shares that a person can
accumulate, directly, indirectly or through related persons, is 65% of the
capital with voting rights. However, the Company's Bylaws establish a
concentration limit of 45% of the capital with voting rights, which is more
restrictive than the one required by law. With the objective of maintaining the
concentration limits, the Company is not obligated to inscribe any share
transaction that would allow any one shareholder to surpass the maximum limit of
concentration. In any case, if a shareholder accumulates more than 45% of the
capital with voting rights, such shareholder must sign a commitment to
decentralize this ownership stake. Said commitment must be in the form of a
public deed and an extract of it must be published in the Official Gazette and
in a newspaper of nationwide circulation (Decree-Law 3500, Articles 124 and
128). The commitment must include a time limit within which the decentralization
of the ownership must be realized, which may not exceed five years from the date
of the signing of the commitment. If the decentralization does not occur within
the agreed time period, the issuer must sell in a Stock Exchange, on behalf and
at the risk of the shareholder, the number of shares necessary to reduce such
shareholder's ownership to the 45% limit.
The Bylaws (Article 40) and Decree-Law 3500 (Article 116) also establish
the following regulations related to concentration of capital: no shareholder
may exercise, personally or through others, the right to vote the shares held in
excess of the maximum limit of concentration established in the Bylaws, that is,
more than 45% of the capital with voting rights; and no person may represent
shareholders that, as a group, own more than 45% of the Company's capital with
voting rights. One share represents the right to one vote and, when a
shareholder gives another person the right to represent him in a shareholders'
meeting, this representation must be for the total amount of shares that he
owns.
Capitalization
Under Chilean law, a corporation "issues" its stock as soon as the
shareholders authorize an increase in such corporation's capital. When a
shareholder subscribes for shares, the shares are transferred to such
shareholder's name, and the shareholder is treated as a shareholder for all
purposes, except receipt of dividends, unless otherwise stipulated in the Bylaws
of the corporation. The shareholder becomes eligible to receive dividends once
such shareholder has paid for the shares. If a shareholder does not pay for
shares for which such shareholder has subscribed on or prior to the date agreed
upon for payment, the corporation is entitled to auction the shares on the stock
exchange, and has a cause of action against the shareholder for the difference
between the subscription price and the price received at auction. However, until
such shares are sold at auction, the shareholder continues to exercise all the
rights of a shareholder (except the right to receive dividends). Authorized
shares that have not been paid for within the period ending three years from the
date of issuance thereof are deemed cancelled under Chilean law, and are no
longer available for sale by the Chilean corporation. At that time, the capital
of the corporation is automatically reduced to the amount effectively paid
within such period.
The Company's Bylaws authorize two classes of common stock, Series A Common
Stock and Series B Common Stock. The rights of both series of shares are
identical, except that the holders of Series B Common Stock are entitled as a
class to (i) elect one of seven directors and an alternate director for that
director and (ii) name one of three liquidators of Telefonica CTC Chile in the
event of its dissolution.
Director Requirements
The Bylaws require the Board to consist of seven directors, six to be
elected by the holders of Series A Common Stock and one to be elected by the
holders of Series B Common Stock. One alternate director will be elected for
each director and will replace that director if the director is unable to attend
a meeting or serve a
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full term. Only the director and alternate director elected by the holders of
the Series B Common Stock are required to be stockholders in the Company.
The Company's Bylaws (Article 18), as well as the Chilean Corporations Law
(Article 38), stipulate that the Board of Directors can only be fully revoked by
a General or Special Shareholders' Meeting (as defined below). The individual or
collective revocation of one or more of the Board members is not allowed.
The Bylaws require that any act or contract by the Company in which a
director or an officer, or a party related to them, holds an interest must be
previously approved by two-thirds of the Board, and the terms of the act or
contract must be comparable to those customarily prevailing in the market.
An additional chapter governing the creation and functions of the
Directors' Committee, which was created by the Board of Directors on April 26,
2001, has been added to the Company's Bylaws. For more information on the
Directors' Committee, see "Item 6: Directors, Senior Management and
Employees--Board Practices--Directors' Committee."
Preemptive Rights and Increases of Share Capital
The Chilean Corporations Law and the Regulations on Corporations grant
certain preemptive rights to shareholders of all Chilean companies. The Chilean
Corporations Law and Regulations on Corporations generally require Chilean
companies to offer to shareholders the right to purchase a sufficient number of
shares or convertible securities to maintain their existing ownership percentage
of a company whenever the company issues new shares or convertible securities.
Dividend and Liquidation Rights
In accordance with Chilean law, the Company must distribute mandatory cash
dividends of 30% of its net income calculated in accordance with Chilean GAAP,
unless otherwise decided by a unanimous vote of the shareholders. See "Item 8:
Financial Information--Dividend Policy and Dividends."
At the option of the Company, the portion of any dividend that exceeds the
mandatory limits established pursuant to Chilean law may be paid in cash, in
shares of the Company or in shares of corporations held by the Company.
Shareholders who do not expressly elect to receive a dividend other than in cash
are legally presumed to have decided to receive the dividend in cash.
Dividends that are declared but not paid within the appropriate time period
set forth in the Bylaws for payment of such dividends (as to minimum dividends,
30 days after declaration; as to optional dividends, the date set for payment at
the time of declaration) are adjusted to reflect the change in the value of the
UF from the date set for payment to the date such dividends are actually paid.
Such dividends also accrue interest at the then prevailing rate for UF
"denominated" deposits during such period. The right to receive a dividend
lapses if it is not claimed within five years.
In the event of a liquidation of the Company, the holders of fully paid
shares would participate in the distribution of assets available after all
creditors have been paid, in proportion to the number of shares held by them.
Shareholders' Meetings and Voting Rights
The General Annual Shareholders' Meeting of the Company is held during the
first four months of each year. Special (or extraordinary) meetings of
shareholders (a "Special Shareholders' Meeting") may be called by the Board of
Directors when deemed appropriate or when requested by shareholders representing
at least 10% of the issued voting shares or by the SVS. Notice to convene the
General Annual Shareholders' Meeting or a Special Shareholders' Meeting is given
by means of a notice published in a newspaper of Telefonica CTC Chile's
corporate domicile (currently, Santiago) or in the Official Gazette in a
prescribed manner. Notice must also be mailed to each shareholder and given to
the SVS 15 days prior to the meeting.
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The quorum for a shareholders' meeting is established by the presence, in
person or by proxy, of shareholders representing at least the absolute majority
of the issued voting shares of the Company; if a quorum is not present at the
first meeting, the meeting can be reconvened and upon the meeting being
reconvened, shareholders present at the reconvened meeting are deemed to
constitute a quorum regardless of the percentage of the shares represented.
However, if a shareholder meeting is called for the purpose of:
(i) considering a change of organization, merger or division of the
Company, (ii) an amendment to the term of duration or early dissolution, (iii) a
change in corporate domicile, (iv) a decrease of corporate capital, (v) approval
of capital contributions or assessments of assets other than cash, (vi)
modification of the authority reserved to shareholders or limitations on the
Board of Directors, (vii) reduction in the number of Directors comprising the
Board, (viii) the sale, transfer or disposition of 50% or more of the Company's
assets, either including or excluding their corresponding liability, or the
formulation or modification of any business plan which includes the sale,
transfer or disposition of the Company's asset in such amount, (ix) the form of
distributing corporate benefits, (x) a guarantee by the Company of liabilities
of any third party, in an amount exceeding 50% of the Company's total assets,
(xi) the purchase by the Company of the Company's issued stock in accordance
with articles 27A and 27B of Law 18,046, (xii) corrections of formal defects
with regard to the Company's incorporation or amendments to the Bylaws relating
to any of the matters enumerated above or (xiii) any other alluded in the
Bylaws; the vote required at such meeting is a two-thirds majority of the issued
voting Shares.
The Company's Bylaws (Article 45), as well as Decree-Law 3500 (Article
121), state that the approval of 75% of voting shares are required in a Special
Shareholders' Meeting, in order to modify the following issues:
(a) the share concentration limit of 45% of the capital with voting rights;
(b) the quorum of two-thirds of the Board of Directors that is required for the
prior approval of the agreements and contracts between the Company and its
majority shareholders, board members and executive officers, or persons
related to them;
(c) the obligation of the Board of Directors to act always within the limits
determined by the investment and financing policy approved by the General
Annual Shareholders' Meeting;
(d) the obligation of the General Annual Shareholders' Meeting to approve the
investment and financing policy proposed by management;
(e) the fact that the following matters are subject to approval of a Special
Shareholders' Meeting: the sale of assets or rights of the Company that
have been declared essential to its operations in the investment and
financing policy, as well as the creation of encumbrances upon such assets,
and the modification of the investment and financing policy approved by the
General Annual Shareholders' Meeting;
(f) the requirement that no shareholder may exercise, personally or through
others, the right to vote shares held in excess of 45% of the capital with
voting rights and that no person may represent shareholders that, as a
group, own more than 45% of the capital with voting rights;
(g) the norms that regulate the withdrawal rights of the AFPs;
(h) the obligation to present to the General Annual Shareholders' Meeting and
to send to shareholders a copy of the account inspectors' report and of the
investment and financing policy; and
(i) the obligation of the General Annual Shareholders' Meeting to designate
two account inspectors and two alternate account inspectors to examine
the accounts, inventory, balance sheet and other financial statements.
Chilean law does not require an open Chilean company to provide the level
and type of information that United States securities laws require a reporting
company to provide to its shareholders in connection with a solicitation of
proxies. Under Chilean law, a notice of a shareholders' meeting listing matters
to be addressed at the meeting must be mailed not later than 15 days prior to
the date of a meeting. In case of a General Annual Shareholders' Meeting, an
annual report of the company's activities, which includes audited financial
statements for the Company, must also be mailed to certain shareholders.
Additionally, the Company regularly provides, and management intends to continue
to provide, a proposal for the final dividend, a
85
statement of the proposed dividend policy for interim dividends for the then
current year and a statement of Telefonica CTC Chile's Investment and Financing
Policy required by Decree-Law 3500 discussed below. See "Item 8: Financial
Information--Dividend Policy and Dividends."
The Chilean Corporations Law provides that, whenever shareholders
representing 10% or more of the issued voting shares so request, a Chilean
company's annual report must include the materials dispatched by the board of
directors to shareholders, and the board's comments and proposals in relation to
the company's affairs. Similarly, the Chilean Corporations Law provides that,
whenever the board of directors of an open company convenes a general meeting of
shareholders and solicits proxies for the meeting, sending out information
supporting its decisions or other similar materials, it is obligated to include
in such package pertinent comments and proposals made by shareholders owning 10%
or more of the company's voting shares who request that such comments and
proposals be so included.
Only shareholders registered as such with the Company at least five days
prior to the date of a shareholders' meeting are entitled to attend and vote
their shares. A shareholder may appoint another individual (who need not be a
shareholder) as his proxy to attend and vote on his behalf. Every shareholder
entitled to attend and vote at a shareholders' meeting shall have one vote for
each share subscribed. The Company's Bylaws (Article 46), as well as the Chilean
Corporations Law (Article 68), stipulate that the shares belonging to
shareholders who, during a period of over five years, have not collected
dividend payments that the Company has distributed and have not attended
shareholders' meetings that were held, are not considered for quorum purposes or
for the voting majorities required at the shareholders' meetings. When one of
the mentioned conditions ceases to occur, those shares must again be considered
for the above-mentioned purposes.
Subject to the terms of the Deposit Agreement among the Company, the Bank
of New York, as Depositary, and the owners and holders of ADRs, dated as of July
19, 1990, as amended and restated in the Amended and Restated Deposit Agreement
among the Company, Citibank N.A., as Depositary, and the owners and holders of
ADRs, dated as of January 2, 1997, and the Second Amended and Restated Deposit
Agreement, dated as of June 1, 1998, among Telefonica CTC Chile, Citibank N.A.,
as Depositary, and the owners and holders of ADRs, the holders of ADRs have the
right to instruct the Depositary as to the exercise of voting rights with
respect to the underlying common shares. The Depositary is not permitted to vote
any of the underlying shares as to which it has received no instructions from
the holders of ADRs.
Approval of Financial Statements and Investment and Financing Policy
The Board of Directors is required to submit the Company's financial
statements to the shareholders annually for their approval. If the shareholders
reject the financial statements, the Board of Directors must submit new
financial statements not later than 60 days from the date of the meeting. If the
shareholders reject the new financial statements, the entire Board of Directors
is deemed removed from office and a new Board of Directors is elected at the
same meeting. Directors who individually approved such financial statements
rejected by the Company's shareholders are disqualified for re-election for the
ensuing period.
As mandated by Decree-Law 3500 (discussed below) and as required by
Telefonica CTC Chile's Bylaws, at each General Annual Shareholders' Meeting,
shareholders of the Company must consider for approval a statement of general
investment directives and limitations proffered by management. At the General
Annual Shareholders' Meeting held in April of 2003, the Investment and Financing
Policy for 2003 was approved by Telefonica CTC Chile's shareholders.
The Company's current Investment and Financing Policy for 2003 requires
that the maximum consolidated debt-to-equity ratio of Telefonica CTC Chile and
its subsidiaries may not exceed 1.6.
Under the terms of the Investment and Financing Policy for 2003,
notwithstanding the restrictions imposed by the law or by the Bylaws on the
grant of real or personal guarantees to secure third-party obligations, the
Company's management may not agree to grant real or personal guarantees to
secure obligations of the Company or of third parties, other than subsidiaries,
except upon shareholder approval at a Special Shareholders' Meeting. Cash
obligations arising from amounts payable for the purchase of goods or
86
real estate are exempt from the foregoing, if they are secured by the assets
purchased. The Company may agree to restrictions on the distribution of
dividends with lenders only after shareholder approval at a General Annual
Shareholders' Meeting or at a Special Shareholders' Meeting.
The Investment and Financing Policy for 2003 also contains restrictions on
the disposition of assets or property rights that are essential for the
functioning of the Company, including the networks, central switches, equipment
and parcels of land used to provide services pursuant to government licenses.
Such assets may, however, be modified or replaced for reasons of technical or
economic obsolescence. As of the General Annual Shareholders' Meeting held in
April 2003, the Company's essential assets also included 51% of the shares of
subsidiaries Telefonica Movil, Telefonica Empresas and 188 Telefonica Mundo.
Finally, the Investment and Financing Policy for 2003, approved in the
General Annual Shareholders' Meeting, establishes that the Company will
concentrate investment resources in 2003 in all areas of business defined in its
Bylaws.
Right of Dissenting Shareholders to Tender their Shares
The Chilean Corporations Law provides that, upon the adoption at a Special
Shareholders' Meeting of any of the resolutions enumerated below, dissenting
shareholders acquire the right to withdraw from a Chilean company and to compel
that company to repurchase their shares, subject to certain terms and
conditions.
"Dissenting" shareholders are defined as (i) shareholders who vote against
a resolution and thus acquire the right to withdraw from the company, or (ii)
shareholders who are absent at a shareholders' meeting and who state in writing
to the company their opposition to the resolution adopted at such a meeting.
Dissenting shareholders must finalize their withdrawal rights by tendering their
stock to the company within 30 days of adoption of the resolution in question
(except in the case of pension fund shareholders, as discussed below).
The price paid to a dissenting shareholder of a public (open) company for
such shares is the weighted average of the closing sale prices for the company's
shares, as reported on the relevant stock exchanges, for the 60-day period
preceding the event giving rise to the withdrawal right.
Under the Chilean Corporations Law, a dissenting shareholder's right to
withdraw arises upon adoption of resolutions concerning the following matters:
(a) transformation of the Company;
(b) merger of the company with another entity;
(c) disposition of 50% or more of the corporate assets under the terms
described in "Item 10: Additional Information--Memorandum and Articles of
Association--Shareholders' Meetings and Voting Rights";
(d) grant of real or personal guarantees to secure third-party obligations in
an amount exceeding 50% of the corporate assets;
(e) creation of preferential rights for a class of shares or modification of
those already existing; in which case the right to withdraw only accrues to
the dissenting shareholder of the class or classes of shares adversely
affected;
(f) corrections of formal defects with regard to the Company's incorporation or
amendments to the Bylaws relating to any of the matters enumerated above;
(g) such other causes as may be established by the Company's Bylaws; and
(h) other instances established by Chilean law and the Bylaws of the Company.
Decree-Law 3500
Decree-Law 3500 regulates, inter alia, the activities of pension funds and
pension fund management companies. This Decree-Law permits investment of pension
fund assets in a number of companies whose shares are listed on the Santiago
Stock Exchange. In accordance with Decree-Law 3500, the Company has
87
amended its Bylaws to prohibit any shareholder from owning more than 45% of
Telefonica CTC Chile's capital stock in order to enable AFPs to invest in
Telefonica CTC Chile.
Registrations and Transfers
The Company's shares are registered by the Company acting as its own
transfer agent, as is customary among Chilean corporations. In the case of
jointly owned shares, an attorney in fact must be appointed to represent the
joint owners before the Company.
C. Material Contracts
On September 26, 2002, Telefonica CTC Chile announced the signature of an
agreement, through its subsidiary Telefonica Empresas, to sell 25% of its
information systems subsidiary, Sonda, for Ch$ 27,921 million (approximately US$
37.5 million). The Company sold 11% of Sonda to Inversiones Pacifico and 14% to
Santa Isabel, both companies related to Mr. Andres Navarro, founder of Sonda. As
a result of this transaction Telefonica CTC Chile, through its subsidiary
Telefonica Empresas, maintains a 35% stake in Sonda, while the remaining 65% is
controlled by Mr. Andres Navarro, through his related companies.
Additionally, the Company signed an agreement with Santa Isabel, through
which Telefonica CTC Chile has a put option for its 35% stake in Sonda, to be
exercised in July 2005, at the book value of this investment as of June 30, 2005
plus UF 142,021, with a minimum value of UF 2,048,885. This minimum price is
guaranteed by a performance bond issued by certain Chilean banks. Santa Isabel
has been granted a call option for Telefonica Empresas's remaining 35% stake in
Sonda, which it may exercise in August 2005 under the same conditions as
described above. Santa Isabel may also exercise its call option in July 2003, at
book value as of June 30, 2003, plus a premium of UF 96,000 with a minimum price
of UF 1,983,185, or in July 2004, at book value as of June 30, 2004, plus a
premium of UF 119,000 with a minimum price of UF 2,003,260.
In March 2001, Telefonica CTC Chile, through its subsidiary Telefonica Data
Chile S.A., acquired from Sonda the company Sonda Comunicaciones S.A., for UF
72,120, approximately US$ 1.9 million (historic value). Sonda Comunicaciones
S.A. is a provider of telecommunications services and network solutions to
corporate customers, and is the part of Sonda which management believed to have
the most synergies with Telefonica CTC Chile's operations. In addition, since
October 2001, Telefonica CTC Chile has a full outsourcing agreement with IBM de
Chile for the operation, support and maintenance of its information systems
infrastructure, a service that was previously provided by Sonda.
As a result of this transaction, Telefonica CTC Chile will no longer own a
majority stake in Sonda nor have management control of this company. Therefore,
the financial results of this subsidiary will no longer be consolidated with the
Company's results after August 31, 2002. As of September 2002, the Company's
consolidated statement of operations shows, as a non-operating income/expense,
the corresponding 35% of Sonda's net result.
The Company will continue to amortize the goodwill corresponding to the 35%
stake that it maintains in Sonda. As of October 2002, this remaining goodwill,
which amounted to approximately Ch$12,438 million will be amortized over a
period of 34 months, excluding the premium of UF 142,021. If Mr. Andres Navarro,
through his related company, Santa Isabel, exercises his call option at one of
the earlier dates allowed, this would have a one-time negative impact on
Telefonica CTC Chile's results at the time of the sale. The Company estimates
that this negative impact on results would amount to approximately Ch$9,000
million if the call option is exercised in July 2003, or Ch$5,600 if the call
option is exercised in July 2004. If the call option is exercised in July 2005,
the Company believes that there would be no material impact on the Company's
financial results.
88
D. Exchange Controls and Other Limitations Affecting Security Holders
Telefonica CTC Chile has outstanding ADRs and Debt Securities. Each of
these securities is subject to requirements as to issuance and other matters
established by the Central Bank.
The Central Bank is, among other things, responsible for monetary policies
and for exchange controls in Chile. Appropriate registration of a foreign
investment in Chile permits the investor to access the formal currency market.
Foreign investments can be registered with the Foreign Investment Committee
under Decree-Law 600 of 1974, as amended, or with the Central Bank under the
Central Bank Act. The Central Bank Act is an organic constitutional law
requiring a "special majority" vote of the Chilean Congress to be modified.
Chapter XIV of Title I of the Compendium of Rules on Foreign Exchange (the
"Compendium") issued by the Central Bank authorizes qualifying Chilean issuers
to offer convertible debentures or debt securities both in Chile and abroad.
Pursuant to an amendment of the Compendium issued by the Central Bank on
April 19, 2001, any new international issue of convertible debentures or debt
securities must be carried out through the Formal Exchange Market, and the
participants must inform the Central Bank of the issuance. However, all
issuances of debt made prior to the April 19, 2001 amendment of the Compendium,
including certain of the Debt Securities of the Company, remain subject to the
rules and regulations as in effect at the time of their respective issuances.
The following is a summary of the relevant portions of the Central Bank's
regulations regarding issuance of convertible debentures and debt securities
denominated in currencies other than pesos in the international markets. This
summary does not purport to be complete and is qualified in its entirety by
reference to Resolution No. 254-15-921029, which has been incorporated by
reference as an exhibit to the Company's Registration Statement on Form F-3
(File No. 333-5184), as filed with the Commission on July 22, 1996 and as
amended on January 7, 1999, and by reference to the resolutions of the Central
Bank authorizing the issuance of the Debt Securities which are the subject of
the above-referenced Registration Statement.
Debt securities must have an average weighted term of not less than four
years, weighted on the basis of principal installments and on the assumption
that, if the issuer has the ability to call the debt securities, they will be
deemed to have been called at the earliest possible date for purposes of this
requirement. Convertible debt securities offered internationally must first be
offered to existing shareholders of the issuer in a preemptive rights offering.
Subscribers in such an offering must purchase the debentures with pesos and
receive peso-payable debt securities whereas international investors must
purchase the debt securities in a foreign currency. Persons not residing or
domiciled in Chile may exchange their peso-payable debt securities for the
foreign-currency payable debt securities, subject to compliance with certain
conditions.
The Compendium also requires that the foreign currency proceeds from the
international sale of debt securities either be brought to Chile and exchanged
for Chilean pesos in the Formal Exchange Market or be held outside of Chile and
used for (i) direct payment abroad of expenses incurred in connection with
import operations, contracting services abroad, issue of securities abroad; (ii)
repayment at maturity of external indebtedness registered with, and approved by,
the Central Bank; and (iii) direct investment in financial instruments abroad.
If the foreign currency proceeds are used to finance investments outside of
Chile or to repay obligations of foreign branches and/or subsidiaries, no access
to the Formal Exchange Market is given.
Until September of 1998, the Compendium made foreign loans granted to
(including international debt offerings issued by) Chilean individuals or
companies subject to a mandatory deposit of an amount equal to 30% of the
proceeds of the loan in a one-year, non-interest bearing U.S. dollar account
with the Central Bank (or to payment of a charge to the Central Bank on the next
business day after the time the foreign currency is converted into Chilean pesos
in an amount equal to interest on such deposit at the rate of the twelve-month
LIBOR for U.S. dollar deposits plus 4.0% for one year). On June 26, 1998, the
Central Bank lowered the amount of this mandatory deposit to 10% of loan
proceeds, and further reduced this amount to 0% on September 17, 1998. Although
the mandatory deposit was eliminated from the Compendium on April 19, 2001, it
is still within the Central Bank's powers, according to its organic law, to
reinstate such mandatory deposit requirement.
International investors must purchase internationally offered debt
securities with foreign currency and receive foreign currency-payable
securities.
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A foreign investment and exchange contract was entered into by the Central
Bank, the Company and The Bank of New York as depositary in 1990 (the "Foreign
Investment Contract") pursuant to Article 47 of the Central Bank Act and to
Chapter XXVI of the Compendium ("Chapter XXVI"). On December 30, 1996, the
Foreign Investment Contract was amended to incorporate the designation of
Citibank N.A. as the successor depositary for Telefonica CTC Chile's ADR
program. Although an amendment made by the Central Bank on April 19, 2001,
repealed Chapter XXVI, it continues to be enforceable with respect to contracts
entered into pursuant to Chapter XXVI, such as the Foreign Investment Contract.
The following is a summary of certain provisions of the Foreign Investment
Contract. This summary does not purport to be complete and is qualified in its
entirety by reference to Chapter XXVI and the Foreign Investment Contract.
Under the Chapter XXVI and the Foreign Investment Contract, the Central
Bank grants to the Depositary, on behalf of ADR holders, and to any non-Chilean
investor who withdraws shares of Series A Common Stock upon delivery of ADRs
(such shares being referred to herein as "Withdrawn Shares") access to the
formal currency market to convert pesos to dollars (and remit such dollars
outside of Chile) with respect to shares of Series A Common Stock represented by
ADSs or Withdrawn Shares, including amounts received as (a) cash dividends, (b)
proceeds from the sale in Chile of Withdrawn Shares (subject to receipt by the
Central Bank of a certificate from the holder of the Withdrawn Shares (or from
an institution authorized by the Central Bank) that such holder's residence and
domicile are outside of Chile and a certificate from a Chilean exchange (or from
a brokerage or securities firm established in Chile) that such Withdrawn Shares
were sold on a Chilean exchange), (c) proceeds from the sale in Chile of rights
to subscribe for additional shares of Series A Common Stock, (d) proceeds from
the liquidation, merger or consolidation of the Company, and (e) other
distributions, including without limitation, those resulting from any
re-capitalization, as a result of holding shares of Series A Common Stock
represented by ADSs or Withdrawn Shares. Transferees of Withdrawn Shares are not
entitled to any of the foregoing rights under Chapter XXVI. Investors receiving
Withdrawn Shares in exchange for ADRs have the right to redeposit such shares in
exchange for ADRs, provided that the conditions to redeposit are satisfied.
Shares of Series A Common Stock acquired as described above may be
deposited for ADRs and receive the benefits of the Foreign Investment Contract,
subject to receipt by the Central Bank of a certificate from the Depositary
stating that such deposit has been made and that the related ADRs have been
issued and a declaration from the person making such deposit waiving the
benefits of the Foreign Investment Contract with respect to the deposited
shares.
Access to the Formal Exchange Market under any of the circumstances
described above is not automatic. Pursuant to Chapter XXVI, such access requires
the Central Bank's approval of a request presented through a banking institution
established in Chile. The Foreign Investment Contract provides that, if the
Central Bank has not acted on such request within a period of seven business
days, the request will be deemed approved.
The Central Bank regulations provide that a person who brings foreign
currency into Chile to purchase shares of Series A Common Stock with the benefit
of the Foreign Investment Contract must convert it into pesos on the same date
and has five banking business days within which to invest in such shares in
order to receive the benefits of the Foreign Investment Contract. If such person
decides within such period not to acquire the shares, such person can access the
Formal Exchange Market to reacquire dollars, provided that the applicable
request is presented to the Central Bank within seven banking business days of
the initial conversion into pesos. Shares of Series A Common Stock acquired as
described above may be deposited for ADSs and receive the benefits of the
Foreign Investment Contract, subject to: (i) receipt by the Central Bank of a
certificate from the Depositary stating that such deposit has been made and that
the related ADRs have been issued, and (ii) receipt by the custodian bank for
the ADRs of a declaration from the person making such deposit waiving the
benefits of the Foreign Investment Contract with respect to the deposited
shares.
Under current Chilean law and judicial precedents, the Foreign Investment
Contract cannot be changed unilaterally by the Central Bank. While the
authorization to issue the Debt Securities is a unilateral act of the Central
Bank, other authorizations of the Central Bank have not been historically
rescinded. Although this area was significantly liberalized as a result of the
amendment made by the Central Bank on April 19, 2001,
90
additional Chilean restrictions applicable to the holders of Debt Securities or
ADRs, the disposition of any such security, or the repatriation of the proceeds
from such disposition, may be imposed in the future. There can be no assessment
of the duration or impact of such restrictions, if imposed.
The Central Bank regulations that became effective on July 4, 1995 (the
"New Central Bank Regulations") required persons bringing foreign currency into
Chile for the purpose of acquiring pesos to purchase securities to either (1)
establish a non-interest bearing deposit with the Central Bank of Chile for a
one year term in an amount equal to 30% of foreign currency brought into Chile
or (2) pay a charge to the Central Bank at the time the foreign currency is
converted into pesos in an amount equal to interest on such deposit for one year
at the rate of 12-month LIBOR plus 4%. The New Central Bank Regulations were
amended in October of 1996 to make them applicable to persons bringing foreign
currency into Chile for the purpose of purchasing securities from certain
issuers thereof as part of a capital increase by the issuer. However, these
rules do not apply to foreign investments made for purposes of purchasing newly
issued shares under Chapter XXVI and an ADR investment contract. The New Central
Bank Regulations apply to subsequent transactions in which foreign currency is
brought into Chile to purchase securities in secondary market transactions.
On September 17, 1998, the Central Bank eliminated this mandatory deposit
requirement. Despite this elimination, the Central Bank may at any time
reinstate its deposit requirements in any amount up to 40%. Although the
mandatory deposit was eliminated from the Compendium on April 19, 2001, its
imposition still constitutes one of the Central Bank's powers, according to its
organic law.
The New Central Bank Regulations may affect the price and volume of trading
in securities in Chile, including the price and volume of trading in the
Company's common stock. The New Central Bank Regulations may also affect the
amount of any differential in prices between American Depositary Shares
evidencing securities of Chilean issuers, including the Company's ADSs, and
prices of the underlying securities in Chile, including the common stock.
However, the Company is unable to assess at this time the impact of the New
Central Bank Regulations on the securities markets in Chile, the market for the
Company's common stock in Chile or the market for its ADRs. The Company is
unable to predict whether (and, if so, how or when) the New Central Bank
Regulations will be modified or terminated or what effect any such modifications
or termination will have on the securities markets in Chile, the market for the
Company's common stock or the market for its ADRs.
E. Taxation
Chilean Tax Considerations
The following discussion summarizes the principal Chilean tax consequences
of the acquisition of Debt Securities and ADRs representing Series A Common
Stock and of the ownership and disposition of any Series A Common Stock, into
which the Debentures have been converted (as defined below), or any ADRs
representing such Series A Common Stock by an individual holder who is not
domiciled or resident in Chile or by a legal entity not organized under the laws
of Chile and with no permanent establishment in Chile (a "Foreign Holder"). For
purposes of Chilean taxation, an individual holder is a resident of Chile if
such holder has resided in Chile for more than six consecutive months in any one
calendar year, or for a total of more than six months in two consecutive years.
A Chilean citizen generally will be treated as a domiciliary and resident of
Chile for Chilean tax purposes, unless such person can demonstrate the contrary.
There is currently no income tax treaty in force between Chile and the
United States.
Interest Payments and Redemption
Payments of interest and premium (including all amounts paid by the Company
in excess of the issue price of the Debt Securities which, under Chilean income
tax law, are deemed to constitute interest) with respect to the Debt Securities
are subject to a Chilean withholding tax at a rate of 4% (the "Chilean Interest
Withholding Tax") imposed on the date of payment.
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Subject to specified exceptions and limitations, all payments made by the
Company to the holders of the Debt Securities are made free and clear of any
withholding taxes imposed by Chile and, therefore, the Company shall pay to the
holders of the Debt Securities such additional amounts ("Additional Amounts") in
respect of the Chilean Interest Withholding Tax as will result in the payment to
such holders of the amount that would otherwise have been received by them in
respect of payments on such Debt Securities in the absence of such withholding.
Taxation of Capital Gain on the Debt Securities
Although there is no direct authority on point and the issue is not free
from doubt, any capital gains realized on the sale or other disposition by a
Foreign Holder of the Debt Securities are not subject to any Chilean taxes,
provided that such sales or other dispositions occur outside of Chile (except
that, as discussed in "Interest Payments and Redemption" above, any premium
payable on redemption of the Debt Securities will be treated as interest and
subject to Chilean Interest Withholding Tax).
Tax Basis of Series A Common Stock Received in Conversion of Debentures
The tax basis of Series A Common Stock that a Foreign Holder received in
the conversion of the Company's previously outstanding 4.5% Convertible
Subordinated Debentures (the "Debentures") is equal to the Foreign Holder's tax
basis in such Debentures reduced by any cash received for fractional shares.
Deposit and Withdrawal of Series A Common Stock in Exchange for ADRs
The deposit and withdrawal of Series A Common Stock in exchange for ADRs is
not subject to any Chilean taxes. As to the tax basis of Series A Common Stock
received by a Foreign Holder in exchange for ADRs, the Company has obtained a
Ruling (the "Ruling") from the Chilean tax authorities that provides that the
Chilean tax authorities will abide by the valuation procedure set forth in the
Depositary Agreement, which values shares at the highest price at which the
Series A Common Stock was traded on the Santiago Stock Exchange on the date of
the withdrawal of the Series A Common Stock from the Depositary.
Taxation of Dividends
Cash dividends paid by the Company with respect to the Series A Common
Stock held by Foreign Holders will be subject to a Chilean withholding tax at
the rate of 35% (the "Additional Tax"), which is withheld and paid over by the
Company. A credit against the withholding tax is available based on the level of
corporate income tax actually paid by the Company on the income to be
distributed (the "First Category Tax"). Full applicability of the First Category
Tax credit at the 16.5% rate results in an effective dividend withholding tax
rate of 22.2 %. Consequently, the withholding tax rate with respect to dividends
fluctuates between 22.2 % and 35%, depending on whether or not the Company is
subject to the First Category Tax.
Since 1994, when the Chilean Internal Revenue Service authorized the
Company to record accelerated depreciation of its fixed assets for tax purposes,
taxable income generally has been negative or less than the dividends
distributed to its shareholders. Consequently, no First Category Tax credit has
been available generally, resulting in the application of the maximum 35%
withholding tax rate for most of the period since 1994.
When the First Category Tax credit is available, it does not reduce the
withholding tax on a one-for-one basis because it also increases the base on
which the withholding tax is imposed. In addition, if the Company distributes
less than all of its distributable income, the credit for First Category Tax
paid by the Company is reduced proportionately. The example below illustrates
the effective Chilean withholding tax burden on a cash dividend received by a
Foreign Holder, assuming a withholding tax rate of 35%, an effective First
Category Tax at the maximum rate of 16.5%, and a distribution of 100% of the
Company's net income that is distributable after payment of the First Category
Tax.
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Company taxable income............................................... 100
First Category Tax (16.5% of Ch$100)............................ (16.5)
Net distributable income........................................ 83.5
Dividend distributed by the Company............................. 83.5
Additional Tax
(35% of the Company's taxable income)........................... (35)
Credit for First Category Tax................................... 16.5
Net Additional Tax withheld..................................... (18.5)
Net dividend received................................................ 65
--------- ----
Effective dividend withholding tax rate.............................. 18.5/83.5 = 22.2%
The foregoing tax consequences apply to cash dividends paid by the Company
to the Depositary as representative of the holders of ADRs. The Ruling provides
that disbursements of such cash dividends by the Depositary to the holders of
ADRs will not be subject to Chilean taxation. Dividend distributions made in
property (other than Shares of Series A Common Stock) will be subject to the
same Chilean tax rules as cash dividends. Stock dividends are not subject to
Chilean taxation.
The distribution and exercise of preemptive rights relating to Series A
Common Stock will not be subject to Chilean taxes; however, amounts received in
exchange for the sale of preemptive rights will be subject to both the First
Category Tax and the Additional Tax (the former being creditable against the
latter).
On September 28, 2001, the Law No. 19,753 modified the Income Tax Law,
raising the corporate income tax rate to 16% for year 2002, 16.5% for year 2003,
and 17% for 2004 and forward.
Consequently, the effective withholding tax rate for dividend distribution
purposes would be as follows:
Year 2001........................ 20/85 = 23.5%
Year 2002........................ 19/84 = 22.6%
Year 2003........................ 18.5/83.5 = 22.2%
From Year 2004................... 18/83 = 21.7%
Taxation of Capital Gain on the Sale of Series A Common Stock and ADRs
The Ruling provides that gains from sales or other dispositions of ADRs are
not subject to any Chilean taxes, provided that such sales occur outside of
Chile.
Gains recognized on a sale or exchange of Series A Common Stock held by
Foreign Holders will be subject to Chilean income taxes at an effective rate of
35% if either (i) the Foreign Holder has held the shares for less than one year
since converting the Debentures into Series A Common Stock or exchanging ADRs
for Series A Common Stock or (ii) the Foreign Holder acquired and disposed of
the Series A Common Stock in the ordinary course of its business or as a
habitual trader of shares. In all other cases, gains on the disposition of
Series A Common Stock will be subject to a Chilean tax imposed at the rate of
16.5%.
Notwithstanding the above rules, under Law No. 19,578, enacted in 1998, a
Foreign Holder that sold Series A Common Stock during calendar years 1998
through 2001 may have elected to be subject to either the general tax treatment
described above (35% effective tax rate) or the First Category Tax levied as a
sole tax, with respect to sales of common shares on a Chilean stock exchange.
