6-K 1 feb0503_6k.txt =============================================================================== FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Report of Foreign Issuer Pursuant to Rule 13a-16 or 15d-16 of the Securities Exchange Act of 1934 For the month of February, 2003 Commission File Number: 001-10579 TELECOMMUNICATIONS COMPANY OF CHILE (Translation of registrant's name into English) Avenida Providencia No. 111, Piso 22 Providencia, Santiago, Chile (562) 691-2020 (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F: Form 20-F X Form 40-F --- --- Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): Yes No X --- --- Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): Yes No X --- --- Indicate by check mark whether by furnishing the information contained in this Form, the Registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934: Yes No X --- --- If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A =============================================================================== TELECOMMUNICATIONS COMPANY OF CHILE TABLE OF CONTENTS Item ---- 1. Compania De Telecomunicaciones De Chile S.A. And Subsidiaries - Report on the Financial Statements for the Years Ended December 31, 2002 and 2001 (Consolidated) 2. Compania De Telecomunicaciones De Chile S.A. And Subsidiaries - Analysis Of The Consolidated Financial Statements As Of December 31, 2002 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELECOMMUNICATIONS COMPANY OF CHILE Date: February 7, 2003 By: /s/ Julio Covarrubias F. ------------------------------- Name: Julio Covarrubias F. Title: Chief Financial Officer Item 1 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES REPORT ON THE FINANCIAL STATEMENTS for the years ended as of December 31, 2002 and 2001 (CONSOLIDATED) (Translation of financial statements originally issued in Spanish) COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES --------------------------------------------------------------------- CONTENTS Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements ThCh$: Thousands of Chilean pesos UF : The Unidad de Fomento, or UF, is an inflation-indexed peso denominated monetary unit in Chile. The daily UF rate is fixed in advance based on the change in the Chilean Consumer Price Index in relation to the previous month COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002 AND 2001 ------------------------------------------------------------------------------------------------------------ A S S E T S notes 2002 2001 ------------------------------------------------------ ---------------------------------------- ThCh$ ThCh$ ----------------- ----------------- CURRENT ASSETS Cash 16,842,002 19,323,709 Time deposits 2,418,477 11,366,992 Marketable securities (net) (4) 76,812,030 60,218,053 Trade accounts receivable (net) (5) 206,605,764 251,113,767 Notes receivable (net) (5) 6,024,436 5,260,269 Other receivables (net) (5) 25,070,611 35,609,281 Notes and accts. receivable from related companies (6 a) 17,113,928 5,581,397 Inventories (net) 14,360,380 32,378,241 Recoverable taxes 19,060,375 45,633,229 Prepaid expenses 8,230,701 11,251,165 Deferred taxes (7 b) 25,188,474 56,581,498 Other current assets (8) 28,656,627 122,898,844 ----------------- ----------------- TOTAL CURRENT ASSETS 446,383,805 657,216,445 ----------------- ----------------- PROPERTY, PLANT AND EQUIPMENT (9) Land 27,372,131 29,030,587 Constructions and infrastructure works 183,151,839 197,925,361 Machinery and equipment 3,294,876,741 3,235,794,533 Other property, plant and equipment 393,378,237 446,283,271 Higher value for technical reappraisal of property, plant and equipment 9,130,267 9,130,322 Depreciation (less) 1,968,865,481 1,794,155,265 ----------------- ----------------- TOTAL PROPERTY, PLANT AND EQUIPMENT 1,939,043,734 2,124,008,809 ----------------- ----------------- OTHER ASSETS Investment in related companies (10) 42,455,138 16,313,598 Investment in other companies 3,816 684,994 Goodwill (11 a) 179,404,553 210,069,277 Long-term debtors (5) 34,840,257 39,943,715 Notes and accts. Rec. from related companies (6 a) - 660,776 Intangibles (12) 32,304,395 16,981,672 Amortization (less) (12) 2,631,312 1,592,094 Others (13) 16,568,919 26,013,621 ----------------- ----------------- TOTAL OTHER ASSETS 302,945,766 309,075,559 ----------------- ----------------- ----------------- ----------------- TOTAL ASSETS 2,688,373,305 3,090,300,813 ================= =================
------------------------------------------------------------------------------------------------------------ L I A B I L I T I E S notes 2002 2001 ------------------------------------------------------ ---------------------------------------- ThCh$ ThCh$ ----------------- ----------------- CURRENT LIABILITIES Short-term obligations with banks and financial institutions (14) 9,191,446 20,652,113 Short-term portion of long-term obligations with banks and financial institutions (14) 146,290,805 112,957,547 Obligations with the public (bonds) (16) 21,704,239 38,651,152 Long-term obligations maturing within a year 489,759 1,142,572 Dividends payable 209,724 301,445 Accounts payable (33) 149,886,640 205,177,454 Notes payable 173,961 623,100 Other creditors 8,101,420 29,698,335 Notes and accounts payable to related companies (6 b) 11,976,196 17,572,625 Provisions (17) 9,952,190 15,069,037 Withholdings 9,533,601 13,314,056 Unearned income 6,963,466 2,653,236 Other current assets 4,947,602 33,520,779 ----------------- ----------------- TOTAL CURRENT ASSETS 379,421,049 491,333,451 ----------------- ----------------- LONG-TERM LIABILITIES Obligations with banks and financial institutions (15) 416,567,542 549,111,998 Obligations with the public (bonds) (16) 512,192,650 567,825,381 Notes and accounts payable to related companies (6 b) 24,214,112 25,769,951 Other long-term creditors 9,246,715 33,366,179 Long-term provisions (17) 17,257,252 20,485,428 Long-term deferred taxes (7 b) 35,990,681 47,117,652 Other long-term liabilities 5,650,989 13,321,005 ----------------- ----------------- TOTAL LONG-TERM LIABILITIES 1,021,119,941 1,256,997,594 ----------------- ----------------- MINORITY INTEREST (19) 1,142,263 36,673,275 ----------------- ----------------- SHAREHOLDERS' EQUITY (20) Paid-in capital 736,468,120 736,468,120 Share premium 114,512,356 114,512,356 Other reserves 1,924,736 1,582,766 Retained earnings 433,784,840 452,733,251 Accumulated earnings 451,465,216 448,881,060 Net (Loss) income for the year (17,680,376) 4,235,008 Accum. deficit development period - subsidiary (less) - 382,817 ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 1,286,690,052 1,305,296,493 ----------------- ----------------- ----------------- ----------------- TOTAL LIAB. & SHAREHOLDERS' EQUITY 2,688,373,305 3,090,300,813 ================= ================= The accompanying notes 1 to 33 are an integral part of these financial statements ------------------------------------------------------------------------------------------------------------
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ---------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AS OF DECEMBER 31, 2002 AND 2001 2002 2001 ---- ---- OPERATING INCOME ThCh$ ThCh$ Operating revenues 863,148,681 920,034,653 Operating Costs (less) 602,236,149 647,194,118 --------------- ---------------- Gross margin (21a) 260,912,532 272,840,535 Administration and selling expenses (less) 130,414,461 131,364,109 --------------- ---------------- OPERATING INCOME 130,498,071 141,476,426 NON-OPERATING INCOME Financial income 16,691,456 18,742,454 Net income from investments in related companies (10) 2,465,491 1,140,091 Other non-operating income (21 b) 13,221,524 15,572,055 Loss from investments in related companies (less) (10) 110,112 528,262 Amortization of goodwill (less) (11 a) 24,661,893 16,211,090 Financial expenses (less) 81,472,292 96,254,647 Other non-operating expenses (less) (21 c) 37,879,947 45,132,039 Price-level restatement (22) (6,164,777) 303,171 Exchange differences (23) (2,788,424) 1,828,210 --------------- ---------------- NON-OPERATING INCOME (120,698,974) (120,540,057) --------------- ---------------- INCOME BEFORE INCOME TAX 9,799,097 20,936,369 Income tax (7 c) (26,716,776) (11,769,028) CONSOLIDATED INCOME (16,917,679) 9,167,341 Minority interest (19) (762,697) (4,938,518) NET (LOSS) INCOME (17,680,376) 4,228,823 Amortization of negative goodwill (11b) - 6,185 --------------- ---------------- NET (LOSS) INCOME FOR THE YEAR (17,680,376) 4,235,008 --------------- ---------------- The accompanying notes 1 to 33 are an integral part of these financial statements
4 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AS OF DECEMBER 31, 2002 AND 2001 2002 2001 ThCh$ ThCh$ NET CASH FLOWS FROM OPERATING ACTIVITIES 324,595,006 356,286,169 Net (Loss) income for the year (17,680,376) 4,235,008 Loss from sale of assets: (7,760,553) (1,120,209) Loss on sale of property, plant and equipment 111,365 537,199 Gain from sale of investments (less) 7,871,918 1,657,408 Charges (credits) to income that do not represent cash flows: 357,798,962 330,625,695 Depreciation for the year 262,734,333 256,651,873 Amortization of intangibles 1,012,746 528,704 Provisions and write offs 30,367,332 22,848,177 Net income from investments in related companies (less) 2,465,491 1,140,091 Loss from investments in related companies 110,112 528,262 Amortization of goodwill 24,661,893 16,211,090 Amortization of negative goodwill (less) - 6,185 Price-level restatement 6,164,777 (1,828,211) Exchange differences 2,788,424 (303,170) Other credits to income that do not represent cash flows (less) 19,956,999 20,088,021 Other charges to income that do not represent cash flows 52,381,835 57,223,267 Changes in assets that affect cash flows (increase) decrease 78,165,522 27,407,830 Trade accounts receivable (25,117,165) (65,495,850) Inventories 11,235,203 (3,106,614) Other assets 92,047,484 96,010,294 Changes in liabilities that affect cash flows (decrease) (86,691,246) (9,800,673) Accounts payable related to operating income (49,408,390) 37,886,619 Interest payable (1,159,320) (1,788,577) Income taxes payable (net) 14,669,367 (13,535,443) Other accounts payable related to non-operating income (50,426,638) (11,352,975) V.A.T. and other similar taxes payable (366,265) (21,010,297) Net income of minority interest 762,697 4,938,518 The accompanying notes 1 to 33 are an integral part of these financial statements
5 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED AS OF DECEMBER 31, 2002 AND 2001 2002 2001 ------------------- ------------------- ThCh$ ThCh$ NET NEGATIVE CASH FLOWS FROM FINANCING ACTIVITIES (253,915,390) (248,144,498) Proceeds from loans 13,815,654 27,192,366 Other sources of financing 1,674,004 712,887 Dividends paid (less) 1,356,091 - Loans paid (less) 142,348,687 249,186,767 Obligations with the public paid (less) 115,634,382 21,873,221 Payment of other loans from related companies (less) 10,065,888 - Other financing disbursements (less) - 4,989,763 NET NEGATIVE CASH FLOWS FROM INVESTMENT ACTIVITIES (134,417,139) (151,928,368) Sale of property, plant and equipment 730,269 336,056 Sale of permanent investments 28,367,432 4,499,333 Sale of other investments - 14,241,266 Other investment income 159,107 158,268 Purchase of property, plant and equipment (less) 99,305,590 127,427,226 Capitalized interest paid (less) 4,348,983 15,470,463 Permanent investments (less) 119,892 7,034,515 Investments in financial instruments (less) 30,170,262 8,578,810 Documented loans to related companies (less) - 10,401,145 Other investment disbursements (less) 29,729,220 2,251,132 ------------------- ------------------- NET CASH FLOWS USED FOR THE YEAR (63,737,523) (43,786,697) EFFECT OF INFLATION ON CASH AND CASH EQUIVALENTS (2,244,307) (5,501,858) ------------------- ------------------- NET CASH AND CASH EQUIVALENTS USED (65,981,830) (49,288,555) ------------------- ------------------- CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 86,884,886 136,173,441 ------------------- ------------------- CASH AND CASH EQUIVALENTS END OF YEAR 20,903,056 86,884,886 ------------------- ------------------- The accompanying notes 1 to 33 are an integral part of these financial statements 6
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Translation of financial statements originally issued in Spanish) ---------- 1. Composition of Consolidated Group and Registration in the Securities Registry: a) Compania de Telecomunicaciones de Chile S.A. (Telefonica CTC Chile) is an open stock corporation registered in the Securities Registry under No. 009 and therefore is subject to oversight by the "Superintendencia de Valores y Seguros" (Chilean Securities and Exchange Commission). 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 Inscription (direct & indirect) SUBSIDIARIES TAXPAYER NO. Number % 2002 2001 ---------------------------------------------------------------------------------------------------------------- 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 as of December 31, 2002 and 2001. (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 set forth by the "Superintendencia de Valores y Seguros". In case of discrepancies between accounting principles generally accepted by the Chilean Accountants Association and the standards set forth by the "Superintendencia de Valores y Seguros", the standards of the "Superintendencia de Valores y Seguros" will prevail. (c) Basis of presentation: The financial statements for 2001 and their notes have been restated by 3.0 % in order to allow comparison with the 2002 financial statements. 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 Parent 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). 7 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 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 NO. Company Name ---------------------------------------- 2002 2001 Direct Indirect Total 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. 99.90 0.09 99.99 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. 99.67 0.32 99.99 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. (Sonda S.A.) (2) (2) - - - 59.99 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. - - - 52.78 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 ----------------------------------------------------------------------------------------------------------------
8 2. Significant Accounting Principles, continued: (d) Basis of consolidation, continued: Companies included in consolidation, continued: ---------------------------------------------------------------------------------------------------------------- Participation Percentage RUT Company Name ------------------------------------------- 2002 2001 Direct Indirect Total 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 extraordinary shareholders' meeting of Telefonica Empresas CTC Chile, held in May of 2002, the incorporation by absorption of subsidiaries Invercom S.A. and Comunicaciones Intercom S.A. was approved. 2) As of December 31, 2002, since Telefonica CTC Chile does not have majority holdings or control over the administration of Sonda, it has recorded 35% interest in Sonda under the equity method, Sonda's financial statements were consolidated until August 31, 2002. 3) The extraordinary shareholders' meeting of Telefonica Data Chile S.A., held in November of 2002, approved the incorporation by absorption of subsidiary Comunicaciones Empresariales S.A. 4) The board of directors' meeting of CTC Internacional S.A., held in December 2002, approved the liquidation of this company. 9 2. Significant Accounting Principles, continued: (d) Bases de consolidation, continued: During September 2002, Telefonica Empresas CTC Chile S.A. sold and transferred 25% 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 the amount of ThCh$ 1,164,197, due to extraordinary proportional amortization 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. Additionally on September 26, 2002 Telefonica Empresas signed an agreement with Inversiones Santa Isabel Limitada, which grants it a sale option for 35% of Sonda, which can be exercised between July 16 and July 25, 2005, at the investment book value as of June 30, 2005, plus a bonus 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 issuance of bank certificates of deposit (see note 28b). Should Telefonica Empresas not exercise the above mentioned sales option, between July 26 and August 5, 2005 Inversiones Santa Isabel has a purchase option for the same 35% of Sonda under the same conditions described before. Santa Isabel can exercise its purchase option in advance between July 26 and July 31, 2003, at the book value on June 30, 2003 plus a bonus of UF 96,000, with a minimum price of UF 1,983,185, or between July 26 and July 31, 2004, at the book value as of June 30, 2004 plus a bonus 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 pending amortization as of December 31, 2002 is ThCh$ 11,560,937 and is being amortized discounting the UF 142,021 bonus over a period of 34 months, effective September 2002. Given the conditions contemplated in the contract, recovery of the equity value of this investment is completely guaranteed, 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 in the recovery of goodwill, since it is estimated that the future income of Sonda S.A. will be sufficient to cover amortization of the mentioned goodwill. Those subsidiaries in which there was indirect participation of less than 50% as of December 31, 2001, were consolidated by their parent company, Sonda S.A., in wich the company held a participation over 50%. 10 2. Significant Accounting Principles, continued: (e) Time deposits: Time deposits are shown according to the value of the invested capital plus readjustments, if applicable and accrued interest at year end. (f) Price-level restatement: The financial statements are shown restated through application of price-level restatement standards, in accordance with generally accepted accounting principles in Chile, in order to reflect the change in the purchasing power of the currency in both years. Accumulated change in the CPI as of December 31, 2002 and 2001, for beginning balances is 3.0% and 3.1%, respectively. (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 current rates as of each year-end: ------------------------------------------------------------------ YEAR US$ EURO UF ------------------------------------------------------------------ 2002 718.61 752.550 16,744.12 ------------------------------------------------------------------ 2001 654.79 578.181 16,262.66 ------------------------------------------------------------------ 11 2. Significant Accounting Principles, continued: (h) Marketable securities: Fixed income securities are carried at their price-level restated purchase price plus interest accrued as of closing of each year-end based on the real rate of interest determined as of the date of purchase or their market value, whichever is less. Investments in mutual funds units are carried at the value of the unit at each year's closing date. Investment in shares are presented at their price-level restated cost or market value, whichever is less (i) Inventories: Equipment destined for sale is carried at price-level restated purchase or development cost or market value, whichever is less. Inventories estimated to be used during the next twelve months are classified as current assets and their cost is price-level restated. Obsolescence provision has been determined on the basis of a survey of merchandise with slow turnover. (j) Subsidies on sale of cellular equipment: Represents the difference between the cost at which the cellular equipment is acquired from suppliers and the value at which they are sold to customers. Effective January 1, 2001, the amounts for prepaid equipment are charged to income at the time they are sold, in the case of equipment with contracts, effective April 1, 2001, they are being commercialized under a commodate concept, which is a legal figure in which the equipment is delivered for use without paying for it. The purchase cost of this equipment is activated as property, plant and equipment (subscriber equipment), end depreciated over a period of 24 months as of the date the contract is signed. As of June 1, 2002, a policy of customer fidelity was implemented, consisting in exchanging equipment associated to commodate contracts that are 18 months old. Based on the above, depreciation provisions have been set up for probable advanced equipment write off. (k) Allowance for doubtful accounts: Differentiated percentages are applied in the calculation of allowance for doubtful accounts, taking into consideration age factors and eventual collection costs, of up to 100% for debts exceeding 120 days. (l) Property, plant and equipment: Property, plant and equipment acquired up until December 31, 1979 are carried at their appraisal value, as stipulated in Article 140 of D.F.L. No. 4, and those acquired after that date are carried at purchase value, except those carried at appraisal value recorded as of June 30, 1986, in accordance with Circular No. 550 issued by the "Superintendencia de Valores y Seguros". All values have been price-level restated. Works in progress include the real financial cost of the loans related to financing them, originated during the construction stage and that could have been avoided if these disbursements had not been incurred. In accordance with the above, there has been a capitalization of the financial cost during the period of ThCh$ 7,774,406 and ThCh$ 21,028,278 for 2002 and 2001, respectively. 2. 12 2. Significant Accounting Principles, continued: (m) Depreciation: Depreciation has been calculated and recorded over the values stated above, by applying fixed factors determined according to the remaining estimated useful lives of the assets. The average annual financial depreciation rate of the Company is approximately 8.13%. (n) Leased assets: i) Rented assets with a purchase option. Rented assets with a purchase option, the contracts of which meet the characteristics of a financial lease, are carried in a manner similar to the purchase of property, plant and equipment, recording the whole obligation and interest on an accrual basis. The Company does not legally own those assets, therefore, as long as it does not exercise the purchase option it cannot freely dispose of them ii) Purchase with reverse-rental transactions. During 2000, the former subsidiary and current related company Sonda S.A. recorded a purchase with reverse-rental 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 rental 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. Investments abroad have been valued as defined in Technical Bulletin No. 64. Those investments are controlled in dollars, since they are in countries considered unstable according to 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 adjustment of the investment cost, at the moment of adopting the equity method or when making a new purchase. 