-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K7YLJfHHPOdWys1CeQV9gbgTtCgirCfZ3qlzPBX/YlPjFsO7Tnejxth1uX0Tg5Sb mBVeyejaX/I2rfknl/qt+g== 0001125282-03-002207.txt : 20030312 0001125282-03-002207.hdr.sgml : 20030312 20030312120141 ACCESSION NUMBER: 0001125282-03-002207 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030311 FILED AS OF DATE: 20030312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELECOMMUNICATIONS CO OF CHILE CENTRAL INDEX KEY: 0000863614 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10579 FILM NUMBER: 03600407 BUSINESS ADDRESS: STREET 1: PROVIDENCIA NO 111 STREET 2: PISO 2 PROVIDENCIA CITY: SANTIAGO CHILE STATE: F3 ZIP: 00000 MAIL ADDRESS: STREET 1: CT CORPORATION SYSTEM STREET 2: 1633 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10069 FORMER COMPANY: FORMER CONFORMED NAME: TELEPHONE COMPANY OF CHILE DATE OF NAME CHANGE: 19941027 6-K 1 b323509_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 March, 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 Telecomunicaciones de Chile S.A. - 2002 Annual Report 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. [GRAPHIC OMITTED] 2002 Annual Report Telefonica CTC Chile_1 2_Telefonica CTC Chile 2002 Annual Report Table of Contents 5_Highlights 7_Chairman's Letter to the Shareholders 12_History of the Company 16_Economic Environment and Telecommunications Industry 17_Economic Environment 18_Telecommunications Sector 20_Regulatory Framework 24_Corporate and Business Strategy 28_The Company 29_Business Areas 37_Analysis of Consolidated Results 39_Investment and Financing 41_Property, Suppliers, Logistics, and Insurance 43_Risk Factors 44_Shareholder Information 45_Composition of Equity Capital 45_Shareholders' Meetings 46_Principal Shareholders 49_Share Price Performance 50_2002 Dividend Distribution Policy 51_Dividend Information 51_2002 Investment and Financing Policy 56_Management Organization and Human Resources 57_Board of Directors 62_Corporate Governance 64_Senior Executives 66_Human Resources 68_Additional Information 70_Information of Subsidiaries and Affiliates 79_Material Events 82_Report on the Financial Statements 84_Consolidated Financial Statements 138_Individual Financial Statements 179_Summarized Financial Statements of Subsidiaries 198_Financial Review and Exhibits With the exception of the Financial Statements and associated notes, the information contained herein has not been audited. 2002 Annual Report Telefonica CTC Chile_3 [TELEFONICA LOGO] [GRAPHIC OMITTED] Operating revenues (1) EBITDA (1) (as of 12/31/02) (as of 12/31/02) millions of Ch$ millions of Ch$ 863,149 391,533 920,035 396,981 899,054 313,251 945,398 357,683 863,170 462,895 Mobile customers Lines per employee (as of 12/31/02) (as of 12/31/02) thousands of customers lines 1,949.3 1,058 1,570.1 845 1,224.5 582 1,153.8 459 554.2 383 4_Telefonica CTC Chile 2002 Annual Report Highlights
As of December 31, Volume Statistics 1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Lines in service 2,649,786 2,592,397 2,700,536 2,723,310 2,686,695 Average lines in service 2,531,848 2,655,157 2,633,278 2,736,633 2,732,208 Line density (1) 17.6 17.0 17.5 17.4 17.1 Connections (lines) 464,885 315,927 288,483 330,619 340,419 Installed capacity (lines) (2) 2,772,641 2,792,663 2,990,941 3,019,416 3,023,541 Local Traffic (in millions of minutes) (3) 19,095 19,323 16,841 16,410 15,900 Access charge traffic (millions of minutes) (3) 6,240 6,147 6,493 7,251 6,788 DLD traffic (millions of minutes) (4) 921 836 712 799 717 Outgoing ILD traffic (millions of minutes) (4) 54 54 56 63 66 ADSLs in service n.a. n.a. 279 14,808 54,163 Pay-phones (5) 11,343 12,853 12,792 12,880 11,834 Total mobile telephony customers 554,225 1,153,794 1,224,520 1,570,087 1,849,283 Proportion of prepaid mobile customers (%) 43 63 71 75 76 DataRed (point-to-point links) 13,960 15,951 17,899 18,467 13,496 Frame Relay (points) 1,704 3,285 4,394 6,012 5,215 ATM (points) 492 717 1,111 1,585 1,719 Dedicated access to the Internet 256 466 1,040 1,652 1,890 Total personnel 8,985 9,933 9,250 7,720 4,571 Telefonica CTC Chile's personnel 6,917 5,649 4,639 3,223 2,540 Subsidiaries' personnel 