However, such election may not be made if the Foreign Holder and the purchaser
of the common shares are "related parties," in which case the capital gain will
be subject to the general tax treatment described above. For purposes of this
election, a "related party" is any entity in which the Foreign Holder is (a) a
partner, or (b) a shareholder if such entity is a closed stock corporation or
(c) a shareholder with more than 10% of the shares if such entity is an open
stock corporation.
93
Other Chilean Taxes
Although there is no direct authority on this point, as a practical matter
there are no Chilean inheritance, gift or succession taxes applicable to the
ownership, transfer or disposition of ADRs by a Foreign Holder, but such taxes
generally will apply to the transfer at death or by gift of the Series A Common
Stock by a Foreign Holder. There are no Chilean stamp, issue, registration or
similar taxes or duties payable by holders of Series A Common Stock or ADRs.
Withholding Tax Certificates
Upon request, the Company will provide to Foreign Holders appropriate
documentation evidencing the payment of the Chilean Interest Withholding Tax and
the Additional Tax (net of the applicable First Category Tax).
U.S. Federal Income Tax Considerations
The following is a summary of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of ADSs (evidenced by
ADRs) or shares of Series A Common Stock by a U.S. Holder. As used herein, the
term "U.S. Holder" means a beneficial owner of ADSs or shares of Series A Common
Stock that is, for U.S. federal income tax purposes, (1) a citizen or resident
alien individual of the United States, (2) a corporation, or other entity
treated as a corporation, created or organized in or under the laws of the
United States or any state thereof (including the District of Columbia), (3) an
estate the income of which is subject to U.S. federal income tax regardless of
its source or (4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust.
This summary does not address all of the U.S. federal income tax
considerations that may be relevant to a particular U.S. Holder's decision to
acquire, own or dispose of ADSs or shares of Series A Common Stock in light of
such U.S. Holder's particular circumstances, and does not address any aspect of
state, local, or non-U.S. tax law, or any aspect of U.S. federal tax law other
than income taxation. In the case of shares of Series A Common Stock acquired by
a U.S. Holder on conversion of Debentures, this summary covers only U.S. Holders
that acquired such Debentures pursuant to their original issuance. This summary
addresses only ADSs and shares of Series A Common Stock that are held by U.S.
Holders as capital assets (i.e., generally, as investment property). This
summary does not address U.S. federal income tax considerations applicable to
U.S. Holders that are subject to special tax rules, such as certain financial
institutions; insurance companies; dealers and traders in securities or foreign
currencies; tax-exempt entities; persons subject to alternative minimum tax;
persons that will hold ADSs or shares of Series A Common Stock as part of an
integrated investment, including a straddle, or as part of a hedging, conversion
or repurchase transaction for U.S. federal income tax purposes; persons that
have a functional currency other than the U.S. dollar; persons that own
directly, indirectly or constructively 10% or more of the total voting power of
the Company; partnerships or other entities classified as partnerships for U.S.
federal income tax purposes; or persons who acquire ADSs or shares of Series A
Common Stock pursuant to the exercise of employee stock options or otherwise as
compensation. This summary is based on the U.S. Internal Revenue Code of 1986,
as amended (the "Code"), U.S. Treasury Regulations (including proposed
regulations) thereunder, and administrative and judicial interpretations
thereof, all as in effect on the date of this Form 20-F and all of which are
subject to change (which change could apply retroactively and could affect the
U.S. federal income tax consequences described below) and to different
interpretations. This summary is also based in part on representations of the
Depositary and the assumption that each obligation in the applicable depositary
agreement and any related agreements will be performed in accordance with their
terms.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS FOR
GENERAL INFORMATION PURPOSES ONLY. YOU ARE URGED TO CONSULT YOUR OWN TAX
ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF ACQUIRING,
OWNING OR DISPOSING OF ADSs OR SHARES OF SERIES A COMMON STOCK, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL TAX
LAWS AND POSSIBLE CHANGES IN TAX LAWS.
94
General
For U.S. federal income tax purposes, a U.S. Holder that owns ADRs
evidencing ADSs generally will be treated as the owner of the shares of Class A
Common Stock represented by such ADSs. Accordingly, a U.S. Holder will not
recognize gain or loss for U.S. federal income tax purposes solely by reason of
the exchange by such U.S. Holder of ADSs for the underlying shares of Class A
Common Stock represented by such ADSs.
Distributions on Class A Common Stock
In general, a distribution of cash or property (other than common stock, if
any, distributed in certain circumstances pro rata to all shareholders of the
Company, including holders of ADSs) received by a U.S. Holder with respect to
shares of Class A Common Stock represented by ADSs will be includible in gross
income by such U.S. Holder as ordinary dividend income in the taxable year of
receipt (which generally will be the taxable year of such U.S. Holder in which
such distribution is received by the Depositary, in the case of ADSs, or by the
U.S. Holder, in the case of shares of our Class A Common Stock) to the extent
that such distribution is made from the current or accumulated earnings and
profits of the Company as determined for U.S. federal income tax purposes. To
the extent that the amount of any distribution exceeds the current and
accumulated earnings and profits of the Company as determined for U.S. federal
income tax purposes, a U.S. Holder's pro rata share of such excess amount will
be treated first as a nontaxable return of capital to the extent of such U.S.
Holder's tax basis in the ADSs or shares of Class A Common Stock and,
thereafter, as capital gain. Dividends paid by the Company will not be eligible
for the "dividends-received deduction" generally available to U.S. Holders that
are corporations.
The amount of any taxable dividend includible in the gross income of a U.S.
Holder will include any amounts withheld by the Company or its paying agent in
respect of Chilean taxes. Generally, such dividend will be treated as foreign
source "passive income" or, in the case of certain U.S. Holders, "financial
services income," for U.S. foreign tax credit purposes. If any Chilean income
taxes are withheld from such dividends, a U.S. Holder may be entitled to claim a
foreign tax credit for the amount of such Chilean incomes taxes against such
U.S. Holder's U.S. federal income tax liability, subject to certain limitations
and restrictions that may vary depending upon such holder's circumstances.
Instead of claiming the foreign tax credit, a U.S. Holder may, at such holder's
election, deduct the U.S. dollar value of such Chilean income taxes in computing
such U.S. Holder's U.S. taxable income, subject to generally applicable
limitations under U.S. federal income tax law. The rules relating to foreign tax
credits are extremely complex and the availability of a foreign tax credit would
depend on various factors. You are urged to consult your own tax advisers
regarding the availability of foreign tax credits in light of your particular
circumstances.
A taxable dividend paid in pesos will be included in the gross income of a
U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate
in effect on the date such dividend is received by the Depositary, in the case
of ADSs, or by the U.S. Holder, in the case of shares of our Class A Common
Stock, regardless of whether the payment is in fact converted into U.S. dollars
at that time. The U.S. Holder generally will have a tax basis in such
distributed pesos equal to the amount included in gross income, and any gain or
loss recognized upon a subsequent disposition of such pesos generally will be
ordinary income or loss. If the distribution is converted into U.S. dollars on
the date of such receipt by the Depositary or the U.S. Holder, as applicable, a
U.S. Holder generally would not be required to recognize foreign currency gain
or loss in respect of the dividend income.
Sale or Other Taxable Disposition of ADSs or Shares of Class A Common Stock
In general, gain or loss, if any, realized upon a sale or other taxable
disposition of ADSs or shares of Class A Common Stock will be subject to U.S.
federal income tax in an amount equal to the excess of the amount realized on
such sale or other taxable disposition over the U.S. Holder's adjusted tax basis
in such ADSs or shares of Class A Common Stock. A U.S. Holder's adjusted tax
basis in ADSs or shares of Class A Common Stock will generally equal the amounts
paid therefor, provided that a U.S. Holder's adjusted tax basis in any shares of
Series A Common Stock received on conversion of Debentures, if applicable, will
generally equal the adjusted tax basis of the converted Debentures at the time
of conversion (reduced by the portion of such adjusted tax basis that is
allocated to any fractional share of Series A Common Stock exchanged for cash).
A U.S. Holder's holding period for shares of Series A Common Stock received on
any
95
such conversion will generally include the period during which the converted
Debentures were held by such U.S. Holder.
Gain or loss from the sale or other taxable disposition of ADSs or shares
of Class A Common Stock generally will be capital gain or loss, and will be
long-term capital gain or loss if, at the time of such sale or other taxable
disposition, the ADSs or shares of Class A Common Stock have been held for more
than one year. Certain non-corporate U.S. Holders (including individuals) may be
eligible for preferential rates of U.S. federal income tax in respect of
long-term capital gains. A U.S. Holder's ability to deduct capital losses in
respect of ADSs or shares of Class A Common Stock is subject to limitations
under the Code.
Gain (or loss), if any, recognized by a U.S. Holder on the sale or other
taxable disposition of ADSs or shares of Class A Common Stock generally will be
treated as U.S. source income (or loss) for U.S. foreign tax credit purposes.
Consequently, if a Chilean income tax is imposed on the sale or other taxable
disposition of ADSs or shares of Class A Common Stock, a U.S. Holder that does
not receive significant foreign source income from other sources may not be able
to derive effective U.S. foreign tax credit benefits in respect of such Chilean
income tax. You are urged to consult your own tax advisers regarding the
implications of a sale or other taxable disposition of ADSs or shares of Class A
Common Stock and the availability of foreign tax credits in light of your
particular circumstances.
Passive Foreign Investment Company Rules
Special U.S. federal income tax rules apply to U.S. persons owning shares
in a passive foreign investment company ("PFIC"). A non-U.S. corporation
generally will be classified as a PFIC for U.S. federal income tax purposes in
any taxable year in which, after applying certain look-through rules with
respect to the income and assets of subsidiaries, either:
o at least 75% of its gross income is "passive income"; or
o at least 50% of the gross value of its assets, determined on the basis
of a quarterly average, is attributable to assets that produce passive
income or are held for the production of passive income.
For this purpose, passive income generally includes, among other items,
dividends, interest, rents, royalties, gains from the disposition of passive
assets and gains from commodities transactions.
Based on certain estimates of our current and projected gross income and
gross assets, the Company believes that it will not be considered a PFIC for
U.S. federal income tax purposes for 2001. However, since the determination of
whether we are a PFIC will be made by us on an annual basis and depends upon the
nature of our activities and the composition of our income and assets, including
the market value of our assets, from time to time, and since there are
uncertainties in the technical application of the relevant rules, there can be
no assurance that we will not be considered a PFIC for any taxable year. If the
Company were treated as a PFIC for any taxable year, a U.S. Holder that owns
ADSs or shares of Class A Common Stock may be subject to adverse U.S. federal
income tax consequences upon a sale or other disposition of such ADSs or shares
of Class A Common Stock, or upon the receipt of certain distributions from the
Company, unless such U.S. Holder makes certain elections (if available),
generally for the first taxable year for which such U.S. Holder is treated as
holding shares in a PFIC.
In general, subject to the elections described below, if the Company were
treated as a PFIC for a taxable year during which a U.S. Holder owns ADSs or
shares of Class A Common Stock, then any gain realized by such U.S. Holder from
the sale or other disposition of such ADSs or shares of Class A Common Stock,
and any excess distribution (i.e., a distribution that exceeds 125% of the
average distributions during the shorter of the prior three years and the U.S.
Holder's holding period for the ADSs or shares of Class A Common Stock), would
be treated as ordinary income earned ratably over each day in the U.S. Holder's
holding period for the applicable ADSs or shares of Class A Common Stock. The
amount allocated to prior taxable years, other than a taxable year before the
Company is treated as a PFIC, would be subject to U.S. federal income tax at the
highest rate in effect for ordinary income earned by individuals or
corporations, as applicable, for such
96
taxable year. In addition, an interest charge would be imposed on the U.S.
federal income tax liability allocated to each such taxable year as if such
liability represents a tax deficiency for such taxable years.
The foregoing rules with respect to distributions and dispositions may be
avoided if a U.S. Holder is eligible for and timely makes either a valid
qualified electing fund ("QEF") election or a valid "mark to market" election.
The Company does not currently intend to complete the actions necessary for U.S.
Holders to make a qualified electing fund election in the event that the Company
is considered a PFIC for a taxable year. A U.S. Holder that owns shares in a
PFIC may be eligible to make a "mark-to-market" election in circumstances where
such shares are treated under applicable Treasury regulations as being regularly
traded on a qualified exchange. There can be no assurance that a U.S. Holder
owning ADSs or shares of Class A Common Stock will be treated as owning stock
that is regularly traded on a qualified exchange for this purpose.
If a valid mark-to-market election is timely made, then for each taxable
year of ownership, the U.S. Holder generally will include in gross income, as an
item of ordinary income, the excess, if any, of the fair market value of the
ADSs or shares of Class A Common Stock at the end of such taxable year over
their adjusted tax basis, and will deduct from gross income, as an ordinary
loss, the excess, if any, of the adjusted tax basis of the ADSs of shares of
Class A Common Stock over their fair market value at the end of the taxable year
(but only to the extent of the amount previously included in gross income as a
result of the mark-to-market election). The U.S. Holder's tax basis in the ADSs
or shares of Class A Common Stock will be adjusted to reflect any such income or
loss that is included in, or deducted from, gross income. If the mark-to-market
election is made, it can only be revoked with the consent of the U.S. Internal
Revenue Service ("IRS"). Special rules apply if the mark-to-market election is
not made for the first taxable year in which a U.S. person owns shares in a
PFIC.
You are urged to consult your own advisers regarding the consequences of
the application of the PFIC rules to the ADSs or shares of Class A Common Stock
and the availability and advisability of making an election to avoid adverse
U.S. federal income tax consequences of the PFIC rules should the Company be
considered a PFIC for any taxable year.
Backup Withholding Tax and Information Reporting
A U.S. Holder may, under certain circumstances, be subject to "backup
withholding" (currently at a rate of 30%) and information reporting requirements
with respect to certain payments, including certain dividends in respect of the
Series A Common Stock and proceeds from the disposition of ADSs or Series A
Common Stock, unless such U.S. Holder (i) is treated as a corporation for U.S.
federal income tax purposes or falls within certain other exemptions (and
demonstrates this fact when so required), or (ii) furnishes a correct taxpayer
identification number and certifies that such U.S. Holder is not subject to
backup withholding, and otherwise complies with applicable requirements of
backup withholding rules. Any amounts withheld under the backup withholding
rules from a payment to a U.S. Holder generally may be claimed as a credit
against such U.S. Holder's U.S. federal income tax liability provided that the
required information is furnished to the IRS.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Telefonica CTC Chile will provide without charge to each person to whom
this Annual Report is delivered, upon written, e-mail or oral request from any
such person, a copy of any or all of the documents
97
referenced in this Annual Report. Written requests for such copies should be
directed to either of the following contacts:
Compania de Telecomunicaciones de Chile S.A. The Global Consulting Group
Avenida Providencia 111, 22nd floor 22 Cortlandt Street, 14th floor New York,
Santiago, Chile New York 10007
Attention: Isabel Margarita Bravo Attention: Richard Huber or Isabel Vieira
Finance Manager
E-mail requests for copies of such documents may be made to Telefonica CTC
Chile at ibravo@ctc.cl or to The Global Consulting Group at
richard.huber@hfgcg.com
Oral requests for copies of such documents may be made to Telefonica CTC
Chile at (800) 814-0282 or to the Global Consulting Group at (646) 284-9413.
I. Subsidiary Information
Not applicable.
98
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
The following discussion about the Company's risk management activities
includes forward-looking statements that involve risk and uncertainties. Actual
results could differ materially from those projected in such forward-looking
statements.
The Company faces primary market risk exposure in two categories: interest
rate fluctuations and exchange rate fluctuations.
The major interest rate risk that the Company faces is a rise in the LIBOR.
The Company had outstanding, as of December 31, 2002, long-term, LIBOR-based
loans in the amount of Ch$493,493 million (US$ 686.7 million), including current
maturities and accrued interest. As of December 31, 2001, the Company had
outstanding long-term, LIBOR-based loans in the amount of Ch$541,860 million -
including current maturities and accrued interest.
The major exchange rate risk that the Company faces is the depreciation of
the peso against the dollar, due to the fact that, although a substantial
portion of the Company's long-term liabilities are dollar-denominated, the
Company's revenues are largely denominated in Chilean pesos. The Company had, as
of December 31, 2002, Ch$ 816,261 million (US$ 1,136 million) in
dollar-denominated, interest-bearing, long-term liabilities (including current
maturities and accrued interest) compared to Ch$ 854,144 million in
dollar-denominated, interest-bearing, long-term liabilities (including current
maturities and accrued interest) as of December 31, 2001. In addition, as of
December 31, 2002, the Company had the equivalent to Ch$121,375 million (US$ 169
million) in euro-denominated, interest-bearing, long-term liabilities (including
current maturities and accrued interest), which also exposes the Company to an
exchange rate risk. As of December 31, 2001, the Company had the equivalent of
Ch$121,772 million in euro-denominated, interest-bearing, long-term liabilities
(including current maturities and accrued interest). In the normal course of
business, the Company also faces risks that are either non-financial or
non-quantifiable. Such risks principally include country risk, credit risk and
legal risk, and are not represented in the tables below.
The Company periodically reviews its exposure to risks arising from
fluctuations in foreign exchange rates and interest rates, and determines at its
senior management level how to hedge such risks. Subject to this review process,
the Company manages foreign currency and interest rate risks through hedging
transactions in the Chilean and foreign derivative markets and through other
mechanisms, such as the purchasing in the Chilean capital markets of
dollar-denominated marketable securities with floating, LIBOR-based interest
rates. The Company has entered into interest rate swaps, forward rate
agreements, cross currency swaps, interest rate collars and foreign currency
forward contracts with respect to a portion of its borrowings. The Company uses
such derivative instruments to reduce risk by offsetting market exposure. The
derivative instruments held by the Company are not leveraged and are held for
purposes other than trading.
Risk of Variations in Floating Interest Rates
The Company does not hedge its Chilean peso-denominated debt. Virtually all
such debt is fixed-rate UF-denominated, and therefore indexed to Chilean
inflation. Of the Company's long-term interest-bearing debt denominated in
foreign currencies, as of December 31, 2002, 47.9% was fixed-rate debt and 52.1%
was floating-rate debt, compared, respectively, to 44.5% and 55.5% as of
December 31, 2001. All of the Company's foreign currency long-term floating-rate
debt is tied to LIBOR and euro-LIBOR.
In order to reduce the impact of floating interest rate fluctuations on its
debt obligations, the Company can enter into interest rate swaps, which are
contracts in which two parties agree to exchange periodic interest payments,
whereby the Company typically agrees to make payments, based on a fixed interest
rate applied to a notional principal amount on designated dates, to a counter
party that, in turn, agrees to make payments based on a floating rate, such as
LIBOR, applied to the same notional amount. As of December 31, 2002, the
99
Company had no interest rate swaps outstanding. Furthermore, the Company has
entered into zero-cost collar contracts for Ch$411,469 million (US$ 573 million)
as of the end of the year 2002, which are a combination of an interest rate cap
and an interest rate floor. In a typical interest rate collar transaction, the
Company purchases an interest rate cap option and sells an interest rate floor
option in lieu of paying a premium for the cap option. Under the cap
transaction, if interest rates exceed the cap rate, the counter party is
obligated to pay the Company the difference between the market rate and the cap
rate multiplied by the notional principal amount. Under the floor transaction,
if interest rates fall below the floor rate, the Company is obligated to make
payments to its counter party equal to the difference between the floor rate and
the market rate multiplied by the notional principal amount. The effect of these
transactions is to confine net interest rate payments with respect to a notional
principal amount to a range bounded by the collar rate. It should be noted,
however, that the Company remains obligated to make the floating rate payments
on its debt regardless of how much the interest rate increases, but the Company
is entitled to receive offsetting payments to cover such interest rate increases
above the capped rate from its counter party to the interest rate collar
transaction. Additionally, in order to reduce financial expenses, the Company
has entered into cross currency swaps for Ch$76,177 million (US$ 106 million),
which serve to hedge a portion of the Eurobonds issued in 1999 against
euro-dollar exchange rate fluctuations and, at the same time, changed the fixed
rate of the bonds to a floating rate allowing the Company to take advantage of a
market trend toward lower rates of interest.
As of December 31, 2002, 20.2% of the Company's interest-bearing debt,
including both long and short term and dollar, euro and Chilean peso-denominated
debt, was exposed to interest rate variations. The remaining 79.8% of the
Company's interest-bearing debt was insulated from interest rate variation risk:
36.6% was hedged through the instruments set forth in the following table, and
43.2 % was fixed rate debt. As of December 31, 2002, the Company had outstanding
zero-cost collar contracts with an aggregate notional amount of Ch$411,469
million (US$ 572.6 million), which were entered into in order to hedge against
changes in interest rates that may affect Telefonica CTC Chile's debt
obligations. Additionally, in December 2002, the Company entered a forward rate
agreement, covering Ch$179,653 million (US$ 250 million), to hedge against
interest rate fluctuations in 2003. As of December 31, 2001, 15.6% of the
Company's interest-bearing debt, including both long and short term and dollar,
euro and peso-denominated debt, was exposed to interest rates variations. The
remaining 84.4% of the Company's interest-bearing debt was insulated from
interest rate variation risk: 30.2% was hedged through the instruments set forth
in the following table, and 52.4% was fixed rate debt. As of December 31, 2001,
the Company had outstanding zero-cost collar contracts with an aggregate
notional amount of Ch$ 393,195 million, which were entered into in order to
hedge against changes in interest rates that may affect Telefonica CTC Chile's
debt obligations. Telefonica CTC Chile matches the terms of these derivative
contracts to those of its particular debt instruments, such that, for example,
the notional amount of the collars matches the principal amount of the debt and
the payment dates and interest rates match.
The following table summarizes the long-term interest-bearing debt
obligations (including current maturities and accrued interest) and derivative
instruments held by the Company as of December 31, 2001 and 2002. The Company
enters into interest rate swaps and/or cross currency swaps and/or zero-cost
collar contracts to achieve synthetically the appropriate level of variable and
fixed-rate debt approved by senior management. For the debt, the tables present
principal payment obligations by maturity date and the related average interest
rate. For the collars, the tables present the notional amounts and cap and floor
rates by contractual dates. Average interest rates for liabilities are
calculated based on the prevailing interest rate as of December 31 of each year,
for each loan. Dollar-denominated liabilities have been converted into Chilean
pesos based on the Observed Exchange Rate as of December 31, 2002, which was
Ch$718.61 = US$ 1.00. Euro-denominated liabilities have been converted into
Chilean pesos based on the exchange rate for the euro against the U.S. dollar as
published by the Central Bank of Chile, which was US$ 1 = euro 1.047 as of
December 31, 2002, and the Observed Exchange Rate for the U.S. dollar against
the Chilean peso as of December 31, 2002.
100
As of December 31, 2002
Expected maturity date
------------------------------------------------------------------------------------------
Total Long
Term Debt
(including
2003 Fair
2003 2004 2005 2006 2007 Thereafter Maturities) Value(1)
---- ---- ---- ---- ---- ---------- ----------- --------
(In millions of constant Chilean pesos
as of December 31, 2002)
Average
Long-Term Interest Interest
Bearing Debt: Rate (2)
Fixed Rate
(Ch$-denominated) ... 6.34% 8,635 3,836 4,357 4,878 5,599 91,164 118,469 108,318
(US $-denominated)(3) 7.61% 11,110 24,214 - 287,444 - - 322,768 288,357
(Euro-denominated) .. 5.38% 2,623 118,752 - - - - 121,375 118,531
Variable Rate
(Ch$-denominated) ... 3.64% 9,841 59,525 - - - - 69,366 70,692
(US $-denominated)(3) 2.55% 136,450 65,207 180,185 57,755 53,896 - 493,493 507,968
(Euro-denominated) .. - - - - - - - - -
Interest Rate
Derivatives (Ch$ Equivalent in millions)
Interest Rate Swaps: . - - - - - - - -
Notional Amount of ...
variable to fixed (US$
denominated) (4) ..... - 107,792 71,861 - - - - - -
Average Pay Rate ... - 1.62% 1.82% - - - - - -
Average Received
Rate (5) ........ - - - - - - - - -
Cross Currency Swaps: - - - - - - - - -
Notional Amount of
fixed to
variable (Euro
denominated) .... - - 76,177 - - - - - -
Average Pay Rate ... - - 6.05% - - - - - -
Average Received
Rate (5) ........ - - 5.38% - - - - - -
Zero-Cost Collar: .... - - - - - - - - -
Notional Amount .... - 411,469 - - - - - - -
Average Cap Rate ... - 7.00% - - - - - - -
Average Floor Rate . - 4.17% - - - - - - -
------------------------
(1) These figures were calculated based on the discounted value of future cash
flows expected to be received or paid, considering current discount rates
that reflect the different risks involved. See Part II(f), "Additional
Disclosure Requirements," to Note 34 of the Audited Consolidated Financial
Statements for more information regarding the fair value of financial
instruments and derivatives.
(2) Average interest rate means, for variable rate debt, the average
prevailing interest rate as of December 31, 2002 on Telefonica CTC Chile's
variable rate debt, and for fixed rate debt, the average prevailing
interest rate as of December 31, 2002 on Telefonica CTC Chile's fixed rate
debt.
(3) These figures were calculated based on the Observed Exchange Rate as of
December 31, 2002, which was Ch$718.61 = US$ 1.00.
(4) In December 2002, the Company entered forward rate agreements to hedge
against interest rate fluctuations in 2003.
(5) These figures were calculated based on the exchange rate for the euro
against the U.S. dollar as published by the Central Bank of Chile, which
was US$ 1.00 = euro 1.047 as of December 31, 2002, and the Observed
Exchange Rate for the U.S. dollar against the Chilean peso as published by
the Central Bank of Chile, which was Ch$718.61 = US$ 1.00 as of December
31, 2002.
101
As of December 31, 2001
Expected maturity date
------------------------------------------------------------------------------------------
Total Long
Term Debt
(including
2002 Fair
2002 2003 2004 2005 2006 Thereafter Maturities) Value(1)
---- ---- ---- ---- ---- ---------- ----------- --------
(Ch$ equivalent in millions)
Average
Long-Term Interest Interest
Bearing Debt: Rate (2)
Fixed Rate
(Ch$-denominated).. 6.33% 27,174 19,969 17,437 17,946 14,576 114,756 211,858 203,551
(US $-denominated)(3) 7.58 % 13,042 28,236 1,233 - 269,773 - 312,284 285,829
(Euro-denominated) 5.38% 2,667 - 119,105 - - - 121,772 119,259
Variable Rate
(Ch$-denominated).. 4.18% 30,680 10,069 68,319 4,928 - 113,996 116,804
(US $-denominated)(3) 3.43% 79,811 220,877 215,818 25,354 - 541,860 557,888
(Euro-denominated) - - - - - -
Interest Rate
Derivatives
Notional Amount of
fixed to
variable (Euro
denominated).... - - 59,553 - - - - -
Average Pay Rate... 6.30%
Average Received
Rate (4)........ 5.40%
Zero-Cost Collar:
Notional Amount.... - 393,195 - - - - - -
Average Cap Rate... 7.00%
Average Floor Rate. 4.17%
------------------------
(1) These figures were calculated based on the discounted value of future cash
flows expected to be received or paid, considering current discount rates
that reflect the different risks involved. See Part II(f), "Additional
Disclosure Requirements," to Note 34 of the Audited Consolidated Financial
Statements for more information regarding the fair value of financial
instruments and derivatives.
(2) Average interest rate means, for variable rate debt, the average
prevailing interest rate as of December 31, 2001 on Telefonica CTC Chile's
variable rate debt, and for fixed rate debt, the average prevailing
interest rate as of December 31, 2001 on Telefonica CTC Chile's fixed rate
debt.
(3) These figures were calculated based on the Observed Exchange Rate as of
December 31, 2001, which was Ch$654.79 = US$ 1.00.
(4) These figures were calculated based on the exchange rate for the euro
against the U.S. dollar as published by the Central Bank of Chile, which
was US$ 1.00 = euro 0.883 as of December 31, 2001, and the Observed
Exchange Rate for the U.S. dollar against the Chilean peso as published by
the Central Bank of Chile, which was Ch$654.79 = US$ 1.00 as of December
31, 2001.
Risk of Variations in Foreign Currency Exchange Rates
As of December 31, 2002, 72.5% of the Company interest-bearing debt was
dollar denominated and fully hedged against exchange rate variations between the
peso and the U.S. dollar through the instruments set forth in the tables below.
Of the remaining 27.5% of the Company's interest bearing debt, 16.7% is UF or
Chilean peso denominated and therefore not subject to exchange rate risk, while
the remaining 10.8% is other currency, primarily euro, denominated, which is
hedged through the instruments set forth in the tables below. As of December 31,
2001, 65.6% of the Company's interest-bearing debt was dollar denominated and
fully hedged against exchange rate variations between the Chilean peso and the
U.S. dollar through the instruments set forth in the tables below. Of the
remaining 34.4% of the Company's interest bearing debt, 25.0% was UF or Chilean
peso denominated and therefore not subject to exchange rate risk, while the
remaining 9.4% was other currency, primarily euro, denominated, 5% of which was
exposed to euro-dollar exchange variations, and the remaining 95% of which was
hedged through the instruments set forth in the tables below.
Telefonica CTC Chile enters into forward contracts, pursuant to which it
agrees to purchase dollars for UF at an agreed exchange rate on a particular
date. The maturities of the forward contracts match certain of Telefonica CTC
Chile's foreign exchange-denominated liabilities in order to hedge those
liabilities. The purpose of the Company's foreign-currency hedging activities is
to protect the Company from the risk of devaluation in the Chilean peso against
the dollar. Telefonica CTC Chile's risk is the replacement cost, at current
market value, of the transactions in the event of default by counter parties.
Management believes that
102
the risk of incurring such losses is remote and that any losses would be
immaterial, although no assurance can be given to this effect.
As of December 31, 2002, the Company had the equivalent of Ch$816,261
million (US$ 1,136 million) in U.S. dollar-denominated, interest-bearing,
long-term debt outstanding and Ch$121,375 million (US$ 169.9 million) of
long-term debt denominated in euros. To reduce the impact of any depreciation of
the Chilean peso against the dollar and against the euro, as of December 31,
2002, the Company had entered into, on a short- and medium-term basis, exchange
rate forward contracts to make delivery of UF and to purchase U.S. dollars in
the amount of Ch$825,388 (US $1,148.6 million), and exchange rate forward
contracts to make delivery of U.S. dollars and to purchase euros in the amount
of Ch$118.755 million (US$ 165.3 million). In order to reduce the impact of
euro/US$ exchange rate fluctuations, Telefonica CTC Chile has entered into a
cross-currency interest rate swap for the purchase of foreign currency.
As of December 31, 2001, the Company had the equivalent of Ch$854,144
million (US$ 1,118.6 million) in U.S. dollar-denominated, interest-bearing,
long-term debt outstanding and Ch$121,772 million (US$ 169.5 million) of
long-term debt denominated in euros. To reduce the impact of any depreciation of
the Chilean peso against the dollar and against the euro, as of December 31,
2001, the Company had entered into, on a short- and medium-term basis, exchange
rate forward contracts to make delivery of UF and to purchase U.S. dollars in
the amount of Ch$896,788, and exchange rate forward contracts to make delivery
of U.S. dollars and to purchase euros in the amount of Ch$140,026 million. Due
to the relatively small amount of Telefonica CTC Chile's debt denominated in
foreign currencies other than U.S. dollars and euros, Telefonica CTC Chile does
not hedge exchange risks for foreign currencies other than U.S. dollars and
euros.
Tables providing information about the Company's borrowings and derivative
financial instruments that are sensitive to foreign currency exchange rates are
set forth on the following pages.
103
The tables below provide information about the Company's borrowings and
derivative financial instruments that are sensitive to foreign currency exchange
rates. For the U.S. dollar- and euro-denominated debt, the table presents
principal cash flows by maturity date. For the forward contracts, the tables
present the amount of foreign currency that Telefonica CTC Chile has contracted
to purchase and the average UF-US$ and euro-US$ exchange rates by contractual
dates.
As of December 31, 2002
Expected maturity date
------------------------------------------------------------------------------------------
Total Long
Term Debt
(including
2003 Fair
2003 2004 2005 2006 2007 Thereafter Maturities) Value(1)
---- ---- ---- ---- ---- ---------- ----------- --------
(Ch$ equivalent in millions)
Average
On Balance Sheet Interest
Financial Instruments: Rate (2)]
Liabilities Long Term
Interest Bearing Debt:
Fixed Rated (US$)(1) 7.61% 11,110 24,214 - 287,444 - - 322,768 288,357
Variable Rate (US$) 2.55% 136,450 65,207 180,185 57,755 53,896 - 493,493 507,968
Fixed Rate (Euro-
denominated) ... 5.38% 2,623 118,752 - - - 121,375 118,531
Anticipated
Transactions and Expected transaction date
Related Derivatives (Ch$ Equivalent in millions)
Forward Exchange Agreements
(Receive US$/Pay UF): (1)
Liability.......... 542,262 212,030 29,919 13,140 - - 797,351 797,351
Average Contractual
Exchange Rate
(UF/US$)........ 0.0423 0.0430 0.0447 0.0413 - - - -
(Receive Euro/Pay US$):
Liability.......... - 40,480 - - - - 40,480 40,480
Average Contractual
Exchange Rate
(US$/Euro)...... - 1.0242 - - - - - -
(Receive US $/Pay Ch$):
Liability.......... 25,162 2,875 - - - - 28,037 28,037
Average Contractual
Exchange Rate
(US$/Ch$)....... 1.0004 1.0003 - - - - - -
Cross-Currency Swaps
(Receive Euro/Pay US $): (1)
Liability.......... - - 78,295 - - - - 78,295 78,295
Average Contractual
Exchange Rate
(US$/Euro)...... - - 1.0895 - - - - - -
---------------------
(1) The UF-dollar exchange rate differs from the peso-dollar exchange rate in
that the UF automatically adjusts in accordance with Chilean inflation and
is tied in part to the peso-dollar exchange rate.
(2) Average interest rate means, for variable rate debt, the average
prevailing interest rate as of December 31, 2002 on Telefonica CTC Chile's
variable rate debt, and for fixed rate debt, the average prevailing
interest rate as of December 31, 2002 on Telefonica CTC Chile's fixed rate
debt.
104
As of December 31, 2001
Expected maturity date
------------------------------------------------------------------------------------------
Total Long
Term Debt
Average (including
Interest 2002 Fair
Rate(2) 2002 2003 2004 2005 2006 Thereafter Maturities) Value(1)
-------- ---- ---- ---- ---- ---- ---------- ----------- --------
On-Balance Sheet
Financial
Instruments
Long-Term
Interest Bearing
Debt:
Fixed Rate
(US$ (1)............. 7.58% 13,042 28,236 1,233 - 269,773 - 312,284 285,829
Variable Rate
(US$)................ 3.43% 79,811 220,877 - 215,818 25,354 - 541,860 557,888
Fixed Rate (Euro).... 5.38% 2,667 - 119,105 - - - 121,772 119,259
Anticipated
Transactions and
Related
Derivatives
Forward Exchange
Agreements
(Receive US$/Pay
UF): (1)
Liability............ 566,225 137,516 113,065 29,216 13,612 - 859,634 859,635
Average
Contractual
Exchange Rate
(UF/US$)........... 0.0397 0.0425 0.0422 0.0436 0.0428 -
(Receive Euro/Pay
US$):
Liability....... 65,139 - - - - - 65,139 65,139
Average
Contractual
Exchange Rate
(US$/Euro).... 0.9658 - - - -
(Receive US$/Pay
Ch$):
Liability....... 37,154 - - - - - 37,154 37,154
Average
Contractual
Exchange Rate
(US$/Ch$)..... 1.1018 - -
Cross-Currency
Swaps
(Receive Euro/Pay
US$): (1)
Liability....... - - 74,887 - - - 74,887 74,887
Average
Contractual
Exchange Rate
(US$/Euro).... 1.1104 -
---------------------------
(1) The UF-dollar exchange rate differs from the peso-dollar exchange rate in
that the UF automatically adjusts in accordance with Chilean inflation and
is tied in part to the peso-dollar exchange rate.
(2) Average interest rate means, for variable rate debt, the average
prevailing interest rate as of December 31, 2002 on Telefonica CTC Chile's
variable rate debt, and for fixed rate debt, the average prevailing
interest rate as of December 31, 2002 on Telefonica CTC Chile's fixed rate
debt.
In addition, the Company maintains Pagares Reajustables en Dolares ("PRD")
U.S. dollar-denominated marketable securities, Zero net premium instruments of
the Chilean Central Bank that are dollar-denominated and pay interest on a fixed
rate basis and principal at maturity, and repurchase agreements that are very
short-term investments and pay interest on a fixed rate basis. The Company
classifies marketable securities as available-for-sale securities, as defined in
Statement of Financial Accounting Standards No. 115. As of December 31, 2002,
the shares of Terra Networks S.A. are classified as marketable securities, which
have no maturity.
During 2001, the Company maintained PRD and Pagares Reajustables con corte
de cupones ("PRC"), U.S. dollar-denominated marketable
105
securities (in the case of PRDs) and UF-denominated marketable securities (in
case of PRCs) that pay interest on a fixed rate basis and principal at maturity,
within its current assets as part of its hedging policy with respect to
peso-dollar exchange rate fluctuations.