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 of the investment. Goodwill and negative goodwill arising from investments abroad are controlled in US dollars (same currency in which the investment is controlled) as per Technical Bulletin No. 64 of the Chilean Accountants Association (see Note 11). (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 similar manner as when obtaining a loan with investment guarantees and are shown in Other Current Liabilities. 13 2. Significant Accounting Principles, continued: (q) Obligations with the public: Obligations from bond issuance 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 real interest rate originated in the transaction is deferred and amortized over the term of the respective (see Note 16). (r) Income tax and deferred income tax: Income tax is calculated on the basis of taxable net income 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 in accordance to Circular No. 1,466 dated January 27, 2000 issued by the "Superintendencia de Valores y Seguros". 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 is accrued provisioned applying the net prevent value method to accrued benefit using an annual discount rate of 7%, considering a future permanence until the retirement date of each employee (see Note 16) As of June 30, 2002, new collective contracts were signed with certain syndicate organizations, which extended the benefits agreed upon to 1,661 employees. Notwithstanding, from July 1 a total of 3,445 employees began a strike process which ended on July 20, 2002, with the application of Article 369 of the Labor Code by the syndicates. This article allows employees to freeze the same conditions of the labor contract prior to collective negotiation for a period of 18 months. (t) Operating revenues: Then Company is revenues is recorded on are 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 provisioned, and determined on the basis of the contracts and traffic at the current period's prices and conditions. Amounts for this concept are shown in Trade Accounts Receivable. Revenues from information services are recorded under the following conditions: sale of hardware and licenses, is recorded when the equipment and/or software is delivered, and in the case of income from projects, these are recorded according to the progress payments approved by the customers, which consider the level of progress of the respective project. 14 2. Significant Accounting Principles, continued: (u) Foreign currency futures contracts: The Company has subscribed 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 and obligations acquired are detailed in Note 26. The balance sheet only reflects the net right or obligation as of year-end, classified according to the expiry date of each of the contracts in Other Current Assets or Other Creditors, as applicable. The contract's implicit insurance premium is deferred and amortized using the straight-line method over its term. (v) Interest rate coverage: Interest loan covered by interest rate swaps is recorded recognizing the effect of the contracts on the interest rate established in the loans. Rights and obligations for this concept are shown in Other Current Assets or in Other Creditors, as applicable (see Note 26). (w) Computer software: The software's purchase cost is deferred and amortized using the straight-line method over a four-year period. The development 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 last few years. (y) Accumulated deficit development period of subsidiaries: In accordance with Circular No. 981 issued by the "Superintendencia de Valores y Seguros", the Company has included all disbursements or obligations, which are not assignable to the cost of tangible or nominal assets. This deficit has been absorbed by net income generated by the Company during operations (z) Accumulated adjustment for conversion differences: The Company recognizes the difference between the variation in the exchange rate and the consumer price index originated in the price-level restatement of its investments abroad, controlled in US dollars; as well as adjustments for exchange differences arising from subsidiaries and related companies that have been recognized for their investments abroad in this shareholders' equity reserve account. The balance in this account is credited (charged) to income in the same period in which the gain or loss on the total or partial disposal of these investments is recognized 15 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 line of 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 to the tariffs set in each agreement. This exchange is accounted for on the accrual basis, recognizing the costs and income in the period in which they are produced, recording the net balances receivable or payable of each correspondent in "Other 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$ 753,229 and ThCh$ 528,704 in 2002 and 2001, 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 radioelectric space: Corresponds to the cost incurred in obtaining licenses for the use of radioelectric space. They are shown at price-level restated value and are amortized over the concession period (30 years from publication of the decrees that accredit the respective licenses in the Official Gazette). 16 3. Accounting Changes: a) Accounting principles have been consistently applied during the years covered in these financial statements. b) Change in informing entity: As of December 31, 2002, since Telefonica CTC Chile does not have majority holdings in the administration of Sonda S.A., it has recorded its 35% interest in Sonda under the equity method. Sonda's financial statements where consolidated until August 31, 2002. As of December 31, 2001 this investment was shown consolidated line-by-line, the balance sheet of Sonda S.A. at that time was as follows: ------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------
In order to make a compared analysis of the figures, we present a consolidated statement of income, assuming that for both years the investment in Sonda S.A. was only recorded using the equity method. ---------------------------------------------------------------------------------------------------------------- Jan-Dec Jan-Dec Difference 2001 2002 ------------------------------- ThCh$ ThCh$ ThCh$ % ---------------------------------------------------------------------------------------------------------------- Operating income 808,186,833 800,525,391 (7,661,442) -0.9% Operating costs (674,523,624) (672,341,046) 2,182,578 -0.3% Payroll (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 Inv. 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) C.S. ---------------------------------------------------------------------------------------------------------------- Non-operating Income (120,790,378) (119,998,617) 791,761 -0.7% Net income before taxes 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% ---------------------------------------------------------------------------------------------------------------- (Loss) Net income for the year 4,235,008 (17,680,376) (21,915,384) C.S. ------------------------------------------------------------------------------------------------------------------
17 4. Marketable Securities: The balance of marketable securities is as follows: -------------------------------------------------------------------------------------------------------------- 2002 2001 ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- Shares 9,456,802 23,712,092 Public offer promissory notes 65,571,937 32,723,967 Mutual funds units 1,773,744 3,473,919 Others 9,547 308,075 -------------------------------------------------------------------------------------------------------------- Total Marketable Securities 76,812,030 60,218,053 --------------------------------------------------------------------------------------------------------------
Shares --------------------------------------------------------------------------------------------------------------- Unit Trading Investment Company Number of Holding Value Trading Value Restated Cost Taxpayer No. Name Shares % 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 ---------------------------------------------------------------------------------------------------------------
Public offer instruments (Fixed Income) ------------------------------------------------------------------------------------------------------------- Par Book Value Date Value Amount Market Value Provision Instrument Purchase Maturity ThCh$ ThCh$ Rate ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------- PRD 26-Dec-2002 01-Sept-2005 1,548,848 1,548,848 6.00% 1,548,848 - PRD 26-Dec-2002 01-Oct-2005 12,338,638 12,338,638 6.00% 12,338,638 - PRD 26-Dec-2002 01-Dec-2005 11,467,944 11,467,944 6.00% 11,467,944 - Zero 26-Dec-2002 01-Jul-2005 7,225,022 7,225,022 5.40% 7,225,022 - Zero 26-Dec-2002 01-Oct-2005 4,215,615 4,215,615 5.07% 4,215,615 - Zero 26-Dec-2002 01-Nov-2005 12,699,963 12,699,963 5.86% 12,699,963 - Zero 26-Dec-2002 01-Dec-2005 16,075,907 16,075,907 5.85% 16,075,907 - ---------------------------------------------------------- -------------------------------------------------- Total 65,571,937 65,571,937 - 65,571,937 - ---------------------------------------------------------- --------------------------------------------------
18 5. Short and long-term receivables: The breakdown of short and long-term receivables is as follows: ------------------------------------------------------------------------------------------------------------------------------ Current --------------------------------------------------------------------------------------- Up to 90 days Over 90 up to 1 year Subtotal Description 2002 2001 2002 2001 2002 ------------------------------------------------------------------------------------------------------------------------------ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ Trade accounts receivable 278,944,527 305,421,892 9,609,496 10,341,211 288,554,023 Standard telephone service 166,129,362 149,402,044 6,593,435 5,464,130 172,722,797 Long distance 44,674,912 72,508,896 - - 44,674,912 Mobile 44,094,079 43,349,155 - - 44,094,079 Communications companies 20,374,036 24,908,743 3,003,547 503,571 23,377,583 Information Service - 3,493,815 - 921,133 - Others 3,672,138 11,759,239 12,514 3,452,377 3,684,652 Allowance for doubtful accts. (78,651,541) (59,674,045) (3,296,718) (4,975,290) (81,948,259) Notes receivable 12,324,459 9,546,513 1,262,106 3,676,668 13,586,565 Allowance for doubtful accts. (7,562,129) (5,816,061) - (2,146,851) (7,562,129) Other debtors 18,046,875 35,260,627 7,023,736 348,654 25,070,611 Allowance for doubtful accts. - - - - - ------------------------------------------------------------------------------------------------------------------------------
Table Continued ----------------------------------------------------------------------------------------------------------------------------- Current ----------------------------------------------------------- Total Current (net) Long-term ------------------------------- Description 2002 2001 2002 2001 ----------------------------------------------------------------------------------------------------------------------------- ThCh$ % ThCh$ % ThCh$ ThCh$ Trade accounts receivable 206,605,764 100.0 251,113,767 100.0 5,590,125 7,926,022 Standard telephone service 110,075,853 53.28 112,747,078 44.90 5,590,125 7,926,022 Long distance 41,290,203 19.99 64,826,010 25.82 - - Mobile 30,304,506 14.67 30,884,111 12.30 - - Communications companies 21,417,510 10.37 24,215,534 9.64 - - Information Service - - 4,227,165 1.68 - - Others 3,517,692 1.70 14,213,869 5.66 - - Allowance for doubtful accts. - - - - - - Notes receivable 6,024,436 - 5,260,269 - - - Allowance for doubtful accts. - - - - - - Other debtors 25,070,611 - 35,609,281 - 29,250,132 32,017,693 Allowance for doubtful accts. - - - - - - ----------------------------------------------------------------------------------------------------------------------------- Total long-term receivables 34,840,257 39,943,715 ---------------------------------------------------------------------------
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 6. Balances and transactions with related companies: a) Notes and Accounts Receivable ----------------------------------------------------------------------------------------------------------------- Tax No. Company Short-term Long-term ----------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- 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. 957,427 2,228,128 - - 93.541.000-2 Impresora y Comercial Publiguias S.A. 843,208 452,224 - - Foreign Telefonica Espana 787,166 748,981 - - 96.895.220-k Atento Chile S.A 615,538 878,472 - - Extranjera Telefonica Data Espana 131,371 5,426 - - 96.910.730-9 Emergia Chile S.A. 22,416 177,798 - - Foreign Terra Networks Espana 9,093 120,587 - - 59.083.900-0 Telefonica Mobile Solutions Chile S.A. 2,995 - - - 78.868.230-1 Atento Educacion 1,228 205 - - 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 17,113,928 5,581,397 - 660,776 -----------------------------------------------------------------------------------------------------------------
There have been charges and credits to current accounts with these companies due to billing for sales of material, equipment and services. b) Notes and Accounts Payable ----------------------------------------------------------------------------------------------------------------- Tax No. Company Short-term Long-term ----------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- ThCh$ ThCh$ ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------------- 96.895.220-k Atento Chile S.A 4,755,211 4,784,561 - - 96.834.230-4 Terra Networks Chile S.A. 3,090,164 1,753,933 - - 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. 261,208 6,761,979 24,214,112 25,534,901 96.910.730-9 Emergia Chile S.A. 43,376 2,399,753 - - 78.868.200-k Atento Recursos Ltda. 24,084 103,671 - - 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 - - Extranjera 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 11,976,196 17,572,625 24,214,112 25,769,951 -----------------------------------------------------------------------------------------------------------------
In accordance with Article 89 of the Companies Act, all these transactions have been carried out under conditions similar to those prevailing in the market. 20 6. Balances and transactions with related companies: c) Transacciones: ------------------------------------------------------------------------------------------------------------------------------ Nature Description 2002 2001 of of ThCh$ ThCh$ Company Tax No. Relationship transaction ---------------------------------------- Effect on Effect on Amount income Amount income ------------------------------------------------------------------------------------------------------------------------------ Telefonica Espana Foreign Parent Co. Purchases and Services Rendered 26,263 26,263 - - ------------------------------------------------------------------------------------------------------------------------------ Telefonica Internacional Chile S.A. 96.527.390-5 Parent Co. Purchases and Services Rendered 521,961 521,961 522,362 522,362 Financial Expenses 838,560 838,560 2,230,347 2,230,347 ------------------------------------------------------------------------------------------------------------------------------ Impresora y Comercial Publiguias S.A. 93.541.000-2 Associate Sales and Services 4,844,225 4,844,225 - - Purchases and Services Rendered 5,048,653 5,048,653 25,883,996 25,883,996 Other Non-operating Income - - 11,389,049 11,389,049 ------------------------------------------------------------------------------------------------------------------------------ Terra Networks Chile S.A. 96.834.230-4 Associate Sales and Services 1,893,375 1,893,375 1,904,923 1,904,923 Purchases and Services Rendered 356,102 356,102 - - ------------------------------------------------------------------------------------------------------------------------------ Atento Chile S.A 96.895.220-k Associate Sales and Services 1,186,805 1,186,805 17,697,280 17,697,280 Purchases and Services Rendered 12,508,479 12,508,479 - - Other Non-operating Income 26,896 26,896 - - ------------------------------------------------------------------------------------------------------------------------------ Emergia Chile S.A. 96.910.730-9 Associate Sales and Services 1,271,907 1,271,907 - - Purchases and Services Rendered 42,843 42,843 44,492 44,492 Other Non-operating Income 12,342 12,342 - - ------------------------------------------------------------------------------------------------------------------------------ Datadec Foreign Associate Purchases and Services Rendered - - 54,448 54,448 ------------------------------------------------------------------------------------------------------------------------------ Orden S.A. 94.071.000-6 Associate Purchases and Services Rendered - - 10,328 10,328 ------------------------------------------------------------------------------------------------------------------------------ Servibanca 96.571.690-4 Associate Purchases and Services Rendered - - 5,690 5,690 ------------------------------------------------------------------------------------------------------------------------------ Unisel Argentina Extranjera Associate Purchases and Services Rendered - - 46,536 46,536 ------------------------------------------------------------------------------------------------------------------------------ Unisel Chile 79.688.080-5 Associate Purchases and Services Rendered - - 917,426 917,426 ------------------------------------------------------------------------------------------------------------------------------ Ediciones Financieras 96.539.380-3 Associate Purchases and Services Rendered - - 15,066 15,066 ------------------------------------------------------------------------------------------------------------------------------ Inversiones Pacifico 84.267.000-4 Associate Other Non-operating Expenses - - 826,879 826,879 ------------------------------------------------------------------------------------------------------------------------------ Atento Recursos Ltda. 78.868.200-k Associate Purchases and Services Rendered 344,378 344,378 - - ------------------------------------------------------------------------------------------------------------------------------ Telefonica. Procesos y Tecnologia de Informacion S.A. Foreign Com.Par.Co.Other Non-operating Income 412,646 412,646 - - ------------------------------------------------------------------------------------------------------------------------------ Orden Gestion 96.703.200-k Associate Purchases and Services Rendered - - 26,948 26,948 ------------------------------------------------------------------------------------------------------------------------------ Orden Integracion 78.214.420-0 Associate Purchases and Services Rendered - - 74,980 74,980 ------------------------------------------------------------------------------------------------------------------------------ Atento Educacion 78.868.230-1 Associate Sales and Services - - 27,810 27,810 ------------------------------------------------------------------------------------------------------------------------------ Solex 96.725.400-2 Associate Purchases and Services Rendered - - 224 224 ------------------------------------------------------------------------------------------------------------------------------ Almacenes Paris S.A. 81.201.000-k Associate Purchases and Services Rendered - - 8,992,403 8,992,403 ------------------------------------------------------------------------------------------------------------------------------ Servicios de Outsourcing Logistica S.A 96.900.580-8 Associate Purchases and Services Rendered - - 35,175 35,175 ------------------------------------------------------------------------------------------------------------------------------ T-Data Corp Foreign Associate Purchases and Services Rendered 1,320,918 1,320,918 - - ------------------------------------------------------------------------------------------------------------------------------
In the case of Sales and Services Rendered, these mature in the short-term (less than a year) and the maturity conditions for each case vary in virtue of the transaction that generates them. 21 7. Income taxes and deferred income taxes: a) General information: As of December 31, 2002 and 2001 Telefonica CTC Chile has not made a first category income tax provision as it has accumulated taxable losses of ThCh$ 88,608,304 and ThCh$ 204,413,894, respectively. Likewise, as of December 31, 2002 and 2001 certain subsidiaries record accumulated tax losses of ThCh$ 138,182,058 and ThCh$ 161,394,294, respectively. Income tax provisions are originated in subsidiaries with taxable net income As of December 31, 2002 the subsidiaries with a positive taxable retained earnings balance and their associated credits are broken down in the following table: --------------------------------------------------------------------------------------------------------- Taxable Taxable Net Income Taxable Net Net Income with 15% Income with Without Amount of Credit 16% Credit Credit Credit Subsidiaries 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 --------------------------------------------------------------------------------------------------------- 22