The tables below provide information about the Company's U.S.
dollar-denominated marketable securities that are sensitive to foreign currency
exchange rates and presents principal cash flows by maturity date.
As of December 31, 2002
Maturity Date (1)
---------------------------------------------------------------------------------
Average No
interest contractual Fair
Rate 2003 2004 2005 2006 2007 maturity value
---------- ------ ------ ------ ------ ------ ------------ --------
Marketable securities
in Ch$ millions as of
December 31, 2002.......
PRD ........................ 6.00% - - 25,355 - - 25,355
ZERO ........................ 5.70% - 40,217 - - 40,217
Marketable securities (2).... - - - - 11,240 11,240
-------------------
(1) These figures, calculated based on the Observed Exchange Rate as of
December 31, 2002, which was Ch$718.61 = US$ 1.00, reflect the amount
Telefonica CTC Chile would receive if the U.S. dollar denominated
marketable securities were held to maturity.
(2) These marketable securities have no stated contractual maturity.
As of December 31, 2001
Maturity Date (1)
---------------------------------------------------------------------------------
Average No
interest contractual Fair
Rate 2002 2003 2004 2005 2006 maturity value
---------- ------ ------ ------ ------ ------ ------------ --------
Marketable securities
in Ch$ millions as of
December 31, 2001.......
PRD ........................ 6.00% 15,199 - - 15,199
ZERO ........................ 5.09% 236 17,289 - 17,525
Marketable securities (2).... 27,494 27,494
60,218
-------------------------
(1) These figures, calculated based on the Observed Exchange Rate as of
December 31, 2001, which was Ch$654.79 = US$ 1.00, reflect the amount
Telefonica CTC Chile would receive if the U.S. dollar denominated
marketable securities were held to maturity.
(2) These marketable securities have no stated contractual maturity.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
106
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
The Company's chief executive officer and chief financial officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,
as amended) as of a date within 90 days prior to the filing date of this Annual
Report and concluded that, as of the date of their evaluation, the Company's
disclosure controls and procedures were effective and designed to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to them by others within those entities,
particularly during the period in which this Annual Report is being prepared.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 16. [RESERVED]
107
PART III
ITEM 17. FINANCIAL STATEMENTS
The registrant has responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Report of Independent Accountants.....................................F-1
Consolidated Balance Sheets as of December 31, 2001 and 2002..........F-2
Consolidated Statements of Operations
for the years ended December 31, 2000, 2001 and 2002..................F-4
Consolidated Statement of Cash Flows for the years ended
December 31, 2000, 2001 and 2002......................................F-5
Notes to the Audited Consolidated Financial Statements................F-7
ITEM 19. EXHIBITS
Exhibit No. Description
----------- -----------
1.1 English translation of the Bylaws (Estatutos) of the
Company, as amended, which includes its corporate charter. *
2.1 The instruments defining the rights of holders of the
long-term debt securities of the Company and its
subsidiaries are omitted pursuant to Instruction 2(b)(i) of
the Instructions to the Exhibits of Form 20-F. The Company
hereby agrees to furnish copies of these instruments to the
Securities and Exchange Commission upon request.
4.1 English translation of Contract for the Sale of Sonda Shares
between Telefonica Empresas CTC Chile S.A. and Inversiones
Pacifico II Limitada dated September 26, 2002.
4.2 English translation of Contract for the Sale of Sonda Shares
between Telefonica Empresas CTC Chile S.A. and Inversiones
Santa Isabel Limitada dated September 26, 2002.
4.3 English translation of the Option Agreement between
Telefonica Empresas CTC Chile S.A. and Inversiones Santa
Isabel Limitada dated September 26, 2002.
8.1 List of Subsidiaries of the Company.
12.1 Certification of the Chief Executive Officer of Compania de
Telecomunicaciones de Chile S.A. furnished pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
12.2 Certification of the Chief Financial Officer of Compania de
Telecomunicaciones de Chile S.A. furnished pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
------------------------------------
* Filed as Exhibit 1.2 to the Company's annual report on Form 20-F for the
fiscal year ended December 31, 2001, and incorporated by reference hereto.
108
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A.
AND SUBSIDIARIES
REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended
December 31, 2000, 2001 and 2002
(CONSOLIDATED)
(Translation of financial statements originally issued in Spanish)
Compania de Telecomunicaciones de Chile S.A. and Subsidiaries
Index to the Consolidated Financial Statements
Page
----
Report of the Independent Accounts F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statement of Cash Flows F-5
Notes to the Consolidated Financial Statements F-7
ThCh$: Thousands of Chilean pesos
UF: The Unidad de Fomento, or UF, is an inflation-indexed peso
denominated monetary unit in Chile. The daily UF rate is fixed in
advance based on the change in the Chilean Consumer Price Index of
the previous month.
ThUS$: Thousands of US dollars.
[Deloitte & Touche Logo]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Compania de Telecomunicaciones de Chile S.A.:
We have audited the accompanying consolidated balance sheets of Compania de
Telecomunicaciones de Chile S.A. and Subsidiaries (the "Company") as of December
31, 2001 and 2002, and the related consolidated statements of operations and
cash flows for each of the three years in the period ended December 31, 2002
(expressed in constant Chilean pesos). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Chile and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Compania de
Telecomunicaciones de Chile S.A. and Subsidiaries as of December 31, 2001 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in Chile.
Accounting principles generally accepted in Chile vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
consolidated net income (loss) expressed in Chilean pesos for each of the three
years in the period ended December 31, 2002 and the determination of
shareholders' equity, also expressed in Chilean pesos, at December 31, 2001 and
2002 to the extent summarized in Note 34 to the consolidated financial
statements. As discussed in Note 34 to the consolidated financial statements net
income (loss) for each of the two years in the period ended December 31, 2001
and stockholders' equity at December 31, 2001 and 2000 determined in accordance
with accounting principles generally accepted in the United States of America
have been restated.
As discussed in Note 34 to the consolidated financial statements, the Company
previously prepared its annual consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
and included such financial statements on Form 20-F filed with the Securities
and Exchange Commission (the "SEC") in accordance with SEC Rules and
Regulations. The Company prepared its consolidated balance sheets as of December
31, 2001 and 2002, and its statements of operations and cash flows for each of
the three years in the period ended December 31, 2002 in its Form 20-F for the
year ended December 31, 2002 in conformity with accounting principles generally
accepted in Chile with a reconciliation to net income (loss) for each of the
three years in the period ended December 31, 2002, as restated, and a
reconciliation to shareholders' equity as of December 31, 2001 and 2002, as
restated, applying accounting principles generally accepted in the United States
of America. This presentation is in accordance with Item 17 (c) (iv) (a) of the
SEC Rules and Regulations.
Our audits also comprehended the translation of constant Chilean pesos amounts
into U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2.g. Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
/s/ DELOITTE & TOUCHE
Santiago, Chile
June 26, 2003
F-1
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2002
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US Dollars)
-----------------------------------------------------------------------------------------------------------------------------------
A S S E T S Notes 2001 2002 2002
-----------------------------------------------------------------------------------------------------------------------------------
ThCh$ ThCh$ ThUS$
-------------- -------------- ----------
CURRENT ASSETS
Cash and bank 19,323,709 16,842,002 23,437
Time deposits 11,366,992 2,418,477 3,365
Marketable securities (net) (4) 60,218,053 76,812,030 106,890
Trade accounts receivable, net of allowance for doubtful accounts (5) 251,113,767 206,605,764 287,507
of ThCh$ 64,649,335 and ThCh$ 81,948,259, respectively
Notes receivable, net of allowance for doubtful notes (5) 5,260,269 6,024,436 8,383
of ThCh$ 7,962,912 and ThCh$ 7,562,129, respectively
Miscellaneous accounts receivable (5) 35,609,281 25,070,611 34,888
Notes and accounts receivable from related companies (6 a) 5,581,397 17,113,928 23,815
Inventories, net of allowance for obsolescence 32,378,241 14,360,380 19,984
of ThCh$ 2,075,450 and ThCh$ 1,790,318, respectively
Recoverable taxes 45,633,229 19,060,375 26,524
Prepaid expenses 11,251,165 8,230,701 11,454
Deferred taxes (7 b) 56,581,498 25,188,474 35,052
Other current assets (8) 122,898,844 28,656,627 39,878
-------------- -------------- ----------
TOTAL CURRENT ASSETS 657,216,445 446,383,805 621,177
-------------- -------------- ----------
PROPERTY, PLANT AND EQUIPMENT (9)
Land 29,030,587 27,372,131 38,090
Constructions and
infrastructure works 197,925,361 183,151,839 254,870
Machinery and equipment 3,235,794,533 3,294,876,741 4,585,069
Other property, plant and equipment 446,283,271 393,378,237 547,416
Technical revaluation 9,130,322 9,130,267 12,705
Accumulated depreciation (less) 1,794,155,265 1,968,865,481 2,739,825
-------------- -------------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 2,124,008,809 1,939,043,734 2,698,325
-------------- -------------- ----------
OTHER NON-CURRENT ASSETS
Investment in related companies (10) 16,313,598 42,455,138 59,080
Investment in other companies 684,994 3,816 5
Goodwill (11 a) 210,069,277 179,404,553 249,655
Accounts receivable (5) 39,943,715 34,840,257 48,483
Notes and accounts receivable from related companies (6 a) 660,776 -
Intangibles (12) 16,981,672 32,304,395 44,954
Accumulated amortization (less) (12) 1,592,094 2,631,312 3,662
Others (13) 26,013,621 16,568,919 23,057
-------------- -------------- ----------
TOTAL NON-CURRENT ASSETS 309,075,559 302,945,766 421,572
-------------- -------------- ----------
-------------- -------------- ----------
TOTAL ASSETS 3,090,300,813 2,688,373,305 3,741,074
============== ============== ==========
The accompanying notes 1 to 34 are an integral part of these consolidated
financial statements
F - 2
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2002
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US Dollars)
-----------------------------------------------------------------------------------------------------------------------------------
L I A B I L I T I E S Notes 2001 2002 2002
-----------------------------------------------------------------------------------------------------------------------------------
ThCh$ ThCh$ ThUS$
-------------- -------------- ----------
CURRENT LIABILITIES
Short-term obligations with banks
and financial institutions (14) 20,652,113 9,191,446 12,791
Short-term portion of long-term obligations
with banks and financial institutions (14) 112,957,547 146,290,805 203,575
Bonds payable (16) 38,651,152 21,704,239 30,203
Long-term obligations maturing
within a year 1,142,572 489,759 681
Dividends payable 301,445 209,724 292
Trade accounts payable (33) 205,177,454 149,886,640 208,578
Notes payable 623,100 173,961 242
Miscellaneous accounts payable 29,698,335 8,101,420 11,274
Notes and accounts payable to related companies (6 b) 17,572,625 11,976,196 16,666
Accruals (17) 15,069,037 9,952,190 13,849
Withholding taxes 13,314,056 9,533,601 13,267
Unearned income 2,653,236 6,963,466 9,690
Other current liabilities 33,520,779 4,947,602 6,885
----------- -------------- ----------
TOTAL CURRENT LIABILITIES 491,333,451 379,421,049 527,993
----------- -------------- ----------
LONG-TERM LIABILITIES
Obligations with banks and
financial institutions (15) 549,111,998 416,567,542 579,685
Bonds payable (16) 567,825,381 512,192,650 712,755
Notes and accounts payable to related companies (6 b) 25,769,951 24,214,112 33,696
Miscellaneous accounts payable 33,366,179 9,246,715 12,867
Accruals (17) 20,485,428 17,257,252 24,015
Deferred taxes (7 b) 47,117,652 35,990,681 50,083
Other liabilities 13,321,005 5,650,989 7,864
-------------- -------------- ----------
TOTAL LONG-TERM LIABILITIES 1,256,997,594 1,021,119,941 1,420,965
-------------- -------------- ----------
CONTINGENCIES AND RESTRICTIONS (27) - - -
MINORITY INTEREST (19) 36,673,275 1,142,263 1,590
SHAREHOLDERS' EQUITY (20)
Paid-in capital 736,468,120 736,468,120 1,024,851
Share premium 114,512,356 114,512,356 159,353
Other reserves 1,582,766 1,924,736 2,678
Retained earnings 452,733,251 433,784,840 603,644
Accumulated earnings 448,881,060 451,465,216 628,248
Net income (loss) for the year 4,235,008 (17,680,376) (24,604)
Subsidiary development stage deficit (less) 382,817 - -
-------------- -------------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,305,296,493 1,286,690,052 1,790,526
-------------- -------------- ----------
-------------- -------------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 3,090,300,813 2,688,373,305 3,741,074
============== ============== ==========
The accompanying notes 1 to 34 are an integral part of these consolidated
financial statements
F-3
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED DECEMBER 31, 2000, 2001 AND 2002
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars)
2000 2001 2002 2002
---- ---- ---- ----
OPERATING RESULTS: ThCh$ ThCh$ ThCh$ ThUS$
Operating revenues 899,054,687 920,034,653 863,148,681 1,201,136
Operating costs (less) 697,027,542 647,194,118 602,236,149 838,057
------------- ------------- ------------ ----------
Gross profit (21a) 202,027,145 272,840,535 260,912,532 363,079
Administration and selling expenses (less) 133,121,853 131,364,109 130,414,461 181,482
------------- ------------- ------------ ---------
OPERATING RESULTS 68,905,292 141,476,426 130,498,071 181,597
NON-OPERATING RESULTS:
Financial income 12,413,943 18,742,454 16,691,456 23,227
Net income from investments in related companies (10) 592,187 1,140,091 2,465,491 3,431
Other non-operating income (21b) 45,361,547 15,572,055 13,221,524 18,399
Loss from investments in related companies (less) (10) 1,572,433 528,262 110,112 153
Amortization of goodwill (less) (11a) 56,544,598 16,211,090 24,661,893 34,319
Financial expenses (less) 112,802,749 96,254,647 81,472,292 113,375
Other non-operating expenses (less) (21c) 47,548,835 45,132,039 37,879,947 52,712
Price-level restatement (22) 8,669,808 303,171 (6,164,777) (8,579)
Exchange differences (23) (41,260,432) 1,828,210 (2,788,424) (3,880)
------------- ------------- ------------ ---------
NON-OPERATING LOSS, NET (192,691,562) (120,540,057) (120,698,974) (167,961)
------------- ------------- ------------ ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (123,786,270) 20,936,369 9,799,097 13,636
Income taxes (7c) 5,763,915 (11,769,028) (26,716,776) (37,178)
INCOME BEFORE MINORITY INTEREST
AND AMORTIZATION OF NEGATIVE GOODWILL (118,022,355) 9,167,341 (16,917,679) (23,542)
Minority interest (19) (3,270,308) (4,938,518) (762,697) (1,062)
Amortization of negative goodwill (11b) 207,205 6,185 - -
------------- ------------- ------------ ---------
NET (LOSS) INCOME FOR THE YEAR (121,085,458) 4,235,008 (17,680,376) (24,604)
------------- ------------- ------------ ---------
The accompanying notes 1 to 34 are an integral part of these consolidated
financial statements
--------------------------------------------------------------------------------
F-4
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2000, 2001 AND 2002
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars)
--------------------------------------------------------------------------------
2000 2001 2002 2002
------------ ----------- ------------ ----------
ThCh$ ThCh$ ThCh$ ThUS$
NET CASH FLOWS
FROM OPERATING ACTIVITIES 353,443,748 356,286,169 324,595,006 451,698
Net (loss) income for the year (121,085,458) 4,235,008 (17,680,376) (24,604)
Loss from sales of assets : 11,370,810 (1,120,209) (7,760,553) (10,799)
Loss on sale of property, plant and equipment 9,190,140 537,199 111,365 155
Gain on sale of investments (less) 879,261 1,657,408 7,871,918 10,954
Loss on sale of investments 3,059,929 - - -
Charges (debits) to income that do not represent
cash flows : 451,197,301 330,625,695 357,798,962 497,904
Depreciation for the year 252,387,183 256,651,873 262,734,333 365,615
Amortization of intangibles - 528,704 1,012,746 1,410
Provisions and write offs 92,990,498 22,848,177 30,367,332 42,258
Net income from investments
in related companies (less) 592,187 1,140,091 2,465,491 3,431
Loss from investments in related companies 1,572,433 528,262 110,112 153
Amortization of goodwill 56,544,598 16,211,090 24,661,893 34,319
Amortization of negative goodwill (less) 207,205 6,185 - -
Price-level restatement (8,669,808) (303,171) 6,164,777 8,579
Exchange differences 41,260,432 (1,828,210) 2,788,424 3,880
Other credits to income that do not represent
cash flows (less) 22,011,216 20,088,021 19,956,999 27,772
Other debits to income that do not represent
cash flows 37,922,573 57,223,267 52,381,835 72,893
Changes in operating assets
(increase) decrease (32,540,350) 27,407,830 78,165,522 108,773
Trade accounts receivable (16,029,012) (65,495,850) (25,117,165) (34,953)
Inventories (2,587,584) (3,106,614) 11,235,203 15,635
Other assets (13,923,754) 96,010,294 92,047,484 128,091
Changes in operating liabilities
increase (decrease) 41,231,137 (9,800,673) (86,691,246) (120,637)
Accounts payable related to
operating activities 24,184,456 37,886,619 (49,408,390) (68,756)
Interest payable 1,972,595 (1,788,577) (1,159,320) (1,613)
Income taxes payable (net) (3,902,798) (13,535,443) 14,669,367 20,414
Other accounts payable related to non-operating
activities 13,844,105 (11,352,975) (50,426,638) (70,172)
V.A.T. and other similar taxes payable 5,132,779 (21,010,297) (366,265) (510)
Minority interest 3,270,308 4,938,518 762,697 1,062
The accompanying notes 1 to 34 are an integral part of these consolidated
financial statements
--------------------------------------------------------------------------------
F-5
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2000, 2001 AND 2002
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars)
--------------------------------------------------------------------------------
2000 2001 2002 2002
------------ ------------ ------------ --------
ThCh$ ThCh$ ThCh$ ThUS$
NET CASH USED IN
FINANCING ACTIVITIES (120,289,545) (248,144,498) (253,915,390) (353,342)
Proceeds from loans 169,632,628 27,192,366 13,815,654 19,225
Increase in debentures 4,454,583 - - -
Other sources of financing 1,856,702 712,887 1,674,004 2,330
Dividends paid (less) 2,611,050 - 1,356,091 1,887
Loans paid (less) 270,801,219 249,186,767 142,348,687 198,089
Bonds payable (less) 19,206,897 21,873,221 115,634,382 160,914
Payment of other loans from
related companies (less) - - 10,065,888 14,007
Other financing activities (less) 3,614,292 4,989,763 - -
NET CASH USED IN
INVESTMENT ACTIVITIES (148,307,996) (151,928,368) (134,417,139) (187,052)
Proceeds from sale of property, plant and equipment 95,920,378 336,056 730,269 1,016
Proceeds from sale of permanent investments 23,936,048 4,499,333 28,367,432 39,475
Proceeds from sale of other investments 20,107,191 14,241,266 - -
Other investment income 430,887 158,268 159,107 221
Acquisition of property, plant and equipment (less) 209,205,494 127,427,226 99,305,590 138,191
Payment of capitalized interest paid (less) 22,859,015 15,470,463 4,348,983 6,052
Permanent investments (less) 13,666,552 7,034,515 119,892 167
Investments in financial instruments (less) 13,075,305 8,578,810 30,170,262 41,984
Documented loans to
related companies (less) 28,672,085 10,401,145 - -
Other investment activities (less) 1,224,049 2,251,132 29,729,220 41,370
------------ ------------ ------------ --------
NET CASH FLOWS FOR THE YEAR 84,846,207 (43,786,697) (63,737,523) (88,696)
EFFECT OF INFLATION ON CASH
AND CASH EQUIVALENTS (3,653,326) (5,501,858) (2,244,307) (3,123)
------------ ------------ ------------ --------
NET INCREASE / DECREASE CASH
AND CASH EQUIVALENTS 81,192,881 (49,288,555) (65,981,830) (91,819)
------------ ------------ ------------ --------
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 54,980,560 136,173,441 86,884,886 120,907
------------ ------------ ------------ ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR 136,173,441 86,884,886 20,903,056 29,088
------------ ------------ ------------ ---------
The accompanying notes 1 to 34 are an integral part of these consolidated
financial statements
--------------------------------------------------------------------------------
F-6
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Composition of Consolidated Group and Registration in the Securities
Registry:
a) Compania de Telecomunicaciones de Chile S.A. (Telefonica CTC Chile), the
parent company of the consolidated group, is a public corporation
registered in the Securities Registry under No. 009 and therefore is
subject to oversight by the Chilean Superintendency of Securities and
Insurance.
b) Subsidiaries registered in the Securities Registry:
As of December 31, 2002 the following subsidiaries of the consolidated group
are registered with the Securities Registry:
-----------------------------------------------------------------------------------------------------------------------
Participation
Registration (direct & indirect)
SUBSIDIARIES TAXPAYER No. Number %
2001 2002
-----------------------------------------------------------------------------------------------------------------------
CTC Transmisiones Regionales S.A. (188 Mundo Telefonica) 96.551.670-0 456 99.16 99.16
Globus 120 S.A. 96.887.420-9 694 99.99 99.99
-----------------------------------------------------------------------------------------------------------------------
2. Significant Accounting Principles:
(a) Accounting period: The consolidated financial statements cover the years
ended December 31, 2000, 2001 and 2002.
(b) Basis of preparation: These consolidated financial statements
(hereafter, the financial statements) have been prepared in accordance
with generally accepted accounting principles in Chile and standards
issued by the Chilean Superintendency of Securities and Insurance.
In the event of discrepancies between accounting principles generally
accepted by the Chilean Accountants' Association and the standards
issued by the Chilean Superintendency of Securities and Insurance, the
standards of the Superintendency will prevail.
(c) Basis of presentation: The financial statements for 2000 and 2001 and
their notes have been restated by 6.2% and 3.0 %, respectively, in order
to allow comparison with the 2002 financial statements (see note 2 f).
Certain reclassifications have been made to the 2001 financial
statements for comparison purposes.
(d) Basis of consolidation: The financial statements include assets,
liabilities, statements of income and cash flows for the Company and
subsidiaries. Significant transactions involving assets, liabilities,
income and cash flows between consolidated related companies have been
eliminated and the participation of minority interests has been
reflected and is presented as Minority Interest (see Note 19).
F-7
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
Companies included in consolidation:
As of December 31, 2002 the consolidated group (The Company) is composed of
Compania de Telecomunicaciones de Chile S.A. and the following subsidiaries:
-------------------------------------------------------------------------------------------------------------------
Participation Percentage
Taxpayer Company Name
N(degree)
-------------------------------------------
2001 2002
Total Direct Indirect Total
-------------------------------------------------------------------------------------------------------------------
79.727.230-2 CTC Isapre S.A. 99.99 99.99 - 99.99
96.545.500-0 CTC Equipos y Servicios de Telecomunicaciones S.A. 99.99 99.99 - 99.99
96.551.670-0 CTC Transmisiones Regionales S.A. (188 Mundo Telefonica) 99.16 99.16 - 99.16
96.961.230-5 Telefonica Gestion de Servicios Compartidos Chile S.A. 99.99 99.90 0.09 99.99
96.786.140-5 Telefonica Movil S.A. 99.99 99.99 - 99.99
74.944.200-k Fundacion Telefonica Chile 50.00 50.00 - 50.00
96.887.420-9 Globus 120 S.A. 99.99 99.99 - 99.99
96.919.660-3 Telemergencia S.A. 99.99 99.67 0.32 99.99
Foreign CTC Internacional S.A.(4) 100.00 - - -
90.430.000-4 Telefonica Empresas CTC Chile S.A. 99.99 99.99 - 99.99
96.811.570-7 Administradora de Telepeajes de Chile S.A. 79.99 - 79.99 79.99
90.184.000-8 Comunicaciones Mundiales S.A. 99.66 - 99.66 99.66
96.700.900-8 Telefonica Data Chile S.A. 99.99 - 99.99 99.99
96.833.930-3 Comunicaciones Empresariales S.A.(3) 99.99 - - -
78.703.410-1 Tecnonautica S.A. 99.99 - 99.99 99.99
96.893.540-2 Infochile S.A. 99.99 - 99.99 99.99
96.934.950-7 Portal de Pagos e Informacion S.A. 99.99 - 99.99 99.99
96.834.320-3 Infoera S.A. 99.99 - 99.99 99.99
96.720.710-1 Invercom S.A.(1) 99.99 - - -
88.269.200-0 Comunicaciones Intercom S.A.(1) 99.99 - - -
83.628.100-4 Sociedad Nacional de Procesamiento de Datos S.A. 59.99 - - -
(Sonda S.A.) (2)
95.191.000-7 Logica S.A. 35.99 - - -
78.072.130-8 Servicios Educacionales Sonda Ltda. 40.03 - - -
96.590.960-5 Tecnopolis S.A. 59.99 - - -
78.214.420-0 Sonda Integracion Ltda. 59.99 - - -
78.249.750-2 Sonda Sistemas Gestion Ltda. 59.98 - - -
78.534.270-4 Sonda Bancos S.A. 52.79 - - -
96.803.810-9 Factoring General S.A. 58.23 - - -
96.527.020-5 Infopyme S.A. 59.39 - - -
78.472.500-6 Soporte Tecnico Ltda. 52.79 - - -
96.667.990-5 Inversiones y Asesorias Integral S.A. 52.74 - - -
96.572.460-5 Asicom Internacional S.A. 30.73 - - -
96.858.720-k Administradora de Activos Financieros S.A. 48.00 - - -
Foreign Setco S.A. (Uruguay) 29.99 - - -
Foreign Sonda del Peru. S.A. 52.79 - - -
Foreign Sonda Guatemala S.A. 30.59 - - -
Foreign Sonda Venezuela. 59.99 - - -
Foreign Westham S.A. de C.V. (Mexico) 59.99 - - -
Foreign Microcomputacion S.A. 59.99 - - -
----------------------------------------------------------------------------------------------------------------
F-8
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(d) Basis of consolidation, continued:
Companies included in consolidation, continued:
-----------------------------------------------------------------------------------------------------------------
Taxpayer Participation Percentage
N(degree) Company Name
--------------------------------------------
2001 2002
Total Direct Indirect Total
-----------------------------------------------------------------------------------------------------------------
Foreign Sonda Colombia 59.99 - - -
Foreign Sonda Computacion S.A.(Argentina) 59.99 - - -
Foreign Westham Trade Corp. 59.99 - - -
Foreign Sonda Uruguay S.A. 29.99 - - -
Foreign Sonda del Ecuador Ecuasonda S.A. 59.99 - - -
79.900.420-8 BAC Servicios Computacionales Ltda. 30.05 - - -
78.707.040-k BAC Consultores Ltda. 30.05 - - -
Foreign BAC Ecuador 44.58 - - -
Foreign BAC Peru 47.33 - - -
Foreign BAC Paraguay 25.55 - - -
Foreign BAC Uruguay 30.05 - - -
Foreign BAC Bolivia 27.05 - - -
Foreign BAC financiero S.A. 29.40 - - -
Foreign Sonda Do Brasil Ltda. (ex Condec) 37.50 - - -
Foreign Softtek Tec Aplicaciones Integrales 30.00 - - -
Foreign Integracion Global de Procesos S.A. (Peru) 52.78 - - -
98.001.500-9 Inversiones Columba 41.96 - - -
-----------------------------------------------------------------------------------------------------------------
1) At an extraordinary shareholders' meeting of Telefonica Empresas CTC Chile,
held in May 2002, the incorporation by absorption of the subsidiaries
Invercom S.A. and Comunicaciones Intercom S.A. was approved.
2) The Company divested itself of a 35% interest in Sonda in September 2002.
Since this date, the remaining % held has been accounted for as an equity
method-investee.
3) The extraordinary shareholders' meeting of Telefonica Data Chile S.A., held
in November 2002, approved the incorporation by absorption of the subsidiary
Comunicaciones Empresariales S.A.
4) The Board of Director's meeting of CTC Internacional S.A., held in December
2002, approved the liquidation of this company.
F-9
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(d) Basis of consolidation, continued:
During September 2002, Telefonica Empresas CTC Chile S.A. sold and
transferred its 25% ownership of Sonda S.A. to Inversiones Pacifico
Limitada and Inversiones Santa Isabel Limitada, companies related to
Mr. Andres Navarro H. This operation resulted in proceeds of ThCh$
27,920,701 (historical), producing a net loss of ThCh$ 1,164,197, due
to the write-off of goodwill related to the percentage sold (note 11a)
and to the difference between the carrying value of the investment and
the amount received. After this transaction was completed, Telefonica
CTC Chile through its subsidiary Telefonica Empresas CTC Chile S.A.,
holds a 35% ownership in that company.
Additionally on September 26, 2002 Telefonica Empresas signed an
agreement with Inversiones Santa Isabel Limitada, which grants the
former a call/put option for 35% of Sonda, which can be exercised
between July 16 and July 25, 2005, at the investment's book value as of
June 30, 2005, plus a premium of UF 142,021, with a minimum value of
UF2,048,885. This minimum value has been guaranteed by Inversiones
Santa Isabel Limitada to Telefonica Empresas by the issuance of bank
guarantees (see note 28b).
Should Telefonica Empresas not exercise the above mentioned sales
option, between July 26 and August 5, 2005 Inversiones Santa Isabel
Limitada has a purchase option for the same 35% of Sonda under the same
previous conditions.
Santa Isabel can exercise its purchase option earlier, between July 26
and July 31, 2003, at book value on June 30, 2003 plus a premium of UF
96,000, with a minimum price of UF 1,983,185, or between July 26 and
July 31, 2004, at book value as of June 30, 2004 plus a premium of UF
119,000, with a minimum price of UF 2,003,260.
Telefonica CTC Chile will continue to amortize goodwill for the
remaining 35% ownership in Sonda. Goodwill less accumulated
amortization as of December 31, 2002 is ThCh$ 11,560,937 and is being
amortized deducting the UF 142,021 over a period of 34 months, from
September 2002.
Given the conditions contemplated in the contract, recovery of the
equity value of this investment is fully assured, whereas recovery of
goodwill will depend on the future net income of Sonda S.A. The Company
has made no provision to cover the eventual loss on the recovery of
goodwill, since it is estimated that the future income of Sonda S.A.
will be sufficient to cover the aforementioned goodwill.
Those subsidiaries in which there was indirect participation of less
than 50% as of December 31, 2001, were not consolidated with their
parent company, Sonda S.A.
(e) Time deposits:
Time deposits are shown at the original invested capital plus
readjustments, if applicable and accrued interest at year end.
F-10
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(f) Price-level restatement:
The cumulative inflation rate in Chile as measured by the Chilean
Consumer Price Index ("CPI") for the three-year period ended December
31, 2002 was approximately 10.8%.
Chilean GAAP requires that the financial statements be restated to
reflect the full effects of loss in the purchasing power of the Chilean
peso on the financial position and results of operations of reporting
entities. The method described below is based on a model that enables
calculation of net inflation gains or losses caused by monetary assets
and liabilities exposed to changes in the purchasing power of local
currency. The model prescribes that the historical cost of all
non-monetary accounts be restated for general price-level changes
between the date of origin of each item and the year-end.
The financial statements of the Company have been price-level restated
in order to reflect the effects of the changes in the purchasing power
of the Chilean currency during each year. All non-monetary assets and
liabilities, all equity accounts and income statement accounts have
been restated to reflect the changes in the CPI from the date they were
acquired or incurred to year-end (see also Note 24).
The purchasing power gain or loss included in net income reflects the
effects of Chilean inflation on the monetary assets and liabilities
held by the Company.
The restatements were calculated using the official consumer price
index of the National Institute of Statistics and based on the "prior
month rule," in which the inflation adjustments are based on the CPI at
the close of the month preceding the close of the respective period or
transaction. This index is considered by the business community, the
accounting profession and the Chilean government to be the index that
most closely complies with the technical requirement to reflect the
variation in the general level of prices in Chile, and consequently it
is widely used for financial reporting purposes.
The values of the Chilean consumer price indices used to reflect the
effects of the changes in the purchasing power of the Chilean peso
("price-level restatement") are as follows:
-------------------------------------------------------------------
Change over Previous
Index November 30,
-------------------------------------------------------------------
November 30, 2000 106.82 4.7%
November 30, 2001 110.10 3.1%
November 30, 2002 113.36 3.0%
-------------------------------------------------------------------
By way of comparison, the actual values of the Chilean consumer price
indices as of the balance sheet dates are as follows:
-------------------------------------------------------------------
Change over Previous
Index November 30,
-------------------------------------------------------------------
December 31, 2000 106.94 4.5%
December 31, 2001 109.76 2.6%
December 31, 2002 112.86 2.8%
-------------------------------------------------------------------
The above-mentioned price-level restatements do not purport to
represent appraisal or replacement values and are only intended to
restate all non-monetary financial statement components in terms of
local currency of a single purchasing power and to include in net
income or loss for each year the gain or loss in purchasing power
arising from the holding of monetary assets and liabilities exposed to
the effects of inflation.
(g) Basis of conversion:
Assets and liabilities in US$ (United States Dollars), Euros, and UF
(Unidad de Fomento), have been converted to pesos at the each year
end's closing rates:
-------------------------------------------------------------------
YEAR US$ EURO UF
-------------------------------------------------------------------
2000 573.65 538.840 15,769.92
2001 654.79 578.181 16,262.66
2002 718.61 752.550 16,744.12
-------------------------------------------------------------------
F-11
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
Convenience translation to U.S. dollars
The financial statements are stated in Chilean pesos. The translations
of Chilean pesos into US dollars are included solely for the
convenience of the reader, using the observed exchange rate reported by
the Chilean Central Bank as of December 31, 2002 of Ch$718.61 to
US$1.00. The convenience translations should not be construed as
representations that the Chilean peso amounts have been, could have
been, or could in the future be, converted into US dollars at this or
any other rate of exchange.
(h) Marketable securities:
Fixed income securities are stated at their price-level restated
purchase price plus interest accrued at each year end based on the real
rate of interest determined as of the purchase date or their market
value, whichever is less.
Investments in mutual funds units are stated at the value of unit at
each year end. Investment in shares are presented at their price-level
restated cost or market value, whichever is less.
(i) Inventories:
Equipment for sale is stated at price-level restated purchase or
construction cost or market value, whichever is less.
Inventories estimated to be consumed during the next twelve months are
classified as current assets and their cost is price-level restated. An
obsolescence provision has been determined on the basis of a study of
slow-moving materials.
(j) Subsidies on sale of cellular equipment:
This amount represents the difference between the cost at which the
cellular equipment is acquired from suppliers and the price at which it
are sold to customers.
Effective January 1, 2001, the losses on the sale of phones are
recognized at the time they are sold. After April 1, 2001 phones are
being sold under accommodation contracts, under these contracts, the
cellular phone is loaned to the customer. The cost of this equipment is
capitalized as property, plant and equipment (subscriber equipment),
and depreciated over 24 months from the date the contract is signed.
Effective June 1, 2002, a policy of customer loyalty was implemented.
Where cellular equipment loaned is changed out after eighteen months.
Based on the above, the useful live of the cellular phone has been
adjusted accordingly.
(k) Allowance for doubtful accounts:
The Company establishes an allowance for doubtful accounts on its
accounts receivable based on a combination of the following factors:
As a general provision, the Company for 100% of its aged accounts
receivable over than 90 days overdue.
In circumstances where the Company sets a valuation allowance is aware
of a specific customer's inability to meet its financial obligations, a
specific reserve for bad debts is recorded for amounts due in order to
reduce the receivable to the amount we reasonably believe will be
collected.
F-12
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(l) Property, plant and equipment:
Property, plant and equipment acquired through December 31, 1979 is
stated at its appraisal value, as stipulated in Article 140 of D.F.L.
No. 4, and that acquired after that date is carried at acquisition
cost, except that carried at appraisal value recorded as of June 30,
1986, in accordance with Circular No. 550 issued by the Chilean
Superintendency of Securities and Insurance. All values have been
price-level restated.
Work in progress includes the real financial cost of the loans related
to their financing. In accordance with the above, capitalization of the
interest cost during the period amounted to ThCh$25,238,443, ThCh$
21,028,278 and ThCh$ 7,774,406 for 2000, 2001 and 2002, respectively.
(m) Depreciation:
Depreciation has been calculated and recorded on the above mentioned
values, by applying fixed percentages determined according to the
estimated useful lives of the assets. The average annual financial
depreciation rate of the Company is approximately 6.69%, 6.82% and
8.13% for 2000, 2001 and 2002, respectively.
(n) Leased assets:
i) Leased assets with a purchase option.
Leased assets with a purchase option, whose contracts have the
characteristics of a financial lease, are carried in a manner similar
to the purchase of property, plant and equipment, recording the full
obligation and interest on an accrual basis. The Company does not
legally own those assets, therefore, until it exercises the purchase
option, it cannot freely dispose of them.
ii) Sale and leaseback.
During 2000, the former subsidiary and current affiliate company Sonda
S.A. recorded a purchase with lease-back transaction in accordance with
Technical Bulletin No. 49 of the Chilean Accountants' Association. The
purchase of these assets was recorded as a property, plant and
equipment purchase and the lease contract was recorded as a financial
lease.