7. Income taxes and deferred income taxes, continued: b) Deferred income taxes: As of December 31, 2002 and 2001, accumulated balances of temporary differences that originate deferred income tax liabilities and assets (net) amount to ThCh$ 10,802,207 and ThCh$ 9,436,846, respectively and their breakdown is as follows: ----------------------------------------------------------------------------------------------------------------- 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 loss 333,509 37,934,435 - - Difference in value of activated I.A.S. - 1,024,959 - - Leased assets and liabilities 61,788 750,079 - 150,960 Reappraisal of property, plant and equipment - 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 activated disbursements - - - 3,605,825 Difference in value of temporary investments 3,207,509 - - - Other events 2,282,337 1,422,776 - 1,125,892 ----------------------------------------------------------------------------------------------------------------- Subtotal 25,188,474 44,771,440 - 225,135,968 ----------------------------------------------------------------------------------------------------------------- Complementary accounts net of accumulated amortization - (13,528,465) - (157,902,312) Valuation provision - - - - ----------------------------------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------------------------------------- Table continue
---------------------------------------------------------------------------------------------------------------- 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 loss 36,836,369 23,521,982 - - Difference in value of activated I.A.S. 3,900 1,554,921 Leased assets and liabilities 60,281 902,987 - Reappraisal of property, plant and equipment - 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 activated disbursements - - - 1,524,758 Difference in value of temporary investments 1,699,692 - - - Other events 2,581,943 1,256,267 13,141 2,179,496 ---------------------------------------------------------------------------------------------------------------- Subtotal 58,188,865 32,117,175 13,141 238,572,133 ---------------------------------------------------------------------------------------------------------------- Complementary accounts net of accumulated amortization (1,594,227) (16,074,530) - (175,411,836) Valuation provision - - - - ---------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- As stated in Note 2 d, until December of 2001, the balance of deferred tax assets and liabilities originating in Sonda S. A. (former subsidiary of Telefonica Empresas CTC Chile) was ThCh$ 455,069 and ThCh$ 69,314 respectively, which has been consolidated line-by-line in the statement of income until August 31, 2002. 23
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 the determination of taxable net income, net of credits for donations, training expenses and other credits. ---------------------------------------------------------------------------------------------------- Description 2002 2001 ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------- Current tax expense (16% income tax) (7,822,374) (8,754,958) Current tax expense (Article 21 single tax at 35%) (307,125) (230,347) Recovery of taxable losses from dividends received from subsidiaries 5,348,208 5,118,927 ---------------------------------------------------------------------------------------------------- Income tax subtotal (2,781,291) (3,866,378) ---------------------------------------------------------------------------------------------------- - Effect of advance and deferred tax assets or liabilities for the year (8,722,257) (25,113,892) - Tax loss benefit. - 18,667,440 - Effect of amortization of deferred assets and liabilities complementary accounts. (15,213,228) (1,456,198) ---------------------------------------------------------------------------------------------------- Deferred taxes subtotal (23,935,485) (7,902,650) ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Total income tax expense (26,716,776) (11,769,028) ---------------------------------------------------------------------------------------------------- 24
8. Other Current Assets: The breakdown of other current assets is as follows: ---------------------------------------------------------------------------------------------------------- 2002 2001 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) 1,154,375 1,643,026 Customs duties interest to be amortized - 3,057,477 Adjustment to market value for cellular equipment to be commercialized (c) 3,981,423 - Exchange insurance premiums to be amortized 1,600,862 4,085,549 Telephone directories for connection program 4,439,338 2,488,808 Higher discount rate of bonds to be amortized 697,793 1,253,042 Disbursements for placement of bonds to be amortized 1,762,067 1,790,109 Disbursements for foreign financing proceeds to be amortized (b) 489,094 2,111,125 Deferred charges for modification of IPAS discount rate (net) 506,747 117,119 Exchange difference insurance debtors (net of partial liquidations) 12,626,720 20,626,301 Others 1,398,208 3,201,544 ---------------------------------------------------------------------------------------------------------- Total 28,656,627 122,898,844 ----------------------------------------------------------------------------------------------------------
(a) During 2002, the Company signed a 2-year collective contract with 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 ThCh$ 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 maintained in stock at year-end, which is charged to income in accordance with the contract type, contract or prepayment. 25 9. Property, plant and equipment: The breakdown of property, plant and equipment is as follows: ----------------------------------------------------------------------------------------------------------------------- 2002 2001 --------------------------------------------------------------------------- Gross property, Gross prop., Accumulated plant Accumulated plant Description Depreciation and equipment Depreciation and equipment ThCh$ ThCh$ ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------------------- Land - 27,372,131 - 29,030,587 Construction and Infrastructure Works 70,454,187 183,151,839 66,610,375 197,925,361 Machinery and equipment 1,751,100,648 3,294,876,741 1,589,845,303 3,235,794,533 Central office telephone equipment 884,264,242 1,534,772,639 774,494,044 1,421,076,491 External plant 606,043,932 1,362,156,206 549,194,894 1,346,281,565 Subscribers' equipment 227,139,867 362,878,756 254,200,836 398,294,086 General equipment 33,652,607 35,069,140 11,955,529 70,142,391 Other Property, Plant and Equipment 136,984,124 393,378,237 127,341,224 446,283,271 Office furniture and equipment 68,228,232 127,723,898 91,773,232 102,515,365 Projects, works in progress and their - 135,303,278 - 223,209,260 materials Contract advances - 310,493 - 319,808 Leased assets (1) 4,416,023 11,241,599 9,577,719 15,247,224 Property, plant and equipment temporarily 11,135,132 23,549,726 6,330,659 14,291,533 out of service Software and others 53,204,737 95,249,243 19,659,614 90,700,081 Circular 550 reappraisal 10,326,522 9,130,267 10,358,363 9,130,322 Total 1,968,865,481 3,907,909,215 1,794,155,265 3,918,164,074 -----------------------------------------------------------------------------------------------------------------------
(1) As of December 2002 this caption mainly considers: ThCh$ 5,453,691 gross value for acquisition of administrative offices with accumulated depreciation of ThCh$ 546,059 with contract terms of 15 years since 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 since 1994. Additionally it considers ThCh$ 1,185,139 gross value of long distance transmission equipment with accumulated depreciation of ThCh$ 322,041 with 18-year contract terms since 1996. The balance of gross property, plant and equipment includes capitalized interest in the amount of ThCh$ 208,962,843 and ThCh$ 201,188,437 in 2002 and 2001, respectively. Accumulated depreciation of this interest amounts to ThCh$ 81,460,095 and ThCh$ 63,437,638 in 2002 and 2001, respectively. Depreciation for the year was charged to operating costs in the amount of ThCh$ 261,035,237 and ThCh$ 255,504,373 for 2002 and 2001, respectively. Property, plant and equipment temporarily out of service, made up mainly by the cable TV networks of La Serena and Concepcion not transferred in the sale of assets to Cordillera Comunicaciones, generated a depreciation charge of ThCh$ 1,699,096 in 2002 and ThCh$ 1,147,500 in 2001, which is classified in Other Non-operating Expenses. The breakdown by caption of the Circular 550 reappraisal is as follows: ----------------------------------------------------------------------------------------------------------------------- Property, plant Property, plant Net Accumulated and equipment and equipment Description Balance Depreciation 2002 2001 ThCh$ ThCh$ ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------------------- Land (472,645) - (472,645) (472,645) Constructions and infrastructure works (611,466) (3,923,157) (4,534,623) (4,534,622) Machinery and equipment 345,994 13,791,541 14,137,535 14,137,589 Total (738,117) 9,868,384 9,130,267 9,130,322 -----------------------------------------------------------------------------------------------------------------------
Depreciation for higher value of technical reappraisal for the year amounts to ThCh$ (23,562) in 2002 and ThCh$ (34,958) in 2001. Gross property, plant and equipment includes assets that have been totally depreciated in the amount of ThCh$ 532,643,685 in 2002 and ThCh$ 350,058,056 in 2001, which include ThCh$ 11,576,295 and ThCh$ 12,068,124, respectively, for Circular 550 reappraisal. 26 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 10. Investments in Related Companies: The breakdown of investments in related companies is as follows: Holding Currency percentage Country of controlling the No. of ---------------- Taxp. No. Company origin investment shares 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- % % Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 48,950,000 2.61 2.61 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 45,648 9.00 9.00 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos 271,615 20.00 20.00 96.895.220-K Atento Chile S.A. Chile Pesos 3,209,374 28.84 28.84 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 In development Time Interating Chile Pesos - 10.25 10.25 96.725.400-2 Solexe S.A. Chile Pesos 80 - 40.00 96.571.690-4 Servibanca S.A. Chile Pesos 1,200 43.33 43.33 96.768.410-4 Payroll S.A. Chile Pesos 1,989,591 33.33 33.33 96.539.380-3 Ediciones Financieras S.A. Chile Pesos 580 6.66 7.18 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - - 33.33 94.071.000-6 Orden S.A. Chile Pesos - - 33.33 Foreign SBS Ltda. Guatemala Dollar - - 49.00 Foreign AGROSYS Guatemala Dollar - - 50.00 Foreign Sonda El Salvador El Salvador Dollar - - 49.00 Foreign Chiptech Guatemala Dollar - - 50.00 96.894.490-8 Puerto Norte S.A. Chile Pesos - - 50.00 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - - 48.33 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - - 16.67 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - - 39.80 96.941.290-k Sustentable cl S.A. Chile Pesos - - 20.96 96.967.100-k Novis S.A. Chile Pesos - - - Foreign Bismark Telecomunicaciones Mexico Pesos - - 49.90 Foreign Westham Trade Co. Ltda. USA Dollar - - 20.00 Foreign Data Dec S.A. Costa Rica Dollar - - 40.00 ------------------------------------------------------------------------------------------------------------------------------- Total ====================================================
Shareholders' equity Currency of the companies Country of controlling the ---------------------------- Taxp. No. Company origin investment 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 196,384,751 168,919,272 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 25,013,978 18,116,689 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos 582,290 526,125 96.895.220-K Atento Chile S.A. Chile Pesos 9,102,320 9,064,005 96.725.400-2 Sonda S.A.(2) Chile Pesos 91,055,240 - In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos 2,063,500 2,063,500 In development Time Interating Chile Pesos 734,361 734,361 96.725.400-2 Solexe S.A. Chile Pesos - 528,173 96.571.690-4 Servibanca S.A. Chile Pesos - 4,261,142 96.768.410-4 Payroll S.A. Chile Pesos - 522,952 96.539.380-3 Ediciones Financieras S.A. Chile Pesos - 58,231 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - 5,724,758 94.071.000-6 Orden S.A. Chile Pesos - 4,393,522 Foreign SBS Ltda. Guatemala Dollar - 156,992 Foreign AGROSYS Guatemala Dollar - 6,122 Foreign Sonda El Salvador El Salvador Dollar - 29,000 Foreign Chiptech Guatemala Dollar - 15,284 96.894.490-8 Puerto Norte S.A. Chile Pesos - 161,020 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - 135,502 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - 6 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - 1,711,128 96.941.290-k Sustentable cl S.A. Chile Pesos - 59,685 96.967.100-k Novis S.A. Chile Pesos - - Foreign Bismark Telecomunicaciones Mexico Pesos - 99,287 Foreign Westham Trade Co. Ltda. USA Dollar - 461,985 Foreign Data Dec S.A. Costa Rica Dollar - 917,233 ------------------------------------------------------------------------------------------------------------------------------- Total ====================================================
Currency Income for the year Country of controlling the ---------------------------- Taxp. No. Company origin investment 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 2,978,314 -10,851,533 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 6,897,278 6,939,111 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos -540,600 -164,135 96.895.220-K Atento Chile S.A. Chile Pesos 38,377 432,164 96.725.400-2 Sonda S.A.(2) Chile Pesos 4,673,789 - In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos - - In development Time Interating Chile Pesos - - 96.725.400-2 Solexe S.A. Chile Pesos - 48,845 96.571.690-4 Servibanca S.A. Chile Pesos 214,673 446,146 96.768.410-4 Payroll S.A. Chile Pesos 81,278 164,605 96.539.380-3 Ediciones Financieras S.A. Chile Pesos -29,910 19,916 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - - 94.071.000-6 Orden S.A. Chile Pesos - 260,798 Foreign SBS Ltda. Guatemala Dollar - - Foreign AGROSYS Guatemala Dollar - - Foreign Sonda El Salvador El Salvador Dollar - - Foreign Chiptech Guatemala Dollar - - 96.894.490-8 Puerto Norte S.A. Chile Pesos - -22,266 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - -68,887 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - -168,914 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - -240,673 96.941.290-k Sustentable cl S.A. Chile Pesos - - 96.967.100-k Novis S.A. Chile Pesos - - Foreign Bismark Telecomunicaciones Mexico Pesos - - Foreign Westham Trade Co. Ltda. USA Dollar - -219,190 Foreign Data Dec S.A. Costa Rica Dollar - 77,559 ------------------------------------------------------------------------------------------------------------------------------- Total ====================================================
Currency Accrued income Country of controlling the ---------------------------- Taxp. No. Company origin investment 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 77,734 -283,225 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 620,755 624,520 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos -108,120 -32,827 96.895.220-K Atento Chile S.A. Chile Pesos 11,068 124,636 96.725.400-2 Sonda S.A.(2) Chile Pesos 1,635,826 - In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos - - In development Time Interating Chile Pesos - - 96.725.400-2 Solexe S.A. Chile Pesos - 1 96.571.690-4 Servibanca S.A. Chile Pesos 93,018 193,315 96.768.410-4 Payroll S.A. Chile Pesos 27,090 54,863 96.539.380-3 Ediciones Financieras S.A. Chile Pesos -1,992 1,430 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - 94.071.000-6 Orden S.A. Chile Pesos - 8 Foreign SBS Ltda. Guatemala Dollar - - Foreign AGROSYS Guatemala Dollar - - Foreign Sonda El Salvador El Salvador Dollar - - Foreign Chiptech Guatemala Dollar - - 96.894.490-8 Puerto Norte S.A. Chile Pesos - -11,133 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - -33,293 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - -28,158 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - -95,788 96.941.290-k Sustentable cl S.A. Chile Pesos - - 96.967.100-k Novis S.A. Chile Pesos - - Foreign Bismark Telecomunicaciones Mexico Pesos - - Foreign Westham Trade Co. Ltda. USA Dollar - -43,838 Foreign Data Dec S.A. Costa Rica Dollar - 31,024 ------------------------------------------------------------------------------------------------------------------------------- Total ====================================================
Currency Equity Value Country of controlling the ---------------------------- Taxp. No. Company origin investment 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 5,125,642 4,408,793 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 2,251,258 1,630,502 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos 116,458 105,225 96.895.220-K Atento Chile S.A. Chile Pesos 2,625,109 2,614,059 96.725.400-2 Sonda S.A.(2) Chile Pesos 31,869,334 - In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos 392,065 392,065 In development Time Interating Chile Pesos 75,272 75,272 96.725.400-2 Solexe S.A. Chile Pesos - 211,269 96.571.690-4 Servibanca S.A. Chile Pesos - 1,846,353 96.768.410-4 Payroll S.A. Chile Pesos - 174,300 96.539.380-3 Ediciones Financieras S.A. Chile Pesos - 4,181 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - 1,908,062 94.071.000-6 Orden S.A. Chile Pesos - 1,464,361 Foreign SBS Ltda. Guatemala Dollar - 76,926 Foreign AGROSYS Guatemala Dollar - 3,061 Foreign Sonda El Salvador El Salvador Dollar - 14,210 Foreign Chiptech Guatemala Dollar - 7,642 96.894.490-8 Puerto Norte S.A. Chile Pesos - 80,510 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - 65,488 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - 1 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - 681,029 96.941.290-k Sustentable cl S.A. Chile Pesos - 12,510 96.967.100-k Novis S.A. Chile Pesos - 28,945 Foreign Bismark Telecomunicaciones Mexico Pesos - 49,544 Foreign Westham Trade Co. Ltda. USA Dollar - 92,397 Foreign Data Dec S.A. Costa Rica Dollar - 366,893 ---------------------------------------------------------------------------------------------------------------------------- Total 42,455,138 16,313,598 ==================================================== ========== ==========
Currency Unearned Income Country of controlling the ---------------------------- Taxp. No. Company origin investment 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar - - 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos - - 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos - - 96.895.220-K Atento Chile S.A. Chile Pesos - - 96.725.400-2 Sonda S.A.(2) Chile Pesos - - In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos - - In development Time Interating Chile Pesos - - 96.725.400-2 Solexe S.A. Chile Pesos - - 96.571.690-4 Servibanca S.A. Chile Pesos - - 96.768.410-4 Payroll S.A. Chile Pesos - - 96.539.380-3 Ediciones Financieras S.A. Chile Pesos - - 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - - 94.071.000-6 Orden S.A. Chile Pesos - - Foreign SBS Ltda. Guatemala Dollar - - Foreign AGROSYS Guatemala Dollar - - Foreign Sonda El Salvador El Salvador Dollar - - Foreign Chiptech Guatemala Dollar - - 96.894.490-8 Puerto Norte S.A. Chile Pesos - - 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - - 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - - 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - - 96.941.290-k Sustentable cl S.A. Chile Pesos - - 96.967.100-k Novis S.A. Chile Pesos - - Foreign Bismark Telecomunicaciones Mexico Pesos - - Foreign Westham Trade Co. Ltda. USA Dollar - - Foreign Data Dec S.A. Costa Rica Dollar - - ---------------------------------------------------------------------------------------------------------------------------- Total - - ==================================================== ===== =====
Currency Investment Book Value Country of controlling the ---------------------------- Taxp. No. Company origin investment 2002 2001 ------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 5,125,642 4,408,793 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 2,251,258 1,630,502 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos 116,458 105,225 96.895.220-K Atento Chile S.A. Chile Pesos 2,625,109 2,614,059 96.725.400-2 Sonda S.A.(2) Chile Pesos 31,869,334 - In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos 392,065 392,065 In development Time Interating Chile Pesos 75,272 75,272 96.725.400-2 Solexe S.A. Chile Pesos - 211,269 96.571.690-4 Servibanca S.A. Chile Pesos - 1,846,353 96.768.410-4 Payroll S.A. Chile Pesos - 174,300 96.539.380-3 Ediciones Financieras S.A. Chile Pesos - 4,181 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - 1,908,062 94.071.000-6 Orden S.A. Chile Pesos - 1,464,361 Foreign SBS Ltda. Guatemala Dollar - 76,926 Foreign AGROSYS Guatemala Dollar - 3,061 Foreign Sonda El Salvador El Salvador Dollar - 14,210 Foreign Chiptech Guatemala Dollar - 7,642 96.894.490-8 Puerto Norte S.A. Chile Pesos - 80,510 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos - 65,488 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos - 1 96.916.540-6 Bazuca Internet Partners S. Chile Pesos - 681,029 96.941.290-k Sustentable cl S.A. Chile Pesos - 12,510 96.967.100-k Novis S.A. Chile Pesos - 28,945 Foreign Bismark Telecomunicaciones Mexico Pesos - 49,544 Foreign Westham Trade Co. Ltda. USA Dollar - 92,397 Foreign Data Dec S.A. Costa Rica Dollar - 366,893 ------------------------------------------------------------------------------------------------------------------------------- Total 42,455,138 16,313,598 ==================================================== ========== ==========