(n) Investments in related companies:
These investments are carried using the equity method, recognizing
their income on an accrual basis. Foreign investments have been valued
following Technical Bulletin No. 64. Those investments have a
functional currency of dollars (U.S.), since they are in countries
considered unstable under said Bulletin, and their activities are not
an extension of the operations of the Parent Company.
(o) Goodwill and negative goodwill:
Goodwill and negative goodwill are differences arising upon step-up of
the investment cost, at the time of making an investment in an
equity-method investee or acquiring a more than 50% interest. The
goodwill and negative goodwill amortization period has been determined
taking into consideration aspects such as the nature and
characteristics of the business and the estimated period for return on
the investment. Goodwill and negative goodwill arising from foreign
investments are held in US dollars as the functional currency (the same
currency as the investment's functional currency) as per Technical
Bulletin No. 64 of the Chilean Accountants Association (see Note 11).
F-13
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(p) Transactions with resale or repurchase agreements:
Purchases of financial instruments with resale agreements are recorded
as a fixed rate placement and classified in Other Current Assets.
Financial instrument sales with repurchase agreements are recorded in a
manner similar to that when obtaining a loan with investments as
guarantees and are shown in Other Current Liabilities.
(q) Bonds payable:
Obligations from bond issues are presented in liabilities at the par
value of the subscribed bonds. The difference between the par value and
the placement value, determined on the basis of the real interest rate
for the transaction is deferred and amortized over the term of the
respective bonds (see Note 16).
(r) Income taxes and deferred income taxes:
Income taxes are calculated on the basis of taxable income calculated
for tax purposes. Deferred income taxes arising from all temporary
differences, tax losses and other events that create differences
between the tax basis of assets and liabilities and their accounting
basis are recorded in accordance with Technical Bulletins No. 60, 68,
69 and 73 issued by the Chilean Accountants' Association and Circular
No. 1,466 dated January 27, 2000 of the Superintendency of Securities
and Insurance.
On September 28, 2001, Law No. 19,753 was published, increasing the
income tax rate to 16% in 2002, 16.5% in 2003 and 17% in 2004 and
thereafter. As of December 31, 2001, the accumulated balances of
temporary differences, include the increased income tax rate. Deferred
income taxes arising due to the increase in the income tax rate, are
recorded in accordance with Technical Bulletin No. 71 issued by the
Chilean Accountants Association (see Note 7).
(s) Staff severance indemnities:
The Company's staff severance indemnities obligation are accrued
applying the net present value method to the actuarial obligation
calculation at an annual discount rate of 7%, considering future
employment until the anticipated retirement date of each employee (see
Note 18).
As of June 30, 2002, new collective contracts were signed with certain
unions, which extended the benefits agreed upon to 1,661 employees.
Notwithstanding, from July 1 a total of 3,445 employees began a strike
which ended on July 29, 2002, with the application of Article 369 of
the Labor Code by the unions. This article allows employees to freeze
the same conditions of the labor contract prior to collective
negotiation for a period of 18 months. The actuarial obligation
assumptions used relate to the provisions of the respective labor
contracts in force. Severance indemnity provisions are included in
these union contracts.
(t) Operating revenues:
The Company's revenues are recorded on the accrual basis in accordance
with generally accepted accounting principles in Chile. Since invoices
are issued on dates other than accounting cut-off dates, as of the date
of preparation of these financial statements, services rendered and not
invoiced have been accrued, and determined on the basis of the
contracts and traffic at the agreed-upon prices and conditions.
Uncollectable amounts are shown in Trade Accounts Receivable.
Revenues from information services are recorded under the following
conditions: sale of hardware and software licenses is recorded when the
equipment and/or software is delivered, and in the case of revenues
from projects, these are recorded according to the percentage
completion method.
F-14
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(u) Foreign currency futures contracts:
The Company has entered into foreign currency futures contracts,
representing a hedge against changes in the exchange rate of its
obligations in foreign currency.
These instruments are valued in accordance with Technical Bulletin No.
57 issued by the Chilean Accountants' Association.
The rights acquired and obligations incurred are detailed in Note 26.
The balance sheet only reflects the net right or obligation as of
year-end, classified according to the maturity date of each of the
contracts, in Other Current Assets or Other Creditors, as applicable.
The contract's implicit premium or discount is deferred and amortized
using the straight-line method over the term of the contract.
(v) Interest rate coverage:
Loan interest covered by interest rate swaps is recorded recognizing
the effect of the contracts on the interest rate established in the
loans. Unrealized gains and losses on the interest rate swap agreements
are shown in Other Current Assets or in Other Creditors, as applicable
(see Note 26).
(w) Computer software:
Software purchases amortized using the straight-line method over a
four-year period. Further programming costs of commercialized software
are amortized over a period of five years.
(x) Research and development expenses:
Research and development expenses are charged to income in the period
in which they are incurred. Such expenses have not been significant in
the period.
(y) Accumulated deficit in development period of subsidiaries:
In accordance with Circular No. 981 of the Superintendency of
Securities and Insurance, the Company has included all disbursements or
obligations arising during the development and start up stage of its
subsidiaries and which are not assignable to the cost of tangible or
nominal, in equity. This deficit has been absorbed by net income earned
by the Company during operations.
(z) Accumulated adjustment for conversion differences:
The Company recognizes in equity accounts the difference between the
variation in the exchange rate and the consumer price index arising on
the price-level restatement of its foreign investments, controlled in
US dollars, as well as adjustments for exchange differences coming from
subsidiaries and related companies, recognized on their foreign
investments. The balance in this account is credited (charged) to
income in the same period in which the gain or loss on the complete or
partial disposal of these investments is recognized.
F-15
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
2. Significant Accounting Principles, continued:
(aa) Statement of cash flows:
For the purposes of preparing the Statement of Cash Flows in accordance
with Technical Bulletin No. 50 issued by the Chilean Accountants'
Association, the Company considers mutual funds, resale agreements and
time deposits maturing in less than 90 days as cash and cash
equivalents.
Cash flows related to the Company's business and those not defined as
from investment or financing activities are included in "Cash Flows
from Operating Activities".
(ab) Correspondents:
The Company has current agreements with foreign correspondents, with
which the conditions that regulate international traffic are set,
charged or paid according to net traffic exchanges (imbalance) and the
tariffs set in each agreement.
This exchange is accounted for on the accrual basis, recognizing the
costs and income in a period on the accrual basis, recording the net
balances receivable or payable of each correspondent in "Trade Accounts
Receivable" or "Accounts Payable" as applicable.
(ac) Intangibles
i) Underwater cable rights:
Underwater cable rights are rights acquired by the Company for the use
of the underwater cable's transmission capacity. These are amortized
over the respective contract term, with a maximum of 25 years.
Amortization for the year amounted to ThCh$ 427,294, ThCh$ 528,704 and
ThCh$ 753,229 in 2000, 2001 and 2002, respectively.
ii) Licenses (software):
Software licenses are carried at price-level restated purchase cost.
Amortization is calculated using the straight-line method considering
the periods in which the license will provide benefits, which does not
exceed 4 years.
iii) License for the use of wireless:
Corresponds to the cost incurred in obtaining licenses for the use of
wireless. They are shown at price-level restated value and are
amortized over the concession period (30 years from publication of the
decrees covering the respective licenses in the "Diario Oficial").
F-16
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
3. Accounting Changes:
a) Accounting principles have been consistently applied during the years
covered in these financial statements.
b) Change in reporting entity:
As of December 31, 2002, as Telefonica CTC Chile did not have a majority
holding in control of the administration of Sonda S.A., it has recorded
its 35% interest in Sonda under the equity method. Sonda's financial
statements were consolidated until August 31, 2002.
As of December 31, 2001 this investment was presented as consolidated,
line-by-line and the balance sheet of Sonda S.A. at that date was as
follows:
--------------------------------------------------------------------------------------------------------------------
Proforma Assets 2001 Liabilities 2001
ThCh$ ThCh$
--------------------------------------------------------------------------------------------------------------------
Current Assets 69,945,551 Current Liabilities 28,285,008
Property, Plant and Equipment 33,745,687 Long-term Liabilities 18,046,758
Other Assets 29,086,563 Shareholders' Equity 86,446,035
--------------------------------------------------------------------------------------------------------------------
Total Assets 132,777,801 Total Liabilities & Shareholders' Equity 132,777,801
--------------------------------------------------------------------------------------------------------------------
For a comparative analysis of the figures, a consolidated statement of
income is presented, assuming that in both years, the investment in
Sonda S.A. was recorded using only the equity method.
-------------------------------------------------------------------------------------------------------------------
Proforma Jan-Dec Jan-Dec Variation
-------------------------------
2001 2002
ThCh$ ThCh$ ThCh$ %
-------------------------------------------------------------------------------------------------------------------
Operating revenues 808,186,833 800,525,391 (7,661,442) -0.9%
Operating costs (674,523,624) (672,341,046) 2,182,578 -0.3%
Salaries and employee benefits (73,800,216) (65,322,095) 8,478,121 -11.5%
Depreciation (238,486,915) (255,031,284) (16,544,369) 6.9%
Goods and Services (250,570,388) (231,814,768) 18,755,620 -7.5%
Administration and selling expenses (111,666,105) (120,172,899) (8,506,794) 7.6%
Operating Income 133,663,209 128,184,345 (5,478,864) -4.1%
Financial income 16,452,112 15,400,183 (1,051,929) -6.4%
Income from investments in related companies 7,360,047 2,894,304 (4,465,743) -60.7%
Amortization of goodwill (15,571,410) (24,122,910) (8,551,500) 54.9%
Financial expenses (95,401,262) (80,717,788) 14,683,474 -15.4%
Other income and expenses (37,535,926) (26,853,451) 10,682,475 -28.5%
Price-level restatement 3,906,061 (6,598,955) (10,505,016) -
-------------------------------------------------------------------------------------------------------------------
Non-operating income (loss) (120,790,378) (119,998,617) 791,761 -0.7%
Net income before taxes and minority interest 12,872,831 8,185,728 (4,687,103) -36.4%
Income tax (8,434,245) (25,711,072) (17,276,827) 204.8%
Minority interest (203,578) (155,032) 48,546 -23.8%
-------------------------------------------------------------------------------------------------------------------
Net income (loss) for the year 4,235,008 (17,680,376) (21,915,384) -
-------------------------------------------------------------------------------------------------------------------
F-17
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars, except as
indicated)
4. Marketable Securities:
The balance of marketable securities is as follows:
---------------------------------------------------------------------------------------------------------------------
2001 2002
ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
Shares 23,712,092 9,456,802
Publicly offered promissory notes 32,723,967 65,571,937
Mutual fund units 3,473,919 1,773,744
Others 308,075 9,547
---------------------------------------------------------------------------------------------------------------------
Total Marketable Securities 60,218,053 76,812,030
---------------------------------------------------------------------------------------------------------------------
Shares
------------------------------------------------------------------------------------------------------------------------
Taxpayer Company Number of Market Quote Market
No. Name Shares Interest per share Value Restated Cost
% ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------------
Foreign Terra Networks S.A. 2,984,986 1.1 % 3,017 9,007,868 23,917,743
Foreign New Skies Satellites 5,198 0.057% 4,685 24,354 249,854
Foreign Intelsat 288,065 0.057% - - 424,580
------------------------------------------------------------------------------------------------------------------------
Value of investment portfolios 9,032,222 24,592,177
Adjustment provision (15,135,375)
Book value of investment portfolio 9,456,802
------------------------------------------------------------------------------------------------------------------------
Publicly offered promissory notes (Fixed Income)
---------------------------------------------------------------------------------------------------------------------
Par Book Value Market
Date Value Amount Value Provision
Instrument Purchase Maturity ThCh$ ThCh$ Rate ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
PRD Dec-26-2002 Sept-01-2005 1,548,848 1,548,848 6.00% 1,548,848 -
PRD Dec-26-2002 Oct-01-2005 12,338,638 12,338,638 6.00% 12,338,638 -
PRD Dec-26-2002 Dec-01-2005 11,467,944 11,467,944 6.00% 11,467,944 -
Zero Dec-26-2002 Jul-01-2005 7,225,022 7,225,022 5.40% 7,225,022 -
Zero Dec-26-2002 Oct-01-2005 4,215,615 4,215,615 5.07% 4,215,615 -
Zero Dec-26-2002 Nov-01-2005 12,699,963 12,699,963 5.86% 12,699,963 -
Zero Dec-26-2002 Dec-01-2005 16,075,907 16,075,907 5.85% 16,075,907 -
---------------------------------------------------------------------------------------------------------------------
Total 65,571,937 65,571,937 - 65,571,937 -
---------------------------------------------------------------------------------------------------------------------
F-18
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars,
except as indicated)
5. Short and long-term receivables:
The detail of short and long-term receivables is as follows:
------------------------------------------------------------------------------------------------------------------
Current
---------------------------------------------------------------------------
Description Up to 90 days Over 90 up to 1 year Subtotal
2001 2002 2001 2002 2002
------------------------------------------------------------------------------------------------------------------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Trade accounts receivable 305,421,892 278,944,527 10,341,211 9,609,496 288,554,023
Standard telephony service 149,402,044 166,129,362 5,464,130 6,593,435 172,722,797
Long distance 72,508,896 44,674,912 - - 44,674,912
Mobile 43,349,155 44,094,079 - - 44,094,079
Communications companies 24,908,743 20,374,036 503,571 3,003,547 23,377,583
Information Service 3,493,815 - 921,133 - -
Others 11,759,239 3,672,138 3,452,377 12,514 3,684,652
Allowance for doubtful accounts (59,674,045) (78,651,541) (4,975,290) (3,296,718) (81,948,259)
Notes receivable 9,546,513 12,324,459 3,676,668 1,262,106 13,586,565
Allowance for doubtful notes (5,816,061) (7,562,129) (2,146,851) - (7,562,129)
Miscellaneous accounts receivable 35,260,627 18,046,875 348,654 7,023,736 25,070,611
Allowance for doubtful accounts - - - - -
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Total Current (net) Long-term
2001 2002 2001 2002
-------------------------------------------------------------------------------------------------------------------
ThCh$ % ThCh$ % ThCh$ ThCh$
Trade accounts receivable 251,113,767 100.0 206,605,764 100.0 7,926,022 5,590,125
Standard telephony service 112,747,078 44.90 110,075,853 53.28 7,926,022 5,590,125
Long distance 64,826,010 25.82 41,290,203 19.99 - -
Mobile 30,884,111 12.30 30,304,506 14.67 - -
Communications companies 24,215,534 9.64 21,417,510 10.37 - -
Information Service 4,227,165 1.68 - - - -
Others 14,213,869 5.66 3,517,692 1.70 - -
Allowance for doubtful accounts - - - - - -
Notes receivable 5,260,269 - 6,024,436 - - -
Allowance for doubtful notes - - - - - -
Miscellaneous accounts receivable 35,609,281 - 25,070,611 - 32,017,693 29,250,132
Allowance for doubtful accounts - - - - - -
-------------------------------------------------------------------------------------------------------------------
Total long-term receivables 39,943,715 34,840,257
------------------------------------------------------------
F-19
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars,
except as indicated)
6. Balances and transactions with related companies:
a) Notes and Accounts Receivable
----------------------------------------------------------------------------------------------------------------------------------
Tax No. Company Short-term Long-term
----------------------------------------------------------------
2001 2002 2001 2002
---- ---- ---- ----
ThCh$ ThCh$ ThCh$ ThCh$
----------------------------------------------------------------------------------------------------------------------------------
Foreign Telefonica procesos Tec. de Informacion - 11,779,407 - -
83.628.100-4 Sonda S.A. - 1,964,079 - -
96.834.230-4 Terra Networks Chile S.A. 2,228,128 957,427 - -
93.541.000-2 Impresora y Comercial Publiguias S.A. 452,224 843,208 - -
Foreign Telefonica Espana 748,981 787,166 - -
96.895.220-k Atento Chile S.A 878,472 615,538 - -
Extranjera Telefonica Data Espana 5,426 131,371 - -
96.910.730-9 Emergia Chile S.A. 177,798 22,416 - -
Foreign Terra Networks Espana 120,587 9,093 - -
59.083.900-0 Telefonica Mobile Solutions Chile S.A. - 2,995 - -
78.868.230-1 Atento Educacion 205 1,228 - -
96.894.490-8 Puerto Norte 15,450 - - -
Foreign Sonda Mexico 20,990 - - -
Foreign Datadec 57,949 - - -
94.071.000-6 Orden S.A. 73,367 - - -
96.571.690-4 Servibanca 840 - - -
Foreign Unisel Argentina 5,395 - - -
79.688.080-5 Unisel Chile 22,138 - - -
Foreign Westham Trade Co Ltda. 544 - - -
96.539.380-3 Ediciones Financieras 5,620 - - -
96.703.020-1 Orden Salud 88,251 - - -
96.703.200-k Orden Gestion 42,807 - - -
78.214.420-0 Orden Integracion 34,162 - - -
96.725.400-2 Solex 232 - - -
Foreign Bismark Telecomunicaciones 23,039 - - -
96.967.100-k Novis S.A. 15,462 - 201,909 -
79.919.680-8 Administradora de Creditos Comerciales 1,122 - - -
81.201.000-K Almacenes Paris S.A. 53,707 - - -
96.929.090-1 Compania de Procesos y Servicios CPS S.A. 399,101 - 253,967 -
96.900.580-8 Servicios de Outsourcing Logistica S.A. 109,400 - - -
77.384.780-0 Bazuca Internet Partners - - 204,900 -
---------------------------------------------------------------------------------------------------------------------------------
TOTAL 5,581,397 17,113,928 660,776 -
---------------------------------------------------------------------------------------------------------------------------------
There have been charges and credits to current accounts with these companies due
to billing for sales of material, equipment and services.
F-20
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars,
except as indicated)
b) Notes and Accounts Payable
-----------------------------------------------------------------------------------------------------------------------------------
Tax No. Company Short-term Long-term
-----------------------------------------------------------------
2001 2002 2001 2002
---- ---- ---- ----
ThCh$ ThCh$ ThCh$ ThCh$
-----------------------------------------------------------------------------------------------------------------------------------
96.895.220-k Atento Chile S.A 4,784,561 4,755,211 - -
96.834.230-4 Terra Networks Chile S.A. 1,753,933 3,090,164 - -
83.628.100-4 Sonda S.A. - 2,148,979 - -
Foreign T-Data Corp - 1,320,918 - -
93.541.000-2 Impresora y Comercial Publiguias S.A. - 332,256 - -
96.527.390-5 Telefonica Internacional Chile S.A. 6,761,979 261,208 25,534,901 24,214,112
96.910.730-9 Emergia Chile S.A. 2,399,753 43,376 - -
78.868.200-k Atento Recursos Ltda. 103,671 24,084 - -
Foreign Telefonica Internacional de Espana S.A. 892,220 - - -
94.071.000-6 Orden S.A. 2,349 - - -
96.768.410-4 Payroll 3,773 - - -
96.571.690-4 Servibanca 752 - - -
Foreign Unisel Argentina - - 235,050 -
79.688.080-5 Unisel Chile 636,623 - - -
Foreign Westham Trade Co Ltda. 201,486 - - -
78.214.420-0 Orden Integracion 30,176 - - -
96.725.400-2 Solex 1,349 - - -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL 17,572,625 11,976,196 25,769,951 24,214,112
-----------------------------------------------------------------------------------------------------------------------------------
In accordance with Article 89 of the Chilean Corporation Law, all these
transactions have been carried out under conditions similar to those prevailing
in the market.
F-21
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars,
except as indicated)
6. Balances and transactions with related companies:
c) Transactions:
------------------------------------------------------------------------------------------------------------------------------------
Company Tax No. Nature of Description of
relationship transaction
------------------------------------------------------------------------------------------------------------------------------------
Telefonica Espana Foreign Parent Company Sales and Services
Telefonica Internacional Chile S.A. 96.527.390-5 Parent Company Purchases and Services Rendered
Financial Expenses
------------------------------------------------------------------------------------------------------------------------------------
Impresora y Comercial Publiguias S.A. 93.541.000-2 Affiliate Sales and Services
Purchases and Services Rendered
Other Non-operating Income
------------------------------------------------------------------------------------------------------------------------------------
Terra Networks Chile S.A. 96.834.230-4 Affiliate Sales and Services
Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Atento Chile S.A 96.895.220-k Affiliate Sales and Services
Purchases and Services Rendered
Other Non-operating Income
------------------------------------------------------------------------------------------------------------------------------------
Emergia Chile S.A. 96.910.730-9 Affiliate Sales and Services
Purchases and Services Rendered
Other Non-operating Income
------------------------------------------------------------------------------------------------------------------------------------
Datadec Foreign Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Orden S.A. 94.071.000-6 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Servibanca 96.571.690-4 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Unisel Argentina Foreign Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Unisel Chile 79.688.080-5 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Ediciones Financieras 96.539.380-3 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Inversiones Pacifico 84.267.000-4 Common Parent Financial Expenses
------------------------------------------------------------------------------------------------------------------------------------
Atento Recursos Ltda. 78.868.200-k Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Telefonica. Procesos y Tecnologia de Informacion S.A. Foreign Affiliate Other Non-operating Income
------------------------------------------------------------------------------------------------------------------------------------
Orden Gestion 96.703.200-k Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Orden Integracion 78.214.420-0 Affiliate Sales and Services
------------------------------------------------------------------------------------------------------------------------------------
Atento Educacion 78.868.230-1 Affiliate Sales and Services
------------------------------------------------------------------------------------------------------------------------------------
Solex 96.725.400-2 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Almacenes Paris S.A. 81.201.000-k Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Servicios de Outsourcing Logistica S.A 96.900.580-8 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
T-Data Corp Foreign Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Tecnopolis Comercial 96.823.020-4 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
Buenaventura 96.590.080-2 Affiliate Sales and Services
------------------------------------------------------------------------------------------------------------------------------------
Telsys S.A. 96.756.140-1 Affiliate Purchases and Services Rendered
------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
----------------------------------------------------------------------------------------------------------------------------------
Effect on Effect on Effect on
Company Amount income Amount income Amount income
----------------------------------------------------------------------------------------------------------------------------------
Telefonica Espana 4,239,475 4,239,475 - - - -
Telefonica Internacional Chile S.A. 54,285 54,285 522,362 522,362 521,961 521,961
3,746,928 3,746,928 2,230,347 2,230,347 838,560 838,560
----------------------------------------------------------------------------------------------------------------------------------
Impresora y Comercial Publiguias S.A. 14,716,067 14,716,067 18,130,026 18,130,026 4,844,225 4,844,225
2,676,101 2,676,101 3,634,978 3,634,978 5,048,653 5,048,653
- - 11,389,049 11,389,049 - -
----------------------------------------------------------------------------------------------------------------------------------
Terra Networks Chile S.A. 167,939 167,939 1,904,923 1,904,923 1,893,375 1,893,375
- - - - 356,102 356,102
----------------------------------------------------------------------------------------------------------------------------------
Atento Chile S.A 17,697,280 17,697,280 1,186,805 1,186,805
11,618,453 11,618,453 - - 12,508,479 12,508,479
- - 26,896 26,896
----------------------------------------------------------------------------------------------------------------------------------
Emergia Chile S.A. - - - - 1,271,907 1,271,907
- - 44,492 44,492 42,843 42,843
- - - - 12,342 12,342
----------------------------------------------------------------------------------------------------------------------------------
Datadec 1,906 1,906 54,448 54,448 - -
----------------------------------------------------------------------------------------------------------------------------------
Orden S.A. 36,448 36,448 10,328 10,328 - -
----------------------------------------------------------------------------------------------------------------------------------
Servibanca 70,560 70,560 5,690 5,690 - -
----------------------------------------------------------------------------------------------------------------------------------
Unisel Argentina 12,571 12,571 46,536 46,536 - -
----------------------------------------------------------------------------------------------------------------------------------
Unisel Chile 36,448 36,448 917,426 917,426 - -
----------------------------------------------------------------------------------------------------------------------------------
Ediciones Financieras - - 15,066 15,066 - -
----------------------------------------------------------------------------------------------------------------------------------
Inversiones Pacifico 1,159,830 1,159,830 - - - -
----------------------------------------------------------------------------------------------------------------------------------
Atento Recursos Ltda. - - - - 344,378 344,378
----------------------------------------------------------------------------------------------------------------------------------
Telefonica. Procesos y Tecnologia de Informacion S.A. - - - - 412,646 412,646
----------------------------------------------------------------------------------------------------------------------------------
Orden Gestion 409 409 26,948 26,948 - -
----------------------------------------------------------------------------------------------------------------------------------
Orden Integracion 32,830 32,830 - - - -
----------------------------------------------------------------------------------------------------------------------------------
Atento Educacion - - 27,810 27,810 - -
----------------------------------------------------------------------------------------------------------------------------------
Solex - - 224 224 - -
----------------------------------------------------------------------------------------------------------------------------------
Almacenes Paris S.A. - - 8,992,403 8,992,403 - -
----------------------------------------------------------------------------------------------------------------------------------
Servicios de Outsourcing Logistica S.A - - 35,175 35,175 - -
----------------------------------------------------------------------------------------------------------------------------------
T-Data Corp - - - - 1,320,918 1,320,918
----------------------------------------------------------------------------------------------------------------------------------
Tecnopolis Comercial 32,095 32,095 - - - -
----------------------------------------------------------------------------------------------------------------------------------
Buenaventura 227,729 227,729 - - - -
----------------------------------------------------------------------------------------------------------------------------------
Telsys S.A. 102,782 102,782 - - - -
----------------------------------------------------------------------------------------------------------------------------------
In the case of Sales and Services Rendered, these mature in the short-term (less
than a year) and the Settlement Conditions for each case vary according to the
transaction that produced them.
F-22
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of constant
Chilean pesos as of December 31, 2002 and thousands of US Dollars,
except as indicated)
7. Income taxes and deferred income taxes:
a) General information:
As of December 31, 2001 and 2002, Telefonica CTC Chile has accrued a
first category income tax as it has accumulated tax losses of ThCh$
204,413,894 and ThCh$ 88,608,304, respectively. Likewise, as of December
31, 2001 and 2002 some subsidiaries have accumulated tax losses of ThCh$
161,394,294 and ThCh$ 138,182,058, respectively.
Income tax provisions arise in subsidiaries with taxable income.
As of December 31, 2002 the subsidiaries with positive taxed retained
earnings balances and the related credits are detailed in the following
table:
-------------------------------------------------------------------------------------------------------------
Taxed
Taxed Taxed Income
Income with Income with Without Amount of
Subsidiaries 15% Credit 16% Credit Credit Credit
ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------
CTC Equipos y Servicios de Telecomunicaciones S.A. - 2,265,438 - 362,470
CTC Transmisiones Regionales S.A. - 18,717,996 - 2,994,879
Globus 120 S.A. 2,031,364 1,208,705 402 551,867
Telefonica Empresas CTC Chile S.A. - 8,592,484 16,422 1,374,797
-------------------------------------------------------------------------------------------------------------
F-23
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
7. Income taxes and deferred income taxes, continued:
b) Deferred income taxes:
As of December 31, 2001 and 2002, accumulated balances of temporary
differences that give rise to deferred income tax liabilities and assets
(net) amount to ThCh$ 9,436,846 and ThCh$ 10,802,207, respectively are
detailed as follows:
-------------------------------------------------------------------------------------------------------------------
Description 2001
---------------------------------------------------------
Deferred tax assets Deferred tax liabilities
Short-term Long-term Short-term Long-term
-------------------------------------------------------------------------------------------------------------------
Temporary differences
Allowance for doubtful accounts 16,188,434 - - -
Vacation provision 818,246 - - -
Tax losses 36,836,369 23,521,982 - -
Difference in amount of capitalized staff severance 3,900 1,554,921 - -
Leased assets and liabilities 60,281 902,987 - -
Technical revaluation - 4,881,018 - -
Depreciation of property, plant and equipment - - - 219,672,604
Staff severance indemnities - - - 7,537,748
Deferred charge on sale of assets - - - 737,927
Software development - - - 6,919,600
Deferred charges for capitalized disbursements - - - 1,524,758
Difference in value of temporary investments 1,699,692 - - -
Others 2,581,943 1,256,267 13,141 2,179,496
-------------------------------------------------------------------------------------------------------------------
Subtotal 58,188,865 32,117,175 13,141 238,572,133
-------------------------------------------------------------------------------------------------------------------
Net complementary accounts (1,594,227) (16,074,530) - (175,411,836)
Subtotal 56,594,638 16,042,645 13,141 63,160,297
-------------------------------------------------------------------------------------------------------------------
Tax reclassification (13,140) (16,042,645) (13,141) (16,042,645)
-------------------------------------------------------------------------------------------------------------------
Total 56,581,498 - - 47,117,652
-------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Description 2002
---------------------------------------------------------
Deferred tax assets Deferred tax liabilities
---------------------------------------------------------
Short-term Long-term Short-term Long-term
------------------------------------------------------------------------------------------------------------------
Temporary differences
Allowance for doubtful accounts 18,523,109 - - -
Vacation provision 780,222 - - -
Tax losses 333,509 37,934,435 - -
Difference in amount of capitalized staff severance - 1,024,959 - -
Leased assets and liabilities 61,788 750,079 - 150,960
Technical revaluation - 3,628,454 - -
Depreciation of property, plant and equipment - - - 207,594,668
Staff severance indemnities - 10,737 - 6,162,642
Deferred charge on sale of assets - - - 667,867
Software development - - - 5,828,114
Deferred charges for capitalized disbursements - - - 3,605,825
Difference in value of temporary investments 3,207,509 - - -
Others 2,282,337 1,422,776 - 1,125,892
------------------------------------------------------------------------------------------------------------------
Subtotal 25,188,474 44,771,440 - 225,135,968
------------------------------------------------------------------------------------------------------------------
Net complementary accounts - (13,528,465) - (157,902,312)
Subtotal 25,188,474 31,242,975 - 67,233,656
------------------------------------------------------------------------------------------------------------------
Tax reclassification - (31,242,975) - (31,242,975)
------------------------------------------------------------------------------------------------------------------
Total 25,188,474 - - 35,990,681
------------------------------------------------------------------------------------------------------------------
As stated in Note 2 d, as of December 31 of 2001, the financial
statements included the balance of deferred tax assets and liabilities in
Sonda S. A. (former subsidiary of Telefonica Empresas CTC Chile) for
ThCh$ 455,069 and ThCh$ 69,314 respectively, which had been consolidated
in the statement of income until August 31, 2002.
F-24
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
7. Income taxes and deferred income taxes, continued:
c) Breakdown of income taxes:
The current income tax expense shown in the following table is based on
taxable income, net of credits for donations, training expenses and other
credits.
-------------------------------------------------------------------------------------------------------------------
Description 2000 2001 2002
ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------------
Current income tax (15,610,827) (8,754,958) (7,822,374)
Current income tax (Article 21 single tax) (293,036) (230,347) (307,125)
Recovery of taxable losses from dividends received from subsidiaries 15,519,482 5,118,927 5,348,208
-------------------------------------------------------------------------------------------------------------------
Income tax subtotal (384,381) (3,866,378) (2,781,291)
-------------------------------------------------------------------------------------------------------------------
- Deferred income tax (12,471,929) (25,113,892) (8,722,257)
- Benefit of tax loss 24,239,016 18,667,440 -
- Amortization of complementary accounts (5,618,791) (1,456,198) (15,213,228)
-------------------------------------------------------------------------------------------------------------------
Deferred taxes subtotal 6,148,296 (7,902,650) (23,935,485)
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Total income tax (charge) debit 5,763,915 (11,769,028) (26,716,776)
-------------------------------------------------------------------------------------------------------------------
F-25
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
8. Other Current Assets:
The detail of other current assets is as follows:
---------------------------------------------------------------------------- ------------------ ------------------
2001 2002
ThCh$ ThCh$
---------------------------------------------------------------------------- ------------------ ------------------
Fixed income securities purchased with resale agreement 52,578,947 -
Fixed income securities sold with repurchase agreements 29,945,797 -
Collective negotiation bonus to be amortized (a) 1,643,026 1,154,375
Adjustment to market value for cellular equipment to be marketed (c) 3,057,477 3,981,423
Derivative contract premiums to be amortized 4,085,549 1,600,862
Telephone directories for connection program 2,488,808 4,439,338
Bond discount to be amortized 1,253,042 697,793
Bond issuance costs to be amortized 1,790,109 1,762,067
Disbursements for foreign financing proceeds to be amortized (b) 2,111,125 489,094
Deferred charges for modification of staff severance indemnities discount
rate (net) 117,119 506,747
Derivative contracts 20,626,301 12,626,720
Others 3,201,544 1,398,208
---------------------------------------------------------------------------- ------------------ ------------------
Total 122,898,844 28,656,627
---------------------------------------------------------------------------- ------------------ ------------------
(a) During June 2002, the Company signed a 2-year collective contract
with a part of its employees (3 years for Telefonica Movil
employees) granting them, among other benefits, a special
negotiation bonus. This bonus was paid between June and July of
2002 (for Telefonica Movil employees, a second installment of ThCh$
440,000 (historical) will be paid in May 2004). The total benefit
which amounts to Ch$ 2,494,544 (historical), is being deferred
using the straight-line method during the term of the respective
collective contracts. The long-term portion is shown under "Other"
long-term (note 13).
(b) This amount corresponds to the cost (net of amortization) of the
reserve paid to the Banco Central de Chile and disbursements
incurred for foreign loans obtained by the Company to finance its
investment plan.
(c) Corresponds to adjustment to market value for cellular equipment
held in inventory at year-end, which is charged to income in
accordance with the contract type, contract or prepayment.
F-26
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
9. Property, plant and equipment:
The detail of property, plant and equipment is as follows:
-------------------------------------------------------------------------------------------------------------------
2001 2002
---------------------------------------------------------------------
Accumulated Gross property, Accumulated Gross property,
plant plant
Description Depreciation and equipment Depreciation and equipment
ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------------
Land - 29,030,587 - 27,372,131
Construction and Infrastructure Works 66,610,375 197,925,361 70,454,187 183,151,839
Machinery and equipment 1,589,845,303 3,235,794,533 1,751,100,648 3,294,876,741
Central office telephone equipment 774,494,044 1,421,076,491 884,264,242 1,534,772,639
External plant 549,194,894 1,346,281,565 606,043,932 1,362,156,206
Subscribers' equipment 254,200,836 398,294,086 227,139,867 362,878,756
General equipment 11,955,529 70,142,391 33,652,607 35,069,140
Other Property, Plant and Equipment 127,341,224 446,283,271 136,984,124 393,378,237
Office furniture and equipment 91,773,232 102,515,365 68,228,232 127,723,898
Projects, work in progress and their
materials - 223,209,260 - 135,303,278
Contract advances - 319,808 - 310,493
Leased assets (1) 9,577,719 15,247,224 4,416,023 11,241,599
Property, plant and equipment temporarily
out of service 6,330,659 14,291,533 11,135,132 23,549,726
Software and others 19,659,614 90,700,081 53,204,737 95,249,243
Technical revaluation-Circular 550 10,358,363 9,130,322 10,326,522 9,130,267
Total 1,794,155,265 3,918,164,074 1,968,865,481 3,907,909,215
-------------------------------------------------------------------------------------------------------------------
(1) As of December 2002 this caption mainly consists of: ThCh$
5,453,691 gross value for purchase of administrative offices with
accumulated depreciation of ThCh$ 546,059 with contract terms of 15
years from 1996, ThCh$ 3,206,834 gross value for electronic and
computer equipment with accumulated depreciation of ThCh$ 2,704,256
with 12-year contract terms from 1994. In addition there is ThCh$
1,185,139 gross value of long distance transmission equipment with
accumulated depreciation of ThCh$ 322,041 with 18-year contract
terms from 1996.
The balance of gross property, plant and equipment includes capitalized
interest of ThCh$ 201,188,437 and ThCh$ 208,962,843 in 2001 and 2002,
respectively. Accumulated depreciation of this interest amounts to ThCh$
63,437,638 and ThCh$ 81,460,095 in 2001 and 2002, respectively.
Depreciation for the year was charged to operating costs for ThCh$
255,504,373 and ThCh$ 261,035,237 for 2001 and 2002, respectively.
Property, plant and equipment temporarily out of service, made up mainly
of the cable TV networks of La Serena and Concepcion not transferred in
the sale of assets to Cordillera Comunicaciones, produced a depreciation
charge of ThCh$ 1,147,500 in 2001 and ThCh$ 1,699,096 in 2002, which is
classified in Other Non-operating Expenses.
The detail by caption of the technical revaluation is as follows:
------------------------------------------------------------------------------------------------------------------
Property, plant Property,
and equipment Net Accumulated plant and
equipment
Description 2001 Balance Depreciation 2002
ThCh$ ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
Land (472,645) (472,645) - (472,645)
Construction and infrastructure works (4,534,622) (611,466) (3,923,157) (4,534,623)
Machinery and equipment 14,137,589 345,994 13,791,541 14,137,535
Total 9,130,322 (738,117) 9,868,384 9,130,267
------------------------------------------------------------------------------------------------------------------
Depreciation for higher value of technical revaluation for the year
amounts to ThCh$ (35,786) in 2000, ThCh$ (34,958) in 2001 and ThCh$
(23,562) in 2002. Gross property, plant and equipment includes assets
that have been totally depreciated in the amount of ThCh$ 350,058,056 in
2001 and ThCh$ 532,643,685 in 2002, which include ThCh$ 12,068,124 and
ThCh$ 11,576,295, respectively, for technical revaluation.
F-27
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
10. Investments in Related Companies:
The detail of investments in related companies is as follows:
----------------------------------------------------------------------------------------------------------------------------------
Percentage
Currency of Equity
Country controlling Number participation of the companies
of the of --------------------------------------
Taxp. No. Company origin investment shares 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
% % ThCh$
Foreign Consorcio Telefonica
de Brasil Celular
Holding (1) Brazil Dollar 48,950,000 2.61 2.61 168,919,272
93.541.000-2 Impresora y Comercial
Publiguias S.A. Chile Pesos 45,648 9.00 9.00 18,116,689
96.922.950-1 Empresa de Tarjetas
Inteligentes S.A. Chile Pesos 271,615 20.00 20.00 526,125
96.895.220-K Atento Chile S.A. Chile Pesos 3,209,374 28.84 28.84 9,064,005
96.725.400-2 Sonda S.A.(2) Chile Pesos 35,000 - 35.00 -
In development Bolsa de Oportunidades
de Negocios S.A. Chile Pesos - 19.00 19.00 2,063,500
In development Time Interating Chile Pesos - 10.25 10.25 734,361
96.725.400-2 Solexe S.A. Chile Pesos 80 40.00 - 528,173
96.571.690-4 Servibanca S.A. Chile Pesos 1,200 43.33 43.33 4,261,142
96.768.410-4 Payroll S.A. Chile Pesos 1,989,591 33.33 33.33 522,952
96.539.380-3 Ediciones Financieras S.A. Chile Pesos 580 7.18 6.66 58,231
96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - 33.33 - 5,724,758
94.071.000-6 Orden S.A. Chile Pesos - 33.33 - 4,393,522
Foreign SBS Ltda. Guatemala Dollar - 49.00 - 156,992
Foreign AGROSYS Guatemala Dollar - 50.00 - 6,122
Foreign Sonda El Salvador El Salvador Dollar - 49.00 - 29,000
Foreign Chiptech Guatemala Dollar - 50.00 - 15,284
96.894.490-8 Puerto Norte S.A. Chile Pesos - 50.00 - 161,020
96.900.580-8 Servicios de Outsourcing
Logistica S.A. Chile Pesos - 48.33 - 135,502
96.929.090-1 Compania de Procesos y
Servicios CPS S.A. Chile Pesos - 16.67 - 6
96.916.540-6 Bazuca Internet Partners S.A. Chile Pesos - 39.80 - 1,711,128
96.941.290-k Sustentable cl S.A. Chile Pesos - 20.96 - 59,685
96.967.100-k Novis S.A. Chile Pesos - - - -
Foreign Bismark Telecomunicaciones Mexico Pesos - 49.90 - 99,287
Foreign Westham Trade Co. Ltda. USA Dollar - 20.00 - 461,985
Foreign Data Dec S.A. Costa Rica Dollar - 40.00 - 917,233
----------------------------------------------------------------------------------------------------------------------------------
Total
================================
----------------------------------------------------------------------------------------------------------------------------------
Net Income Net income
(loss) of (loss) of Investment
the company investment value
---------------------------------------------------------------------------------
Taxp. No. Company 2002 2001 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------------------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Foreign Consorcio Telefonica
de Brasil Celular
Holding (1) 196,384,751 (10,851,533) 2,978,314 (283,225) 77,734 4,408,793
93.541.000-2 Impresora y Comercial
Publiguias S.A. 25,013,978 6,939,111 6,897,278 624,520 620,755 1,630,502
96.922.950-1 Empresa de Tarjetas
Inteligentes S.A. 582,290 (164,135) (540,600) (32,827) (108,120) 105,225
96.895.220-K Atento Chile S.A. 9,102,320 432,164 38,377 124,636 11,068 2,614,059
96.725.400-2 Sonda S.A.(2) 91,055,240 - 4,673,789 - 1,635,826 -
In development Bolsa de Oportunidades
de Negocios S.A. 2,063,500 - - - - 392,065
In development Time Interating 734,361 - - - - 75,272
96.725.400-2 Solexe S.A. - 48,845 - 19,538 - 211,269
96.571.690-4 Servibanca S.A. - 446,146 214,673 193,315 93,018 1,846,353
96.768.410-4 Payroll S.A. - 164,605 81,278 54,863 27,090 174,300
96.539.380-3 Ediciones Financieras S.A. - 19,916 (29,910) 1,430 (1,992) 4,181
96.831.860-8 Inversiones Valparaiso S.A. - - - 3,841 - 1,908,062
94.071.000-6 Orden S.A. - 260,798 - 86,924 - 1,464,361
Foreign SBS Ltda. - - - - - 76,926
Foreign AGROSYS - - - - - 3,061
Foreign Sonda El Salvador - - - - - 14,210
Foreign Chiptech - - - - - 7,642
96.894.490-8 Puerto Norte S.A. - (22,266) - (11,133) - 80,510
96.900.580-8 Servicios de Outsourcing
Logistica S.A. - (68,887) - (33,293) - 65,488
96.929.090-1 Compania de Procesos y
Servicios CPS S.A. - (168,914) - (28,158) - 1
96.916.540-6 Bazuca Internet Partners S.A. - (240,673) - (95,788) - 681,029
96.941.290-k Sustentable cl S.A. - - - - - 12,510
96.967.100-k Novis S.A. - - - - - 28,945
Foreign Bismark Telecomunicaciones - - - - - 49,544
Foreign Westham Trade Co. Ltda. - (219,190) - (43,838) - 92,397
Foreign Data Dec S.A. - 77,559 - 31,024 - 366,893
----------------------------------------------------------------------------------------------------------------------------------
Total 16,313,598
================================ =========================================
-------------------------------------------------------------------------------------------------------------
Unearned Investment
results book value
---------------------------------------------------------
Taxp. No. Company 2002 2001 2002 2001 2002
------------------------------------------------------------------------------------------------------------
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
Foreign Consorcio Telefonica
de Brasil Celular
Holding (1) 5,125,642 - - 4,408,793 5,125,642
93.541.000-2 Impresora y Comercial
Publiguias S.A. 2,251,258 - - 1,630,502 2,251,258
96.922.950-1 Empresa de Tarjetas
Inteligentes S.A. 116,458 - - 105,225 116,458
96.895.220-K Atento Chile S.A. 2,625,109 - - 2,614,059 2,625,109
96.725.400-2 Sonda S.A.(2) 31,869,334 - - - 31,869,334
In development Bolsa de Oportunidades
de Negocios S.A. 392,065 - - 392,065 392,065
In development Time Interating 75,272 - - 75,272 75,272
96.725.400-2 Solexe S.A. - - - 211,269 -
96.571.690-4 Servibanca S.A. - - - 1,846,353 -
96.768.410-4 Payroll S.A. - - - 174,300 -
96.539.380-3 Ediciones Financieras S.A. - - - 4,181 -
96.831.860-8 Inversiones Valparaiso S.A. - - - 1,908,062 -
94.071.000-6 Orden S.A. - - - 1,464,361 -
Foreign SBS Ltda. - - - 76,926 -
Foreign AGROSYS - - - 3,061 -
Foreign Sonda El Salvador - - - 14,210 -
Foreign Chiptech - - - 7,642 -
96.894.490-8 Puerto Norte S.A. - - - 80,510 -
96.900.580-8 Servicios de Outsourcing
Logistica S.A. - - - 65,488 -
96.929.090-1 Compania de Procesos y
Servicios CPS S.A. - - - 1 -
96.916.540-6 Bazuca Internet Partners S.A. - - - 681,029 -
96.941.290-k Sustentable cl S.A. - - - 12,510 -
96.967.100-k Novis S.A. - - - 28,945 -
Foreign Bismark Telecomunicaciones - - - 49,544 -
Foreign Westham Trade Co. Ltda. - - - 92,397 -
Foreign Data Dec S.A. - - - 366,893 -
-------------------------------------------------------------------------------------------------------------
Total 42,455,138 16,313,598 42,455,138
=============================================================================================
(1) Recognition of income for this company is on a one - month lag.
(2) Income for this company was recorded for September, 2002 through
December, 2002.
As of the date of these consolidated financial statements, there are no
liabilities for hedge instruments assigned to foreign investments. The
Company has the intention of reinvesting net income from foreign
investments on a permanent basis, therefore there is no net income that
is potentially remittable.
F-28
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
11. Goodwill and negative goodwill:
(a) Goodwill: The detail of goodwill is as follows:
---------------------------------------------------------------------------------------------------------------------
2000
Amount 2001 2002
Taxpayer Company Year amortized Amount Amount
No. in the amortized Balance of amortized Balance of
year in the year Goodwill in the year Goodwill
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
Foreign Consorcio telefonica do Brasil 2001 - 455,049 3,014,133 173,938 2,840,195
84.119.600-7 Instacom S.A. 1994 503,777 1,931,147 - - -
90.430.000-4 CTC Globus S.A. 1998 1,073,136 1,073,136 18,032,764 1,073,136 16,959,632
78.703.410-1 Tecnonautica S.A. 1999 42,233 65,805 1,202,048 65,805 1,136,243
96.786.140-5 Telefonica Movil 1997 9,765,112 9,765,112 155,893,996 9,765,112 146,128,880
83.628.100-4 Sonda S.A. (a) 1999 1,426,762 1,927,431 24,051,302 12,490,365 11,560,937
Foreign Sonda Uruguay 1999 84,000 106,445 1,225,110 94,366 -
Foreign Setco S.A. (Uruguay) 1999 63,781 63,781 545,635 92,633 -
Foreign Sonda del Ecuador 1997 36,676 28,238 177,131 25,908 -
96.571.690-4 Servibanca 2000 33,883 36,964 298,790 24,140 -
Foreign Sonda Do Brasil Ltda. 1998 - - - 187,909 -
96.834.320-3 Infoera 1999 43,927 41,431 743,247 41,429 701,818
96.768.410-4 Payroll 1999 1,667 1,667 13,334 1,225 -
96.894.490-8 Puerto Norte 2000 874 1,311 10,928 856 -
Foreign Integral Peru 1996 37,306 10,086 - - -
Foreign Integral Chile S.A. 1996 119,240 34,867 - - -
Foreign Bac Peru 2001 - 31,439 - - -
96.895.220-K Atento Chile S.A. 2001 - 243,104 351,740 351,740 -
Foreign Sonda Bancos 2001 - 2,486 96,989 6,496 -
Foreign Sonda Peru 2001 - - - 3,313 -
Foreign Bismark (Mexico) 2001 - 1,139 44,075 3,199 -
Foreign Tecnoglobal S.A. 2001 - - - 35,747 -
96.811.570-7 Telepeajes S.A. 2001 - 7,927 91,715 14,867 76,848
Foreign Bac Financiero 2001 - 38,974 510,136 60,275 -
96.833.930-3 Telef. Comun. Empresariales 2001 - 22,294 146,518 146,518 -
96.590.960-5 Tecnopolis 2001 - 688 19,945 1,348 -
Foreign Track S.A. 2002 - - - 1,568 -
95.191.000-7 Logica S.A. 2001 - 48,449 847,721 - -
94.071.000-6 Orden S.A. 2001 - 37,504 671,951 - -
78.072.130-8 New Horizontes S.A. 2001 - 5,511 102,854 - -
96.900.580-8 Servicio de Outsourcing 2001 - 2,512 250,181 - -
96.941.290-K Sustentable.cl S.A. 2001 - 839 39,474 - -
96.929.090-1 Cia. de Procesos y Servicios 2001 - 5,826 - - -
S.A.
96.725.400-2 Soluciones expertas S.A. 2001 - 1,469 25,455 - -
Foreign Condec Brasil 1998 135,666 218,459 1,662,105 - -
96.771.760-6 Finsoft 2000 11,943 - - - -
96.720.710-1 Invercom S.A. 1994 16,859,409 - - - -
96.720.710-1 Invercom S.A. 1998 23,830,307 - - - -
96.645.980-8 Multicable Television S.A. - 2,474,899 - - - -
---------------------------------------------------------------------------------------------------------------------
Total 56,544,598 16,211,090 210,069,277 24,661,893 179,404,553
---------------------------------------------------------------------------------------------------------------------
The goodwill amortization period has been determined considering aspects such
as; nature and characteristics of the business and estimated period of return of
the investment.
(a) For 2002 goodwill amortization includes ThCh$ 8,884,110, as
extraordinary write-off due to the sale of 25% of the shares which the
subsidiary Telefonica Empresas S.A. held in Sonda S.A.
F-29
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
11. Goodwill and negative goodwill, continued:
(b) Negative goodwill:
The detail of negative goodwill is as follows:
-------------------------------------------------------------------------------------------------------------------
2000 2001 2002
Amount Amount Amount
amortized Balance of amortized Balance of amortized Balance of
Taxpayer No. Company Year in the Negative in the Negative in the Negative
year Goodwill year Goodwill year Goodwill
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------------
88.269.200-0 Intercom S.A. 1994 204,552 - - - - -
Foreign Condec Ltda. 1999 - - 6,185 - - -
Foreign Sonda Do Brasil 1999 2,653 22,571 - - - -
-------------------------------------------------------------------------------------------------------------------
Total 207,205 22,571 6,185
-------------------------------------------------------------------------------------------------------------------
12. Intangibles:
-------------------------------------------------------------------------- ------------- ------------- ------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------- ------------- ------------- ------------
Underwater cable rights (gross) 11,878,534 16,981,672 20,722,149
Accumulated amortization previous year (636,095) (1,063,390) (1,592,181)
Amortization for the year (427,295) (528,704) (753,229)
Licenses (Software) (gross) - - 2,083,683
Amortization for the year - - (259,517)
Licenses for use of wireless (gross) - - 9,498,563
Amortization for the year - - (26,385)
Total Net Intangibles 10,815,144 15,389,578 29,673,083
-------------------------------------------------------------------------- ------------- ------------- ------------
13. Others (from Other Assets):
The detail of Others is as follows:
-------------------------------------------------------------------------- -------------------- -------------------
2001 2002
ThCh$ ThCh$
-------------------------------------------------------------------------- -------------------- -------------------
Disbursements for obtaining external financing to be amortized (see
note 8b) 1,270,594 1,914,264
Disbursements for placement of bonds to be amortized 6,103,671 4,177,432
Leased vehicles 1,003,964 329,278
Higher discount rate for bonds to be amortized 7,355,920 4,623,831
Deferred charge for modification of staff severance indemnities
discount rate ( net) 1,095,190 -
Commercial projects in development (Lottery, Investment Fund) 1,946,940 -
Collective negotiation bonus ( see note 8a) - 1,044,419
Deferred exchange insurance premiums to be amortized 924,581 435,248
Pole rent in advance 2,560,642 1,338,648
Security deposits 316,136 329,078
Telephone directories for connection programs - 1,880,443
Others 3,435,983 496,278
-------------------------------------------------------------------------- -------------------- -------------------
Total 26,013,621 16,568,919
-------------------------------------------------------------------------- -------------------- -------------------
F-30
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
14. Current and Short-term Liabilities
The breakdown of short-term obligations with banks and financial
institutions is as follows:
Bank or financial institution U.S.$ U.F.
----------------------------- --------------------------------- -----------------------------
Taxp. No. Short-term 2001 2002 2001 2002
------------ ------------------------------------ -------------- ---------------- -------------- --------------
ThCh$ ThCh$ ThCh$ ThCh$
97.008.000-7 CITIBANK - - 8,510,324 -
97.030.000-7 ESTADO - - 10,791,371 9,191,446
59.004.250-1 SUDAMERIS 172,655 - - -
97.004.000-5 BANCO DE CHILE 775,959 - - -
Foreign REPUBLICA DE GUATEMALA 8,767 - - -
97.032.000-8 BANCO BBVA BHIF - - - -
97.036.000-K BANCO SANTIAGO - - - -
97.006.000-6 BANCO DE CREDITO E INVERSIONES - - - -
-------------- ---------------- -------------- --------------
Total 957,381 - 19,301,695 9,191,446
-------------- ---------------- -------------- --------------
Principal 954,678 - 19,221,244 9,178,122
============== ================ ============== ==============
Annual average interest rate 4.58% 3.53% - 0.78%
----------------------------------------------------------------------------------------------------
Short-term portion of long-term
----------------------------------------------------------------------------------------------------
79.561.240-8 CHASE MANHATTAN 473,401 375,186 - -
Foreign ABN AMRO BANK 250,805 1,545,331 - -
Foreign BBVA-(BANCO EXTERIOR) 8,736,493 18,147,934 6,169,556 -
97.006.000-6 BANCO DE CREDITO E INVERSIONES - - 6,533,683 -
97.008.000-7 CITIBANK 8,965,832 116,381,125 - -
97.015.000-5 SANTANDER - - 8,211,894 9,841,229
97.036.000-K SANTIAGO - - 9,764,132 -
Foreign CREDIT LYONNAIS 2,468,166 - - -
Foreign MORGAN GUARANTY 61,383,585 - - -
-------------- ---------------- -------------- --------------
Total 82,278,282 136,449,576 30,679,265 9,841,229
-------------- ---------------- -------------- --------------
Principal 78,839,957 133,474,948 30,058,565 9,711,590
============== ================ ============== ==============
Annual average interest rate 3.86% 2.39% 4.33% 0.90%
----------------------------------------------------------------------------------------------------------------------------
Percentage of obligations in foreign currency: 62.30 % for 2001 and 87.76 % for 2002
Percentage of obligations in local currency: 37.70 % for 2001 and 12.24 % for 2002
Bank or financial institution $ TOTAL
----------------------------- ------------------------- -------------------------------
Taxp. No. Short-term 2001 2002 2001 2002
------------ ------------------------------------ ------------ ------------ --------------- ---------------
ThCh$ ThCh$ ThCh$ ThCh$
97.008.000-7 CITIBANK 1,291 - 8,511,615 -
97.030.000-7 ESTADO 174 - 10,791,545 9,191,446
59.004.250-1 SUDAMERIS - - 172,655 -
97.004.000-5 BANCO DE CHILE 74,997 - 850,956 -
Foreign REPUBLICA DE GUATEMALA - - 8,767 -
97.032.000-8 BANCO BBVA BHIF 9,269 - 9,269 -
97.036.000-K BANCO SANTIAGO 11,298 - 11,298 -
97.006.000-6 BANCO DE CREDITO E INVERSIONES 296,008 - 296,008 -
------------ ------------ --------------- ---------------
Total 393,037 - 20,652,113 9,191,446
------------ ------------ --------------- ---------------
Principal 393,037 - 20,568,959 9,178,122
============ ============ =============== ===============
Annual average interest rate - 3.51% 0.78%
----------------------------------------------------------------------------------------------
Short-term portion of long-term
----------------------------------------------------------------------------------------------
79.561.240-8 CHASE MANHATTAN - - 473,401 375,186
Foreign ABN AMRO BANK - - 250,805 1,545,331
Foreign BBVA-(BANCO EXTERIOR) - - 14,906,049 18,147,934
97.006.000-6 BANCO DE CREDITO E INVERSIONES - - 6,533,683 -
97.008.000-7 CITIBANK - - 8,965,832 116,381,125
97.015.000-5 SANTANDER - - 8,211,894 9,841,229
97.036.000-K SANTIAGO - - 9,764,132 -
Foreign CREDIT LYONNAIS - - 2,468,166 -
Foreign MORGAN GUARANTY - - 61,383,585 -
------------ ------------ --------------- ---------------
Total - - 112,957,547 146,290,805
------------ ------------ --------------- ---------------
Principal - - 108,898,522 143,186,538
============ ============ =============== ===============
Annual average interest rate - - 3.99% 2.29%
----------------------------------------------------------------------------------------------------------------------
F-31
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
15. Current and Long-term liabilities, continued
Long-term obligations with banks and financial institutions:
Currency Long-term
or portion Years to maturity for long-term portion
Indexation as of -----------------------------------------------
Bank or Financial Index 12/31/2001 1 to 2 2 to 3 3 to 5
Taxp. No. Institution
------------- ------------------------------- ------------------------------ -----------------------------------------------
ThCh$ ThCh$ ThCh$ ThCh$
LOANS IN DOLLARS
79.561.240-8 CHASE MANHATTAN US$ 80,932,043 57,488,800 28,744,400 -
Foreign ABN AMRO BANK US$ 134,886,740 - - 107,791,500
Foreign BANCO BILBAO VIZCAYA Y OTHER US$ - 143,721,999 -
97.008.000-7 CITIBANK US$ 177,100,619 7,718,198 7,718,198 3,859,100
Foreign CREDIT LYONNAIS US$ 3,700,169 - - -
Foreign J. P. MORGAN US$ 60,699,033 - - -
Foreign BANCO EXTERIOR DE ESPANA US$ 8,430,420
SUBTOTAL 465,749,024 65,206,998 180,184,597 111,650,600
LOANS IN UNIDADES DE FOMENTO
97.015.000-5 SANTANDER UF 69,292,903 59,525,347 - -
97.032.000-8 BANCO BBVA BHIF UF 14,023,535 - - -
SUBTOTAL 83,316,438 59,525,347 - -
LOANS IN OTHER CURRENCIES
Foreign MERCOM BANK $ readjustable 46,536 - - -
----------------- -----------------------------------------------
TOTAL 549,111,998 124,732,345 180,184,597 111,650,600
================= ===============================================
----------------------------------------------------------------------------------------------------------------------------------
Percentage of obligations in foreign currency: 84.83% in 2001 and 85.71% in 2002
Percentage of obligations in national currency: 15.17% in 2001 and 14.29% in 2002
Long-term
portion
as of
Bank or Financial 12/31/2002
Taxp. No. Institution
------------- ------------------------------- ----------------------------------------
ThCh$
LOANS IN DOLLARS
79.561.240-8 CHASE MANHATTAN 86,233,200 Libor + 0,75%
Foreign ABN AMRO BANK 107,791,500 Libor + 1,000%
Foreign BANCO BILBAO VIZCAYA Y OTHER 143,721,999 Libor + 1,125%
97.008.000-7 CITIBANK 19,295,496 Libor + 0,725%
Foreign CREDIT LYONNAIS -
Foreign J. P. MORGAN -
Foreign BANCO EXTERIOR DE ESPANA
SUBTOTAL 357,042,195 2.57%
LOANS IN UNIDADES DE FOMENTO
97.015.000-5 SANTANDER 59,525,347 Tab 90 + 0,75%
97.032.000-8 BANCO BBVA BHIF -
SUBTOTAL 59,525,347 TAB + 0.9%
LOANS IN OTHER CURRENCIES
Foreign MERCOM BANK -
----------------------------------------
TOTAL 416,567,542 2.33%
========================================
-------------------------------------------------------------------------------------------
F-32
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
16. Bonds:
The detail of obligations with the public for bond issues, classified in the
short and long-term is as follows:
-----------------------------------------------------------------------------------------
Nominal
Registration number Amount Basis annual
or identification of of for interest Final
the instrument Series issue readjustment rate maturity
-----------------------------------------------------------------------------------------
%
Short-term portion of
long-term bonds
143.27.06.91 E 156,250 U.F. 6.000 Apr.2003
143.27.06.91 F 71,429 U.F. 6.000 Apr.2016
177.12.08.94 H (a) - U.F. 5.800 Aug.2006
177.12.08.94 I 125,000 U.F. 5.500 Aug.2015
203.23.04.98 J (b) - U.F. 6.750 Feb.2010
203.23.04.98 K - U.F. 6.750 Feb.2020
Issued in New York Yankee Bonds - US$ 7.625 Jul.2006
Issued in New York Yankee Bonds - US$ 8.375 Jan.2006
Issued in Luxemburg Eurobonos (c) - EURO 5.375 Aug.2004
Long-term bonds
143.27.06.91 E - U.F. 6.000 Apr.2003
143.27.06.91 F 892,857 U.F. 6.000 Apr.2016
177.12.08.94 H (a) - U.F. 5.800 Aug.2006
177.12.08.94 I 1,437,500 U.F. 5.500 Aug.2015
203.23.04.98 J (b) - U.F. 6.750 Feb.2010
203.23.04.98 K 4,000,000 U.F. 6.750 Feb.2020
Issued in New York Yankee Bonds 200,000,000 US$ 7.625 Jul.2006
Issued in New York Yankee Bonds 200,000,000 US$ 8.375 Jan.2006
Issued in Luxemburg Eurobonos (c) 157,800,000 EURO 5.375 Aug.2004
------------------------------------------------------------------------------------------------
Frequency Par value
Registration number -------------------------------------------------------- Country
or identification of Interest Amorti- of placing
the instrument payment zations 2001 2002 bonds
------------------------------------------------------------------------------------------------
ThCh$ ThCh$
Short-term portion of
long-term bonds
143.27.06.91 Biannual Biannual 5,330,441 2,648,222 Chile
143.27.06.91 Biannual Biannual 1,408,354 1,393,207 Chile
177.12.08.94 Biannual Biannual 8,641,818 - Chile
177.12.08.94 Biannual Biannual 2,283,629 2,268,699 Chile
203.23.04.98 Biannual Biannual 6,084,352 - Chile
203.23.04.98 Biannual Biannual 1,661,474 1,660,837 Chile
Issued in New York Biannual Maturity 4,799,720 6,030,394 Foreign
Issued in New York Biannual Maturity 5,773,902 5,079,754 Foreign
Issued in Luxemburg Biannual Maturity 2,667,462 2,623,126 Foreign
---------------------------------
Total 38,651,152 21,704,239
===========================================
Long-term bonds
143.27.06.91 Biannual Biannual 2,617,272 - Chile
143.27.06.91 Biannual Biannual 16,152,307 14,950,107 Chile
177.12.08.94 Biannual Biannual 29,313,445 - Chile
177.12.08.94 Biannual Biannual 26,172,718 24,069,673 Chile
203.23.04.98 Biannual Biannual 37,688,715 - Chile
203.23.04.98 Biannual Biannual 67,002,158 66,976,480 Chile
Issued in New York Biannual Final 134,886,740 143,722,000 Foreign
Issued in New York Biannual Final 134,886,740 143,722,000 Foreign
Issued in Luxemburg Biannual Final 119,105,286 118,752,390 Foreign
---------------------------------
Total 567,825,381 512,192,650
===========================================
(a) During December 2002, Telefonica CTC Chile prepaid this bond placement,
paying down the outstanding capital balance (UF) plus interest accrued to
date. Resulted in recognizing in income the placement expenses for these
bonds as well as the higher discount rate for their placement, the amounts
involved in each case are ThCh$75,738 and ThCh$376,314, which are included
under "Financial Expenses".
(b) During August 2002, Telefonica CTC Chile prepaid this bond placement,
paying down the outstanding capital balance (UF) plus interest accrued to
date. This transaction implied recognizing in income the placement expenses
for these bonds as well as the higher discount rate for their placement,
the amounts involved in each case are ThCh$423,724 and ThCh$1,789,383,
which are included under "Financial Expenses".
(c) Between June and December of 2002, Telefonica CTC Chile carried out a
partial repurchase of 37.6 million euros of this placement. This
transaction was carried out at a price of 96.8% of par value, which
resulted in a payment of 36.4 million euros, plus interest accrued as of
that date on the nominal amount of the repurchase. Partial redemption of
this bond had a net effect on income of ThCh$557,260, due to the lower
price paid and the proportional anticipated amortization of expenses
related to the placement which has been classified under Financial Income.
F-33
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
17. Accruals:
The detail of accruals shown in liabilities is as follows:
---------------------------------------- ----------- --------------
2001 2002
ThCh$ ThCh$
---------------------------------------- ---------- --------------
Current 15,069,037 9,952,190
Staff severance indemnities 523,192 90,218
Vacation 6,990,961 5,440,631
Other employee benefits 10,666,069 6,737,658
Employee benefit advances (3,111,185) (2,316,317)
---------------------------------------- ----------- -----------
Long-term 20,485,428 17,257,252
Staff severance indemnities 20,485,428 17,257,252
---------------------------------------- ----------- -----------
Total 35,554,465 27,209,442
---------------------------------------- ----------- -----------
There were no write offs in 2000, 2001 and 2002.
18. Staff severance indemnities:
The detail of the charge to income for staff severance indemnities is
as follows:
---------------------------------------------------------------- ------------------ -------------- ----------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
---------------------------------------------------------------- ------------------ -------------- ----------------
Operating costs and administration and selling expenses 7,943,140 3,803,010 4,049,348
Other non-operating expenses 3,147,634 16,605,183 11,463,596
---------------------------------------------------------------- ------------------ -------------- ----------------
Total charge to income 11,090,774 20,408,193 15,512,944
---------------------------------------------------------------- ------------------ -------------- ----------------
Payments for the year (10,481,492) (30,804,995) (19,174,094)
---------------------------------------------------------------- ------------------ -------------- ----------------
19. Minority interest:
Minority interest includes recognition of the portion of equity and
income of subsidiaries pertaining to third parties. The detail is as
follows:
-----------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage Participation Participation
Minority Minority Minority in equity in net income (loss)
Interest Interest Interest December 31, for the year ended
Subsidiaries December 31,
---------------------------------------- 2000 2001 2002 2001 2002 2000 2001 2002
% % % ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
-----------------------------------------------------------------------------------------------------------------------------
Soc. Nacional de Procesamiento de Datos 40.01 40.01 - 35,695,600 - 2,965,584 4,717,129 607,665
S.A. (i)
Administradora de Telepeajes de Chile 36.01 19.01 19.01 (62,073) 27,826 (23,514) (11,148) (12,619)
S.A.
CTC - Transmisiones Regionales S.A. 0.84 0.84 0.84 863,354 925,774 246,571 261,808 155,355
Fundacion Telefonica 50.00 50.00 50.00 171,240 183,447 82,013 (29,224) 12,208
Comunicaciones Mundiales 0.20 0.34 0.34 5,282 5,224 (346) (202) 88
----------------------------------------------------------------------------------
TOTAL 36,673,275 1,142,263 3,270,308 4,938,518 762,697
==================================================================================
(i) In 2002, this is the participation in income up to August 31, 2002 (see
note 2d)
F-34
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
20. Shareholders' Equity:
During each period, changes in shareholders' equity accounts are
as follows:
----------------------------------------------------------------------------------------------------------------------------
Paid-in Share Other Retained
capital premium reserves earnings
------------- ----------- ------------- -------------
2000 ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------
Balance as of January 1, 2000 662,386,359 102,993,491 571,941 565,531,247
Transfer of 1999 loss to retained earnings - - - (50,462,252)
Transfer to retained earnings - - - (1,933,457)
Absorption subsidiary start-up accumulated deficit - - - (58,754)
Currency translation adjustment - - 298,866 -
Subsidiary start-up accumulated - - - -
Price-level restatement 31,132,159 4,840,693 26,881 24,114,609
Net loss for the year - - - -
-------------- -------------- -------------- --------------
Balance as of December 31, 2000 693,518,518 107,834,184 897,688 537,191,393
-------------- -------------- -------------- --------------
Balances as of December 31, 2000 restated 736,468,120 114,512,356 953,281 570,459,656
-------------- -------------- -------------- --------------
2001
-------------------------------------------------
Balance as of January 1, 2001 693,518,518 107,834,184 897,688 537,191,393
Transfer of 2000 loss to retained earnings - - - (114,023,953)
Absorption subsidiary start-up accumulated deficit - - - (464,381)
Currency translation adjustment - - 611,149 -
Subsidiary start-up accumulated - - - -
Price-level restatement 21,499,074 3,342,860 27,829 13,103,795
Net income for the year - - - -
-------------- -------------- -------------- --------------
Balance as of December 31, 2001 715,017,592 111,177,044 1,536,666 435,806,854
-------------- -------------- -------------- --------------
Balances as of December 31, 2001 restated 736,468,120 114,512,356 1,582,766 448,881,060
-------------- -------------- -------------- --------------
2002
-------------------------------------------------
Balance as of January 1, 2002 715,017,592 111,177,044 1,536,666 435,806,854
Transfer of 2001 net income to retained earnings - - - 4,111,658
Final 2001 dividend - - - (1,233,497)
Absorption subsidiary start-up accumulated deficit - - - (371,667)
Currency translation adjustment - - 362,843 -
Price-level restatement 21,450,528 3,335,312 25,227 13,151,868
Net loss for the year - - - -
-------------- -------------- -------------- --------------
Balance as of December 31, 2002 736,468,120 114,512,356 1,924,736 451,465,216
-------------- -------------- -------------- --------------
-------------------------------------------------------------------------------------------------------------------------------
Subsidiary Net income
development (loss)
Provisional stage for Total
dividends deficit the year shareholders' equity
------------ ------------- ------------ -------------------
2000 ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------
Balance as of January 1, 2000 (1,933,457) (58,754) (50,462,252) 1,279,028,575
Transfer of 1999 loss to retained earnings - - 50,462,252 -
Transfer to retained earnings 1,933,457 - - -
Absorption subsidiary start-up accumulated deficit - 58,754 - -
Currency translation adjustment - - - 298,866
Subsidiary start-up accumulated - (464,381) - (464,381)
Price-level restatement - - - 60,114,342
Net loss for the year - - (114,023,953) (114,023,953)
-------------- -------------- -------------- --------------
Balance as of December 31, 2000 - (464,381) (114,023,953) 1,224,953,449
-------------- -------------- -------------- --------------
Balances as of December 31, 2000 restated - (493,140) (121,085,457) 1,300,814,816
-------------- -------------- -------------- --------------
2001
-------------------------------------------------
Balance as of January 1, 2001 - (464,381) (114,023,953) 1,224,953,449
Transfer of 2000 loss to retained earnings - - 114,023,953 -
Absorption subsidiary start-up accumulated deficit - 464,381 - -
Currency translation adjustment - - - 611,149
Subsidiary start-up accumulated - (371,667) - (371,667)
Price-level restatement - - - 37,973,558
Net income for the year - - 4,111,658 4,111,658
-------------- -------------- -------------- --------------
Balance as of December 31, 2001 - (371,667) 4,111,658 1,267,278,147
-------------- -------------- -------------- --------------
Balances as of December 31, 2001 restated - (382,817) 4,235,008 1,305,296,493
-------------- -------------- -------------- --------------
2002
-------------------------------------------------
Balance as of January 1, 2002 - (371,667) 4,111,658 1,267,278,147
Transfer of 2001 net income to retained earnings - - (4,111,658) -
Final 2001 dividend - - - (1,233,497)
Absorption subsidiary start-up accumulated deficit - 371,667 - -
Currency translation adjustment - - - 362,843
Price-level restatement - - - 37,962,935
Net loss for the year - - (17,680,376) (17,680,376)
-------------- -------------- -------------- --------------
Balance as of December 31, 2002 - - (17,680,376) 1,286,690,052
-------------- -------------- -------------- --------------
In accordance with Article 10 of Corporation the Chilean Law 18,046,
restatement of paid-in capital has been incorporated to that account.
F-35
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
20. Shareholders' Equity, continued:
(a) Paid-in capital:
As of December 31, 2002, the Company's paid-in capital is as
follows:
Number of shares:
-------------------------------------------------------------------------------
Series No. of subscribed No. of paid shares No. of shares with
shares voting rights
-------------------------------------------------------------------------------
A 873,995,447 873,995,447 873,995,447
B 83,161,638 83,161,638 83,161,638
-------------------------------------------------------------------------------
Paid-in capital:
-------------------------------------------------------------------------------
Series Subscribed Paid-in
Capital Capital
ThCh$ ThCh$
-------------------------------------------------------------------------------
A 672,480,822 672,480,822
B 63,987,298 63,987,298
-------------------------------------------------------------------------------
(b) Shareholder distribution:
In accordance with Circular No. 792 of the Chilean Superintendency
of Securities and Insurance, the distribution of shareholders based
on their participation in the Company as of December 31, 2002 is as
follows:
------------------------------------------------------------------------------------------
Percentage of Total Number of
Type of shareholder holdings shareholders
%
------------------------------------------------------------------------------------------
10% holding or more 63.85 2
Less than 10% holding:
Investment equal to or exceeding UF 200 35.40 2,441
Investment under UF 200 0.75 12,258
------------------------------------------------------------------------------------------
Total 100.00 14,701
------------------------------------------------------------------------------------------
Company controller 43.64 1
------------------------------------------------------------------------------------------
(c) Dividend policy:
As established in Law No. 18,046, except when it is otherwise
agreed upon at the General Shareholders' Meeting with the unanimous
vote of the outstanding shares, when there is net income, at least
30% should be distributed as dividends.
On April 5, 2002, the Ordinary Shareholders' Meeting was informed of
the dividend distribution policy proposed by the Board of Directors
for 2002.
F-36
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
20. Shareholders' Equity, continued:
(c) Dividend policy, continued:
Distribution for 2002, of at least 30% of net income of the same
year will be the - percentage equal to that required by law - by
means of a final dividend in May 2003, which will be proposed at the
corresponding General Shareholders' Meeting.
On April 5, 2002, the General Shareholders' Meeting agreed to pay a
dividend of ThCh$1,233,497 (historical) out of retained earnings and
which was paid on May 15, 2002.