(1) Recognition of income for this company is that accrued for November 2002 and 2001. (2) Recognition of income for this companis is only that accrued from September to December 2002. As of the date of these 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. 27 11. Goodwill and negative goodwill: (a) Goodwill: The breakdown of goodwill is as follows: ---------------------------------------------------------------------------------------------------------------- Taxpayer No. Company Year 2002 2001 Amount Amount amortized Balance of amortized Balance of in the year Goodwill in the year Goodwill ThCh$ ThCh$ ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------------- Foreign Consorcio telefonica do 2001 173,938 2,840,195 455,049 3,014,133 Brasil 84.119.600-7 Instacom S.A. 1994 - - 1,931,147 - 90.430.000-4 CTC Globus S.A. 1998 1,073,136 16,959,632 1,073,136 18,032,764 78.703.410-1 Tecnonautica S.A. 1999 65,805 1,136,243 65,805 1,202,048 96.786.140-5 Telefonica Movil 1997 9,765,112 146,128,880 9,765,112 155,893,996 83.628.100-4 Sonda S.A. (a) 1999 12,490,365 11,560,937 1,927,431 24,051,302 Foreign Sonda Uruguay 1999 94,366 - 106,445 1,225,110 Foreign Setco S.A. (Uruguay) 1999 92,633 - 63,781 545,635 Foreign Sonda del Ecuador 1997 25,908 - 28,238 177,131 96.571.690-4 Servibanca 2000 24,140 - 36,964 298,790 Foreign Sonda Do Brasil Ltda. 1998 187,909 - - - 96.834.320-3 Infoera 1999 41,429 701,818 41,431 743,247 96.768.410-4 Payroll 1999 1,225 - 1,667 13,334 96.894.490-8 Puerto Norte 2000 856 - 1,311 10,928 Foreign Integral Peru 1996 - - 10,086 - Foreign Integral Chile S.A. 1996 - - 34,867 - Foreign Bac Peru 2001 - - 31,439 - 96.895.220-K Atento Chile S.A. 2001 351,740 - 243,104 351,740 Foreign Sonda Bancos 2001 6,496 - 2,486 96,989 Foreign Sonda Peru 2001 3,313 - - - Foreign Bismark (Mexico) 2001 3,199 - 1,139 44,075 Foreign Tecnoglobal S.A. 2001 35,747 - - - 96.811.570-7 Telepeajes S.A. 2001 14,867 76,848 7,927 91,715 Foreign Bac Financiero 2001 60,275 - 38,974 510,136 96.833.930-3 Telef. Comun. Empresariales 2001 146,518 - 22,294 146,518 96.590.960-5 Tecnopolis 2001 1,348 - 688 19,945 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 - - 218,459 1,662,105 ---------------------------------------------------------------------------------------------------------------- Total 24,661,893 179,404,553 16,211,090 210,069,277 ----------------------------------------------------------------------------------------------------------------
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 amortization due to the sale of 25% of the ownership of subsidiary Telefonica Empresas S.A. in Sonda S.A. 11. Goodwill and negative goodwill, continued: (b) Negative goodwill: The breakdown of negative goodwill is as follows: -------------------------------------------------------------------------------------------------------------- Taxpayer No. Company Year 2002 2001 Amount Balance of Amount Balance of amortized Negative amortized Negative in the year Goodwill in the year Goodwill ThCh$ ThCh$ ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- Foreign Condec Ltda. 1999 - - 6,185 - -------------------------------------------------------------------------------------------------------------- 12. Intangibles: -------------------------------------------------------------------------- ------------------ ---------------- 2002 2001 ThCh$ ThCh$ -------------------------------------------------------------------------- ------------------ ---------------- Underwater cable rights (gross) 20,722,149 16,981,672 Accumulated amortization previous year (1,592,181) (1,063,390) Amortization for the year (753,229) (528,704) Licenses (Software) (gross) 2,083,683 - Amortization for the year (259,517) - Licenses for use of electronic radio space (gross) 9,498,563 - Amortization for the year (26,385) - Total Net Intangibles 29,673,083 15,389,578 -------------------------------------------------------------------------- ------------------ ---------------- 13. Others (from Other Assets): The breakdown of Others is as follows: -------------------------------------------------------------------------- ---------------- ---------------- 2002 2001 ThCh$ ThCh$ -------------------------------------------------------------------------- ---------------- ---------------- Disbursements for obtaining external financing to be amortized (see 1,914,264 1,270,594 note 8b) Disbursements for placement of bonds to be amortized 4,177,432 6,103,671 Leased vehicles 329,278 1,003,964 Higher discount rate for bonds to be amortized 4,623,831 7,355,920 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 435,248 924,581 Rental of telephone posts paid in advance 1,338,648 2,560,642 Guarantee deposits 329,078 316,136 Telephone directories for connection programs 1,880,443 - Others 496,278 3,435,983 -------------------------------------------------------------------------- ---------------- ---------------- Total 16,568,919 26,013,621 -------------------------------------------------------------------------- ---------------- ----------------
COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- 14 Short-term obligations with banks and financial institutions: The breakdown of short-term obligations with banks and financial institutions is as follows: ------------------------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------- Bank or financial institution U.S.$ U.F. $ TOTAL -------------------- ---------------------- ----------------------- ------------- ------------------------- Taxp. No. Short-term 2002 2001 2002 2001 2002 2001 2002 2001 ------------- -------------------- --------- --------- --------- ---------- ----- ------ ----------- ---------- ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ 97.008.000-7 CITIBANK - - - 8,510,324 - 1,291 - 8,511,615 97.030.000-7 ESTADO - - 9,191,446 10,791,371 - 174 9,191,446 10,791,545 59.004.250-1 SUDAMERIS - 172,655 - - - - - 172,655 97.004.000-5 BANCO DE CHILE - 775,959 - - - 74,997 - 850,956 Foreign REPUBLICA DE GUATEMALA - 8,767 - - - - - 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 - 957,381 9,191,446 19,301,695 - 393,037 9,191,446 20,652,113 --------------------- --------- ---------- --------------- --------- ---------- Capital owed - 954,678 9,178,122 19,221,244 - 393,037 9,178,122 20,568,959 ===================== ======================= =============== ======================= Average annual interest rate - 4.58% 0.78% 3.53% - - 0.78% 3.51% ---------------------------------------------------------------------------------------------------------------------- Short-term portion of long-term ---------------------------------------------------------------------------------------------------------------------- 79.561.240-8 CHASE MANHATTAN 375,186 473,401 - - - - 375,186 473,401 Foreign ABN AMRO BANK 1,545,331 250,805 - - - - 1,545,331 250,805 Foreign BBVA-(BANCO EXTERIOR) 18,147,934 8,736,493 - 6,169,556 - - 18,147,934 14,906,049 97.006.000-6 BANCO CREDITOS- INERSIONES - - - 6,533,683 - - - 6,533,683 97.008.000-7 CITIBANK 116,381,125 8,965,832 - - - - 116,381,125 8,965,832 97.015.000-5 SANTANDER - - 9,841,229 8,211,894 - - 9,841,229 8,211,894 97.036.000-K SANTIAGO - - - 9,764,132 - - - 9,764,132 Foreign CREDIT LYONNAIS - 2,468,166 - - - - - 2,468,166 Foreign MORGAN GUARANTY - 61,383,585 - - - - - 61,383,585 ------------------------------------------------------------------------------------------------- Total 136,449,576 82,278,282 9,841,229 30,679,265 - - 146,290,805 112,957,547 ------------------------------------------------------------------------------------------------- Capital owed 133,474,948 78,839,957 9,711,590 30,058,565 - - 143,186,538 108,898,522 ================================================================================================= Average annual interest rate 2.39% 3.86% 0.90% 4.33% - - 2.29% 3.99% ------------------------------------------------------------------------------------------------------------------------------------
Percentage of obligations in foreign currency": 87.76% for 2002 y 62.30% for 2001 Percentage of obligations in national currency 12.24% for 2002 y 37.70% for 2001 30 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- 15 Long-term obligations with banks and financial institutions: Long-term obligations with banks and financial institutions: ------------------------------------------------------------------------------------------------------------------------------------ Years to maturity for long-term portion Currency --------------------------------------- Long-term Long-term or portion portion Indexation as of as of Bank or Financial Index 1 to 2 2 to 3 3 to 5 12/31/02 12/31/01 Taxp. No. Institution ---------- ------------------ ------------------------------------------------------------------------------- ------------- ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ LOANS IN DOLLARS 79.561.240-8 CHASE MANHATTAN US$ 57,488,800 28,744,400 - 86,233,200 Libor + 0,75% 80,932,043 Foreign ABN AMRO BANK US$ - 143,721,999 107,791,500 251,513,499 Libor + 1,125% 134,886,740 97.008.000-7 CITIBANK US$ 7,718,198 7,718,198 3,859,100 19,295,496 Libor + 0,725% 177,100,619 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 65,206,998 180,184,597 111,650,600 357,042,195 2.57% 465,749,024 LOANS IN UNIDADES DE FOMENTO 97.015.000-5 SANTANDER UF 59,525,347 - - 59,525,347 Tab 90 + 0,75% 69,292,903 97.032.000-8 BANCO BBVA BHIF UF - - - - 14,023,535 SUBTOTAL 59,525,347 - - 59,525,347 0.90% 83,316,438 LOANS IN OTHER CURRENCIES Foreign MERCOM BANK $ - - - - 46,536 --------------------------------------------------------------------- ------------- TOTAL 124,732,345 180,184,597 111,650,600 416,567,542 2.33% 549,111,998 ===================================================================== ============= --------------------------------------------------------------------------------------------------------------------- ------------- 0 Percentage of obligations in foreign currency: 85.71% in 2002 and 84.83% in 2001 357,042,195 Percentage of obligations in national currency 14.29% in 2002 and 15.17% in 2001 59,525,347 416,567,542 357,042,195
31 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- 16. Obligations with the public: The breakdown of obligations with the public for bond issuance, classified in the short and long-term is as follows: ------------------------------------------------------------------------------------------------------------------------------------ Current Bond Periodicity Par value Registration number nominal readjust- ------------------------------------------ Placement or identification of amount ment Interest Final Interest In Chile the instrument Series placed unit rate deadline payment Amortizations 2002 2001 or abroad ------------------------------------------------------------------------------------------------------------------------------------ % ThCh$ ThCh$ Short-term portionof long-term bonds 143.27.06.91 E 156,250 U.F. 6.000 Apr.2003 Biannual Biannual 2,648,222 5,330,441 National 143.27.06.91 F 71,429 U.F. 6.000 Apr.2016 Biannual Biannual 1,393,207 1,408,354 National 177.12.08.94 H (a) - U.F. 5.800 Aug.2006 Biannual Biannual 8,641,818 National 177.12.08.94 I 125,000 U.F. 5.500 Aug.2015 Biannual Biannual 2,268,699 2,283,629 National 203.23.04.98 J (b) - U.F. 6.750 Feb.2010 Biannual Biannual 6,084,352 National 203.23.04.98 K - U.F. 6.750 Feb.2020 Biannual Biannual 1,660,837 1,661,474 National Issued in New York Yankee Bonds - US$ 7.625 Jul.2006 Biannual Final 6,030,394 4,799,720 Foreign Issued in New York Yankee Bonds - US$ 8.375 Jan.2006 Biannual Final 5,079,754 5,773,902 Foreign Issued in Luxemburg Eurobonos (c) - EURO 5.375 Aug.2004 Biannual Final 2,623,126 2,667,462 Foreign ------------------------- Totales 21,704,239 38,651,152 ========================= Long-term bonds 143.27.06.91 E - U.F. 6.000 Apr.2003 Biannual Biannual 2,617,272 National 143.27.06.91 F 892,857 U.F. 6.000 Apr.2016 Biannual Biannual 14,950,107 16,152,307 National 177.12.08.94 H (a) - U.F. 5.800 Aug.2006 Biannual Biannual 29,313,445 National 177.12.08.94 I 1,437,500 U.F. 5.500 Aug.2015 Biannual Biannual 24,069,673 26,172,718 National 203.23.04.98 J (b) - U.F. 6.750 Feb.2010 Biannual Biannual 37,688,715 National 203.23.04.98 K 4,000,000 U.F. 6.750 Feb.2020 Biannual Biannual 66,976,480 67,002,158 National Issued in New York Yankee Bonds 200,000,000 US$ 7.625 Jul.2006 Biannual Final 143,722,000 134,886,740 Foreign Issued in New York Yankee Bonds 200,000,000 US$ 8.375 Jan.2006 Biannual Final 143,722,000 134,886,740 Foreign Issued in Luxemburg Eurobonos (c) 157,800,000 EURO 5.375 Aug.2004 Biannual Final 118,752,390 119,105,286 Foreign ------------------------- Total 512,192,650 567,825,381 ========================== ------------------------------------------------------------------------------------------------------------------------------------
(a) During December of 2002, Telefonica CTC Chile prepaid this bond placement, paying the complete 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$ 75,738 and ThCh$ 376,314, which are included under "Financial Expenses". (b) During August of 2002, Telefonica CTC Chile prepaid this bond placement, paying the complete 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 his placement. This transaction was carried out at a price of 96.8% par value, which meant a payment of 36.4 million euros, plus interest accrued as of that date on the nominal amount of 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. 32 17. Provisions: The breakdown of provisions shown in liabilities is as follows: ---------------------------------------- ------------------------- ----------------- 2002 2001 ThCh$ ThCh$ ---------------------------------------- ------------------------- ----------------- Current 9,952,190 15,069,037 Staff severance indemnities 90,218 523,192 Accrued vacation cost provision 5,440,631 6,990,961 Other provisioned benefits 6,737,658 10,666,069 Employee benefit advances (2,316,317) (3,111,185) ---------------------------------------- ------------------------- ----------------- Long-term 17,257,252 20,485,428 Staff severance indemnities 17,257,252 20,485,428 ---------------------------------------- ------------------------- ----------------- Total 27,209,442 35,554,465 ---------------------------------------- ------------------------- -----------------
There were no write off in 2002 and 2001. 18. Staff severance indemnities: The breakdown of the charge to income for staff severance indemnities is as follows: ----------------------------------------------------- ----------------- ------------- 2002 2001 ThCh$ ThCh$ ----------------------------------------------------- ----------------- ------------- Operating and administration and selling costs 4,049,348 3,803,010 Other non-operating expenses: 11,463,596 16,605,183 ----------------------------------------------------- ----------------- ------------- Total 15,512,944 20,408,193 ----------------------------------------------------- ----------------- ------------- Payments for the year (19,174,094) (10,481,492) ----------------------------------------------------- ----------------- -------------
19. Minority interest: Minority interest includes recognition of the portion of equity and income of subsidiaries belonging to third parties. The breakdown for 2002 and 2001 is as follows: ----------------------------------------------------------------------------------------------------------------- Minority Minority Minority Minority Subsidiaries Interest Interest Interest Interest Liabilities Income 2002 2001 2002 2001 2002 2001 % % ThCh$ ThCh$ ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------------- Soc. Nacional de Procesamiento de Datos S.A. (i) - 40.01 - 35,695,600 607,665 4,717,129 Administradora de Telepeajes de Chile S.A. 19.01 19.01 27,826 (62,073) (12,206) (11,148) CTC - Transmisiones Regionales S.A. 0.84 0.84 925,774 863,354 109,441 261,808 Infoera S.A. 0.01 0.01 (9) (2) (13) (14) Fundacion Telefonica 50.00 50.00 183,447 171,240 12,208 (29,224) Tecnonautica S.A. 0.01 0.01 1 (126) 9,516 (55) Comunicaciones Mundiales 0.34 0.34 5,224 5,282 86 22 -------------------------------------------- TOTAL 1,142,263 36,673,275 726,697 4,938,518 ============================================= -----------------------------------------------------------------------------------------------------------------
(i) For 2002, corresponds to participation in income up to August 31, 2002 (see note 2d) 33 COMPANA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- 20. Shareholders' Equity During 2002 and 2001, changes in shareholders' equity accounts are as follows: ------------------------------------------------------------------------------------------------------------------------------------ Accumulated (Loss) deficis Net income Total Paid-in Contributed Other Retained development for shareholders' capital surplus reserves earnings period the year equity ---------- ------------- ---------- -------- ------------ ---------- -------------- ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ 2002 ----------------------------------- Balances as of December 31, 2001 715,017,592 111,177,044 1,536,666 435,806,854 (371,667) 4,111,658 1,267,278,147 Transfer of 2001 net income to retained earnings - - - 4,111,658 - (4,111,658) - Final 2001 dividend - - - (1,233,497) - - (1,233,497) Absorption of accum. deficit develop. period susidiaries - - - (371,667) 371,667 - - Adjustment of foreign investment conversion reserve - - 362,843 - - - 362,843 Price-level restatement 21,450,528 3,335,312 25,227 13,151,868 - - 37,962,935 Loss for the year - - - - - (17,680,376) (17,680,376) =========== =========== ========= =========== ======== ========== ============= Balance as of December 31, 2002 736,468,120 114,512,356 1,924,736 451,465,216 - (17,680,376) 1,286,690,052 =========== =========== ========= =========== ======== ========== ============= 2001 ----------------------------------- Balances as of December 31, 2000 693,518,518 107,834,185 897,688 537,191,393 (464,381) 114,023,952) 1,224,953,451 Transfer of 2000 loss to retained earnings - - - (114,023,952) - 114,023,952 - Absorption of accum. deficit develop. period subsidiaries - - - (464,381) 464,381 - - Adjustment of foreign investment conversion reserve - - 611,149 - - - 611,149 Accum. deficit develop. period subsidiaries - - - - (371,667) - (371,667) Price-level restatement 21,499,074 3,342,859 27,829 13,103,794 - - 37,973,556 Net income for the year - - - - - 4,111,658 4,111,658 =========== =========== ========= =========== ======== ========== ============== Balance as of December 31, 2001 715,017,592 111,177,044 1,536,666 435,806,854 (371,667) 4,111,658 1,267,278,147 =========== =========== ========= =========== ======== ========== ============== Restated balances as of December 31, 2002 736,468,120 114,512,356 1,582,766 448,881,060 (382,817) 4,235,008 1,305,296,493 =========== =========== ========= =========== ======== ========== ============== -----------------------------------------------------------------------------------------------------------------------------------
In accordance with Article 10 of Corporations Law 18,046, restatement of paid-in capital has been incorporated to that account. 34 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 20. Shareholders' Equity, continued: (a) 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 ---------------------------------------------------------------------------------------------------------- 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 issued by the Chilean Superintendence of Securities and Insurance, the distribution of shareholders according to their participation in the Company as of December 31, 2002 is as follows: --------------------------------------------------------------- ---------------------- -------------------- Percentage of Total Number of holdings shareholders Type of shareholder % --------------------------------------------------------------- ---------------------- -------------------- 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) Dividends: As established in Law No. 18, 046, except otherwise agreed upon at the General Shareholders' Meeting by unanimous vote of the outstanding shares, when there is net income, at least 30% of it 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. 35 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 20. Shareholders' Equity, continued: (c) Dividends, continued: Distribute for 2002, at least 30% of net income generated in the same year - 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$1,233,497 (historical) charged to retained earnings, which was paid on May 15, 2002. (d) Other reserves: In 1994 the Company set up a reserve for the purchase of Invercom S.A. and Instacom S.A., in 1998 for the purchase of Sonda S.A. and its subsidiaries and since 2001 for the adjustment of Consorcio Telefonica de Brasil Celular Holding . ------------------------------------------------------------------------------------------------------- Company Amount Balance as of 31.12.2001 P.L.R. Net Movement 31.12.2002 ThCh$ 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) Accumulated deficit development period of subsidiary: The General Ordinary Shareholders' Meeting held on April 5, 2002, approved absorption of the accumulated deficit development period that the Company maintained as of December 31, 2001, for subsidiaries Telefonica Gestion de Servicios Compartidos S.A. and Infoera S.A. 36 21. Income and Expenses: (a) Operating income and expenses: The breakdown of operating income and expenses is as follows: ------------------------------------------------------------------ ------------------------- --------------- 2002 2001 ThCh$ ThCh$ ------------------------------------------------------------------ ------------------------- --------------- Operating income Income from sale of services 786,651,882 858,748,543 Income from sale of equipment and projects 76,496,799 61,286,110 Total Operating income 863,148,681 920,034,653 Depreciation and amortization 261,035,237 255,504,373 Payroll 79,566,180 101,149,516 Cost of long distance services and interconnections 71,640,922 50,087,726 Cost of sales of equipment and projects 53,852,813 75,260,511 Allowance for doubtful accounts 26,001,066 20,536,073 Contracts with third parties 44,821,608 59,148,432 Cost of sale of information development 13,510,995 30,927,099 Vehicle, office and equipment rentals 11,535,508 11,847,364 Materials (includes obsolescence provisions) 6,140,081 5,175,646 Post rentals 5,438,878 5,601,700 Telephone directory printings 5,048,653 3,634,978 Others 23,644,208 28,320,700 Total operating costs 602,236,149 647,194,118 Gross margin 260,912,532 272,840,535 ------------------------------------------------------------------ ------------------------- ---------------