(d) Other reserves:
In 1994 the Company set up a reserve for the purchase of Invercom
S.A. and Instacom S.A., in 1998 for the purchase of Sonda S.A. and
its subsidiaries and since 2001 for the adjustment of Consorcio
Telefonica de Brasil Celular Holding.
---------------------------------------------------------------------------------------------------------------
Amount
-------------------------- Balance as of
December 31, Price-level Net December 31,
Company 2001 restatement Movement 2002
ThCh$ ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------
96.720.710-1 Invercom S.A. 39,813 1,194 - 41,007
84.119.600-7 Instacom S.A. 15,268 458 - 15,726
83.628.100-4 Sonda S.A. 2,007,627 39,356 (645,317)(1) 1,401,666
Foreign Consorcio Telefonica de Brasil Celular
Holding (526,042) (15,781) 1,008,160 (1) 466,337
---------------------------------------------------------------------------------------------------------------
Total 1,536,666 25,227 362,843 1,924,736
---------------------------------------------------------------------------------------------------------------
(1) This movement corresponds to the net effect of the adjustment for
conversion differences in accordance with Technical Bulletin No. 64
issued by the Chilean Accountants' Association.
(e) Subsidiary development stage deficit:
The General Ordinary Shareholders' Meeting held on April 5, 2002,
approved absorption of the accumulated deficit in the development
period as of December 31, 2001, for the subsidiaries Telefonica
Gestion de Servicios Compartidos S.A. and Infoera S.A.
F-37
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
21. Income and Expenses:
(a) Operating revenues and expenses:
The detail of operating revenue and expenses is as follows:
---------------------------------------------------------- ------------------ --------------- ----------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
---------------------------------------------------------- ------------------ --------------- ----------------
Operating revenues
Revenues from sale of services 865,109,742 858,748,543 786,651,882
Revenues from sale of equipment and projects 33,944,945 61,286,110 76,496,799
Total Operating revenues 899,054,687 920,034,653 863,148,681
Depreciation and amortization 249,346,034 255,504,373 261,035,237
Salaries and employee benefits 103,372,113 101,149,516 79,566,180
Cost of long distance services and interconnections 54,743,412 50,087,726 71,640,922
Cost of sales of equipment and projects 111,993,703 75,260,511 53,852,813
Provision for doubtful accounts 70,029,139 20,536,073 26,001,066
Contracts with third parties 56,001,659 59,148,432 44,821,608
Cost of sales of information development - 30,927,099 13,510,995
Vehicle, office and equipment rentals 6,493,156 11,847,364 11,535,508
Materials (includes obsolescence provisions) 5,869,051 5,175,646 6,140,081
Pole rental 5,948,970 5,601,700 5,438,878
Telephone directory printings 4,722,102 3,634,978 5,048,653
Others 28,508,203 28,320,700 23,644,208
Total operating costs 697,027,542 647,194,118 602,236,149
Gross profit 202,027,145 272,840,535 260,912,532
---------------------------------------------------------- ------------------ --------------- ----------------
Depreciation includes ThCh$4,722,102, ThCh$13,963,397, ThCh$18,022,457 in 2000,
2001 and 2002, respectively, for capitalized interest.
F-38
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
21. Income and Expenses continued:
(b) Other non-operating income:
The detail of non-operating income is as follows:
------------------------------------------------------------------ ------------- ------------- -------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------ ------------- ------------- -------------
Other non operating income:
Damage indemnity and supplier fines 848,495 37,207 -
Gain on sale of shares - - 1,784,257
Gain on sale of investment 152,631 1,657,408 -
Insurance recovery - 240,285 -
Gain on sale of property, plant and equipment and sale of 211,244 404,067 912,077
materials
Dividends received - - 172,505
Compensation for premature termination of contract with - 11,389,049 -
Publiguias
Net gain on sale of participation in subsidiaries (a) and (b) 39,610,790 - 7,874,374
Net gain on sale of Compaq contract - 466,599 -
Administrative services 195,238 879,855 75,409
Extraordinary recovery of written off accounts - - 880,778
Proportional equity adjustment for prior periods in Sonda
subsidiaries 492,723 - -
Others 3,850,426 497,585 1,522,124
------------------------------------------------------------------ ------------- ------------- -------------
Total 45,361,547 15,572,055 13,221,524
------------------------------------------------------------------ ------------- ------------- -------------
(a) Corresponds to net gain from selling the ownership in Metropolis-Intercom
in 2000.
(b) Corresponds to net gain from selling 25% ownership in Sonda S.A. originated
by the difference between the amount received of ThCh$ 27,920,701
(historical) and the investment's book value in 2001. (See Note 2 (a)).
F-39
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
21. Income and Expenses continued:
(c) Other non-operating expenses:
The detail of other non-operating expenses is as follows:
------------------------------------------------------------------ ------------- ------------- -------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------ ------------- ------------- -------------
Other non operating expenses:
Restructuring costs (1) 8,115,268 18,961,222 15,224,434
Lawsuit indemnities and other provisions 1,636,639 2,086,846 3,115,875
Depreciation and write off of out of service property, plant
and equipment (2) 3,886,909 2,169,904 2,002,190
Extraordinary charges for write off of Mobile business net 2,812,632 5,205,612 -
Inventory write off 6,068,245 1,055,502 -
Accounts receivable write off 2,121,216 157,220 -
Charges for non-provisioned taxes 1,463,310 541,089 278,622
Differences in appraisal of mobile services - 3,264,356 -
Provision for lower market value - Terra Networks S.A. 4,104,868 3,582,030 7,566,697
Provision for lower market value of other investments - 384,719 -
Tax recovery difference - - 537,635
Medical costs - 403,269 -
Write-off of past-due accounts prior to 1999 3,843,305 - -
Correction of non-feasible LD service prior to 1999 2,612,930 - -
Write-off of calls of initial period of "calling party pays" 2,198,730 - -
Unrecovered securities in portfolio 2,033,371 - -
Others 6,651,412 7,320,270 9,154,494
------------------------------------------------------------------ ------------- ------------- -------------
Total 47,548,835 45,132,039 37,879,947
------------------------------------------------------------------ ------------- ------------- -------------
(1) This amount includes costs related to administrative restructuring plans
and the difference in the current value provision of staff severance
indemnities and the value paid at the time employees were terminated.
(2) This caption is made up mainly of depreciation of the cable TV network in
La Serena and Concepcion (assets temporarily out of service), not
transferred in the sale of subsidiary Multimedia to Cordillera
Comunicaciones.
F-40
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
22. Price-level restatement:
The detail of price-level restatement is as follows:
---------------------------------------------------------------------------------------------------------------------
Assets (Charges) Credits Indexation 2000 2001 2002
ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
Inventories C.P.I. 808,777 946,006 484,941
Prepaid expenses C.P.I. 16,670 (18,606) 5,701
Prepaid expenses U.F. 2,575 6,257 (2,523)
Other current assets C.P.I. 3,184,428 2,535,612 902,112
Other current assets U.F. (9,377,581) (16,323,621) (6,648,402)
Short and long-term deferred taxes C.P.I. 7,233,106 4,119,481 4,709,485
Property, plant and equipment C.P.I. 103,188,605 67,040,899 60,206,880
Investments in related companies C.P.I. 1,177,046 1,201,322 705,812
Goodwill C.P.I. 9,987,944 7,002,195 6,213,231
Long-term debtors C.P.I. - (105,565) (4,765,743)
Long-term debtors U.F. (3,996,919) (5,498,967) 3,178
Other long-term assets C.P.I. 2,615,103 779,402 891,945
Other long-term assets U.F. 8,921,795 10,659,340 9,156,005
Expense accounts C.P.I. 10,725,603 8,859,413 15,306,543
---------------------------------------------------------------------------------------------------------------------
Total Credits 134,487,152 81,203,168 87,169,165
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Liabilities - Shareholders' Equity (charges) credits Indexation 2000 2001 2002
ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
Short-term obligations C.P.I. 338,674 (341,809) (411,123)
Short-term obligations U.F. (17,856,937) (11,860,218) (18,491,417)
Long-term obligations C.P.I. (1,515,081) (894,415) (233,572)
Long-term obligations U.F. (24,689,631) (14,083,203) (14,022,076)
Minority interest C.P.I. (1,663,027) (1,174,198) -
Shareholders' equity C.P.I. (63,837,225) (39,112,764) (37,962,935)
Revenue accounts C.P.I. (16,594,117) (13,433,390) (22,212,819)
---------------------------------------------------------------------------------------------------------------------
Total Charges (125,817,344) (80,899,997) (93,333,942)
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------- ----------------------------------------------
Income (loss) net from price-level restatement 8,669,808 303,171 (6,164,777)
------------------------------------------------------- ----------------------------------------------
F-41
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
23. Exchange differences:
The detail of exchange differences is as follows:
---------------------------------------------------------------------------------------------------------------------
Assets (Charges) Credits Currency 2000 2001 2002
ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
Inventories US$ - - 57,604
Other current assets US$ 37,926,586 121,878,775 36,128,754
Other current assets EURO 2,726,103 1,626,247 (246,605)
Property, plant and equipment US$ - 44,644 1,176
Property, plant and equipment Other (5,001) (4,444) -
Goodwill US$ (3,008,698) (1,371,913) -
Long-term debtors US$ 6,236,533 23,431,937 25,178,673
Other long-term assets US$ 564,315 906,815 (289,110)
Other long-term assets EURO (4,769) 92,974 144,762
Prepaid expenses US$ 53,983 6,114 64
---------------------------------------------------------------------------------------------------------------------
Total Credits 44,489,052 146,611,149 60,975,318
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Liabilities (charges) credits Currency 2000 2001 2002
ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
Short-term obligations US$ (32,294,856) (18,505,711) (3,253,123)
Short-term obligations EURO - (4,999,056) 10,250,478
Short-term obligations DM (2,897) (33,719) -
Short-term obligations OTHERS (100,866) (81,687) -
Long-term obligations US$ (52,692,238) (121,622,660) (60,596,743)
Long-term obligations EURO (710,518) 530,492 (10,163,290)
Long-term obligations DM 51,891 328 -
Long-term obligations OTHERS - (70,926) (1,064)
---------------------------------------------------------------------------------------------------------------------
Total Charges (85,749,484) (144,782,939) (63,763,742)
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------- ----------------------------------------------
Income (Loss) net from exchange differences (41,260,432) 1,828,210 (2,788,424)
------------------------------------------------------- ----------------------------------------------
F-42
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
24. Issuance and placement of shares and debt expense:
The detail of this item is as follows:
-------------------------------------------------------------------------------------------------------------------
Short-term Long-term
-------------------------------------------------------------------------------------------------------------------
2001 2002 2001 2002
ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------------
Disbursements made for issuance of bond placement 1,790,109 1,762,067 6,103,671 4,177,432
Higher discount rate of bonds to be amortized 1,253,042 697,793 7,355,920 4,623,831
-------------------------------------------------------------------------------------------------------------------
Total 3,043,151 2,459,860 13,459,591 8,801,263
-------------------------------------------------------------------------------------------------------------------
These items are classified in Other Current Assets and Other Long-term
Assets, as applicable, and are amortized over the term of the respective
bonds, as described in Note 16 "Bonds payable".
25. Cash Flows:
Financing and investment activities that did not generate cash flows during
the year, but that involve future cash flows are as follows:
a) Financing activities: The detail of financing activities that involve
future cash flows is as follows:
Loans paid - see note 14 and 15
Bonds payable - see note 16
b) Investment Activities: Investment activities that involve future cash
flows are as follows:
------------------------------------------------------------ -------------------- ------------------
Maturity year ThCh$
------------------------------------------------------------ -------------------- ------------------
Other investment income from maturity of PRD and Zero: 2005 65,571,937
------------------------------------------------------------ -------------------- ------------------
F-43
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
26. Derivative obligations:
The detail of derivative contracts at December 31, 2002 is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
HEDGED ITEM
OR TRANSACTION
POSITION -------------------------------------
TYPE OF TYPE OF CONTRACT DUE DATE SPECIFIC PURCHASE AMOUNT
DERIVATIVE CONTRACT VALUE ITEM SALE NAME OF ITEM
ThCh$ ThCh$
-----------------------------------------------------------------------------------------------------------------------------------
FR CCPE 181,000,000 I Quart. 2003 Exchange rate P Debts in US$ 181,000,000
FR CCPE 160,000,000 II Quart. 2003 Exchange rate P Debts in US$ 160,000,000
FR CCPE 175,600,000 III Quart. 2003 Exchange rate P Debts in US$ 175,600,000
FR CCPE 249,000,000 IV Quart. 2003 Exchange rate P Debts in US$ 249,000,000
FR CCPE 164,800,000 I Quart. 2004 Exchange rate P Debts in US$ 164,800,000
FR CCPE 10,000,000 II Quart. 2004 Exchange rate P Debts in US$ 10,000,000
FR CCPE 80,000,000 III Quart. 2004 Exchange rate P Debts in US$ 80,000,000
FR CCPE 40,000,000 IV Quart. 2004 Exchange rate P Debts in US$ 40,000,000
FR CCPE 15,000,000 I Quart. 2005 Exchange rate P Debts in US$ 15,000,000
FR CCPE 25,000,000 II Quart. 2005 Exchange rate P Debts in US$ 25,000,000
FR CCPE 19,000,000 III Quart. 2006 Exchange rate P Debts in US$ 19,000,000
FR CCPE 155,000,000 III Quart. 2004 Exchange rate P Debts in EURO 155,000,000
FR CCPE 13,000,000 I Quart. 2003 Exchange rate P Debts in US$ 13,000,000
FR CCPE 22,000,000 II Quart. 2003 Exchange rate P Debts in US$ 22,000,000
FR CCPE 4,000,000 I Quart. 2004 Exchange rate P Debts in US$ 4,000,000
Zero Cost Collar CCTE 347,591,590 I Trim. 2003 Interest rate P Debts in US$ 347,591,590
Zero Cost Collar CCTE 225,000,000 IV Trim. 2003 Interest rate P Debts in US$ 225,000,000
S CCTE 100,000,000 III Trim. 2004 Interest rate P Debts in EURO 100,000,000
-----------------------------------------------------------------------------------------------------------------------------------
Income to be deferred for exchange insurance to be amortized
Costs to be deferred for exchange insurance to be amortized
Exchange insurance expired during the year ( net )
-----------------------------------------------------------------------------------------------------------------------------------
Total
-----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
AFFECTED ACCOUNTS
---------------------------------------------------------------
--------------------------------
AMOUNT ASSET / LIABILITY EFFECT ON INCOME
OF ---------------------------------------------------------------
TYPE OF PROTECTED
DERIVATIVE ITEM NAME AMOUNT REALIZED UNREALIZED
ThCh$ ThCh$ ThCh$
----------------------------------------------------------------------------------------------------------------------------------
FR 130,068,410 asset 130,068,410 - 4,299,117
liability (127,725,942)
FR 114,977,600 asset 114,977,600 - 7,870,678
liability (110,810,209)
FR 126,187,916 asset 126,187,916 - 2,974,499
liability (124,834,491)
FR 178,933,890 asset 178,933,890 - 8,307,780
liability (178,117,650)
FR 118,426,928 asset 118,426,928 - 3,217,065
liability (117,553,457)
FR 7,186,100 asset 7,186,100 - 422,654
liability (6,931,889)
FR 57,488,800 asset 57,488,800 - 3,615,279
liability (58,165,148)
FR 28,744,400 asset 28,744,400 - 1,398,424
liability (29,259,813)
FR 10,779,150 asset 10,779,150 - 668,509
liability (11,144,728)
FR 17,965,250 asset 17,965,250 - 991,266
liability (18,744,054)
FR 13,653,590 asset 13,653,590 - 1,141,942
liability (13,382,007)
FR 116,645,250 asset 116,645,250 - 12,236,257
liability (115,672,496)
FR 9,341,930 asset 9,341,930 - 39,290
liability (9,360,340)
FR 15,809,420 asset 15,809,420 - 246,430
liability (15,801,670)
FR 2,874,440 asset 2,874,440 - 64,680
liability (2,875,400)
Zero Cost Collar - asset (1,151,473) (5,862,433) (1,151,473)
Zero Cost Collar - asset (1,518,508) (3,222,729) (1,518,508)
S - asset 921,679 (1,452,521) 921,679
-----------------------------------------------------------------------------------------------------------------------------------
Income to be deferred for exchange insurance to be amortized liability (2,432,895) 997,568 1,361,637
Costs to be deferred for exchange insurance to be amortized asset 2,036,110 (3,535,079) (4,096,940)
Exchange insurance expired during the year ( net ) 29,554,173
-----------------------------------------------------------------------------------------------------------------------------------
Total 16,478,979 43,010,265
-----------------------------------------------------------------------------------------------------------------------------------
Types of derivatives: Type of Contract:
FR: Forward CCPE: Hedge contract for existing items
S : Swap CCTE: Hedge transactions coverage
CI : Investment contract
F-44
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
27. Contingencies and restrictions:
a) Lawsuits:
(i) Complaint filed by Profesionales Temporales Ltda. (Protempore
Ltda.):
On January 2, 1998, the Company was notified of a complaint
filed by Protempore Ltda. with the 15th Civil Court of
Santiago for cancellation of contract with damage indemnity
amounting to ThCh$ 7,885,711.
In a sentence dated June 28, 2002, the court rejected all
parts of the complaint and damage indemnity filed by
Protempore and accepted the counterclaim filed by Telefonica
CTC Chile, declaring cancellation of the contracts due to
non-compliance by the former, sentencing them to indemnify all
payments made by the Company as a consequence of their
non-compliance. Protempore filed a motion to vacate and appeal
against this sentence, which is underway (Case No. 4958-1997).
(ii) Complaint filed by VTR Telefonica S.A.:
On June 30, 2000 VTR Telefonica S.A. filed a complaint in
plenary suit for the collection of access charges of Ch$ 2,203
million, based on the differences that would arise when access
charge tariffs were reduced. The first instance sentence
accepted VTR's complaint and compensation presented by
Telefonica CTC. The Company filed a motion to vacate and
appeal that is currently underway.
(iii) Labor lawsuits:
In the normal course of business of the Company there have
been labor lawsuits filed against it.
To date, among others, there are certain labor lawsuits
involving 27 former employees who claim wrongful dismissal.
These employees did not sign releases or receive staff
severance indemnities. First instance sentences have been
handed down in two of these lawsuits, accepting the complaint.
They have been appealed by the Company. The Company has
obtained favorable sentencing in a third lawsuit, with the
Supreme Court ratifying a previous verdict by the Court of
Appeal of Concepcion which accepted the Company's arguments.
In addition there are other lawsuits involving 116 former
employees who have been paid their staff severance indemnities
and have signed their releases, who in spite of having
accepted voluntary retirement plans or having been terminated
due to the Company's needs, intend to obtain a declaration of
nullity. Of these lawsuits, two have been decided in favor of
the Company, rejecting the nullity.
Certain unions have filed complaints with the Santiago Labor
Courts, requesting indemnity for various concepts.
(iv) Complaint from the Metropolitan Region's Customs Management:
The Metropolitan Region's Customs management filed charges
against the Telefonica Movil S.A. subsidiary for certain
regulatory infractions in importing telecommunications
equipment, amounting to a total of US$ 5,070,649.44. In this
regard it is noted that, in the opinion of management and
legal counsel, the loss contingency as compared to the
original estimate has been reduced by 90%, since, if the first
verdict is confirmed, the charges filed and regulatory
infractions claimed would not exceed 10% of the indicated
amounts.
In management's opinion and that of in-house legal counsel,
the risk of the Company being ordered to pay indemnities in
the amounts claimed in the above mentioned lawsuits mentioned
previously, is remote. Management considers it improbable that
the Company's revenues and shareholders' equity will be
significantly affected by these loss contingencies. Therefore
no provision has been set up for the indemnities being
claimed.
F-45
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
27. Contingencies and restrictions, continued:
(v) Complaint against the Chilean Government:
Telefonica CTC Chile continued its efforts to have
illegalities incurred in the drafting of Decree 187 which set
its rates, corrected. Of note is the presentation of an
administrative replacement recourse. Subsequent to the
negative response from the Authority, Telefonica CTC Chile
filed an indemnity complaint against the Government for
illegalities incurred in the rate setting process.
The complaint was for US$274 million, plus readjustments and
interest, and covers past and future damages until May 2004,
due to having to charge lower rates than those that should
legally have been set.
The Third Civil Court of Santiago accepted the complaint, and
notified the Government. Once the answer from the Government
had been received, as well as its defense arguments with which
the discussion period ends, the Court of Justice dictated the
writ of evidence, defining the pertinent, substantial and
disputed evidence. To date, the complaint is at the evidential
stage, during which Telefonica CTC Chile has provided abundant
testimonial evidence.
b) Financial restrictions:
In order to develop its investment plans, the Company has obtained
financing both from the local market as well as the foreign market
(Notes 14, 15 and 16), that establish among others: maximum debt
clauses for the Company and interest and cash flow coverage.
The maximum debt ratio for these contracts is 1.60, while the
interest coverage ratio cannot be less than 3.00 and, lastly, the
cash flow ratio must be equal to, or exceed, 0.166.
Non compliance with these clauses implies that all obligations
assumed in those financing contracts will become due.
As of December 31, 2002, the Company meets all financial
restrictions.
c) Performance bonds for frequencies awarded to Telefonica Movil.
On July 18, 2002, three 10 Mhz frequencies on the 1,900 Mhz band
were put out to tender. Telefonica Movil de Chile was awarded two
frequencies (20 Mhz) for UF 544,521 equivalent to US$ 12.8
million. Therefore, Telefonica Movil de Chile has had to issue
performance guarantee deposit, obtained from its banks, in favor
of the Telecommunications Subsecretary for amounts similar to
those mentioned earlier.
d) Contracts with Sonda S.A.
In September 2002, Telefonica CTC Chile through its subsidiary
Telefonica Empresas, sold and transferred 25% ownership of Sonda
S.A. to Inversiones Pacifico Limitada and Inversiones Santa Isabel
Limitada, companies related to Mr. Andres Navarro. In addition,
the Company signed an agreement with Inversiones Santa Isabel
Limitada, which grants various rights and obligations to both
parties in the sales option for the remaining 35% of Sonda (See
Note 2d).
F-46
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
27. Contingencies and restrictions, continued:
e) PCS-1900 network project contract:
During 2002, the subsidiary Telefonica Movil de Chile S.A. signed
contracts related to the PCS-1900 network project for
approximately ThUS$ 53,000.
28. Third party guarantees:
a) Purchase of VTR L.D. S.A.
In relation to the purchase of VTR L.D. S.A. (CTC Globus S.A.),
VTR S.A. (in which Telefonica CTC Chile S.A. does not
participate), declared that regarding any contingency that arose
before the purchase and sale contract (dated October 14, 1998) and
that was not declared at that time, VTR S.A. shall be solely and
exclusively responsible for settling it up to approximately US$10
million, granting guarantees to cover said contingencies. Those
guarantees expired on December 27, 2001.
On December 26, 2001 the parties renewed the guarantees for US$
2.5, million which would have expired on December 27, 2003.
On June 14, 2002, the parties signed a release which resulted in a
payment by VTR S.A. amounting to US$ 2 million.
b) Commitment to sell ownership in Sonda S.A.
Inversiones Santa Isabel Limitada, signed an agreement with
Telefonica Empresas that give it a sales option for 35% of Sonda
(as described in note 2d). To guarantee faithful and timely
compliance with the obligations derived from the option contract,
Inversiones Santa Isabel Limitada issued bank guarantees in favor
of Telefonica Empresas for UF 1,983,185. These guarantees will
remain in custody until August 26, 2003 and must be renewed within
the following 20 days for UF 2,003,260, bearing in mind that they
must be sight and renewed with a maturity date of September 26,
2004. Subsequently, during September 2004 they must once again be
renewed until Sept 26, 2005 for UF 2,048,885 with procedure
similar to that described above.
F-47
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
29. National and foreign currency:
The detail of national and foreign currency is as follows:
A summary of the assets in local and foreign currency is as follows:
-----------------------------------------------------------------------------------------------------------------------------------
Description Currency 2001 2002
ThCh$ ThCh$
-----------------------------------------------------------------------------------------------------------------------------------
Total current assets: 657,216,445 446,383,805
Cash Non-indexed Ch$ 17,036,117 16,417,174
Dollars 2,062,812 184,746
Euros 224,780 240,082
Time deposits Indexed Ch$ 597,708 262,647
Non-indexed Ch$ 9,602,704 -
Dollars 1,166,580 2,155,830
Marketable securities Indexed Ch$ 16,364,277 9,597,515
Non-indexed Ch$ 7,233,154 1,642,578
Dollars 33,011,385 65,571,937
Others currencies 3,609,237 -
Notes and accounts receivable (a) Indexed Ch$ 5,386,896 5,782,448
Non-indexed Ch$ 280,607,284 231,918,363
Dollars 5,989,137 -
Notes and accounts receivable from related companies Non-indexed Ch$ 5,496,519 5,334,521
Dollars 84,878 11,779,407
Other current assets (b) Indexed Ch$ 61,478,278 52,046,849
Non-indexed Ch$ 176,363,107 27,180,879
Dollars 30,435,549 15,651,379
Euros 466,043 617,450
Total property, plant and equipment : 2,124,008,809 1,939,043,734
Property, plant and equipment and accumulated Indexed Ch$ 2,121,842,859 1,939,043,734
depreciation Dollars 2,165,950 -
Total other long-term assets 309,075,559 302,945,766
Investment in related companies Indexed Ch$ 16,313,598 42,455,138
Investment in other companies Indexed Ch$ 10,561 3,816
Dolares 674,433 -
Goodwill Indexed Ch$ 210,069,277 179,404,553
Other long-term assets (c) Indexed Ch$ 35,638,892 49,870,178
Non-indexed Ch$ 22,942,072 6,470,955
Dollars 22,649,988 24,422,775
Euros 776,738 318,351
----------------------------------------------------------------------------------------------------------------------------------
Total assets 3,090,300,813 2,688,373,305
----------------------------------------------------------------------------------------------------------------------------------
Indexed Ch$ 2,467,702,346 2,278,466,878
Non-indexed Ch$ 519,280,957 288,964,470
Dollars 98,240,712 119,766,074
Euros 1,467,561 1,175,883
Other currencies 3,609,237 -
----------------------------------------------------------------------------------------------------------------------------------
(a) Includes the following balance sheet accounts: Trade Accounts Receivable,
Notes Receivable and Misellaneous Accounts Receivable.
(b) Includes the following balance sheet accounts: Inventories, Recoverable
Taxes, Prepaid Expenses, Deferred Taxes and Other Current Assets.
(c) Includes the following balance sheet accounts:Long-term Debtors, Notes and
Accounts Receivable from Related Companies, Intangibles, Amortization and
Others.
F-48
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
29. National and foreign currency,
A summary of the current liabilities in local and foreign currency is as
follows:
---------------------------------------------------------------------------------------------------------------------------------
Up to 90 days
------------------------------------------------------------
2001 2002
------------------------------------------------------------
Average Average
annual annual
DESCRIPTION Currency Amount interest Amount interest
ThCh$ % ThCh$ %
---------------------------------------------------------------------------------------------------------------------------------
Short-term obligations with banks and
financial institutions Indexed Ch$ 11,960,365 5.97 - -
Dollars 181,423 4.50 - -
Short-term portion of obligations with
banks and financial institutions Indexed Ch$ 28,026,165 4.36 114,586 -
Dollars 10,682,048 4.08 24,798,977 2.30
Bonds payable Indexed Ch$ 5,233,246 6.75 - -
Dollars 10,573,622 - 11,110,148 -
Euros - - - -
Long-term obligations maturing
within a year Indexed Ch$ 593,750 9.40 428,856 8.95
Notes and accounts payable to related parties Indexed Ch$ 10,523,562 - - -
Non-indexed Ch$ 260,597 - 8,992,723 -
Dollars 297,835 - - -
Other current liabilities (d) Indexed Ch$ 15,113,635 - 1,666,936 -
Non-indexed Ch$ 222,716,033 - 180,983,741 -
Dollars 15,425,707 - 5,621,194 -
---------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 331,587,988 - 233,717,161 -
---------------------------------------------------------------------------------------------------------------------------------
Subtotal by currency Indexed Ch$ 71,450,723 - 2,210,378 -
Non-indexed Ch$ 222,976,630 - 189,976,464 -
Dollars 37,160,635 - 41,530,319 -
Euros - - - -
----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
90 days up to 1 year
-------------------------------------------------
2001 2002
-------------------------------------------------
Average Average
annual annual
DESCRIPTION Currency Amount interest Amount interest
ThCh$ % ThCh$ %
------------------------------------------------------------------------------------------------------------------------
Short-term obligations with banks and
financial institutions Indexed Ch$ 8,510,325 5.39 9,191,446 0.78
Dollars - - - -
Short-term portion of obligations with
banks and financial institutions Indexed Ch$ 2,653,101 3.99 9,726,643 0.90
Dollars 71,596,233 3.70 111,650,599 2.40
Bonds payable Indexed Ch$ 20,176,822 6.75 7,970,964 5.78
Dollars - - - -
Euros 2,667,462 - 2,623,127 -
Long-term obligations maturing
within a year Indexed Ch$ 548,822 8.51 60,903 8.89
Notes and accounts payable to related parties Indexed Ch$ - - - -
Non-indexed Ch$ - - 2,983,473 -
Dollars 6,490,631 3.00 - -
Other current liabilities (d) Indexed Ch$ 21,837,585 - 388,567 -
Non-indexed Ch$ 24,892,864 - 1,108,166 -
Dollars 371,618 - - -
------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 159,745,463 - 145,703,888 -
------------------------------------------------------------------------------------------------------------------------
Subtotal by currency Indexed Ch$ 53,726,655 - 27,338,523 -
Non-indexed Ch$ 24,892,864 - 4,091,639 -
Dollars 78,458,482 - 111,650,599 -
Euros 2,667,462 - 2,623,127 -
------------------------------------------------------------------------------------------------------------------------
(d) Includes the following balance sheet accounts: Dividends payable, Accounts
payable, Notes payable, Miscellaneous accounts payable, Accruals,
Withholding taxes, Unearned Income and Other current liabilities.
F-49
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
29. National and foreign currency
A summary of the long-term liabilities in local and foreign currency is as
follows:
-----------------------------------------------------------------------------------------------------------------------------------
1 to 3 years 3 to 5 years
--------------------------------------------------------------
2001 2001
--------------------------------------------------------------
Average Average
annual annual
interest interest
Amount rate Amount rate
--------------- ------------------------------ -----------
LONG-TERM LIABILITIES ThCh$ % ThCh$ %
------------------------
Obligations with banks and
financial institutions Indexed Ch$ 79,559,340 3.57 3,757,097 4.39
Dollars 224,577,206 3.47 215,818,784 3.21
Other currencies 13,489 - 33,048 -
Bonds payable Indexed Ch$ 36,125,603 6.05 30,970,371 6.12
Dollars - - 269,773,480 8.00
Euros 119,105,286 5.38 - -
Other long-term liabilities (e) Indexed Ch$ 36,492,392 7.60 4,580,110 -
Non-indexed Ch$ 13,371,687 - 6,594,459 -
Dollars 25,534,900 - 7,419 -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 534,779,903 - 531,534,768 -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal by currency Indexed Ch$ 152,177,335 - 39,307,578 -
Non-indexed Ch$ 13,371,687 - 6,594,459 -
Dollars 250,112,106 - 485,599,683 -
Euros 119,105,286 - - -
Other currencies 13,489 - 33,048 -
-----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
5 to 10 years more than 10 years
------------------------------ ---------------------------
2001 2001
------------------------------ ---------------------------
Average Tasa
annual interes
interest promedio
Amount rate Monto anual
----------------- ---------- ----------------- -----------
LONG-TERM LIABILITIES ThCh$ % M$ %
------------------------
Obligations with banks and
financial institutions Indexed Ch$ - - - -
Dollars 25,353,034 4.29 - -
Other currencies 0 - - -
Bonds payable Indexed Ch$ 47,243,395 6.35 64,607,246 6.51
Dollars - - - -
Euros - - - -
Other long-term liabilities (e) Indexed Ch$ 14,087,233 - 17,190,372 -
Non-indexed Ch$ 6,488,558 - 15,713,085 -
Dollars - - - -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 93,172,220 - 97,510,703 -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal by currency Indexed Ch$ 61,330,628 - 81,797,618 -
Non-indexed Ch$ 6,488,557 - 15,713,085 -
Dollars 25,353,035 - - -
Euros - - - -
Other currencies - - - -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
1 to 3 years 3 to 5 years
---------------------------- -------------------------------
2002 2002
---------------------------- -------------------------------
Average Average
annual annual
interest interest
Amount rate Amount rate
--------------- ---------- ------------------ ----------
LONG-TERM LIABILITIES ThCh$ % ThCh$ %
------------------------
Obligations with banks and
financial institutions Indexed Ch$ 59,525,347 0.52 111,650,600 2.38
Dollars 245,391,595 2.73 - -
Bonds payable Indexed Ch$ 7,339,142 5.78 9,368,733 5.85
Dollars - - 287,444,000 8.00
Euros 118,752,390 5.38 - -
Other long-term liabilities (e) Indexed Ch$ 19,913,201 - 5,595,102 -
Non-indexed Ch$ 3,132,239 - 444,293 -
Dollars 24,214,112 3.00 - -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 478,268,026 - 414,502,728 -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal by currency Indexed Ch$ 86,777,690 - 126,614,435 -
Non-indexed Ch$ 3,132,239 - 444,293 -
Dollars 269,605,707 - 287,444,000 -
Euros 118,752,390 - - -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
5 to 10 years more than 10 years
------------------------------ ----------------------------
2002 2002
------------------------------ ----------------------------
Average Average
annual annual
interest interest
Amount rate Amount rate
----------------- ---------- ----------------- ----------
LONG-TERM LIABILITIES ThCh$ % ThCh$ %
------------------------
Obligations with banks and
financial institutions Indexed Ch$ - - - -
Dollars - - - -
Bonds payable Indexed Ch$ 32,301,289 6.17 56,987,096 6.57
Dollars - - - -
Euros - - - -
Other long-term liabilities (e) Indexed Ch$ 8,041,989 - 11,305,189 -
Non-indexed Ch$ 1,094,840 - 18,618,784 -
Dollars - - - -
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 41,438,118 - 86,911,069 -
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal by currency Indexed Ch$ 40,343,278 - 68,292,285 -
Non-indexed Ch$ 1,094,840 - 18,618,784 -
Dollars - - - -
Euros - - - -
-----------------------------------------------------------------------------------------------------------------------------------
(e) Includes the following balance sheet accounts: Notes and accounts payable
to related companies, Miscellaneous accounts payable, Accruals, Deferred
Taxes, Other Liabilities.
F-50
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
30. Sanctions:
Neither the Company, nor its Directors and Managers have been sanctioned
by the Superintendency of Securities and Insurance or any other
administrative authority during 2002.
31. Subsequent Events:
a) VTR access charges lawsuit
On January 20, 2003, the Sixth Court of Appeals decided not to
accept the protection recourse filed by the Company against
Resolution 1726 dictated by the Telecommunications Subsecretary on
October 2, 2002.
In this resolution, the Subsecretary stated that the Company had
to pay VTR, the debt for interconnection access charges set since
the publication of the rate decree on June 25, 2002.
The Company shall appeal the resolution of the Court of Appeals in
the Supreme Court, notwithstanding other necessary actions and
recourses to obtain compliance with the "interconnection
agreement".
b) Labor Lawsuit SINATE and others against CTC
On January 22, 2003, the Court of Appeals dictated sentence
rejecting the executive complaint filed by Intercompany Unions
SINATE, V Region No. 1 and Profesionales against the Company, in
which they request payment of ThCh$ 7,500,000 for incentives
contemplated in Clause 4.4 of the collective contract dated June
9, 1998.
The verdict accepted the exceptions presented by the Company,
additionally establishing that the unions do not have the nature
of creditors of the obligation that they were attempting to
enforce, nor do they have a right to receive the remuneration of
their members. Both facts reaffirm the Company's stance in the
rest of the ordinary lawsuits with regard to this matter.
The Unions have 5 days from the date of the resolution to appeal
to the Supreme Court.
c) In the period from January 1 to January 27, 2003 there have been
no other subsequent events, except for those mentioned, that
significantly affect the financial statements.
32. Environment:
In management's opinion and in the opinion of in-house legal counsel, the
nature of the Company's operations do not directly or indirectly affect
the environment, therefore, as of the closing date of these consolidated
financial statements, no resources have been committed or payments made
for non-compliance of municipal ordinances or of those of other
overseeing bodies.
F-51
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
33. Accounts payable:
The detail of the accounts payable balance is as follows:
------------------------------------------------------------------------------------------
2001 2002
ThCh$ ThCh$
------------------------------------------------------------------------------------------
Suppliers
Local 118,292,020 94,984,787
Foreign 19,503,571 8,195,753
Carrier service
Local 20,451,153 11,438,418
Foreign 1,079,083
-
Provision for advances on work in progress 45,851,627 35,267,682
------------------------------------------------------------------------------------------
Total 205,177,454 149,886,640
------------------------------------------------------------------------------------------
34. Differences Between Chilean And United States Generally Accepted
Accounting Principles
For the years 2000 and 2001, the Company included on its Form 20-F filed
with the Securities and Exchange Commission (the "SEC") its annual
financial statements in conformity with accounting principles generally
accepted in the United States of America ("USGAAP"), in accordance with
SEC Rules and Regulations. See (s) below.