Depreciation includes ThCh$ 18,022,457 and ThCh$ 13,963,397 in 2002 and 2001, respectively, for capitalized interest. 37 21. Income and Expenses continued: b) Other non-operating income: The breakdown of non-operating income is as follows: ------------------------------------------------------------------- ------------------ -------------- 2002 2001 ThCh$ ThCh$ ------------------------------------------------------------------- ------------------ -------------- Other Income: Damage indemnity and supplier fines - 37,207 Gain on sale of shares 1,784,257 - Gain on sale of investment - 1,657,408 Insurance recovery - 240,285 Gain on sale of property, plant and equipment and sale of 912,077 404,067 materials Dividends received 172,505 - Compensation for early termination of contract with Publiguias - 11,389,049 Net gain on sale of participation in subsidiary (a) 7,874,374 - Net gain on sale of Compaq contract - 466,599 Administrative services 75,409 879,855 Extraordinary recovery of written off accounts 880,778 - Others 1,522,124 497,585 ------------------------------------------------------------------- ------------------ -------------- Total 13,221,524 15,572,055 ------------------------------------------------------------------- ------------------ --------------
(a) 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 38 21. Income and Expenses continued: (c) Other non-operating income and expenses: The breakdown of other non-operating income and expenses is as follows: ---------------------------------------------------------------- ------------------- ---------------- 2002 2001 ThCh$ ThCh$ ---------------------------------------------------------------- ------------------- ---------------- Other Expenses: Restructuring costs (1) 15,224,434 18,961,222 Lawsuit indemnities and other provisions 3,115,875 2,086,846 Depreciation and write off of out of service property, plant 2,002,190 2,169,904 and equipment (2) Extraordinary charges for write off of Mobile business - 5,205,612 Inventory write off - 1,055,502 Accounts receivable write off - 157,220 Charges for non-provisioned taxes 278,622 541,089 Differences in appraisal of mobile services - 3,264,356 Provision for lower market value - Terra Networks S.A. 7,566,697 3,582,030 Provision for lower market value of other investments - 384,719 Tax recovery difference 537,635 - Medical costs - 403,269 Others 9,154,494 7,320,270 ---------------------------------------------------------------- ------------------- ---------------- Total 37,879,947 45,132,039 ---------------------------------------------------------------- ------------------- ----------------
(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. 39 22. Price-level restatement: The breakdown of price-level restatement is as follows: -------------------------------------------------------------------------------------------------------------- Assets (Charges) Credits Indexation 2002 2001 ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- Inventories C.P.I. 484,941 946,006 Prepaid expenses C.P.I. 5,701 (18,606) Prepaid expenses U.F. (2,523) 6,257 Other current assets C.P.I. 902,112 2,535,612 Other current assets U.F. (6,648,402) (16,323,621) Short and long-term deferred taxes C.P.I. 4,709,485 4,119,481 Property, plant and equipment C.P.I. 60,206,880 67,040,899 Investments in related companies C.P.I. 705,812 1,201,322 Goodwill C.P.I. 6,213,231 7,002,195 Long-term debtors C.P.I. (4,765,743) (105,565) Long-term debtors U.F. 3,178 (5,498,967) Other long-term assets C.P.I. 891,945 779,402 Other long-term assets U.F. 9,156,005 10,659,340 Expense accounts C.P.I. 15,306,543 8,859,413 -------------------------------------------------------------------------------------------------------------- Total Credits 87,169,165 81,203,168 -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Liabilities - Shareholders' Equity (charges) Indexation 2002 2001 credits ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- Short-term obligations C.P.I. (411,123) (341,809) Short-term obligations U.F. (18,491,417) (11,860,218) Long-term obligations C.P.I. (233,572) (894,415) Long-term obligations U.F. (14,022,076) (14,083,203) Minority interest C.P.I. - (1,174,198) Shareholders' Equity C.P.I. (37,962,935) (39,112,765) Revenue accounts C.P.I. (22,212,819) (13,433,390) -------------------------------------------------------------------------------------------------------------- Total Charges (93,333,942) (80,899,998) -------------------------------------------------------------------------------------------------------------- ----------------------------------------------------- ----------------------------------------- (Loss) net income from price-level restatement (6,164,777) 303,170 ----------------------------------------------------- -----------------------------------------
40 23. Exchange differences: The breakdown of exchange differences is as follows: ---------------------------------------------------------------------------------------------------------------- Assets (Charges) Credits Currency 2002 2001 ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------------- Inventories US$ 57,604 - Other currents assets US$ 36,128,754 121,878,775 Other currents assets EURO (246,605) 1,626,247 Property, plant and equipment US$ 1,176 44,644 Property, plant and equipment Other - (4,444) Goodwill US$ - (1,371,913) Long-term debtors US$ 25,178,673 23,431,937 Other long-term assets US$ (289,110) 906,815 Other long-term assets EURO 144,762 92,974 Prepaid expenses US$ 64 6,114 ---------------------------------------------------------------------------------------------------------------- Total Credits 60,975,318 146,611,149 ---------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------- Liabilities (charges) credits Currency 2002 2001 ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------------- Short-term obligations US$ (3,253,123) (18,505,711) Short-term obligations EURO 10,250,478 (4,999,056) Short-term obligations DM - (33,719) Short-term obligations OTHERS - (81,687) Long-term obligations US$ (60,596,743) (121,622,660) Long-term obligations EURO (10,163,290) 530,492 Long-term obligations DM - 328 Long-term obligations OTHERS (1,064) (70,925) ---------------------------------------------------------------------------------------------------------------- Total Charges (63,763,742) (144,782,938) ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------- ----------------------------------------- (Loss) Net income from exchange differences (2,788,424) 1,828,211 ------------------------------------------------------- -----------------------------------------
41 24. Issuance and placement of share titles and debt titles expense: The breakdown of this item is as follows: -------------------------------------------------------------------------------------------------------------- Short-term Long-term -------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ThCh$ ThCh$ ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- Disbursements made for issuance of bond placement 1,762,067 1,790,109 4,177,432 6,103,671 Higher discount rate of bonds to be amortized 697,793 1,253,042 4,623,831 7,355,920 -------------------------------------------------------------------------------------------------------------- 2,459,860 3,043,151 8,801,263 13,459,591 Total --------------------------------------------------------------------------------------------------------------
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 "Obligations with the Public". 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 breakdown of financing activities that involve future cash flows is as follows: Loans paid - see note 14 and 15 Obligations with the public - 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 ------------------------------- ------------------ --------------- 42 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 26. Derivative Contracts: The breakdown of derivative contracts is as follows: ------------------------------------------------------------------------------------------------------------------------- TYPE OF TYPE OF PROTECTED ITEM DERIVATIVE CONTRACT CONTRACT MATURITY SPECIFIC PURCHASE OR TRANSACTION VALUE OR EXPIRY ITEM SALE -------------------------------- POSITION NAME AMOUNT ------------------------------------------------------------------------------------------------------------------------- FR CCPE 181,000,000 I Quart. 2003 Exchange rate P Oblig. in US$ 181,000,000 FR CCPE 160,000,000 II Quart. 2003 Exchange rate P Oblig. in US$ 160,000,000 FR CCPE 175,600,000 III Quart. 2003 Exchange rate P Oblig. in US$ 175,600,000 FR CCPE 249,000,000 IV Quart. 2003 Exchange rate P Oblig. in US$ 249,000,000 FR CCPE 164,800,000 I Quart. 2004 Exchange rate P Oblig. in US$ 164,800,000 FR CCPE 10,000,000 II Quart. 2004 Exchange rate P Oblig. in US$ 10,000,000 FR CCPE 80,000,000 III Quart. 2004 Exchange rate P Oblig. in US$ 80,000,000 FR CCPE 40,000,000 IV Quart. 2004 Exchange rate P Oblig. in US$ 40,000,000 FR CCPE 15,000,000 I Quart. 2005 Exchange rate P Oblig. in US$ 15,000,000 FR CCPE 25,000,000 II Quart. 2005 Exchange rate P Oblig. in US$ 25,000,000 FR CCPE 19,000,000 III Quart. 2006 Exchange rate P Oblig. in US$ 19,000,000 FR CCPE 155,000,000 III Quart. 2004 Exchange rate P Oblig. in EURO 155,000,000 FR CCPE 13,000,000 I Quart. 2003 Exchange rate P Oblig. in US$ 13,000,000 FR CCPE 22,000,000 II Quart. 2003 Exchange rate P Oblig. in US$ 22,000,000 FR CCPE 4,000,000 I Quart. 2004 Exchange rate P Oblig. in US$ 4,000,000 Zero Cost Collar CCTE 347,591,590 I Trim. 2003 Interest rate P Oblig. in US$ 347,591,590 Zero Cost Collar CCTE 225,000,000 IV Trim. 2003 Interest rate P Oblig. in US$ 225,000,000 S CCTE 100,000,000 III Trim. 2004 Interest rate P Oblig. in EURO 100,000,000 ------------------------------------------------------------------------------------------------------------------------- Total -------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------- AFFECTED ACCOUNTING ACCOUNTS TYPE OF TYPE OF VALUE OF ---------------------------------------------------------------- DERIVATIVE CONTRACT PROTECTED ASSET/LIABILITY EFFECT ON INCOME ITEM ---------------------------------------------------------------- M$ NAME AMOUNT REALIZED UNREALIZED ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------- FR CCPE 130,068,410 asset 130,068,410 4,299,117 liability (127,725,942) FR CCPE 114,977,600 asset 114,977,600 7,870,678 liability (110,810,209) FR CCPE 126,187,916 asset 126,187,916 2,974,499 liability (124,834,491) FR CCPE 178,933,890 asset 178,933,890 8,307,780 liability (178,117,650) FR CCPE 118,426,928 asset 118,426,928 3,217,065 liability (117,553,457) FR CCPE 7,186,100 asset 7,186,100 422,654 liability (6,931,889) FR CCPE 57,488,800 asset 57,488,800 3,615,279 liability (58,165,148) FR CCPE 28,744,400 asset 28,744,400 1,398,424 liability (29,259,813) FR CCPE 10,779,150 asset 10,779,150 668,509 liability (11,144,728) FR CCPE 17,965,250 asset 17,965,250 991,266 liability (18,744,054) FR CCPE 13,653,590 asset 13,653,590 1,141,942 liability (13,382,007) FR CCPE 116,645,250 asset 116,645,250 12,236,257 liability (115,672,496) FR CCPE 9,341,930 asset 9,341,930 39,290 liability (9,360,340) FR CCPE 15,809,420 asset 15,809,420 246,430 liability (15,801,670) FR CCPE 2,874,440 asset 2,874,440 64,680 liability (2,875,400) Zero Cost Collar CCTE - asset (1,151,473) (5,862,433) (1,151,473) Zero Cost Collar CCTE - asset (1,518,508) (3,222,729) (1,518,508) S CCTE - asset 921,679 (1,452,521) 921,679 ----------------------------------------------------------------------------------------------------------- Income to be deferred for exchange insurance to be amortized pasivo (2,432,895) 997,568 1,361,637 Costs to be deferred for exchange activo 2,036,110 (3,535,079) (4,096,940) insurance to be amortized 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 contract for expected transactions CI: Investment contract
43 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 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 By 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 originate 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. Fist 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 syndicates have filed complaints before the Santiago Labor Courts, requesting indemnity for various concepts. (iv) Complaint from the Regional Metropolitan Customs Directorate(Direccion Regional de Aduanas Metropolitanas): The Regional Direction of Metropolitan Customs 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 respect we should note that it is the opinion of management and legal counsel, that the loss contingency in relation to the original estimation has been reduced by 90%, since should the first verdict be confirmed, the charges filed and regulatory infractions claimed could not be determined for an amount exceeding 10% of the indicated amounts. In Management's opinion and that of internal 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 in relation to the indemnities claimed. 44 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 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. We emphasize 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 rates setting process. The complaint was for US$274 million, plus readjustments and interest, and covers past and future damages until May 2004, due to having to charge lower rates than those that should legally have been set. The Third Civil Court of Santiago accepted the complaint, and notified the Government. Once the answer from the Government had been received, as well as its defense arguments with which the discussion period ends, the Court of Justice dictated the writ of evidence, setting the pertinent, substantial and disputed evidence. To date the complaint is at the evidence stage, during which Telefonica CTC Chile has provided abundant testimonial evidence. b) Financial restrictions: In order to develop its investment plans, the Company has obtained financing both from the local market and the foreign market (Notes 14, 15 and 16), that establish among others: maximum debt clauses for the Company, interest and cash flow coverage. The maximum debt ratio for these contracts is 1.60, therefore the interest coverage ratio cannot be less than 3.00 and, lastly, the cash flows ratio must be equal to or exceed 0.166. Non compliance with these clauses implies that all obligations assumed in those financing contracts will become due. As of December 31, 2002 the Company meets all financial restrictions. c) Certificates of deposit for frequencies awarded to Telefonica Movil. On July 18, 2002 three 10 Mhz frequencies on the 1,900 Mhz band were put out to tender. Telefonica Movil de Chile was awarded two frequencies (20 Mhz) for UF 544,521 equivalent to US$ 12.8 million. Therefore, Telefonica Movil de Chile has had to issue bank certificates of deposit in favor of the Telecommunications Subsecretary for amounts similar to those indicated. 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. Additionally 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, which are detailed in note 2d. 45 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 27. Contingencies and restrictions, continued: e) PCS-1900 network project contract: During 2002, subsidiary Telefonica Movil de Chile S.A. has signed contracts outlining 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 originated before the purchase and sale contract (dated October 14, 1998) and that was not declared at that time, it shall be solely and exclusively responsible for paying it up to an approximate amount of US$10 million, granting guarantees to cover said contingencies. Those guarantees expired on December 27, 2001. On December 26, 2001 the parties renewed the guarantees in the amount of US$ 2.5 million, expiring on December 27, 2003. On June 14, 2002, the parties signed a release which meant a payment on the part of 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 certificates of deposit in favor of Telefonica Empresas in the sum of UF 1,983,185. These certificates of deposit will remain in custody until August 26, 2003 and must be renewed within the following 20 days for the total amount of UF 2,003,260, keeping in mind that they must be on sight and renewed with maturity dates as of September 26, 2004. Subsequently, during September 2004 they must once again be renewed until Sept 26, 2005 for a total value of UF 2,048,885 with an execution procedure similar to the one previously described. 46 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 29. National and Foreign Currency: The breakdown of national and foreign currency is as follows: Description Currency 2002 2001 ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------- Total current assets: 446,383,805 657,216,445 Cash Non-indexed Ch$ 16,417,174 17,036,117 Dollars 184,746 2,062,812 Euros 240,082 224,780 Time deposits Indexed Ch$ 262,647 597,708 Non-indexed Ch$ - 9,602,704 Dollars 2,155,830 1,166,580 Marketable securities Indexed Ch$ 9,597,515 16,364,277 Non-indexed Ch$ 1,642,578 7,233,154 Dollars 65,571,937 33,011,385 Otras Monedas - 3,609,237 Notes and accounts receivable (a) Indexed Ch$ 5,782,448 5,386,896 Non-indexed Ch$ 231,918,363 280,607,284 Dollars - 5,989,137 Notes and accounts receivable from related companies Non-indexed Ch$ 5,334,521 5,496,519 Dollars 11,779,407 84,878 Other current assets (b) Indexed Ch$(b) 52,046,849 61,478,278 Non-indexed Ch$ 27,180,879 176,363,107 Dollars 15,651,379 30,435,549 Euros 617,450 466,043 Total property, plant and equipment: 1,939,043,734 2,124,008,809 Property, plant and equipment and accumulated depreciation Indexed Ch$ 1,939,043,734 2,121,842,859 Dollars - 2,165,950 Total other long-term assets 302,945,766 309,075,559 Investment in related companies Indexed Ch$ 42,455,138 16,313,598 Investment in other companies Indexed Ch$ 3,816 10,561 Dolares - 674,433 Goodwill Indexed Ch$ 179,404,553 210,069,277 Other long-term assets (c) Indexed Ch$ 49,870,178 35,638,892 Non-indexed Ch$ 6,470,955 22,942,072 Dollars 24,422,775 22,649,988 Euros 318,351 776,738 -------------------------------------------------------------------------------------------------------- Total assets 2,688,373,305 3,090,300,813 -------------------------------------------------------------------------------------------------------- Indexed Ch$ 2,278,466,878 2,467,702,346 Non-indexed Ch$ 288,964,470 519,280,957 Dollars 119,766,074 98,240,712 Euros 1,175,883 1,467,561 Otras Monedas - 3,609,237 -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes the following balance sheet accounts: Trade Accounts Receivable, Notes Receivable and Other Receivables. (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. 47 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 29. National and foreign currency, continued The breakdown of current liabilities is as follows: ------------------------------------------------------------------------------------------------------------------------------- Up to 90 days ---------------------------------------------------------- DESCRIPTION Currency 2002 2001 ---------------------------------------------------------- Average Average Amount annual Amount annual interest 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$ 114,586 - 28,026,165 4.36 Dollars 24,798,977 2.30 10,682,048 4.08 Obligations with the public (bonds) Indexed Ch$ - - 5,233,246 6.75 Dollars 11,110,148 - 10,573,622 - Euros - - - - Long-term obligations maturing within a year Indexed Ch$ 428,856 8.95 593,750 9.40 Notes and accounts payable to related parties Indexed Ch$ - - 10,523,562 - Non-indexed Ch$ 8,992,723 - 260,597 - Dollars - - 297,835 - Other current liabilities (d) Indexed Ch$ 1,666,936 - 15,113,635 - Non-indexed Ch$ 180,983,741 - 222,716,033 - Dollars 5,621,194 - 15,425,707 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 233,717,161 - 331,587,988 - ------------------------------------------------------------------------------------------------------------------------------- Subtotal by currency Indexed Ch$ 2,210,378 - 71,450,723 - Non-indexed Ch$ 189,976,464 - 222,976,630 - Dollars 41,530,319 - 37,160,635 - Euros - - - - ------------------------------------------------------------------------------------------------------------------------------- (d) Includes the following balance sheet accounts: Dividends payable, Accounts payable, Notes payable, Other Creditors, Provisions, Withholdings, Unearned Income and Other Current Assets.
------------------------------------------------------------------------------------------------------------------------------- 90 days up to 1 year ------------------------------------------------------- DESCRIPTION Currency 2002 2001 ------------------------------------------------------- Average Average Amount annual Amount annual interest interest ThCh$ % ThCh$ % ---------------------------------------------------------------------------------------------------------------------------- Short-term obligations with banks and financial institutions Indexed Ch$ 9,191,446 0.78 8,510,325 5.39 Dollars - - - - Short-term portion of obligations with banks and financial institutions Indexed Ch$ 9,726,643 0.90 2,653,101 3.99 Dollars 111,650,599 2.40 71,596,233 3.70 Obligations with the public (bonds) Indexed Ch$ 7,970,964 5.78 20,176,822 6.75 Dollars - - - - Euros 2,623,127 - 2,667,462 - Long-term obligations maturing within a year Indexed Ch$ 60,903 8.89 548,822 8.51 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$ 388,567 - 21,837,585 - Non-indexed Ch$ 1,108,166 - 24,892,864 - Dollars - - 371,618 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 145,703,888 - 59,745,463 - ---------------------------------------------------------------------------------------------------------------------------- Subtotal by currency Indexed Ch$ 27,338,523 - 53,726,655 - Non-indexed Ch$ 4,091,639 - 24,892,864 - Dollars 111,650,599 - 78,458,482 - Euros 2,623,127 - 2,667,462 - ---------------------------------------------------------------------------------------------------------------------------- (d) Includes the following balance sheet accounts: Dividends payable, Accounts payable, Notes payable, Other Creditors, Provisions, Withholdings, Unearned Income and Other Current Assets.
---------- 48 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 29. National and foreign currency, continued The breakdown of long-term liabilities for 2002 is as follows: --------------------------------------------------------------------------------------------------------------------- 1 to 3 years 3 to 5 years ------------------------ ---------------------- 2002 2002 ----------------------- ---------------------- Average Average annual annual interest interest Amount rate Amount rate ------------ -------- ----------- -------- ThCh$ % ThCh$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ 59,525,347 0.52 111,650,600 2.38 Dollars 245,391,595 2.73 - - Obligations with the public (bonds) 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 - Dolares 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 - Euro 118,752,390 - - - -----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------- 5 to 10 years over 10 years --------------------- --------------------- 2002 2002 --------------------- --------------------- Average Average annual annual interest interest Amount rate Amount rate ---------- -------- --------- -------- ThCh$ % ThCh$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ - - - - Dollars - - - - Obligations with the public (bonds) Indexed Ch$ 32,301,289 6.17 6,987,096 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 - Dolares - - - - ---------------------------------------------------------------------------------------------------------------- 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 - - - - Euro - - - - ------------------------------------------------------------------------------------------------------------
The breakdown of long-term liabilities for 2001 is the following: --------------------------------------------------------------------------------------------------------------------- 1 to 3 years 3 to 5 years ------------------------ ---------------------- 2002 2002 ----------------------- ---------------------- Average Average annual annual interest interest Amount rate Amount rate ------------ -------- ----------- -------- ThCh$ % ThCh$ % LONG-TERM LIABILITIES 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 Otras Monedas 13,489 - 33,048 - Obligations with the public (bonds) 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 - Dolares 25,534,900 - 7,419 - Dollars --------------------------------------------------------------------------------------------------------------------- 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 - Dolares 250,112,106 - 485,599,683 - Euros 119,105,286 - - - Otras Monedas 13,489 - 33,048 - --------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------- 5 to 10 years mas de 10 anos ------------------------ ---------------------- 2002 2001 ----------------------- ---------------------- Average Tasa annual interes interest promedio Amount rate Monto anual ------------ -------- ----------- -------- ThCh$ % ThCh$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ - - - - Dollars 25,353,034 4.29 - - Otras Monedas 0 - - - Obligations with the public (bonds) 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 - Dolares - - - - 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 - Dolares 25,353,035 - - - Euros - - - - Otras Monedas - - - - ---------------------------------------------------------------------------------------------------------------------------- (e) Includes the following balance sheet accounts: Notes and accounts payable to related companies, Other Long-term Creditors, Long-term Provisions, Long-term Deferred Taxes, Other Long-term Liabilities.
49 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- 30. Sanctions: Neither the Company, nor its Directors and Managers have been sanctioned by the "Superintendencia de Valores y Seguros" or any other administrative authority during this year. 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 Undersecretary of Telecommunications on October 2, 2002. In this resolution, the Undersecretary of Telecommunications 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 other against CTC On January 22, the Court of Appeals dictated sentence rejecting the executive complaint filed by Intercompany Syndicates SINATE, V Region No. 1 and Profesionales against the Company, where they request payment of ThCh$ 7,500,000 for incentive contemplated in Clause 4.4 of the collective contract dated June 1998. The verdict accepted the exceptions presented by the Company, additionally establishing that the syndicates do not have the nature of creditors in 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 in respect to this matter. The Syndicates have 5 days from the date of 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 their internal legal counsel, the nature of the Company's operations does not directly or indirectly affect the environment, therefore, as of the closing date of these financial statements no resources have been committed or payments made for non-compliance of municipal ordinances or of those of other overseeing organizations. 50 33. Accounts payable: The breakdown of the accounts payable balance is as follows: ------------------------------------------------------------------------------ 2002 2001 ThCh$ ThCh$ ------------------------------------------------------------------------------ Suppliers National 94,984,787 118,292,020 Foreign 8,195,753 19,503,572 Carrier service Nationals 11,438,418 20,451,153 Foreign - 1,079,083 Level of progress provision 35,267,682 45,851,627 ------------------------------------------------------------------------------ Total 149,886,640 205,177,455 ------------------------------------------------------------------------------ Alejandro Espinoza Querol Claudio Munoz Zuniga General Accountant General Manager 51 Item 2 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 2 TABLE OF CONTENTS 1. Highlights............................................................... 3 2. Volume Statistics, Property, Plant and Equipment and Statement of Income................................................................ 8 3. Analysis of results for the year 3.1 Operating Income................................................... 10 3.2 Non-operating income............................................... 12 3.3 Net Income for the Year............................................ 12 4. Business Results by Area................................................ 12 5. Statement of Cash Flows................................................. 15 6. Financial Indicators.................................................... 16 7. Indication of main differences between market or economic value and book value of the Company's assets.................................. 17 8. Regulatory Issues....................................................... 17 9. Market analysis, competition and relative participation................. 20 10. Market Risk Analysis.................................................... 24 3 1. HIGHLIGHTS Results for the Year and Business Figures for the Company As of December 31, 2002, Telefonica CTC Chile recorded a consolidated net loss of Ch$ 17,680 million, which compares with net income of Ch$ 4,235 million obtained as of December 31, of the previous year. This year net income was especially affected by an extraordinary charge of Ch$15,224 million derived from the restructuring plan at the end of October of 2002, as well as by a decrease of Ch$7,567 million in the value of Terra Networks shares. At an operating level, the main effects affecting Telefonica CTC Chile's income in 2002 were given mainly by the drop in operating income from the activities of Sonda, the subsequent deconsolidation of this subsidiary as of the financial statements as of September 2002, and the decrease in income derived from the new contract signed with Publiguias in August of 2001. After excluding the effects of Sonda and Publiguias on operating income for 2001 and 2002, as detailed below, revenues increased by 0.7% in relation to the previous year, whereas operating income grew by 7.7%, which translated into an operating margin of 16.1%, with a growth of 1.0 percentage point in comparison to the margin of 15.1% obtained the previous year. Adjusted Operating Income ------------------------- 2001 2002 % Variation ---- ---- ----------- Revenues 790,057 795,681 0.7% Costs (432,402) (412,261) -4.7% EBITDA 357,655 383,420 7.2% Depreciation (238,487) (255,031) 6.9% Operating Income 119,168 128,389 7.7% Including the effects of Sonda and Publiguias, consolidated operating income for 2002 reached Ch$ 130,498 million, decreasing by 7.8% in relation to the previous year. With this, the operating margin reached 15.1%. Consolidated revenues present a decrease of 6.2%, influenced by a 44.8% decrease in the revenues of Sonda(1), less income from Publiguias, and a 5.1% decrease in revenues from Basic Telephone service; compensated by a 12.4% growth in mobile telephone revenues and a 19.2% growth in corporate communications. Operating costs decreased by 5.9% mainly due to lower Sonda costs, and a decrease in payroll and goods and services expenses, reflecting, among other aspects, the positive effect of cost containment and materialization of the personnel restructuring processes of June 2001 and October 2002. Non-operating income shows a similar level to the previous year, mainly due to a drop in financial expenses associated to a lower level of debt load and improved financing conditions. Additionally, the process of personnel reduction in 2002 translated into a lower non-operating charge in relation to the personnel reduction process in 2001. The above was mainly compensated by a higher charge in ------------ (1) In addition to the negative tendency of Sonda's results, this company contributed to the corporation's revenues only up until August 2002. As of that date Telefonica CTC Chile decreased its participation in that company to 35%, recognizing its income using the equity method under non-operating income. 4 relation to the previous year derived from the lower market trading value of Terra Networks and higher price-level restatement charges derived partly from the devaluation of Sonda's investments in Argentina and Brazil. Regarding business operating figures, as of December 31, 2002, fixed telephone lines in service of Telefonica CTC Chile reached 2,686,695, showing a decrease of 1.3% in relation to 2001. Customers of the mobile service reached 1,849,283 with a growth of 17.8% compared to 2001. The long distance business presented a drop in traffic of 10.3% in domestic long distance (DLD) and a growth of 5.2% in outgoing international long distance (ILD), reaching 717 million minutes and 66 million minutes, respectively, as of December 31, 2002. ATM links for corporate customers increased by 8.5% whereas IP links grew by 31.0%. As of December 31, 2002, the corporation's staff reached 4,571 employees. This figure does not include Sonda's staff, due to the selling of participation in that subsidiary. With this, employees as of December 31, 2002 show a 40.8% decrease in respect to December 2001 (17.9% when excluding Sonda employees in 2001). Corporate Restructuring On October 28, 2002, Telefonica CTC Chile reorganized its business structure. The purpose of this restructuring is to confront the strong and accelerated changes that are occurring in the telecommunications industry. The main element of the new structure is a stronger focus on the customer. Along this line, the reorganization consists mainly in that the Company began operating with three business units: General Consumers and Small Businesses; Corporations (which includes the business of subsidiary Telefonica Data), and Mobile Communications. To support these units are the areas of Customer Management, responsible for distribution and commercialization of products throughout the country, Corporate Network Management, responsible for infrastructure and technical maintenance and "T-gestiona", responsible for shared administration and support services. This reorganization implied a reduction of approximately 1,070 employees of Telefonica CTC Chile and its subsidiaries. The financial impact of this restructuring affecting the Company's non-operating income reached Ch$15,224 million as of December 31, 2002. Regulatory Issues During 2001, Telefonica CTC Chile requested elimination of rate distortions that prevented it from competing under equal conditions with other telecommunications companies. In this area, the Company presented requests for flexibility of local rates to the public, on the one hand and on the other hand the simultaneous and symmetric setting of access charges to all local telephone companies. For these purposes the Company requested from the authorities approval of alternative tariff plans to Decree No. 187. In this respect, the Ministry of Transport and Telecommunications and of Economy, Development and Reconstruction approved, by Decree No. 455 dated 2002, the structure, rate levels and formulas for indexation of rates of Alternative Tariff Plans for Very High Usage and High Usage. Furthermore, Subtel authorized the Company to offer prepaid telephone services in low income segments. Additionally, Telefonica CTC Chile continued its efforts to achieve correction of illegalities that were incurred in Decree No. 187, which set its rates, trought the presentation of a request to modify the tariff decree. In this regard, and confronted with a negative response from the authorities, Telefonica CTC 5 Chile S.A. presented a lawsuit for damages against the State of Chile for illegalities incurred in the process of setting rates. The lawsuit for US$274 million, plus readjustments and interest, covers damages due to having to charge lower rates than those that should have legally been set. Telefonica CTC Chile has continued participating in improving technical regulations. Worth noting is the recent promulgation of modifications to the Fundamental Technical Numbering Plans, Signaling Plans and Telephone Transmission Plans. Likewise, Telefonica CTC Chile participated preparing concrete proposals regarding the "Navigation Letter" (formerly White Book (Libro Blanco)), promoted by the Undersecretary of Telecommunications. Tender Process for PCS Mobile Spectrum On July 18 a tender was held for three 10 Mhz frequencies in the 1,900 Mhz band. Telefonica Movil Chile was awarded two frequencies (20 Mhz) for a total of UF 544,521 equivalent to US$12,8 million. Collective Negotiation Process During the second quarter of 2002, the Company carried out the collective negotiation process with the non-executive employees of CTC S.A. and its Subsidiaries, excluding Sonda S.A. As of June 30, collective contracts were signed with unions which extended the benefits agreed upon to 1,330 employees, achieving agreements subsequent to that, with another 331 employees, totaling 1,661 employees. Notwithstanding, on July 1 a total of 3,445 employees began a legal 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 the collective negotiation for a period of 18 months. It should be noted that employees on legal strike did not receive payment for the 28 days which they did not work, nor the bonus for ending negotiations which was paid to each employee that reached an agreement with the Company (the bonus amounted to Ch$1.3 million per person). Sale of 25% of Sonda On September 26, 2002, Telefonica CTC Chile S.A. through its subsidiary Telefonica Empresas signed an agreement to sell 25% of its ownership in Sonda S.A. for Ch$27,921 million (approximately US$37.5 million), paid in cash. Through this agreement, Inversiones Pacifico II Limitada purchased 11% of Sonda and Inversiones Santa Isabel Limitada purchased 14%. Both companies are related to Mr. Andres Navarro H. In this manner company control was transferred to Andres Navarro, while Telefonica CTC Chile kept the remaining 35% ownership through its subsidiary Telefonica Empresas. Additionally, the Company signed an agreement with Inversiones Santa Isabel, in which Telefonica Empresas obtained a put option for its 35% of Sonda, which can be exercised in July of 2005, at the book value of the investment as of June 30, 2005, plus a premium of UF142,021 (approx. US$3.1 million), with a minimum value of UF2,048,885 (approx. US$45.2 million). Should Telefonica Empresas not exercise the above mentioned option, in August 2005 Santa Isabel 6 has a call option for the 35% of Sonda owned by Telefonica Empresas, under the same conditions mentioned above. Santa Isabel can exercise its call option in advance in July 2003, at book value on June 30, 2003 plus a premium of UF 96,000 (approx. US$2.1 million), with a minimum price of UF1,983,185 (approx. US$43.8 million), or in July 2004, at book value as of June 30, 2004 plus a premium of UF 119,000 (approx. US$2.6 million), with a minimum price of UF2,003,260 (approx. US$44.2 million). To guarantee payment of this minimum value, Santa Isabel gave Telefonica Empresas a performance bond issued by banks. Accounting Impact of the Transaction As a result of this transaction, Telefonica CTC Chile recorded the following extraordinary charges during the third quarter of 2002: o Extraordinary net income of Ch$7,748 million (historical), as a result of the sale of 25% of Sonda at a price that was higher than book value. o An extraordinary one-time charge to income of $8,884 million (historical), for the proportional goodwill cost of 25% of Sonda, which was being amortized over a period of 7 years. Since as of December 31, 2002 Telefonica CTC Chile does not have a controlling interest in Sonda, or control over the administration of that company, the financial statements of the Company reflect consolidation with the Sonda subsidiary until August 31, 2002, and as of September 2002, 35% of Sonda's net income is recognized as equity value. The Company will continue to amortize goodwill for the remaining 35% ownership of Sonda. Goodwill pending amortization as of December 31, 2002 amounts to approximately Ch$11,561 million and is being amortized discounting the UF142,021 (approx. US$3.1 million) premium until June 2005. Should Andres Navarro exercise his call option in advance, it will mean recognizing a one-time charge to income of approximately Ch$9,000 million in case that option is exercised in July 2003, or approximately Ch$5,600 million if the option is exercised in July 2004. Should the option be exercised in July 2005, the Company believes it will not significantly affect income. Argentina Effect and Devaluation in Brazil Due to the effects of the economic and financial instability in Argentina, as of the last quarter of 2001, and considering the dispositions from the Chilean Superintendencia de Valores y Seguros (Securities and Excharge Commission) regarding investments of Chilean companies in that country, Telefonica CTC Chile through its participation in Sonda has continued devaluating the investments maintained in Argentina, in accordance with the new conversion and price of the Argentine peso in relation to the US dollar. The effect of this conversion has caused Sonda S.A. to recognize a decrease in income of Ch$859 million in 2002. Likewise, due to the devaluation of the Brazilian currency, Sonda S.A. recognized in its results the effect of a decrease in the value of investments in that country, situation which had an impact on income of Ch$470 million as of December 31, 2002. Financial Debt Decrease Telefonica CTC Chile continues to improve its debt level through amortization of loans, renegotiation of rates and terms of current loans and also through global lower rates in the economy. As of December 31, 2002, interest-bearing debt reached US$1,550.1 million, reflecting a decrease of 19.9% compared 7 to the nominal interest-bearing debt of US$1,934.9 million recorded as of December 31, 2001. The decrease in the levels of debt together with improved financing conditions in turn had the effect of lowering financial expenses in 2002. Effect of Decreased Value of Terra Networks Shares The decreased value of Terra Networks shares on the international market had a negative impact on valuation of the investment in shares that Telefonica Mundo has in that company. This meant recognizing Ch$7,567 million in non-operating income in 2002. Likewise, the previous year, the effect was Ch$3,582 million. 8 2. VOLUME STATISTICS, PROPERTY, PLANT AND EQUIPMENT AND STATEMENTS OF INCOME TABLE No. 1 VOLUME STATISTICS ====================================================================================================== DECEMBER DECEMBER VARIATION DESCRIPTION 2001 2002 Q % ------------------------------------------------------------------------------------------------------ Lines in Service at Year End 2,723,310 2,686,695 (36,615) -1.3% ------------------------------------------------------------------------------------------------------ Total Average Lines in Service 2,736,633 2,732,208 (4,425) -0.2% ------------------------------------------------------------------------------------------------------ Local Calls (millions) (1) 5,437 5,110 (327) -6.0% ------------------------------------------------------------------------------------------------------ Inter-primary DLD Minutes (2) (thousands) 3,040,929 3,035,641 (5,288) -0.2% ------------------------------------------------------------------------------------------------------ Total ILD Minutes (3) (thousands) 2,232,085 2,024,691 (207,394) -9.3% ------------------------------------------------------------------------------------------------------ ILD Minutes Outgoing (incl. Internet) 1,963,388 1,715,588 (247,800) -12.6% ------------------------------------------------------------------------------------------------------ ILD Minutes Incoming 268,697 309,103 40,406 15.0% ------------------------------------------------------------------------------------------------------ Line Connections 330,619 340,419 9,800 3.0% ------------------------------------------------------------------------------------------------------ ADSL Connections in service 14,808 54,163 39,355 265.8% ------------------------------------------------------------------------------------------------------ Mobile Telephone Customers 1,570,087 1,849,283 279,196 17.8% ------------------------------------------------------------------------------------------------------ Permanent Personnel Telefonica CTC Chile 3,223 2,540 (683) -21.2% ------------------------------------------------------------------------------------------------------ Permanent Personnel Subsidiaries 4,497 2,031 (2,466) -54.8% ------------------------------------------------------------------------------------------------------ Total Corporate Personnel 7,720 4,571 (3,149) -40.8% ======================================================================================================