For the year 2002, the Company prepared its consolidated balance sheets
as of December 31, 2001 and 2002, respectively, and its consolidated
statements of income and cash flows for each of the three years in the
period ended December 31, 2002 in its 20-F filing for the year ended
December 31, 2002 in conformity with accounting principles generally
accepted in Chile ("ChGAAP") with a reconciliation to net income (loss)
for each of the three years in the period ended December 31, 2002, and a
reconciliation to shareholders' equity as of December 31, 2001 and 2002,
respectively, applying accounting principles generally accepted in the
United States of America. This presentation is in accordance with Item 17
(c) (iv) (a) of the SEC Rules and Regulations.
I.- Differences in measuring methods
The Company's consolidated financial statements are prepared in
accordance with generally accept accounting principles ("GAAP") in Chile,
which differ in certain respects from USGAAP.
Under Chilean GAAP, financial statement are restated to reflect the full
effects of the gain (loss) in the purchasing power of the Chilean peso on
the financial position and results of operations of reporting entities.
The method is based on a model that enables calculation of net inflation
gains or losses caused by monetary assets and liabilities exposed to
changes in the purchasing power. The model prescribes that the historical
cost of such accounts be restated for general price-level changes between
the date of origin of each item and the year-end.
The inclusion of price-level adjustments in the accompanying financial
statements is considered appropriate under the prolonged inflationary
conditions affecting the Chilean economy even though the cumulative
inflation rate for the last three years does not exceed 100%. As allowed
pursuant to the rules and regulations for Form 20-F, the reconciliation
included herein of consolidated net income other comprehensive income,
and shareholders' equity, as determined in accordance with U.S. GAAP,
does not include adjustments to eliminate the effect of inflation
accounting under Chilean GAAP.
(a) Property, Plant and Equipment:
As mentioned in note 2(l), in accordance with standards issued by the
SVS in 1985, the property, plant and equipment of companies subject to
its regulation are allowed to be revalued pursuant to a technical
appraisal. The difference between the book value prior to revaluation
and the revalued amount is included in equity as a surplus on account
of such technical appraisal, and is subject to Chilean inflation
adjustment and depreciation. Under U.S. GAAP, such revaluations are not
performed. The effects of the reversal of this revaluation, as well as
of the related accumulated depreciation expense for the year is shown
under paragraph (r) below.
F-52
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(b) Investment in Securities:
Under Chilean GAAP, investments in securities are accounted for at the
lower of cost or market value. Under U.S. GAAP, marketable securities
are classified as trading, held-to-maturity or available-for-sale.
Those securities classified as trading are carried at their fair value,
with gains and losses recognized currently in earnings.
Available-for-sale securities are also carried at fair value, with
unrealized gains and losses recorded in shareholders' equity.
Securities classified as held-to-maturity are carried at amortized
cost. During 2001 and 2002, the Company recorded an
other-than-temporary impairment charges of ThCh$7,563,473 and
ThCh$4,754,515, respectively, for Terra Networks (See (s) below). For
Chilean GAAP purposes, in each of the three years, instruments in
securities available-for-sale were recorded at the market value
recording loss in the income statements. The effects of the reversal of
these unrealized losses that did not have an other-than-temporary
impairment loss into 2002 shareholders' equity for US GAAP purposes in
each year are included under paragraph (r) below.
(c) Deferred Income Taxes:
Under Chilean GAAP, until December 31, 1999, deferred income taxes were
recorded based on non-recurring timing differences between the
recognition of income and expense items for financial statement and tax
purposes. Accordingly, there was an orientation toward the income
statement focusing on differences in the timing of recognition of
revenues and expenses in pre-tax accounting income and taxable income.
Chilean GAAP also permitted not providing for deferred income taxes
where a deferred tax asset or liability is not expected to be realized.
Starting January 1, 2000, the Company recorded income taxes in
accordance with Technical Bulletin No. 60 of the Chilean Association of
Accountants, recognizing, using the liability method, the deferred tax
effects of temporary differences between the financial reporting basis
and the tax basis of assets and liabilities. As a transitional
provision, a contra asset or liability has been recorded for the
effects of the deferred tax assets and liabilities not recorded prior
to January 1, 2000. Such complementary asset or liability are being
amortized to income over the estimated average reversal periods
corresponding to the underlying temporary differences to which the
deferred tax asset or liability relates.
Under U.S. GAAP, companies must account for deferred taxes in
accordance with SFAS No. 109, which requires an asset and liability
approach for financial accounting and reporting of income taxes, under
the following basic principles:(i) a deferred tax liability or asset is
recognized for the estimated future tax effects attributable to
temporary differences and tax loss carry forwards; (ii) the measurement
of deferred tax liabilities and assets is based on the provisions of
the enacted tax law and the effects of future changes in tax laws or
rates are not anticipated; and (iii) the measurement of deferred tax
assets is reduced by a valuation allowance, if based on the weight of
available evidence, it is more likely than not that some portion of the
deferred tax assets will not be realized.
Temporary differences are defined as any difference between the
financial reporting basis and the tax basis of an asset and liability
that at some future date will reverse, thereby resulting in taxable
income or expense. Temporary differences ordinarily become taxable or
deductible when the related asset is recovered or the related liability
is settled. A deferred tax liability or asset represents the amount of
taxes payable or refundable in future years under currently enacted tax
rates as a result of temporary differences at the end of the current
year. The effects of the differences, primarily related to the
amortization of the complementary account which, does not exist in U.S.
GAAP, are included under paragraph (r) below.
(d) Capitalized Interest:
Under Chilean GAAP, all interest on debt directly associated with
construction projects is capitalized, including interest, price-level
restatement and, with respect to foreign currency borrowings, foreign
currency translation gains and losses. The capitalization of interest
costs associated with projects under construction is optional when
incurred on debt that is not directly related to such projects.
Under U.S. GAAP, the Company reverses those amounts capitalized due to
foreign currency exchange gains and losses and the related monetary
gain on foreign currency borrowings for construction cost for purposes
of reconciling to U.S. GAAP.
Additionally, under U.S. GAAP, the capitalization of interest on
qualifying assets under construction is required, regardless of whether
interest is associated with debt directly related to a project. The
effects are included under paragraph (r) below.
F-53
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(e) Prepaid Staff Severance:
Under Chilean GAAP, prior service cost resulting from the adoption of
new severance indemnity plans was charged to income upon adoption.
Under U.S. GAAP, prior service cost is deferred, carried as an asset
and amortized over its service life. The effects of these adjustment in
assets and the corresponding amortization for the year is shown under
paragraph (r) below.
(f) Staff Severance Indemnities:
Under Chilean GAAP, staff severance indemnities are valued based on a
discounted liability method. In calculating the severance liability,
this method assumes that all employees will remain until retirement age
and discounts the estimated liability to the balance sheet date.
Under U.S. GAAP, such amount would be recorded in accordance with SFAS
N(degree) 87, "Employer's Accounting for Pensions" using an actuarial
method. This method involves calculations using variables such as
workforce rotation, average salary increases, workforce mortality,
retirement age and discount factors. The effects are included under
paragraph (r) below.
(g) Derivatives:
As described in note 26, the Company uses derivative instruments to
manage exposures to foreign currency and interest rate risk. The
Company's objectives for holding derivatives are to minimize these
risks using the most effective methods to eliminate or reduce the
impact of these exposures.
Interest rate swaps:
The Company entered into interest rate swaps, whereby it receives
variable interest payments and pays fixed interest payments in order to
convert variable rate debt into fixed rate. Under Chilean GAAP, the
Company has recorded the interest expense using the short cut method
and the fair value of the swap has not been recorded in the books.
However, for US GAAP purposes as the Company did not have formal
documentation at the inception of the hedge these swaps did not qualify
for hedge accounting treatment, the changes in the fair value of these
derivatives are recognized in income. The effects are included under
paragraph (r) below.
Forward exchange contracts:
The Company has forward exchange contracts between the US dollar and
Chilean peso, US dollar and the U.F. and US dollar and Euro. Under
Chilean GAAP, these forward exchange contracts are recorded at fair
value with the changes in the fair value recorded as unrealized gains
or losses. These derivatives are considered cash flow hedges of
forecasted transactions. The initial premium or discount on these
contracts is deferred and amortized over the life contract.
Under U.S. GAAP, these forward exchange contracts are also valued at
fair value with changes in fair value recognized in income.
Embedded derivatives:
For U.S. GAAP purposes certain implicit or explicit terms included in
host contracts that affect some or all of the cash flows or the value
of other exchanges required by the contract in a manner similar to a
derivative instrument must be separated from the host contract and
accounted for at fair value. The Company separately measures embedded
derivatives as freestanding derivatives instruments at their estimated
fair values recognizing changes in earnings when they occur.
The effects of the adjustment with respect to financial derivatives and
embedded derivatives for the years ended December 31, 2002 and 2001 are
included in the net income (loss) and shareholders' equity
reconciliation to U.S. GAAP under paragraph (r) below.
F-54
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(h) Accommodation Equipment:
Since April 1, 2001, the Company loaned out phones under certain
accompanying service contracts; ownership of the phones stays with
the Company. The Company expenses the equipment over the average
life of such service contract.
Under U.S. GAAP, these equipments are not considered fixed assets
and accordingly these amounts are charged to expense. The effects
are included under paragraph (r) below.
(i) Sales Commission Cost:
Until year 2000, under Chilean GAAP, sale commission costs were
deferred and expensed over a period from 6 to 24 months.
On January 1, 2001 the Company changed its Chilean GAAP accounting
policy for all new sales to recognize the full costs of sales
commissions at the time sale.
Under U.S. GAAP, as the minimal contractual revenue does not exceed
the direct costs, sales commission expenses are recognized at the
time of sale. The reversal of the effect of the commission deferral
in 2000 and expense in 2001 for Chilean GAAP are included under
paragraph (r) below.
(j) Subsidiaries in Development Stage:
Under Chilean GAAP, costs incurred during the development stage of
the subsidiary company are not charged to the income statement
during the year in which they were incurred, being charged instead
directly to equity account (subsidiary start-up deficit). U.S. GAAP
requires that all such costs be charged to the income statement in
the year incurred. The effects are included under paragraph (r)
below.
(k) Goodwill:
Under Chilean GAAP, the Company generally records goodwill or
negative goodwill for the differences between the purchase price
and the carrying value of the assets acquired and liabilities and
liabilities assumed. Circular No. 1358, dated December 3, 1997,
issued by the SVS, extended the maximum amortization period of both
goodwill and negative goodwill to 20 years from the previous 10 and
5 years, respectively. Under U.S. GAAP, the difference between the
cost of an investment and the amount of underlying equity in net
assets is allocated to the fair value of the underlying assets and
liabilities. Any excess of the cost of the investment over such
fair value is treated as goodwill. Any excess in fair value over
cost is allocated to reduce proportionately the values assigned to
non-current assets in determining their fair values. In the opinion
of the Company, the book value of any net assets acquired did not
materially differ from their fair values in any transactions
recorded under purchase accounting.
Since year 2002, according to SFAS N(degree) 142, goodwill will no
longer be amortized, but will be tested for impairment on an annual
basis and whenever indicators of impairment arise. The goodwill
impairment test, which is based on fair value, is to be performed
on a reporting unit level annually. As the result of both the
transitional goodwill test the annual goodwill test required under
SFAS No. 142 performed in 2002, no goodwill impairment was
recorded. The difference in (q) reverses the effects of the
amortization booked under Chilean GAAP.
F-55
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Had we adopted SFAS No. 142 effective January 1, 2000 and
accordingly not amortized goodwill for the years ended December 31,
2001 and 2000 the Company's net loss and basic and diluted loss per
share would have been as follows:
2000 2001 2002
restated restated
ThCh$ ThCh$ ThCh$
Net income (loss) under US GAAP as reported (136,503,604) (36,726,196) 28,988,039
Add bank: Goodwill Amortization under US GAAP 56,544,598 16,562,835
-----------------------------------------------------
Adjusted net income (loss) under US GAAP (79,959,006) (20,163,361) 28,988,039
=====================================================
2000 2001 2002
Ch$ Ch$ Ch$
Basic and diluted earnings per share:
Reported net income (loss) (0.143) (0.038) 0.030
Add bank: Goodwill amortization 0.059 0.017 -
-----------------------------------------------------
Adjusted net income (loss) (0.084) (0.021) 0.030
=====================================================
(l) Subsidies on sale of handsets:
Under Chilean GAAP, a portion of cost in excess of revenue on
handsets were deferred and expensed over a period from 6 to 24
months during the years 1999 and 2000. The deferred portion of
equipment costs represents the excess of the cost over the sales
price of the equipment. As of January 1, 2001, the Company changed
its Chilean GAAP accounting policy for all new sales to recognize
the full amounts of the losses at the time of sale.
Under U.S. GAAP, all costs in excess of revenue on handsets are
expensed at the time of sale. The adjustment of the effects that
were deferred in 2000 and expensed in 2001 under Chilean GAAP are
included under paragraph (r) below.
(m) Minimum Dividend:
As required by Law No. 18,046 and unless the shareholders
unanimously agree otherwise, the Company must distribute a minimum
cash dividend equivalent to 30% of net income. No accrual would be
necessary when there is a loss. Since the payment of these
dividends is a legal requirement in Chile, an accrual for U.S.GAAP
purposes should be made to recognize the corresponding decrease in
equity at each balance sheet date. The effects on equity is shown
in the reconciliation below.
(n) Translation of Financial Statement of Investment Outside of Chile:
In accordance with technical bulletin 64 (BT 64), the financial
statement of foreign subsidiaries that operate in countries exposed
to significant risks, and are not considered to be an extension of
the parent Company's operations, must be remeasured into US
dollars. The Company has remeasured its foreign subsidiaries into
US dollars under this requirement as follows:
- Monetary assets and liabilities are translated at year-end
rates of exchange between the US Dollar and the local
currency.
- All non-monetary assets and liabilities and shareholder's
equity are translated at historical rates of exchange
between the US dollar and the local currency.
- Income and expense accounts are translated at average rates
of exchange between the US dollar and local currency.
- The effects of any exchange rate fluctuations are included
in the results of operations for the period.
F-56
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Under BT 64, the investment in a foreign subsidiary is price-level
restated, the effects of which are reflected in income, while the
effects of the foreign exchange gain or loss between the Chilean
Peso and the US Dollar are reflected in equity in the account
"Cumulative Translation Adjustment"; as the foreign investment
itself is measured in US dollars.
In the opinion of the Company, the Chilean GAAP procedures
described above are part of the comprehensive basis of preparation
of price-level adjusted financial statement required by Chilean
GAAP. Inclusion of inflation and translation effects in the
financial statements is considered appropriate under the
inflationary conditions that have historically affected the
Chilean economy and, accordingly, are not eliminated in the
reconciliation to U.S. GAAP.
(o) Effect of U.S. GAAP adjustments in related Companies accounted for
under the equity method:
The principal U.S. GAAP adjustments affecting the Company's equity
investees is:
i) Accounting for deferred tax assets and liabilities, in
accordance with SFAS No. 109.
The effect of these differences is included under paragraph (r).
(p) Loss on sale of investment:
On September 2002, Telefonica Empresas CTC Chile S.A. sold and
transferred a 25% of its ownership of Sonda S.A. to Inversiones
Pacifico Limitada and Inversiones Santa Isabel Limitada, companies
related to Mr. Andres Navarro H. This operation caused the
purchasing companies to disburse ThCh$ 27,920,701 (historical),
generating a net loss in Chilean GAAP, in the amount of ThCh$
1,164,197, due to extraordinary proportional write off of goodwill
in relation to the percentage sold (Note 11a) and to the
difference between the carrying value of the investment and the
amount received (Note 20c). Once this transaction was completed,
Telefonica CTC Chile through its subsidiary Telefonica Empresas
CTC Chile S.A., holds 35% ownership of that company.
Under U.S. GAAP, this operation resulted in a loss as a result of
the effects of U.S. GAAP adjustments on the carrying value of the
investment, as is explained on paragraph (o). The effects are
included under paragraph (r) below.
(q) Publiguias Agreement
Under Chilean GAAP the payment was recognized as income from
operations.
Under US GAAP the cancellation fee is deferred over the remaining
term of the original contract. See more details on Note (s)
F-57
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(r) Effects of conforming to U.S. GAAP:
The adjustments to reported net income required to conform with
accounting principles generally accepted in the United States are
as follows:
------------------------------------------------------------------------------------------------------------
Years ended December 31.
2000 2001 2002
Restated Restated
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with Chilean GAAP (121,085,458) 4,235,008 (17,680,376)
Reversal of additional depreciation of technical revaluation (133,004) (59,087) (55,888)
(a)
Marketable securities (b) 3,972,954 (4,104,868) 2,591,887
Deferred income taxes (c) 5,325,754 (19,870,895) 13,369,232
Deferred taxes effects of U.S. GAAP adjustments (c) 3,548,056 6,080,535 (3,531,746)
Capitalization of financing costs for construction of fixed (1,229,823) (4,869,976) (6,133,086)
assets (d)
Prepaid staff severance (e) (892,051) (1,757,442) (870,683)
Staff severance indemnities (f) (195,395) (9,976,282) 6,523,337
Derivatives (g) - (21,612,362) 2,802,263
Accommodation equipment (h) - (6,432,462) 1,993,074
Sales commission cost (i) (7,326,762) 7,326,762 -
Subsidiary in development stage (j) (493,140) (382,817) -
Goodwill (k) - (351,745) 15,132,370
Subsidies sales of handsets (l) (17,849,624) 17,849,624 -
Investments in related companies (o) - - 445,831
Loss on sale of investment (p) - - (175,526)
Publiguias Agreement (q) - (14,406,410) 14,406,410
Effects of minority interest on U.S. GAAP adjustments (145,111) 21,112 170,940
------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP before (136,503,604) (48,311,305) 28,988,039
cumulative effect of change in accounting principle
Cumulative effect of change in accounting principle, net of tax - 11,585,109 -
------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP (136,503,604) (36,726,196) 28,988,039
------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax:
Unrealized (losses)/gain on marketable securities (g) (3,377,011) 3,489,138 (2,151,266)
Cumulative translation adjustment - Chilean GAAP (n) 317,375 629,483 344,400
------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance with U.S. GAAP (139,563,240) (32,607,575) 27,181,173
------------------------------------------------------------------------------------------------------------
F-58
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
The adjustments required to conform shareholders' equity amounts
to U.S. GAAP are as follows:
------------------------------------------------------------------------------------------------------------
December 31,
2001 2002
Restated
ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------
Shareholders' equity in accordance with Chilean GAAP 1,305,296,493 1,286,690,052
Reversal of technical revaluation
of property, plan and equipment (a) 3,314,659 3,258,771
Deferred income taxes (c) (157,743,084) (144,373,847)
Deferred taxes effects of U.S. GAAP adjustments (c) 3,633,768 542,643
Capitalization of financing costs for construction of fixed assets 13,252,099 7,119,013
(d)
Prepaid Staff Severance (e) 2,887,668 2,016,985
Staff severance indemnities (f) (12,666,152) (6,142,815)
Derivatives (g) (7,937,417) (5,135,156)
Accommodation equipment (h) (6,432,462) (4,439,388)
Goodwill (k) (351,745) 14,780,625
Minimum dividend (m) (1,270,502) -
Investments in related companies (o) - 445,831
Loss on the sale of investment (p) - (175,526)
Agreement Publiguias (q) (14,406,410) -
Effects of minority interest on U.S GAAP adjustments (123,998) 46,942
------------------------------------------------------------------------------------------------------------
Shareholders' equity in accordance with U.S. GAAP 1,127,452,917 1,154,634,130
------------------------------------------------------------------------------------------------------------
The following summarizes the changes in shareholders' equity under
U.S. GAAP during the years ended December 31, 2001 and 2002:
------------------------------------------------------------------------------------------------------------
Year ended December 31,
2001 2002
Restated
ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------
Balance as of January 1 1,161,330,994 1,127,452,917
Minimum dividend (m) (1,270,502) -
Other comprehensive income, net of tax:
Cumulative translation adjustment determined under Chilean
GAAP (m) 629,483 344,400
Unrealized gain on marketable securities (b) 3,489,138 (2,151,226)
Net income (loss) in accordance with U.S. GAAP for the year (36,726,196) 28,988,039
Balance at December 31 1,127,452,917 1,154,634,130
------------------------------------------------------------------------------------------------------------
F-59
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(s) Restatement of Reconciliation to US GAAP
In previous years, management of Telefonica CTC Chile, in
consultation with the Company's prior auditors, considered that
certain accounting principles it applied were correct and in
accordance with USGAAP. Upon reconsideration in 2002, management
determined that it was appropriate to make certain restatements to
the 2000 and 2001 amounts reported for USGAAP. Accordingly, net
income (loss) and shareholders' equity under USGAAP for both 2000
and 2001 have been restated to reflect the following changes:
Year ended December 31
--------------------------------------
2000 2001
--------------------------------------
ThCh$ ThCh$
Net loss under US GAAP as previously reported (130,210,243) (16,489,725)
Differences due to:
Customer-related direct costs (42,297,322) 2,319,573
Embedded derivatives - (435,304)
Other than temporary decline on marketable securities - (7,503,746)
Curtailment loss (87,663) (946,436)
Publiguias agreement - (14,406,410)
Deferred taxes related to restated items (1,275,826) 2,720,480
Minority interest (145,111) 21,113
Others 2,542,001 (4,154,110)
----------------- -----------------
Net loss before cumulative effect of change in accounting principle
under US GAAP as adjusted (171,474,164) (38,874,565)
================= =================
Cumulative effect of change in accounting principle 34,970,560 2,148,369
----------------- -----------------
Net loss under US GAAP as adjusted (136,503,604) (36,726,196)
================= =================
Basic loss per share under US GAAP as previously reported
(in Chilean pesos) (0.1360) (0.0172)
----------------- -----------------
Basic loss per share under US GAAP as restated (in Chilean pesos) (0.1426) (0.0203)
----------------- -----------------
US GAAP Shareholders' equity as previously reported 1,166,036,219 1,145,487,965
Differences due to:
Customer-related direct costs (7,326,762) (5,007,189)
Embedded derivatives - 2,137,593
Curtailment loss (2,869,319) (3,815,755)
Publiguias agreement - (14,406,410)
Deferred taxes related to restated items 605,628 2,711,955
Minority interest (145,111) (123,998)
Others 5,030,339 468,756
----------------- -----------------
US GAAP shareholders' equity as restated 1,161,330,994 1,127,452,917
================= =================
F-60
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Customer - related direct costs
Under US GAAP, customer related direct costs such as commissions
are expensed as incurred as these amounts currently exceed the
minimal contractual revenue, the amount of the adjustment is
Ch$7,326 million.
In addition the amount included the reclassification to operating
cost that what was included as a cumulative effect of a change in
accounting principle as of January 1, 2000 (See "Cumulative effect
of change in accounting principle" below).
Embedded derivative
For the year ended December 31, 2001, management identified a
contract which contained an "embedded" derivative. Certain implicit
or explicit terms included in host contracts must be separated from
the host contract and accounted for at fair value. Changes in fair
value are recognized for these derivatives in the income statement.
Other-than temporary decline on marketable securities
In accordance with SFAS 115, available-for-sale marketable
securities are required to be tested for an other-than-temporary
decline when certain circumstances are met. In 2000 and 2001, the
Company recorded the adjustment to market value of its available
for sale marketable securities to other comprehensive income for US
GAAP purposes. Management has determined that, for the year ended
December 31, 2001, an other-than-temporary decline of
ThCh$7,039,285 on its available for sale securities has occurred.
Therefore, the Company wrote down such securities to fair value at
which time it established a new cost basis.
Curtailment loss
During the year ended December 31, 2000, the Company initiated a
restructuring program which included pay-off of severance
indemnities earlier than expected due to the termination of a
number of employees. In accordance with SFAS 88 an adjustment to
the net unamortized balance of the transition asset recorded upon
SFAS 87 adoption should have been made for a change in estimate as
a result of the curtailment.
Publiguias agreement
In August of 2001, the Company and Publiguias, an affiliate of the
Company, agreed to cancel their master service agreement that was
to be in effect until December 31, 2002 and to replace it with a
new agreement for similar services. Under the early cancellation
provisions the Company received as consideration Ch$ 20,000 million
that will be adjusted based on the actual Publiguias performance
over the remaining eighteen months of the original agreement.
In the 2001 financial statements the Company recognized the payment
as income from operations. During 2002 upon reconsideration of the
agreement, management concluded that deferral of the consideration
received with recognition over the remaining period of the original
contract was required due to the provisions of the calculation of
the cancellation fee that provided for an adjustment based on
Publiguias actual performance over the remaining term of the
original contract and the fact that the parties are affiliated.
Consequently the Company has adjusted the 2001 results to defer Ch$
14,406 million of this payment. This amount was recognized in 2002
based on terms of the original contract and Publiguias' actual
performance in 2002.
Cumulative effect of change in accounting principle
As of January 1, 2000, the Company recorded the write-off of
deferred subsidies on handset sales as a Cumulative Effect of
Change in Accounting Principle under SAB 101. This charge to income
was made however, as the result of the inability of the Company to
recover its subsidies on handset sales and other direct
customer-related costs through its contractual revenue.
Consequently, the Company reclassified the amount to an operating
cost.
F-61
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Deferred tax and minority interest effect on the restated items
This amount represents the tax effect as calculated under SFAS 109
and the minority interest effect of the above-mentioned restatement
items.
Others
These amounts represent other miscellaneous corrections regarding
mainly to inventory and fixed assets.
Taken together, the effects of these adjustments result in a change
in the reported net loss of the Company in accordance with U.S.GAAP
from Ch$16,490 million to a loss of Ch$36,726 million in 2001, and
from a reported net loss of Ch$130,210 million to a loss of
Ch$136,504 million in 2000. Accordingly, shareholders' equity in
accordance with U.S.GAAP is adjusted from Ch$1,145,488 million to
Ch$1,127,453 million in 2001 and from Ch$1,166,036 million to
Ch$1,161,331 million in 2000.
(t) Comprehensive Income
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" the Company
reports a measure of all changes in shareholder's equity that
result from transactions and other economic events of the period
other than transactions with owners ("comprehensive income").
Comprehensive income is the total net income and other non-owner
equity transactions that result in changes in net equity. The
components of other comprehensive income are reported net of the
related tax effects.
The following represents accumulated other comprehensive income
balances as of December 31, 2000, 2001 and 2002 (in thousands of
constant Chilean pesos as of December 31, 2002).
-------------------------------------------- ----------------------------------------------------------
2000
Effect of US GAAP
Chilean GAAP Unrealized Accumulated
cumulative losses on other
translation marketable comprehensive
adjustment securities income
-------------------------------------------------------------------------------------------------------
Beginning balance 635,907 (112,127) 523,780
Credit (charge) for the period 317,375 (3,377,011) (3,059,636)
Ending balance 953,282 (3,489,138) (2,535,856)
-------------------------------------------------------------------------------------------------------
-------------------------------------------- ----------------------------------------------------------
2001
Restated
Effect of US GAAP
Chilean GAAP Unrealized Accumulated
cumulative losses/gain other
translation on marketable comprehensive
adjustment securities income
-------------------------------------------------------------------------------------------------------
Beginning balance 953,282 (3,489,138) (2,535,856)
Credit (charge) for the period 629,483 3,489,138 4,118,621
Ending balance 1,582,765 - 1,582,765
-------------------------------------------------------------------------------------------------------
-------------------------------------------- ----------------------------------------------------------
2002
Effect of US GAAP
Chilean GAAP Unrealized Accumulated
cumulative losses/gain other
translation on marketable comprehensive
adjustment securities income
-------------------------------------------------------------------------------------------------------
Beginning balance 1,582,765 - 1,582,765
Credit (charge) for the period 344,400 (2,151,226) (1,806,826)
Ending balance 1,927,165 (2,151,226) (224,051)
-------------------------------------------------------------------------------------------------------
F-62
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
II. Additional Disclosure Requirements:
(a) Earnings per share:
The following earnings (loss) per share information, presented in
Chilean pesos per share, is not required to be presented in the
financial statements under Chilean GAAP but is a required
disclosure under U.S. GAAP:
------------------------------------------------------------------------------------------------------------
For the year ended December 31,
2000 2001 2002
------------------------------------------------------------------------------------------------------------
Earnings (loss) per share (Chilean GAAP) (0.1265) 0.0044 (0.0185)
U.S. GAAP (loss) earnings per share before cumulative
effect of change in accounting principle (0.1426) (0.0504) 0.0303
====================================================
Cumulative effect of change in accounting principle
(net of taz) - 0.0121 -
====================================================
Basic and diluted earnings (loss) per share (U.S.
GAAP) (0.1426) (0.0383) 0.0303
====================================================
Weighted average number of shares outstanding (in
thousands) 957,157,085 957,157,085 957,157,085
------------------------------------------------------------------------------------------------------------
Basic and diluted earnings (loss) per share shown above is
determined by dividing net income (loss) available to common
shareholders by the weighted-average number of shares outstanding
during the period. The Company has not issued convertible debt or
equity securities. Consequently, there are not potentially dilutive
effect on the earning per share of the Company.
(b) Income taxes:
The provision (benefit) for income taxes differs under Chilean GAAP
from the charge calculated in accordance with U.S. GAAP, as a
result of the following differences:
------------------------------------------------------------------------------------------------------------
Year ended December 31,
2000 2001 2002
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------
Current income taxes as determined under Chilean GAAP 384,381 3,866,378 2,781,291
Deferred income taxes as determined under Chilean GAAP (6,148,296) 7,902,650 23,935,485
Sub-Total (5,763,915) 11,769,028 26,716,776
U.S. GAAP adjustments:
Deferred tax effect applying SFAS N(degree)109 (5,325,754) 19,870,895 (13,369,232)
Deferred tax effect of U.S. GAAP Adjustments (3,548,056) (6,080,535) 3,531,746
Deferred tax effect of cumulative effect of change in
accounting principle - 2,089,835 -
------------------------------------------------------------------------------------------------------------
Charge (credit) for the period under U.S. GAAP (14,638,725) 27,649,223 16,879,290
Total
------------------------------------------------------------------------------------------------------------
F-63
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Deferred tax assets (liabilities) as of balance sheet dates are
summarized as follows:
--------------------------------------------------------------------------------------------------------------------------
2001 2002
---------------------------------------- ----------------------------------------
SFAS SFAS SFAS Total
No. 109 No. 109 Total SFAS No. 109 deferred
Applied to Applied to Deferred Taxes No. 109 Applied to Taxes
Chilean U.S. Under Applied to U.S. Under
GAAP GAAP SFAS Chilean GAAP GAAP SFAS
Balances Adjustments No. 109 Balances Adjustments No. 109
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
--------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts 16,188,434 - 16,188,434 18,523,108 - 18,523,108
Vacation provision 818,246 - 818,246 780,222 - 780,222
Tax loss (1) 60,358,351 - 60,358,351 38,267,944 - 38,267,944
Capitalized staff severance indemnities 1,558,821 - 1,558,821 1,024,959 - 1,024,959
Assets and liabilities for leasing 963,268 - 963,268 660,907 - 660,907
Reappraised property, plant and
equipment depreciation 4,881,018 (563,492) 4,317,256 3,628,454 (553,991) 3,074,463
Marketable securities 1,699,692 1,669,692 3,207,509 - 3,207,509
Capitalized interest - (2,252,857) (2,252,857) - (1,210,232) (1,210,232)
Other temporary differences 1,645,573 1,349,361 2,994,934 2,579,221 872,976 3,452,197
Total Assets 88,113,403 (1,466,988) 86,646,415 68,672,324 (891,247) 67,781,077
Property, plant and equipment
depreciation (219,672,604) 1,061,356 (218,611,248) (207,594,668) 732,499 (206,862,169)
Staff severance indemnities (7,537,748) 2,153,246 (5,384,502) (6,151,905) 1,044,279 (5,107,626)
Deferred income 2,377,058 2,377,058
Deferred loss on sale of assets (737,927) (737,927) (667,867) - (667,867)
Software development (6,919,600) (6,919,600) (5,828,114) - (5,828,114)
Deferred charges (1,524,758) (1,524,758) (3,605,824) - (3,605,824)
Other - (490,904) (490,904) - (342,888) (342,888)
Total Liabilities (236,392,637) 5,100,756 (231,291,881) (223,848,378) 1,433,890 (222,144,488)
--------------------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities from
application of SFAS No. 109 (148,279,234) 3,633,768 (144,645,466) (155,176,054) 542,643 (154,633,411)
--------------------------------------------------------------------------------------------------------------------------
(1) Under the current Chilean law, tax losses can be carried forward
indefinitely.
The provision for income taxes differs from the amount of income tax
determined by applying the applicable local statutory income tax rate to
pretax income, calculated in accordance with U.S. GAAP, as a result of
the following differences:
----------------------------------------------------------------------------------------------------------------
December 31,
2000 2001 2002
ThCh$ ThCh$ ThCh$
----------------------------------------------------------------------------------------------------------------
Tax provision (benefit) at statutory Chilean tax rates (14,746,432) 4,906,207 5,400,383
Differences between accounting and tax bases:
Price-level restatement not accepted for tax purposes 5,376,600 5,300,658 5,809,905
Amortization of goodwill 5,551,700 2,431,663 3,945,903
Sale of subsidiaries (14,639,390) 224,485 (1,086,025)
Effect of tax rate increase - 17,029,694 -
Write-off accounts receivables not accepted for tax
purposes - 19,720 -
Other - non deductible item 3,818,797 (2,263,204) 2,809,124
----------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) (1) (14,638,725) 27,649,223 16,879,290
----------------------------------------------------------------------------------------------------------------
(1) Although Telefonica CTC Chile recorded net losses for financial
reporting purposes during 2000, 2001 and 2002, certain of
Telefonica CTC Chile's subsidiaries recorded taxable income thus
giving rise to provisions for income taxes, as Chile tax returns
are filed on an individual legal entity basis.
F-64
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(c) Segment information:
1. Information by Business Segments:
Telefonica CTC Chile discloses segment information in accordance
with SFAS N(degree)131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for
reporting information about operating segments and related
disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about
which separate financial information is available that is regularly
used by the Chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company
presents segment information in accordance with Chilean GAAP, which
is used by management for internal reporting and decision-making
purposes.
The Company manages and measures the performance of its operations
by business segment. The internally reported operating segments are
as follows:
Fixed Telephony
Fixed Telephony services include Primary Service, line connections
and installations, value-added services, terminal equipment
marketing, directory advertising and dedicated lines. Consistent
with the financial statements, revenue is recognized as services
are rendered.
Long Distance
The Company provides domestic and international long distance
services. The long distance business segment also rents its long
distance network to other telecom operators, such as long distance
carriers, mobile telephony operators and Internet service
providers. Consistent with the financial statements, revenue is
recognized as services are rendered.
Mobile Communications
Total mobile communications revenues include revenues from outgoing
mobile traffic and mobile equipment sales, CPP interconnection
revenues and revenues from other mobile services, such as paging,
trucking and mobile data transmission. Handset and activation fee
revenue is recognized at time of sale. Fees for cellular service
are recognized monthly as services are provided, which includes a
month-end estimate for cut-off purposes for contract services
provided but not yet billed. Prepaid card revenues are recognized
upon the customer's usage of the cards.
Corporate Customer Communications and Data
Corporate customer communications service includes revenues from
the sale and rental of telecommunications equipment and the sale of
networks to corporate customers, the rental of networks associated
with private network projects of corporate customers, and data
transmission services. Revenue is recognized as the service is
rendered or at the point of sale.
Information Systems Services
The Information Systems Services segment generates revenues by
providing systems integration services and products, as well as
information systems platforms. The services it provides include
outsourcing, network management, hardware and software maintenance,
development of information systems solutions and software
applications, consulting and training services. Consistent with the
financial statements, revenue is recognized as services are
rendered.
F-65
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Other
Other services principally include public telephone services and
interconnection services provided to other local networks. Revenue
is recognized as services are rendered.