1. Does not include calls from public phones owned by the Company. 2. DLD: Domestic Long Distance. Corresponds to all outgoing traffic of primary areas attended by Telefonica CTC Chile, including the traffic of 188 Telefonica Mundo and Globus 120, for which access fees are charged. 3. ILD: International Long Distance. Corresponds to all outgoing and incoming international calls of primary areas attended by Telefonica CTC Chile, including the traffic of 188 Telefonica Mundo and Globus 120, for which access fees are charged. TABLE No. 2 CONSOLIDATED NET PROPERTY, PLANT AND EQUIPMENT (Figures in millions of pesos as of 31.12.2002) ===================================================================================================== DECEMBER DECEMBER VARIATION DESCRIPTION 2001 2002 MCh$ % ----------------------------------------------------------------------------------------------------- Land, Infrastructure, Machinery and Equipment 3,694,955 3,772,606 77,651 2.1% and Others ----------------------------------------------------------------------------------------------------- Projects and Works in Progress 223,209 135,303 (87,906) -39.4% ----------------------------------------------------------------------------------------------------- Accumulated depreciation (1,794,155) (1,968,865) (174,710) 9.7% ----------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT & EQUIPMENT 2,124,009 1,939,044 (184,965) -8.7% =====================================================================================================
9 TABLE No. 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AS OF DECEMBER 31, 2002 AND 2001 (Figures in millions of pesos as of 31.12.2002) ================================================================================================================ VARIATION (2002/2001) DESCRIPTION Jan - Dec Jan - Dec ------------------------ 2001 2002 MCh$ % ---------------------------------------------------------------------------------------------------------------- Local Telephone Service 412,467 381,227 (31,240) -7.6% Basic Telephone Service 339,579 322,140 (17,439) -5.1% Fixed Charge 164,094 158,733 (5,361) -3.3% Variable Charge 167,464 156,447 (11,017) -6.6% Connections and Other Installations 8,021 6,960 (1,061) -13.2% Access Charges and Interconnections (1) 24,267 23,265 (1,002) -4.1% Domestic Long Distance 9,215 9,436 221 2.4% International Long Distance 4,402 3,513 (889) -20.2% Other Charges and Interconnection Services 10,650 10,316 (334) -3.1% Directory Advertising 18,130 4,844 (13,286) -73.3% Other Local Telephone Services 30,491 30,978 487 1.6% Value Added Services 17,473 17,163 (310) -1.8% Commercialization of Equipment 7,388 4,967 (2,421) -32.8% Other Services 5,630 8,848 3,218 57.2% Long Distance (3) 81,900 74,731 (7,169) -8.8% Domestic Long Distance 36,017 32,936 (3,081) -8.6% International Service 31,088 28,048 (3,040) -9.8% Rental of network 14,795 13,747 (1,048) -7.1% Mobile Communications 184,173 206,932 22,759 12.4% Mobile Communications 102,955 120,894 17,939 17.4% CPP Interconnection (2) 81,218 86,038 4,820 5.9% Corporate Communications 72,335 86,206 13,871 19.2% Equipment Sales and Rental, Network Sales 19,579 24,501 4,922 25.1% Private Services 52,756 61,705 8,949 17.0% Other Businesses 169,160 114,053 (55,107) -32.6% Information Services 112,828 62,322 (50,506) -44.8% Public Telephones 16,056 12,078 (3,978) -24.8% ITI Maintenance and Equipment Sales 26,371 28,243 1,872 7.1% Other Income (*) 13,905 11,410 (2,495) -17.9% ---------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUES 920,035 863,149 (56,886) -6.2% ---------------------------------------------------------------------------------------------------------------- OPERATING COSTS (647,195) (602,236) 44,959 -6.9% Salaries (101,149) (79,566) 21,583 -21.3% Depreciation (255,504) (261,035) (5,531) 2.2% Other Operating Costs (290,542) (261,635) 28,907 -9.9% ADMINISTRATION AND SELLING COSTS (131,364) (130,415) 949 -0.7% ---------------------------------------------------------------------------------------------------------------- TOTAL OPERATING COSTS (778,559) (732,651) 45,908 -5.9% ---------------------------------------------------------------------------------------------------------------- OPERATING INCOME 141,476 130,498 (10,978) -7.8% ---------------------------------------------------------------------------------------------------------------- Financial Income 18,743 16,691 (2,052) -10.9% Other Non-operating Income 15,572 13,222 (2,350) -15.1% Income from Investment in Related Companies (4) 612 2,355 1,743 284.8% Financial Expenses (96,255) (81,472) 14,783 -15.4% Amortization of Goodwill (16,211) (24,662) (8,451) 52.1% Other Non-operating Expenses (45,132) (37,880) 7,252 -16.1% Monetary Correction 2,131 (8,953) (11,084) c.s. ---------------------------------------------------------------------------------------------------------------- NON-OPERATING INCOME (120,540) (120,699) (159) 0.1% ---------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX 20,936 9,799 (11,137) -53.2% ---------------------------------------------------------------------------------------------------------------- Taxes (11,769) (26,717) (14,948) 127.0% Minority Interest (4,938) (762) 4,176 -84.6% Amortization of Negative Goodwill 6 - (6) -100.0% ---------------------------------------------------------------------------------------------------------------- NET INCOME 4,235 (17,680) (21,915) c.s. ================================================================================================================
(*) Includes income from Telemergencia, Isapre, T Gestiona, Telepeajes, Tecnonautica, Infoera, Infochile, Todocuenta and Comunicaciones Empresariales. (1) Due to accounting consolidation does not include access charges of188 Mundo Telefonica and Globus. (2) Corresponds to income recorded in Telefonica Movil. (3) ILD and DLD services are no longer subject to rate regulation by Resolution No. 515 issued by the Antitrust Commission on April 22, 1998. (4) For the purposes of a comparative analysis, participation in income from investments in related companies is shown net (net income/losses). For comparative purposes certain types of income have been reclassified for 2001. 10 3. ANALYSIS OF RESULTS FOR THE YEAR 3.1 OPERATING INCOME As of December 31, 2002, operating income reached Ch$130,498 million, which represents a decrease of 7.8% in comparison to the previous year. Operating Revenues Operating revenues for the period reached Ch$863,149 million showing a decrease of 6.2% in relation to 2001. This decrease incorporates the effects of the 44.8% drop in the revenues of subsidiary Sonda, as well as the new contract with Publiguias. Isolating both these effects, operating income increased by 0.7% in 2002 in relation to the previous year. This variation was mainly originated by: (i) a 19.2% growth in revenues from corporate communications, and (ii) a 12.4% growth in revenues from mobile services. The above was compensated by: (i) a decrease of 5.1% in revenues from basic telephone service; (ii) a decrease of 8.8% in long-distance revenues, and (iii) a drop of 24.8% in revenues from public telephones. Revenues from Local Telephone Service: Revenues from Basic Telephone Service decreased by 5.1% in respect to the previous year. The variation experienced by this revenues is mainly derived from: (i) the 3.3% decrease in the level of fixed charge corresponding to the fixed monthly charge for network connections; (ii) revenues from variable charge which decreased by 6.6% in respect to the previous year, due to a reduction of 0.2% in the number of average lines in service, to the drop in traffic per line and due to a change in the composition of traffic between the local tranche and local measured service. Together with this, in May 2002 these rates were reduced by 1% in accordance to the current Decree. Consolidated revenues from access charges and interconnections decreased by 4.1%, mainly due to the drop in international and domestic interconnection traffic of 9.3% and 0.2%, respectively. Revenues from Directory Advertising decreased by 73.3%, due to the new contract signed between Telefonica CTC Chile and Publiguias as of the second half of 2001, which terminated the previous contract in advance. Long Distance: Revenues from these services decreased by 8.8% in comparison to 2001, due to a decrease in DLD and ILD revenues. These were influenced also by less revenues from international business. Billed DLD and ILD traffic shows a drop of 10.3% and an increase of 2.2%, respectively. It should be noted that in June of 2001, 188 Mundo Telefonica launched the Mundo Movil plan directed at cellular telephone users, consisting in a fixed monthly charge (Ch$ 2,990) and a single rate per minute for international long distance plus the variable cellular charge. Additionally, in November the Papa Contento plan was launched, which allows customers to control long distance calls and calls to cellular telephones. In June 2002 the Mundo a Llamada Local plan was launched in order to massify the use of ILD service with cellular and fixed line users. Mobile Communications: Total revenue from this business increased by 12.4% in relation to 2001, mainly due to the 22.5% growth experienced in the average mobile customer base, partially offset by the drop in average revenue per subscriber, and a higher level of prepaid customers in relation to 11 contract customers. It should be noted that these revenues include regulated calling party pays revenues for incoming traffic to mobile telephones. Corporate Communications: This business revenue shows a 19.2 % increase in respect to the previous year, due to the growth in services to corporations. Thus, ATM and IP links showed a growth of 8.5% and 31.0%, respectively. Additionally, the growth in Broad Band and ISP services contributed positively to the increased revenue from these services. Information Services: This revenue reflects a drop of 44.8%, basically explained by a decrease in revenues from Sonda subsidiaries abroad, and because as of September, due to the sale of part of the Company's participation in Sonda, they are no longer consolidated in Telefonica CTC Chile. Public Telephones: This revenue decreased by 24.8% in the year, mainly due to a decrease in the traffic generating less revenues from the use of this service. Other Operating Income: This revenue reached Ch$11,410 million in 2002, showing a drop of 17.9% in relation to 2001. This revenue incorporates, among others, revenue that the startup of subsidiaries T-Gestiona and Telemergencia are starting to generate. Operating Costs Operating costs of Ch$732,651 million for the period decreased by 5.9% compared to 2001. This decrease is mainly explained by a 21.3% decrease in salaries costs, reflecting the savings effect of the workforce reduction carried out by the Company in June 2001 and October 2002. Depreciation increased by 2.2% due mainly to the operation of the Corporation's new assets. Other operating costs dropped by 9.9% due to lower mobile telephone subscriber acquisition cost (SAC), information development costs, contracts with third parties and savings derived from the cost containment policy that the Company has implemented on a continuous and sustained basis during the last few years. Administration and selling costs dropped by 0.7% compared to the previous year, mainly due to salary savings related to the Company's personnel reduction and due to savings arising from the Company's cost containment policy. This decrease was partly compensated by the new outsourcing contract signed with IBM as of the fourth quarter of 2001. Previously these services were provided by the Company's information services business (Sonda). It should be noted that 2002 costs have been influenced by decreased costs due to the drop in revenues from Sonda and due to deconsolidation of that company in the Corporation's results as of September 2002. 3.2 NON-OPERATING INCOME Non-operating income obtained in 2002 shows a loss of Ch$120,699 million, figure that is similar to the non-operating income in 2001. The variation in non-operating income is broken down as follows: Financial income shows a drop of 10.9%, mainly due to lower national and international interest rates and less available funds, destined to decrease the Corporation's financial debt. 12 Financial expenses decreased by 15.4% in 2002, mainly associated to lower interest-bearing debt, renegotiation of rates for current loans and a drop in market interest rates. Other non-operating expenses decreased by 16.1%, derived mainly from lower expenses associated to the personnel reduction plan in 2002 in relation to expenses incurred for this same concept in 2001. Also influencing this decrease are fewer extraordinary charges arising from the mobile business. The above has been compensated in part by higher charges in 2002 due to the drop in the trading market value of the shares of Terra Networks. Monetary Correction recorded a loss of Ch$8,953 million, figure that partly reflects the effects of devaluation of the investments of Sonda in Argentina and Brazil. It should be noted, that a 100% hedge has been maintained for exchange rate variations and 81% for interest rate variation. The Company's exchange rate (peso-dollar) hedge policy in great measure was able to neutralize the effects of the exchange rate variations in 2001 and 2002. 3.3 NET RESULT FOR THE YEAR The net result showed a loss of Ch$17,680 million, in comparison with net income of Ch$4,235 million recorded the previous year. The result obtained in the year derives from the 7.8% decrease in operating income, the 0.1% increase in non-operating loss and from higher taxes of Ch$14,948 million recorded in 2002 compared to the previous year. During this year, net income was especially affected by an extraordinary charge of Ch$ 15,224 million derived from the restructuring plan at end of October 2002, as well as a decrease of Ch$ 7,567 million in the value of Terra Networks shares. 4. RESULTS BY BUSINESS AREAS Local Telephone Business: Presented a net loss of Ch$52,162 million in the year, situation that represents an increase of Ch$33,668 million in the loss with respect to the previous year. Operating income decreased by 33.6% due in part to lower revenues from changes in the contract with Publiguias. Long Distance Business: Presents net income of Ch$19,397 million, a 37.9% decrease in relation to the previous year. This variation is composed of a drop of 23.3% in operating income and an increase of 31.5% in non-operating loss. Corporate Communications Business: This business contributed net income of Ch$16,793 million in the year, whereas in 2001 it recorded net income of Ch$11,660 million. The growth derives from increased revenues attributable to the growth in services and customers, translating into a better operating margin for this business. Mobile Business: The mobile business contributed net income of Ch$3,899 million in 2002, which allows it to record, after a few years, positive results. The contribution to this result is derived from both operating and non-operating growth. Other Businesses: Composed mainly of Sonda S.A. information services, and public telephone services and installations and maintenance of basic telephone equipment. These businesses as a whole generated a net loss of Ch$5,608 million and operating income of Ch $5,507 million for the year, 13 whereas in the previous year they recorded net income of Ch $6,354 million and operating income of Ch$23.205 million. The following table shows the contribution of each business area to the corporate results: 14 INCOME AND COSTS BY BUSINESS AS OF DECEMBER 31, 2001 AND 2002 (Figures in millions of pesos as of 31.12.02) ----------------------------------------------------------------------------------------------------------------------------------- Local Corporate Long Distance Mobile Others Communications Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 2001 2002 2001 2002 2001 2002 2001 2002 2001 2002 ----------------------------------------------------------------------------------------------------------------------------------- Operating Revenue 459,583 428,512 99,049 131,814 114,416 99,856 192,408 215,483 215,538 138,147 Revenue 412,468 379,470 72,335 86,206 81,901 74,732 184,172 206,932 169,158 115,809 Intercompany Transfers 47,115 49,042 26,714 45,609 32,515 25,124 8,236 8,552 46,380 22,337 Operating Expenses (386,872) (380,205) (86,088) (111,325) (68,974) (65,024) (205,480) (198,927) (192,333) (132,640) Salaries (65,190) (54,900) (16,257) (14,519) (6,659) (6,427) (13,642) (13,597) (40,615) (25,532) Depreciation (165,254) (172,570) (10,236) (11,055) (8,979) (9,796) (44,407) (50,996) (26,383) (16,947) Goods and Services (81,871) (93,206) (28,502) (36,325) (39,571) (35,976) (136,467) (124,538) (94,526) (66,265) Intercompany Transfers (74,557) (59,529) (31,092) (49,426) (13,764) (12,824) (10,964) (9,796) (30,810) (23,896) Operating Income 72,711 48,307 12,961 20,490 45,443 34,832 (13,072) 16,556 23,205 5,507 Non-operating Income and Expenses Financial Expenses (93,443) (81,947) (272) (456) (528) (221) 1,643 2,205 (3,655) (1,054) Other Income and Expenses (6,767) (24,524) (390) (1,108) (5,884) (8,141) (9,509) (1,836) (1,735) (3,616) Intercompany Transfers 16,882 23,101 (971) 268 (1,868) (2,528) (12,337) (12,369) (1,478) (3,665) Non-operating Income (83,328) (83,370) (1,632) (1,297) (8,280) (10,890) (20,204) (12,000) (6,868) (8,336) ----------------------------------------------------------------------------------------------------------------------------------- EBITDA (*) 248,081 219,454 21,836 30,703 46,670 33,959 9,489 53,347 46,374 15,172 ----------------------------------------------------------------------------------------------------------------------------------- Taxes and Others (7,878) (17,099) 331 (2,399) (5,905) (4,545) 6,733 (658) (9,982) (2,779) Income After Taxes (18,494) (52,162) 11,660 16,793 31,258 19,397 (26,543) 3,899 6,354 (5,608) -----------------------------------------------------------------------------------------------------------------------------------
(*) EBITDA: Earnings before interest, taxes, depreciation, amortization and extraordinary items. GRAPH OF NET INCOME (LOSS) BY BUSINESS (As of December 31 of each year) (Figures in millions of pesos as of 12.31.02 [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIALS.] Corporate Local Communications Long Distance Mobile Others Dec 2001 (18,494) 11,660 31,258 (26,543) 6,354 Dec 2002 (52,162) 16,793 19,397 3,899 (5,608) 15 5. STATEMENT OF CASH FLOWS TABLE No. 4 CONSOLIDATED CASH FLOWS (Figures in millions of pesos as of 31.12.2002) ======================================================================================================= DESCRIPTION JAN - DEC JAN - DEC VARIATION 2001 2002 MCh$ % ------------------------------------------------------------------------------------------------------- Cash flows from operating activities 356,286 324,595 (31,691) -8.9% ------------------------------------------------------------------------------------------------------- Cash flows from financing activities (248,144) (253,915) (5,771) 2.3% ------------------------------------------------------------------------------------------------------- Cash flows from investment activities (151,928) (134,417) 17,511 -11.5% ------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash (5,502) (2,244) 3,258 -59.2% equivalents ------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents for (49,289) (65,982) (16,693) 33.9% the year =======================================================================================================
The Ch$65,892 million negative variation in cash flows for 2002 compared to the Ch$49,289 million negative variation in 2001, is mainly due to lower cash flows from operating activities, together with increased cash flows for amortization and prepayments destined to decrease the interest-bearing debt of Telefonica CTC Chile during the period from January to December 2002 in comparison to the same period in the previous year. The decrease in cash flows was compensated in part by a decrease in cash flows destined to investment activities. 16 6. FINANCIAL INDICATORS TABLE No. 5 CONSOLIDATED FINANCIAL INDICATORS ----------------------------------------------------------------------------------------------------- DESCRIPTION JAN - DEC JAN - DEC 2001 2002 ----------------------------------------------------------------------------------------------------- LIQUIDITY RATIO Current Liquidity 1.34 1.18 ----------------- (Current Assets/Current Liabilities) Acid Ratio 0.19 0.25 ---------- (Most liquid assets/Current Liabilities) ----------------------------------------------------------------------------------------------------- DEBT RATIOS Leverage Ratio -------------- (Total Liabilities/Shareholders' Equity) 1.30 1.09 Long-term Debt Ratio -------------------- (Long-term Liabilities/Total Liabilities) 0.72 0.73 Interest Coverage ----------------- (Income Before Taxes and Interest / Financial Expenses) 1.02 0.92 ----------------------------------------------------------------------------------------------------- PROFITABILITY RATIOS AND NET INCOME PER SHARE Operating Margin 15.4% 15.1% ---------------- (Operating Income/Operating Revenues) Operating Income Return 6.4% 6.1% ----------------------- (Operating Income/Net Property, Plant and Equipment (1)) Net Income per Share Ch$ 4.4 -Ch$18.5 -------------------- (Net Income / Amount of average paid shares each year) Return on Equity 0.3% -1.4% ----------------- (Net Result/Average shareholders' equity) Return on Assets 0.14% -0.61% ----------------- (Net Result/Average assets) Operating Assets Yield 0.20% -0.87% ----------------------- (Net Result/Average operating assets (2)) Dividends Return N.A. 0.1% ---------------- (Dividends paid (3)/ Market Price per Share) ----------------------------------------------------------------------------------------------------- ACTIVITY INDICATORS Total Assets MCh$ 3,090,301 MCh$ 2,688,373 ------------ Sale of Assets MCh$ 4,888 MCh$ 21,576 -------------- Investments in other companies and property, plant and equipment MCh$ 201,503 MCh$ 146,376 ---------------------------------------------------------------- Inventory Turnover 2.5 2.6 ------------------ (Cost of Sales/Average Inventory) Inventory Permanence 143 140 -------------------- (Average Inventory/Cost of sales times 360 days) =====================================================================================================