Relevant information concerning Telefonica CTC Chile and its principal
subsidiaries, which represent different segments, together with
information regarding other subsidiaries is as follows:
Corporate
Customer Information
As of and for the year Fixed Long Mobile Comm. Systems Other
ended December 31, 2000 Telephony Distance Communication And data Services Subsidiaries Eliminations Total
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
----------------------- ------------ ------------- ------------ ---------- ----------- ------------ ----------- --------------
Operating revenues 464,998,650 120,149,500 191,940,500 81,049,670 136,756,220 61,549,327 (157,389,180) 899,054,687
Revenues 429,099,030 76,328,150 183,147,390 59,711,160 96,826,180 53,942,777 - 899,054,687
Intercompany 35,899,620 43,821,350 8,793,110 21,338,510 39,930,040 7,606,550 (157,389,180) -
transactions
Operating expenses (441,030,550) (75,306,390) (208,757,240) (86,961,870) (126,537,560) (52,783,675) 161,227,890 (830,149,395)
Salaries (71,938,290) (7,477,800) (13,354,980) (15,329,490) (34,827,390) (2,862,370) - (145,790,320)
Services (123,093,953) (49,893,216) (150,939,220) (32,938,370) (58,168,022) (20,977,522) 999,262 (435,013,041)
Depreciation (170,734,147) (8,237,924) (31,405,730) (10,928,300) (20,116,098) (6,924,573) (999,262) (249,346,034)
Intercompany (75,264,160) (9,697,450) (13,057,310) (27,765,710) (13,426,050) (22,017,210) 161,227,890 -
transactions
Operating income, net 23,968,100 44,843,110 (16,816,740) (5,912,200) 10,218,660 8,765,652 3,838,710 68,905,292
Non-operating income 15,882,565 917,730 907,670 4,484,620 3,184,760 (829,007) 33,819,339 58,367,677
Financial income 9,560,460 523,240 503,910 107,120 1,467,750 251,463 - 12,413,943
Other non-operating
income 6,322,105 394,490 403,760 4,377,500 1,717,010 (1,080,470) 33,819,339 45,953,734
Non-operating expenses (141,744,979) (8,983,660) (22,054,670) (1,935,370) (5,091,320) (4,839,277) (33,819,339) (218,468,615)
Financial expenses (98,817,170) (1,303,980) (4,828,640) (747,780) (3,206,390) (2,244,813) (1,653,976) (112,802,749)
Other non-operating
expenses (42,927,809) (7,679,680) (17,226,030) (1,187,590) (1,884,930) (2,594,464) (32,165,363) (105,665,866)
Price-level restatement (24,819,274) (150,380) (7,121,420) 255,440 (951,720) 196,730 - (32,590,624)
Intercompany
transactions 14,146,020 (2,875,760) (7,955,720) (3,034,380) 2,971,550 587,000 (3,838,710) -
Non-operating income,
net (136,535,668) (11,092,070) (36,224,140) (229,690) 113,270 (4,884,554) (3,838,710) (192,691,562)
Income (loss) before
income taxes (112,567,568) 33,751,040 (53,040,880) (6,141,890) 10,331,930 3,881,098 - (123,786,270)
Income taxes 14,261,415 (4,260,709) 176,130 (465,560) (2,154,760) (1,792,601) - 5,763,915
Minority interest - (246,571) - - (2,965,584) (58,153) - (3,270,308)
Amortization of
negative goodwill 2,654 204,551 207,205
Net (loss) income (98,306,153) 29,243,760 (52,864,750) (6,607,450) 5,214,240 2,234,895 - (121,085,458)
Total Identifiable
Assets 2,891,536,091 270,544,483 448,884,570 233,441,991 144,979,029 110,053,136 (929,129,997) 3,170,309,303
CAPITAL EXPENDITURES
67,247,674 6,178,198 112,838,641 8,849,874 5,649,071 9,441,298 (999,262) 209,205,494
DEPRECIATION AND
AMORTIZATION 172,208,959 8,237,924 31,405,730 10,928,300 20,116,098 8,490,910 999,262 252,387,183
CAPITALIZED INTEREST 26,455,413 - 5,772,077 - - - - 32,227,490
-----------------------------------------------------------------------------------------------------------------------------------
F-66
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
Corporate
As of and for Customer Information
the year ended Fixed Long Mobile Comm. And Systems Other
December 31, 2001 Telephony Distance Communications data Services Subsidiaries Eliminations Total
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
----------------- ------------- ----------- ----------- ----------- ------------ ----------- ----------- -------------
Operating revenues 459,582,910 115,388,840 192,408,120 105,359,160 168,182,520 67,916,160 (188,803,057) 920,034,653
Revenues 412,468,650 81,901,480 184,172,240 72,334,353 112,828,260 56,329,670 - 920,034,653
Intercompany
transactions 47,114,260 33,487,360 8,235,880 33,024,807 55,354,260 11,586,490 (188,803,057) -
Operating expenses (387,207,900) (70,084,290)(205,478,820) (92,417,780) (153,999,420) (58,555,867) 189,185,850 (778,558,227)
Salaries (65,189,730) (6,658,950) (13,641,320) (16,257,520) (35,725,550) (4,889,410) - (142,362,480)
Services (82,202,264) (40,099,458)(136,466,760) (28,502,160) (70,301,620) (23,893,759) 774,647 (380,691,374)
Depreciation (165,254,206) (8,450,622) (44,406,390) (10,236,140) (17,016,630) (9,365,738) (774,647) (255,504,373)
Intercompany
transactions (74,561,700) (14,875,260)( 10,964,350) (37,421,960) (30,955,620) (20,406,960) 189,185,850 -
Operating
income, net 72,375,010 45,304,550 (13,070,700) 12,941,380 14,183,100 9,360,293 382,793 141,476,426
Non-operating
income 28,616,738 444,960 852,840 9,270 4,982,110 508,737 39,945 35,454,600
Financial income 15,500,014 425,390 541,780 (221,450) 2,509,080 (12,360) - 18,742,454
Other non-operating
income 13,116,724 19,570 311,060 230,720 2,473,030 521,097 39,945 16,712,146
Non-operating
expenses (131,004,329) (5,186,050) (11,717,280) (1,049,000) (3,980,950) (5,148,484) (39,945) (158,126,038)
Financial expenses (93,443,777) (527,360) 1,642,850 (271,920) (2,307,200) (1,347,240) - (96,254,647)
Other non-operating
expenses (37,560,552) (4,658,690) (13,360,130) (777,080) (1,673,750) (3,801,244) (39,945) (61,871,391)
Price-level
restatement 2,445,220 (1,671,121) 2,997,300 379,040 (1,774,690) (244,368) - 2,131,381
Intercompany
transactions 16,885,820 (1,729,370) (12,337,340) (951,720) 1,618,130 (3,102,727) (382,793) -
Non-operating
income, net (83,056,551) (8,141,581) (20,204,480) (1,612,410) 844,600 (7,986,842) (382,793) (120,540,057)
Income (loss) before
income taxes (10,681,541) 37,162,969 (33,275,180) 11,328,970 15,027,700 1,373,451 - 20,936,369
Income taxes (7,877,688) (5,643,137) 6,733,110 330,630 (3,335,784) (1,976,159) - (11,769,028)
Minority interest - (261,808) - - (4,717,865) 41,155 - (4,938,518)
Amortization of
negative goodwill 6,185 6,185
Net (loss) income (18,559,229) 31,258,024 (26,542,070) 11,659,600 6,981,236 (561,553) - 4,235,008
Total
Identifiable 2,898,790,581 319,854,719 429,160,103 214,415,437 132,777,802 82,153,207 (986,851,035) 3,090,300,814
Assets
CAPITAL
EXPENDITURES 29,598,557 11,195,694 133,436,542 16,469,495 2,685,513 7,048,299 (73,006,874) 127,427,226
DEPRECIATION AND
AMORTIZATION 165,979,394 8,450,622 44,406,390 10,236,140 17,016,630 10,316,754 774,647 257,180,577
CAPITALIZED
INTEREST 15,477,075 - 5,551,203 - - - - 21,028,278
-----------------------------------------------------------------------------------------------------------------------------------
F-67
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
------------------ ----------- ----------- ------------- ----------- ----------- ----------- ------------ ------------
Corporate
As of and for Customer Information
the year ended Fixed Long Mobile Comm. And Systems Other
December 31, 2002 Telephony Distance Communications data Services Subsidiaries Eliminations Total
ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$
------------------ ----------- ----------- ------------- ----------- ----------- ----------- ------------ ------------
Operating
revenues 430,270,762 103,441,034 215,483,413 123,025,230 63,033,630 69,713,030 (141,818,418) 863,148,681
Revenues 381,227,272 78,316,783 206,931,327 86,206,862 62,321,623 48,144,814 - 863,148,681
Intercompany
transactions 49,043,490 25,124,251 8,552,086 36,818,368 712,007 21,568,216 (141.818.418) -
Operating
expenses (381,963,117) (68,607,686)(198,928,213) (102,537,025) (60,719,607) (65,886,421) 145,991,459 (732,650,610)
Salaries (54,900,145) (6,427,064) (13,595,546) (14,519,145) (18,712,187) (6,608,066) - (114,762,153)
Services (94,963,510) (40,307,485)(124,540,668) (36,325,363) (35,836,358) (25,558,392) 678,558 (356,853,218)
Depreciation (172,569,867) (9,049,009) (50,995,901) (11,054,111) (6,004,060) (10,683,733) (678,558) (261,035,239)
Intercompany
transactions (59,529,595) (12,824,128) (9,796,098) (40,638,406) (167,002) (23,036,230) 145,991,459 -
Operating
income, net 48,307,645 34,833,348 16,555,200 20,488,205 2,314,023 3,826,609 4,173,041 130,498,071
Non-operating
income 14,702,147 959,009 1,970,019 (124,001) 3,949,040 11,194,551 (272,294) 32,378,471
Financial income 13,795,138 446,004 935,009 20,000 1,291,013 204,292 - 16,691,456
Other
non-operating
income 907,009 513,005 1,035,010 (144,001) 2,658,027 10,990,259 (272,294) 15,687,015
Non-operating
expenses (114,636,951) (9,091,091) (990,448) (2,077,021) (1,640,017) (16,730,019) 1,041,303 (144,124,244)
Financial
expenses (81,947,819) (221,002) 2,205,584 (456,005) (755,008) (136,001) (162,041) (81,472,292)
Other
non-operating
expenses (32,689,132) (8,870,089) (3,196,032) (1,621,016) (885,009) (16,594,018) 1,203,344 (62,651,952)
Price-level
restatement (6,505,065) (231,266) (610,006) 610,006 (2,352,619) 135,749 - (8,953,201)
Intercompany
transactions 23,075,231 (2,528,025) (12,369,124) 297,003 - (3,533,035) (4,942,050) -
Non-operating
income, net (83,364,638) (10,891,373) (11,999,559) (1,294,013) (43,596) (8,932,754) (4,173,041) (120,698,974)
Income (loss)
before income
taxes (35,056,993) 23,941,975 4,555,641 19,194,192 2,270,427 (5,106,145) - 9,799,097
Income taxes (17,061,798) (4,442,642) (657,680) (2,404,024) (1,005,704) (1,144,928) - (26,716,776)
Minority
interest - (155,355) - - (607,665) 323 - (762,697)
Amortization
of negative
goodwill - -
Net (loss)
income (52,118,791) 19,343,978 3,897,961 16,790,168 657,058 (6,250,750) - (17,680,376)
Total
Identifiable
Assets 2,640,788,463 213,718,949 419,574,826 206,966,537 - 73,224,700 (865,900,170) 2,688,373,305
CAPITAL
EXPENDITURES 32,265,976 3,252,421 40,052,120 14,553,531 - 8,502,984 678,558 99,305,590
DEPRECIATION AND
AMORTIZATION 173,269,197 9,049,009 50,995,901 11,054,111 6,004,060 12,696,243 678,558 263,747,079
CAPITALIZED
INTEREST 4,349,117 - 3,425,289 - - - - 7,774,406
----------------------------------------------------------------------------------------------------------------------------------
F-68
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(d) Reclassifications to U.S. GAAP
Certain reclassifications would be made to the Chilean GAAP income
statement in order to present Chilean GAAP amounts in accordance
with presentation requirements under U.S. GAAP. Amortization of
negative goodwill, amortization of goodwill, and certain other
non-operating income and expense, would be included in operating
income. Recoverable taxes included in other non-operating revenues
would be recorded as part of income taxes under U.S. GAAP. Equity
participation in income or losses of related companies included in
non-operating income would be presented after income taxes and
minority interest in accordance with U.S. GAAP. The following
reclassifications included in the column labeled
"Reclassifications" disclose amounts using a U.S. GAAP
presentation, although the amounts displayed have been determined
in accordance with Chilean GAAP.
------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000
US GAAP
Chilean GAAP Reclassification presentation
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
Operating income 68,905,292 (89,438,029) (20,532,737)
Non-operating expenses (192,691,562) 92,088,790 (100,602,772)
Income taxes 5,763,915 (1,463,310) 4,300,605
Minority interest (3,270,308) - (3,270,308)
Participation in income of related
Companies, net (980,246) (980,246)
Amortization negative goodwill 207,205 (207,205) -
-------------------------------------------------------------------------
Net loss (121,085,458) - (121,085,458)
-----------------------------------------=========================================================================
------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
US GAAP
Chilean GAAP Reclassification presentation
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
Operating income 141,476,426 (47,784,438) 93,691,998
Non-operating expenses, net (120,540,057) 47,719,883 (72,820,174)
Income taxes (11,769,028) (541,089) (12,310,117)
Minority interest (4,938,518) - (4,938,518)
Participation in income of related
Companies, net 611,829 611,829
Amortization negative goodwill 6,185 (6,185) -
-------------------------------------------------------------------------
Net income 4,235,008 - 4,235,008
-----------------------------------------=========================================================================
F-69
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
US GAAP
Chilean GAAP Reclassification presentation
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
Operating income 130,498,071 (43,002,202) 87,495,869
Non-operating expenses, net (120,698,974) 41,463,080 (79,235,894)
Income taxes (26,716,776) (816,257) (27,533,033)
Minority interest (762,697) - (762,697)
Participation in income of related
companies, net 2,355,379 2,355,379
Amortization negative goodwill - - -
-------------------------------------------------------------------------
Net loss (17,680,376) - (17,680,376)
------------------------------------------------------------------------------------------------------------------
(e) Cash flows:
i) Information for inclusion in the statement of cash flows required by
U.S. GAAP, is as follows:
-------------------------------------------------------------------------------------------------------------------------
December 31,
2000 2001 2002
---- ---- ----
ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Cash provided by operating activities under Chilean GAAP 353,443,748 356,286,169 324,595,006
Cash provided by operating activities under U.S. GAAP 353,443,748 356,286,169 324,595,006
INVESTING ACTIVITIES:
Cash provided by investing activities under Chilean GAAP (148,307,996) (151,928,368) (134,417,139)
Repayment of loan form related company 28,672,085 10,401,145 -
Net cash used in investing activities under U.S. GAAP (119,635,911) (141,527,223) (134,417,139)
FINANCING ACTIVITIES:
Cash provided by (used in) financing activities under Chilean GAAP (120,289,545) (248,144,498) (253,915,390)
Repayment of loan from related company (28,672,085) (10,401,145) -
Net cash used in financing activities under
U.S. GAAP (148,961,630) (258,545,643) (253,915,390)
-------------------------------------------------------------------------------------------------------------------------
F-70
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
ii.) For the purposes of the U.S. GAAP statement of cash flows, the
Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents:
------------------------------------------------------------------------------------------------------------------
December 31,
2000 2001 2002
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
Cash 18,909,857 19,323,709 16,842,002
Time deposits 79,417,081 11,366,992 2,287,310
Marketable securities 2,746,119 3,473,919 1,773,744
Other deposit instruments (*) 35,100,384 52,720,266 -
------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 136,173,441 86,884,886 20,903,056
------------------------------------------------------------------------------------------------------------------
(*) These items consist of investments made for cash management
purposes with original maturities of less than three months.
(iii.) Supplementary Cash Flow information:
------------------------------------------------------------------------------------------------------------------
Year ended December 31,
------------------------
2000 2001 2002
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
Interest paid 112,752,040 99,364,100 83,423,755
Income taxes paid 27,562,800 6,874,220 11,671,235
Plant and equipment acquired by assuming directly related
long-term debt or entering into capital leases 1,155,660 367,710 147,644
------------------------------------------------------------------------------------------------------------------
(iv) Maturities of debt:
The Company has an unused line of credit outstanding as of December 31,
2002 with Credit Lyonnais in the amount of ThCh$9,800.
The following payments of bank borrowings (short-term obligations and
short-term portion of long-term obligation) and long-term debt, including
capital leases and current maturities, are scheduled to be paid during
each of the years indicated:
------------------------------------------------------------------------------------------------------------------
Capital Leases Other Total
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------------
2003 including accrued interest - 155,482,251 155,482,251
2004 959,043 284,584,649 285,543,692
2005 911,958 191,812,376 192,724,334
2006 862,637 351,814,662 352,677,299
2007 1,157,700 60,667,729 61,825,429
2008 and thereafter 2,440,847 125,908,340 128,349,187
------------------------------------------------------------------------------------------------------------------
Total 6,332,185 1,170,270,007 1,176,602,192
------------------------------------------------------------------------------------------------------------------
The present value of net long-term minimum lease payments totaled
Ch$5,084,787, as of December 31, 2002. The imputed interest totals
Ch$1,551,741.
F-71
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(f) Disclosure regarding the fair value of financial instruments and
derivative financial instruments:
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments", information is provided about the fair value of
certain financial instruments for which it is practicable to
estimate that value.
For the purpose of SFAS No. 107, the estimated fair value of
financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other
than in a forced sale or liquidation.
There are certain limitations inherent in the fair value data since
while the data represents management's best estimate, the data is
subjective, involving significant estimates regarding current
economic and market conditions. The methods and assumptions used to
estimate the fair values are as follows.
For cash, short-term deposits and investment, and current
receivables and payables, the carrying amounts approximate the fair
value due to the short-term maturity of these instruments.
For interest earning assets and interest bearing liabilities, which
are contracted at variable interest rates, the book value is
considered to be equivalent to the fair value.
For financial instruments where an active secondary market exists,
the fair value was calculated by discounting contractual cash flows
at the current market origination rates for financial instruments
with similar terms.
For the Company's long-term fixed rate debt, the contractual cash
flows were discounted at prevailing interest rates at the balance
sheet dates.
The estimated fair values of Telefonica CTC Chile's financial
instruments are as follows:
-------------------------------------------------------------------------------------------------------------
As of December 31,
2001 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
ThCh$ ThCh$ ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents 86,884,886 86,884,886 19,260,479 19,260,479
Marketable securities 60,218,053 60,218,053 76,812,030 76,812,030
Accounts and notes receivable (net) and
other 291,983,317 291,983,317 237,700,811 237,700,811
Other current assets 197,503,888 197,503,888 99,983,765 99,983,765
Liabilities:
Current maturities of long-term debt 153,374,370 152,823,370 168,658,764 168,505,962
Accounts payable and accrued liabilities 263,560,327 263,560,327 177,683,575 177,683,575
Bank borrowings (long-term)and long-term
debt 1,122,626,390 1,104,740,390 932,597,581 901,145,388
Derivatives (18,873,085) (10,935,669) (46,150,677) (41,015,521)
-------------------------------------------------------------------------------------------------------------
F-72
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(g) Disclosure regarding interest capitalization:
------------------------------------------------------------------------------------------------------------
Year ended December 31,
2000 2001 2002
ThCh$ ThCh$ ThCh$
------------------------------------------------------------------------------------------------------------
Interest cost incurred 112,802,749 96,254,647 81,472,292
Interest capitalized under Chilean GAAP 32,227,490 21,028,278 7,774,406
Interest capitalized under U.S. GAAP 28,967,179 19,156,050 7,774,406
------------------------------------------------------------------------------------------------------------
(h) Marketable Securities
Under U.S. GAAP, marketable securities are accounted for under SFAS
115 "Accounting for Certain Investments in Debt and Equity
Securities". This standard requires investments to be accounted for
as follows: (1) Held-to-maturity securities, which are defined as
debt securities that a Company has a positive intent and ability to
hold to maturity are reported at amortized cost, (2) Trading
securities, which are defined as those that are bought and held
principally for the purpose of selling them in the near term, are
reported at fair value with unrealized gains and losses included in
earnings, and (3) Available-for-sale securities, which include
securities not classified in either of the other two categories,
are reported at fair value with unrealized gains and losses
excluded from earnings and included as a separate component of
shareholders' equity.
Under Chilean GAAP, the Company presents marketable securities at
the lower of cost plus indexation adjustment or market, except for
investment in mutual funds which are presented at market value.
Under U.S. GAAP, these investments would be considered
available-for-sale and be presented at fair value with unrealized
gains and losses included as a separate component for the
shareholders' equity.
Marketable securities as of each year-end are as follows:
-------------------------------------------------------------------------------------------------------------
As of December 31,
2001 2002
ThCh$ ThCh$
-------------------------------------------------------------------------------------------------------------
Cost plus accrued indexation and interest 60,218,053 76,812,030
Unrealized loss on marketable securities - (2,591,887)
-------------------------------------------------------------------------------------------------------------
Fair value 60,218,053 74,220,143
-------------------------------------------------------------------------------------------------------------
The maturities of marketable securities are the following as of
December 31, 2002:
---------------------------- ------------------
Year of Maturity Amount
ThCh$
---------------------------- ------------------
2003 -
2004 -
2005 65,571,937
2006 -
No contractual maturity 8,648,206
---------------------------- ------------------
Total 74,220,143
---------------------------- ------------------
F-73
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(i) Employee Benefit Plans
i. Employee Benefits:
Employee pension and health insurance benefits are provided by
independent pension funds and health-insurance companies, which are
funded by employees' contributions. Telefonica CTC Chile has no
responsibility as an employer to make payments under these plans,
other than to withhold amounts from employees' salaries.
Substantially all of Telefonica CTC Chile's employees have the
right to receive an indemnity in the event of voluntary or
involuntary severance of employment. The severance indemnity is
generally equal to 40 days' remuneration for each year of service,
computed at the latest salary level. As permitted by law, in
certain cases Telefonica CTC Chile prepaid part of the future
severance indemnities. The difference between the prepaid amount
and the present value of such future obligations prepaid amounts
were charged to income. The effect of such charges on all periods
presented was not significant.
Termination indemnity employee benefits have been accounted for in
accordance with SFAS No. 87 consistent with that of a defined
benefit pension plan, measuring the liability by projecting the
future expected severance payments using a salary progression rate
net of inflation adjustments, mortality and turnover assumptions,
and which are then discounted to their present value using real
interest rates.
An analysis of the changes in the accrued amounts for staff
severance indemnities during each of the two years ended December
31, 2002 is as follows.
----------------------------------------------------------------------------------------------
2001 2002
Changes in obligations: ThCh$ ThCh$
----------------------------------------------------------------------------------------------
Obligation as of January 1 29,686,000 33,151,580
Net periodic benefit expense 30,663,760 9,512,799
Benefits paid (27,198,180) (19,174,094)
----------------------------------------------------------------------------------------------
Obligation as of December 31 33,151,580 23,490,285
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
2001 2002
Components of net periodic benefit expenses: ThCh$ ThCh$
----------------------------------------------------------------------------------------------
Service cost 2,844,860 3,066,265
Interest cost 2,993,180 2,320,611
Actuarial gain (loss) 24,825,720 4,125,923
----------------------------------------------------------------------------------------------
Net periodic benefit expense 30,663,760 9,512,799
----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
Assumption as of December 31 2000 2001 2002
-------------------------------------------------------------------------------------
Discount rate 7% 7% 7%
Salary increase 4.7% 4.65% 4.5%
Turnover 0% 2.4% 2.4%
-------------------------------------------------------------------------------------
F-74
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
ii. Corporate Restructuring and Activity Value Analysis Project:
During 1999, the Company completed an evaluation of its costs and
productivity of the following areas of Telefonica CTC Chile's
operations: administration, network management and maintenance,
repairs, sales, customer service, collections and finance. The
completion of this project resulted in the elimination or
alteration of certain business activities of the Company,
termination of its contractual relationships with several of its
independent contractors, and the reduction of its workforce in 1999
and 2000 due to early retirement plans, voluntary resignations and
other reasons. In addition, during the months of January and
February 2001, and as part of the corporate restructuring process,
the Company implemented a new early retirement plan.
During the month of June 2001, the Company carried out a headcount
reduction process which involved employees of Telefonica CTC Chile
and its subsidiaries. This process, together with the early
retirement plan implemented in early 2001, originated charges to
income from severance payments and other costs for a total amount
of ThCh$18,961,222 during the first half of 2001.
During the month of October 2002, the Company carried out a
headcount reduction process which involved employees of Telefonica
CTC Chile and its subsidiaries. This process, originated charges to
income from severance payments and other costs for a total amount
of ThCh$15,224,434 during the second half of 2002.
This headcount reduction process is part of a broad business
restructuring with the objective of achieving a better competitive
positioning and increased efficiency that would allow the Company
to partly compensate for the losses recorded in the last two years.
(j) Derivatives instruments:
Beginning January 1, 2001, for purpose of the U.S. GAAP
reconciliation, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) and the
corresponding amendments under SFAS No. 138. SFAS 133 as
amended establishes accounting and reporting standards that
required every derivative instrument (including certain derivative
instruments embedded in other contracts) to be recorded in the
balance sheet as either an asset or liability, measured at its fair
value. SFAS 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement. However, as the
company's formal documentation at the inception for the hedge did
not qualify for hedged accounting treatment.
The following is a summary of the Company's adjustment to fair
values for all identified derivative contracts at the date of
implementation of SFAS No. 133 on January 1, 2001.
As of January 1, 2001
Total
ThCh$
Financial derivatives 11,102,047
Embedded derivatives 2,572,897
Deferred tax effects (2,089,835)
--------------
Cumulative change in accounting principle 11,585,109
==============
F-75
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(k) Early extinguishments of debt
As of January 1, 2002, the Company adopted SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." Among other items,
this Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishments of Debt". As a result, early
extinguishments of debt are no longer reported as extraordinary
items but are included in income from continuing operations. For
the year ended December 31, 2002, the Company extinguished bank
loans, repurchase of bonds in the national and international
markets and the renegotiation of loans, obtaining reduced interest
rates and extended maturities. This resulted in a loss of
approximately ThCh$ 2,107,899 for the year ended December 31, 2002.
There were no early extinguishments of debt during 2001 and 2000.
(l) Recently issued pronouncements
In January 2003, the Chilean Association of Accountants issued
Technical Bulletin No. 72, "Combinacion de Negocios Inversiones
Permanentes y Consolidacion de Estados Financieros". This standard
complements or replaces existing accounting literature for business
combinations under Chilean GAAP, and requires all acquisitions
initiated after January 1, 2003 to be accounted for using the
purchase method based on fair values of assets acquired and
liabilities assumed. In addition, in exceptional cases, the
pooling-of-interest method may be used in reorganizations between
related parties or for those transactions, where there is no clear
acquirer. Technical Bulletin No. 72 continues to require the
amortization of goodwill, and specifies the requirement for an
impairment test. Notwithstanding any future transactions, the
adoption of Technical Bulletin No. 72 is not expected to have a
significant effect on the results of operations, financial position
or cash flows of the Company.
In June 2001 the U.S. Financial Accounting Standards Board issued
Statement of Financial Accounting Standard SFAS No. 143,
"Accounting for Asset Retirement Obligations". SFAS No. 143
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimated of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset and depreciated over the life of the
associated fixed asset. An entity shall measure changes in the
liability for an asset retirement obligation due to passage of time
by applying an interest method of allocation to the amount of the
liability at the beginning of the period. The interest rate used to
measure that change shall be the credit-adjusted risk-free rate
that existed when the liability was initially measured. That amount
shall be recognized as an increase in the carrying amount of the
liability and as an expense classified as an operating item in the
statement of income. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002. The Company determined that
the adoption of SFAS 143 will not have any impact on its results of
operations, its financial position and its cash flows.
In June 2002, the U.S. Financial Accounting Standards Board issued
Statement No. 146 (SFAS 146), "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred and indicates that an
entity's commitment to an exit plan does not by itself create a
present obligation to others that meets the definition of a
liability. This statement nullifies Emerging Issue Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a Restructuring)". The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. Compania de
Telecomunicaciones de Chile S.A. will apply the provisions of SFAS
146 to all exit and disposal activities after December 31, 2002.
F-76
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
In November, 2002, Emerging Issues Task Force ("EITF") 02-16,
"Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" was issued, which is
applicable for all arrangements of this nature entered into after
December 15, 2002. This EITF expanded the scope of the issue No.
01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)," to (a) include
resellers that sell goods or services to a vendor (that is,
resellers and vendors that sell goods or services to each other),
(b) include end-users that receive cash consideration from a
vendor, and (c) provide guidance on the recognition and measurement
of cash consideration (including up-front nonrefundable cash
consideration) received from a vendor. The Company believes that
the adoption of this EITF will have no impact on its statements of
financial condition, its statements of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires additional disclosures by guarantors about
obligations under guarantees that it has issued. This statement
also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of
obligations undertaken in issuing guarantees. The disclosure
requirements for FIN 45 are effective for financial statements of
interim and annual periods ending after December 15, 2002. The
initial recognition and initial measurement requirements are
applicable on a prospective basis for guarantees issued or modified
after December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), an
interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements (ARB 51). FIN 46 addresses consolidation by
business enterprises of variable interest entities, which are
entities subject to consolidation according to the provisions of
FIN 46. For interests acquired on or after February 1, 2003, FIN 46
applies immediately. For existing interests as of January 31, 2003,
FIN 46 is effective on July 1, 2003. The Company does not believe
that the adoption of FIN 46 will affect its accounting.
In January, 2003, Emerging Issues Task Force ("EITF") 00-21,
"Revenue Arrangements with Multiple Deliverables," was issued,
which is applicable for all revenue arrangements of this nature
entered into after June 15, 2003. This EITF applies to all
deliverables within contractually binding arrangements in all
industries in which a vendor will perform multiple
revenue-generating activities with certain exceptions. The
application guidance contains guidance on 1) how these arrangements
should be measured; 2) whether the arrangement should be divided
into separate units of accounting, and 3) how the arrangement
consideration should be allocated among the separate units of
accounting. The Company believes that the issuance of this EITF
will have no impact on its statements of financial condition, its
statements of operations or cash flows.
In April 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards SFAS No. 149
(SFAS No.149), Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 is applied prospectively and is
effective for contracts entered into or modified after June 30,
2003, except for SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003,
and certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist.
The Company does not believe that SFAS No. 149 will affect its
consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150 ("SFAS No.
150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity and will require an issuer to classify as a
liability certain instruments currently classified as equity. The
Company does not expect SFAS 150 to have a material impact on its
consolidated financial statements.
F-77
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
(m) Additional Subsequent Events
i) VTR access charges
On April 7, 2003, Chile's Supreme Court upheld a Court of
Appeals' ruling rejecting an injunction filed by the Company
against Resolution No. 1726, dated October 2, 2002, of the
Undersecretary of Telecommunication ordering the Company to
pay a Ch$78 million invoice for access charges incurred
between June 25 and June 30, 2002 issued by VTR with no
consideration for the Interconnection Agreement it entered
into with the Company on March 3, 1997. Nevertheless, the
Court of Appeals' ruling states that Subtel's Resolution can
be overturned by the ruling of a court of law at the end of
a normal lawsuit.
On April 15, 2003, the Company submitted to the
Transportation and Telecommunications Minister a brief
against Ordinary Notification No. 36,396, dated October 17,
2002. In the brief the Company seeks the nullification of
Subtel's allegation that the Company did not comply with
Resolution No. 1726.
Apart from the administrative proceedings started with the
Transportation and Telecommunications Minister, the Company
will try to obtain a court of law ruling pronouncing the
March 3, 1997 Interconnection Agreement entered into by and
between the Company and VTR, to be binding for the two
parties.
ii) Dividend distribution policy
At the General Shareholders' Meeting held on April 4, 2003,
the Board of Directors announced the Company's dividend
distribution policy. In 2003, it will consist of
distributing at least 30% of the 2003 net income accordance
with Chilean GAAP, through in a final dividend to be paid in
May 2004.
iii) Resignation of Board Member and Deputy Chairman and his
replacement
On April 22, 2003, Mr. Jacinto Diaz Sanchez resigned from
his position of Member of the Board and Deputy Chairman of
"Telefonica CTC Chile". On that same date, the Board of
Directors appointed Mr. Jose Maria Alvarez-Pallete as his
replacement.
iv) Changes in essential assets declaration.
Annually, in the Ordinary Shareholder's Meeting, the Company
restricts the disposition of assets or property rights which
are essential for the Company's ongoing business and
declared as essential assets the 51% of the shares of its
strategic subsidiaries. The Shareholder's meeting held on
April 4, 2003, approved to declare as an essential asset the
51% of the shares of Telefonica Empresas CTC Chile S.A. and
to exclude the subsidiary CTC Equipos S.A. which was
declared as essential asset until this date.
v) Tariff Setting Process for Telefonica CTC Chile's Services
for 2004 -2009
On January 13, 2003, Telefonica CTC Chile requested that the
Antitrust Commission, on the basis that market conditions
are sufficient to guarantee healthy competition, rule in
favor of tariff deregulation in specific geographical areas
and allow the Company flexibility to offer tariff plans
different from the regulated rates without previous
authorization. The Company also requested that, in cases
where conditions are not sufficient to guarantee
competition, the Antitrust Commission define the services
that will be subject to tariff regulation by the
corresponding Ministries.
F-78
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
On May 22, 2003, the Antitrust Commission issued Resolution
686. This Resolution ruled against deregulation of rates
charged by Telefonica CTC Chile for services to the public.
Although the Ministries of Economy and of
Telecommunications, as part of the Antitrust Commission's
resolutory process, issued opinions that were favorable to
providing tariff flexibility to the Company, the Antitrust
Commission did not issue a specific pronouncement regarding
such tariff flexibility. Resolution 686 also defined the
services subject to tariff regulation by the Ministries for
the 2004 - 2009 tariff decree, which are substantially
similar to the services regulated in Tariff Decree No. 187.
In accordance with the requirements of the tariff setting
process, on April 30, 2003, Telefonica CTC Chile presented
to Subtel its proposal for the technical-economic bases upon
which tariffs for the 2004-2009 period will be determined.
The Company's proposed criteria addresses all necessary
aspects to be defined previous to the tariff study, such as,
among other things, the analysis period, tariff areas,
tariff projections criteria and network design criteria. On
May 30, 2003, Subtel provided the Company with the text of a
proposal of the technical-economic bases. Subsequently, the
Company presented arguments against such text and, as
provided for in the tariff setting process, requested the
formation of a panel of experts, which was constituted in
June 2003. The panel, whose final opinion is not binding
upon Subtel, consists of three experts, one designated by
the Company, one by Subtel and the third by mutual agreement
between both parties. Once these issues are resolved, Subtel
must issue the final technical-economic bases, which will
define the conditions that will govern the "Tariff Study,"
which is the document that sets the tariff structure and the
tariff level, as well as the indexation formula for each
regulated service. The period for Telefonica CTC Chile to
present its Tariff Study to the Ministries expires on
November 5, 2003.
vi) Refinancing
In April, 2003, Compania de Telecomunicaciones de Chile
S.A. refinanced the obligation with Citibank of US$ 180
million which has allowed the company to: (a) make payment
of US$ 30 million in 2003, and (b) lengthen the maturity
profile of its debt.
vii) Telefonica CTC Chile S.A. announces proposal of
extraordinary dividend
On May 29, 2003, The Board of Directors agreed to hold an
Extraordinary Shareholders Meeting to approve the
distribution of a dividend of Ch$17.5 per share, to be
charged to retained earnings as of December 31, 2002. This
Extraordinary Shareholders Meeting will be held on July 11,
2003.
viii) Complaint from the Metropolitan Region's Customs Management
In June 2003, the national customs office rejected the
administrative determination of the regional customs office,
and made a final ruling in favor of the Company's appeal and
against any finding of liability on the part of the Company
(See Note 27 (iv)).
ix) In the period from January 1 to June 26, 2003, there have
been no other subsequent events that would materially affect
these financial statements.
F-79
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
-------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Restated for general price-level changes and expressed in thousands of
constant Chilean pesos as of December 31, 2002 and thousands of US
Dollars, except as indicated)
---------------------------------------------------------------------------------------------------------------------
2002
Schedule II - Valuation and Qualifying Accounts (in thousands of constant
Chilean pesos of December 31, 2002)
---------------------------------------------------------------------------------------------------------------------
Balance at Additions charged
Beginning to costs and Balance at
of period expenses Deductions end of period
ThCh$ ThCh$ ThCh$ ThCh$
---------------------------------------------------------------------------------------------------------------------
December 31, 2000 104,993,050 72,352,819 79,693,436 97,652,433
Allowance for doubtful accounts 100,705,160 70,029,139 76,605,496 94,128,803
December 31, 2001 97,652,433 22,575,473 45,540,209 74,687,697
Allowance for doubtful accounts 94,128,803 20,536,073 42,052,629 72,612,247
December 31, 2001 74,687,697 27,940,567 11,327,558 91,300,706
Allowance for doubtful accounts 72,612,247 26,001,066 9,102,925 89,510,388
---------------------------------------------------------------------------------------------------------------------
F-80
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
Compania de Telecomunicaciones de Chile S.A.
By: /s/ Julio Covarrubias F.
--------------------------------------------
Name: Julio Covarrubias F.
Title: Chief Financial Officer
Dated: June 30, 2003
CERTIFICATION
I, Claudio Munoz Z., certify that:
1. I have reviewed this annual report on Form 20-F of Compania de
Telecomunicaciones de Chile S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 30, 2003
By: /s/ Claudio Munoz Z.
------------------------------------
Name: Claudio Munoz Z.
Title: Chief Executive Officer
CERTIFICATION
I, Julio Covarrubias F., certify that:
1. I have reviewed this annual report on Form 20-F of Compania de
Telecomunicaciones de Chile S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 30, 2003
By: /s/ Julio Covarrubias F.
----------------------------------
Name: Julio Covarrubias F.
Title: Chief Financial Officer