(1) Figures at the beginning of the year, restated. (2) Property, plant and equipment are considered operating assets (3) Telefonica CTC Chile did not pay any dividends in 2001 17 From the previous table, we emphasize the following: The decrease in the liquidity ratio derives from a better working capital position given by a decrease in current assets (accounts receivable and financial investments) and lower levels of accounts payable and other current liabilities. Likewise, the debt ratio decreased due to lower levels of financial liabilities in relation to January - December 2001. 7. EXPLANATION OF THE MAIN DIFFERENCES BETWEEN MARKET OR ECONOMIC VALUE AND THE BOOK VALUE OF THE COMPANY'S ASSETS Due to market inaccuracies regarding the assets of the sector, there is no economic or market value that can be compared to the respective accounting values. However, there are certain buildings with a book value of zero or close to zero, which have a market value, which compared to the book value is not significant in respect to the Company's assets taken as a whole. In relation to other assets, such as marketable securities (shares and promissory notes) with a referential market value, the corresponding provisions have been set up, when the market value is less than the book value. 8. REGULATORY ISSUES Fixed Telephony Tariff Decree Decree No. 187 is in effect as of May 5, 1999. It establishes maximum rates for Telefonica CTC Chile for local telephone services and interconnection services for a period of five years, which expires on May 4, 2004. The main services subject to regulation of rates are: Telephone Line Service (formerly Fixed Charge), Local Measured Service, Local Tranche, Access Charges, Communications Service from Public Telephones and Network Unbundling Services. Mobile Telephone Tariff Decree Decree No. 97 is in effect as of February 12, 1999. It establishes maximum rates for Telefonica Movil for interconnection services, including Mobile Access Charge, for a period of five years, which expires on February 12, 2004. Since the expiration of the five-year period of current regulated rates is nearing, on January 10, 2003, Telefonica Movil presented its Technical Economic Basis Proposal to the Undersecretary of Telecommunications, beginning the process of setting the rates for the 2004-2009 period. Network Unbundling and Other Services Tariff Decree No. 187 dated 1999 established rates for the following unbunbled network services: last mile, connection of last mile, housing in local switches, adaptation of pipes and chambers for the installation of cables of other telecommunications operators, point-to-point connection between central switches, DSL facilities and resale of lines. 18 Based on the regulation, Telefonica CTC Chile launched its commercial offer for these services. At 2002 year-end, 13 contracts with 7 companies have been signed in light of this offer providing unbundled network services. (see www.ctc.cl/desagregacion). Request to Deregulate Local Rates to the Public On January 18, 2001, Telefonica CTC Chile presented a request to deregulate local telephone rates to the public to the Antitrust Resolutive Commission (Comision Resolutiva Antimonopolios). According to Article 29 of the General Telecommunications Law, the Resolutive Commission is exclusively authorized to qualify telecommunications services subject to tariff regulation; qualification that the Commission itself must modify when they consider that the conditions are present to tariff liberalization. On July 11 the Antitrust Resolutive Commission (Comision Resolutiva Antimonopolio) in Resolution No. 611, rejected the request for liberalization presented by Telefonica CTC Chile declaring that the existing market conditions still do not merit such liberty throughout the country. Notwithstanding, they assigned the National Economic Supervisor (Fiscal Nacional Economico) to maintain special vigilance on the market's evolution to detect in a timely manner changes that merit establishing freedom of rates in certain geographic areas for certain services. Additionally they resolved that Telefonica CTC Chile can request from the authorities administrative acts complementary to Tariff Decree No. 187 allowing differentiation of rates based on costs, within each rate area, for user categories based on volume. Based on this possibility, during the second half of 2001 the Company presented a proposal to Subtel for alternate tariff plans by customer category. The Ministries of Transport and Telecommunications and Economy, Development and Reconstruction approved the structure, rate levels and rate indexation formulas of the Alternative Rate Plans for Very High Usage, and High Usage, in Decree No. 455, dated 2002. Additionally, Subtel authorized the use of the prepayment method for telephone services in low income segments. Request to Set Symmetric and Simultaneous Access Charges On March 30, 2001, Telefonica CTC Chile filed a petition with the Resolutive Commission requesting a review of the access charges regime for local companies. This petition was based on: (i) competitive distortions introduced by the asymmetries prevailing in the market between the access charges of local companies, and (ii) the fact that as of that date only Telefonica CTC Chile, Telefonica del Sur and Telefonica Coyhaique had fixed access charges. Telefonica CTC Chile requested that local company access charges should be symmetrical within the same area and that they should be simultaneously set for all companies. On April 3, 2001 the Resolutive Commission declared itself incompetent resolving that Telefonica CTC Chile should go before the corresponding authority, the Undersecretary of Telecommunications. On April 10, 2001, the Company presented the request to set symmetrical and simultaneous access rates to the Undersecretary of Telecommunications, which to date has not responded. However, the Ministries set the rates for access charges and other interconnection services for VTR Telefonica S.A. establishing maximum access charges higher than those set for Telefonica CTC Chile. Currently, the process of setting access charges for Telesat S.A. and CMET SACI is underway. 19 Request for Administrative Action to Correct Decree No. 187 On October 31, 2001, Telefonica CTC Chile filed an administrative motion for reconsideration before the Ministries of Transport and Telecommunications and Economy, Development and Reconstruction, to obtain correction of the following errors in Decree No. 187, dated 1999: mathematical error in determining the Telephone Line Service rate; illegal application of the depreciation method to determine tax cost; failure to consider the cost of telephone directories; reduction of investments due to efficient location of switching centers; application of the same non-payment rate for local telephone service as for calling party pays service; and failure to scale the rates for access charges and local tranche. On November 16, 2001, the Ministries requested from the General Controller of the Republic a formal prior pronouncement regarding the lawfulness and need to correct the errors - should they be proven, based on the corresponding technical - economic and legal criteria, and the administrative acts that should be dictated for that purpose. The response from the General Controller dated December 10, 2001, stated that the Ministries had the right and duty to rectify Decree No. 187, subject to the following conditions: - That there are legal defects or that it was based on incorrect estimates. - That the defects or irregularities contained in it must be of a magnitude or relevance such that they justify the invalidation and corresponding rectification of the decree. - That these defects or irregularities must be evidenced in order that there is no doubt regarding their existence. For this purpose, the Administration must undertake a full study of the information. - That eventual rectification cannot affect the rights that have been previously correctly incorporated to the equity of third parties in good faith. - Such rectification would have to be made in a decree subject to review and approval. By joint official letter the Ministries responded to the request to correct the errors in Decree No. 187, stating that having evaluated in detail, only the feasibility and timing of the petition, considering the circumstances and the prudence that must guide public acts, they had decided to reject the request for rectification of Decree No. 187 by administrative means. Lawsuit Against the State of Chile Upon extinguishing the administrative instances to correct the illegalities involved in the tariff setting, Telefonica CTC Chile S.A. filed a lawsuit for damages against the State of Chile. The lawsuit for US$274 million, plus readjustments and interest, covers past and future damages until May 2004, resulting from 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 State. Once the answer from the State had been received, as well as the answer and rejoinder with which the discussion period ends, the Court dictated the writ of evidence, setting the pertinent, substantial and disputed evidence, which initiated the presentation of evidence stage, in which witnesses for the plaintiff and for the State have testified. Assignment of Frequencies in 1,900 MHz for Mobile Telephony On May 31, 2001, four companies, among them Telefonica Movil, presented offers to participate in the 20 Public Tender to grant three concessions to provide mobile telephone service to the public on the 1,900 MHz band. A tie was declared between Telefonica Movil, Bellsouth and Smartcom for the three frequencies put out to tender, since the difference was less than 2 points. On September 6, 2001 Subtel issued the report on observations made by the bidders involved in the Public Tender, excluding Smartcom S.A. for non compliance with the Public Tender Documents. Smartcom appealed to the General Controller of the Republic to void the exclusion from the Public Tender decreed by the Undersecretary of Telecommunications for non-compliance with the Tender Documents. Subsequently the General Controller of the Republic voided the exclusion from the Public Tender, ordering Subtel to incorporate Smartcom in the process. Due to the above, Bellsouth filed a protective petition against the General Controller of the Republic before the Santiago Court of Appeals. Telefonica Movil made itself a party to this petition. The Court of Appeals accepted the protective petition presented by Bellsouth, voiding the resolution of the General Controller of the Republic who ordered the Undersecretary of Telecommunications to incorporate Smartcom in the public tender to award three 1900 MHz mobile telephone service concessions. Smartcom and the State Defense Council (Consejo de Defensa del Estado), appealed before the Supreme Court against the sentence of the Court of Appeals. Telefonica Movil S.A. became a party in the process before the Supreme Court. The Supreme Court ratified the verdict of the Court of Appeals, which excluded Smartcom from the Tender. On July 18, the tender for the three 10 MHz frequencies on the 1,900 MHz band took place. Telefonica Movil Chile was awarded two frequencies (20 MHz) for a total sum of UF 544,521 equivalent to US$12.8 million. 9. ANALYSIS OF MARKETS, COMPETITION AND RELATIVE PARTICIPATION The Company estimates that sales in the telecommunications sector grew 4% during 2002 reaching some US$2,540 million, without including Pay TV. The growth was driven primarily by the mobile, data and Internet business. The growth in the traditional fixed-network voice communications business has slowed as consumers, unlike in previous years, are allocating an increasing proportion of their budget to mobile and Internet services. These changes have forced companies to adjust to the new market realities by refocusing resources and searching for new value-added businesses in which their current infrastructure can be used as leverage. Therefore, 2002 was characterized by significant restructuring on the part of the major operators, by a rationalization of investment, by changes in financing structure, and by the rollout of new technologies. Local Telephone Service This market contemplates providing local telephone services inside the primary areas, interconnection services with other telecommunications companies and other unregulated local services. Incorporation to this market is regulated by concessions awarded by the Undersecretary of Telecommunications of the Ministry of Transport and Telecommunications (Subtel). 21 Currently eleven companies with twelve brands participate in this market, including rural operators. The penetration rate per 100 inhabitants as of December 2002 was in the order of 22.6, slightly lower than in December of 2001 (22.7 lines per 100 inhabitants). Telefonica CTC Chile had approximately 76% of fixed telephone lines as of December 2002. On August 21, 1999, Decree No. 187 was published in the Official Gazette. This decree was drafted jointly by the Ministries of Transport and Telecommunications and of Economy, Development and Reconstruction and it sets rates for the regulated services of Telefonica CTC Chile during the five-year period from 1999-2004. The Decree had to be applied retroactively as of May 4, 1999. In Resolution No. 611, the Antitrust Resolutive Commission established the possibility for Telefonica CTC Chile to offer alternative tariff plans to Decree No. 187, oriented toward volume discounts, and to request rate freedom in certain geographic areas. On September 4, 2001, Telefonica CTC Chile presented a proposal for alternative tariff plans (for high traffic consumption), which were approved in October 2002. On May 24, 2002, Telefonica CTC Chile also obtained authorization from Subtel to commercialize prepaid telephone service for low income segments, which was commercially implemented in October 2002. Of the five companies that were awarded the bid to operate fixed wireless telephone service concessions in the 3,400 to 3,700 MHz Wireless Local Loop (WLL), only Entel (licenses: one national and 13 regional) is developing its projects. Telefonica del Sur (which was awarded licenses in the VIII and X Regions) informed Subtel it was interrupting the project, due to extenuating circumstances. Telefonica CTC Chile does not currently hold a license to operate with WLL technology. Long Distance This market contemplates communications services between primary areas (DLD) and international communications (ILD), also known as intermediate services. On March 9, 1994 Law No. 19,302 came into effect. It establishes the application of a multicarrier system for domestic and international long distance. This law allows local telephone operators to participate in the long distance market through an independent subsidiary subject to a series of requirements. In this market there are currently 14 companies operating with 17 carrier codes. Traffic in the DLD and ILD market, through fixed telephone lines recorded a drop in 2002 compared to 2001 estimated at 9.5% and 1.9% respectively. Telefonica CTC Chile, through its subsidiaries Telefonica Mundo 188 and Globus 120, reached a market share of 39% in domestic long distance and 31% in international outgoing long distance at the end of 2002. Corporate Communications This business area contemplates providing circuit and data services (Datared, E1, ATM, Frame Relay), IP network solutions, Hosting, ASP and advanced telecommunications solutions for companies and Internet service providers (ISPs). Likewise includes commercialization of advanced equipment (multiple lines and PABx, among others). 22 In October 2002 the management of Telefonica Empresas was refocused toward the company and corporate segment. In this business Telefonica CTC Chile competes with 8 companies in the private service area and with at least 10 companies in the hosting business, reaching a market share of approximately 49% of revenues, including sale of advanced equipment to companies. Mobile Communications Provides mobile communication services (cellular telephones, pagers, trunking and wireless data transmission). There are currently four mobile telephone operators and one smaller operator of mobile satellite communications. Telefonica CTC Chile, through its subsidiary Telefonica Movil, has approximately 30.4% of a total 6.1 million estimated subscribers as of December 2002. Of these companies, two operate with three linceses of 30 MHz each in the 1,900 MHz frequency band. Each of these was awarded in tenders in 1998. Two companies operate with two lincenses in the 800 MHz band, one of which is Telefonica Movil. Regarding the tender for PCS mobile spectrum in the 1,900 MHz band (3 bands of 10 MHz each), once the Supreme Court verdict to exclude Smartcom was handed down, the Ministry of Transport and Telecommunications called on Telefonica Movil S.A. and Bellsouth to proceed to bid on the three concessions on July 18, 2002. On July 18 the three 10 MHz frequencies on the 1,900 MHz band were awarded. Telefonica Movil Chile was awarded two frequencies (20 MHz) for a total sum of UF 544,521 equivalent to US$12.8 million. Pay TV The pay television market is composed of two main cable TV competitors with approximately 80% of the pay TV market. Two satellite TV operators and approximately 20 cable TV operators in specific areas, jointly have the remaining 20% of the market share. On July 3, 2000, a contract was signed for the sale by Telefonica CTC Chile of MetropolisIntercom to Cordillera Comunicaciones S.A. once the transaction was authorized by the Preventive Antitrust Commission (Comision Preventiva Antimonopolios). The amount of the transaction was US$270 million for 40% of Metropolis Intercom, 100% of its cable television network (except the cable TV network in the IV and VIII Regions) and 100% of Compania de Telecomunicaciones de Chile Plataforma Tecnica Red Multimedia. In addition the arbitration processes between both companies ended through judicial agreement. In January 2002 a merger agreement was achieved between Liberty Media and United Global Com (UCG), companies that participate in the Chilean operations of Metropolis Intercom and VTR, respectively. Internet Access In this market there are currently approximately 33 ISP's operating effectively, with two of these concentrating 80% of traffic. As of December 2002 it is estimated that the penetration rate per home is 19.6%; an important growth with respect to the 14.5% estimated at the end of 2001. IP traffic (switched) in 2002 in the network of Telefonica CTC Chile, reached in the order of 6,580 million minutes, with a growth of 4% compared to 2001. 23 Telefonica CTC Chile focuses on Internet access for companies through its ISP TIE, segment in which it holds a market share of close to 30%, and has commercial agreements with ISP Terra. During 2002, Telefonica CTC Chile made an intensive deployment of internet access through ADSL broad band, directly to the customer and through a wholesale model in the ISP industry. At the end of December 2002 ADSL connections in the service of Telefonica CTC Chile reached 54,163 with a growth of 266% compared to December 2001, thus achieving a market share of 30%. Other Businesses Comprises the Public Telephone market, in which Telefonica CTC Chile participates through its subsidiary CTC Equipos. There are seven nationwide companies, out of which CTC Equipos as of December 2002 has approximately a 23% market share considering its own public telephones. On January 11, 1999, Telefonica CTC Chile completed the acquisition of 60% of Sonda S.A. The agreement included the commitment of Sonda S.A. to purchase 100% of the information assets of Telefonica CTC Chile, which occurred in the first quarter of 1999. On October 12, 2001, Telefonica CTC Chile signed a new shareholders' agreement with Inversiones Pacifico II Ltda. and Inversiones Atlantico Ltda. in which it grants each of these companies a call option for its 60% stake in Sonda S.A. maturing in June 2005. Additionally the outsourcing and rental contracts between Sonda and Telefonica CTC Chile were terminated and a contract was signed by virtue of which Telefonica CTC Chile repurchases, at book value the assets that were sold to Sonda S.A. in January 1999. On September 26, 2002, Telefonica CTC Chile S.A. through its subsidiary Telefonica Empresas signed a sales contract for 25% ownership of Sonda S.A. for Ch$27,921 million (approximately US$37.5 million), paid in cash. Through this agreement Inversiones Pacifico II Limitada acquired 11% of Sonda and Inversiones Santa Isabel Limitada acquired 14%. Both companies are related to Mr. Andres Navarro H. Thus, company control is transferred to Andres Navarro, while Telefonica CTC Chile keeps the remaining 35% ownership through its subsidiary Telefonica Empresas. During the third quarter of 2001 a new contract was signed between Telefonica CTC Chile and Publiguias, which terminated the existing contract in advance. This new agreement mainly consists of a billing and collections contract for which Telefonica CTC Chile receives a percentage of revenues generated by the sale of advertising in the Yellow and White Pages. Additionally, Publiguias shall pay a charge per customer for permanent updating of the database of Telefonica CTC Chile. On November 20, 2001 a subsidiary was formed to commercialize and install alarm systems and video cameras for residences and companies, providing monitoring and surveillance services and any other service relating to the above. As of December 2002 it is estimated that Telefonica CTC Chile has a market share of 24% in this service. 10. ANALYSIS OF MARKET RISK Financial Risk Coverage 24 Due to the size of the Company in comparison to the banking and capital markets in Chile, the Company obtains a large part of its financing abroad. In this sense it has obtained financing abroad denominated mainly in dollars and euros and in certain cases at a floating interest rate. For this reason the Company faces two types of financial risks, the risk of exchange rate fluctuations and the risk of interest rate fluctuations. Financial risk due to foreign currency fluctuations The Company has exchange rate coverage instruments, the purpose of which is to reduce the negative impact of dollar and euro fluctuations on its results. The percentage of interest-bearing debt exposure is defined and continuously reviewed, basically considering the volatility of the exchange rate, its trend, and the cost and availability of hedging instruments for different terms. The main hedging instruments used are dollar/UF and dollar/peso forwards contracts. As of December 31, 2002, the interest-bearing debt in original currency expressed in dollars was US$1,550.1 million, including US$1,119.8 million of financial liabilities in dollars, US$265.0 million in debt in "unidades de fomento" (inflation indexed chilean currency unit) and US$165.2 million of debt in euros. In this manner US$1.285 million corresponded to debt exposed to foreign currencies and therefore directly or indirectly exposed to variations in the dollar. Simultaneously, the Company had dollar/UF forward contracts and assets in dollars that resulted, as of December 31, 2002, in a coverage of close to 100% of outstanding debt. Financial risk due to floating interest rate fluctuations The policy for hedging interest rates seeks to reduce the negative impact on financial expenses due to interest rate increases. As of December 31, 2002, the Company had debts with variable Libor, Euro Libor and TAB interest rates mainly for syndicated loans. To protect the Company from increases in the variable (floating) interest rates, derivative financial instruments have been used, particularly "collars" (which protect the Libor rate) and variable to fixed interest rate "swaps", which limit within a range the future fluctuations of interest rates. This has allowed the Company to end 2002 with an exposure to floating interest rates of 19.4% of total interest-bearing debt in original currency.