2,068 4,284 4,611 4,497 2,031 Quality and Efficiency Indicators Average waiting period for line installations (6) 35.4 15.4 4.3 5.7 4.4 (days between application and connection) Defects per line (annual average) (6) 0.52 0.41 0.25 0.25 0.35 Defects repaired within 24 hours (average%) (6) 71.87 75.16 72.45 62.43 60.14 Defects repaired within 72 hours (average%) (6) 93.76 95.84 96.39 92.16 89.60 Lines per employee 383 459 582 845 1,058 Consolidated Financial Data (in millions of US$ as of Dec-02) Operating Revenues 1,201 1,316 1,251 1,280 1,201 EBITDA (7) 644 498 443 552 545 Operating Income 374 176 96 197 182 Net income 207 -78 -168 6 -25 Long-term debt 1,612 2,065 1,728 1,749 1,421 Total assets 4,363 4,730 4,412 4,300 3,741 Capital Expenditures (millions of nominal US$) 615 589 349 291 204 Market capitalization (millions of nominal US$) 4,739 4,211 3,156 3,116 2,215 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Telefonica CTC Chiles lines per 100 habitants (2) Lines installed for 2000, 2001 and 2002, include links and ISDN lines (3) The per second billing system was implemented as of February 2000, information for 1998-1999 is shown in rounded minutes (4) Long distance traffic originated by 188 Telefonica Mundo and Globus 120 (5) Community lines are not included (6) During 2002, quality indicators were affected by the strike carried out in July 2002. (7) EBITDA = Operating income + Depreciation 2002 Annual Report Telefonica CTC Chile_5 Bruno Philippi Irarrazabal chairman of Telefonica CTC Chile [GRAPHIC OMITTED] 6_Telefonica CTC Chile 2002 Annual Report Chairman's Letter to the Shareholders Dear Shareholders, For technology and telecommunications companies, 2002 was a difficult year. The slow pace of global economic growth affected even those countries known for their dynamism and strength. Chile was not spared. While our country clearly stands out in the region, our growth has slowed with respect to the preceding decade. In this context, we in the telecommunications field have had to make some adjustments. In addition to the circumstances affecting the industry as a whole, the Company continues to operate in an adverse regulatory environment created by Tariff Decree No. 187. Due to the low profitability resulting from this decree, in the local telephony segment, Telefonica CTC Chile has been forced to scale down its capital expenditure plans in this business. Between 1995 and 1999, average annual investment was US$640 million, of which 45% was destined to fixed telephony. For the 2000-2003 period, we estimate an average annual investment on the order of US$270 million, of which less than 20% will be allotted to fixed lines. The cutbacks in planned investment in fixed telephony have also affected nationwide service penetration, which at year-end 2002 stands at 23 lines per 100 inhabitants, but has experienced very slow growth, particularly in the past three years. In our attempts to resolve this issue, we exhausted all possible administrative venues. In each case, although the authorities did not reject the legal, technical and economic arguments submitted by the Company, they cited diverse considerations not directly related to the Company's requests as grounds for not modifying the Tariff Decree. Consequently, the Board of Directors of the Company was forced in March 2002 to bring legal action against the State of Chile in order to enforce the right of the Company and its shareholders to be compensated for damages derived from the application of this Tariff Decree. The total amount of damages being sought was estimated at US$274 million. In the area of labor relations, through the collective bargaining process that was conducted in June the Company aimed to simplify and make more flexible the existing labor contracts and adjust them to reflect market conditions and the actual economic environment. Of the Company's employees, 43% agreed to adjust their contracts. Nevertheless, 3,445 employees, grouped under an alliance of labor unions, elected not to negotiate and decided to implement a legal strike that resulted in damages for customers, due to service interruptions and network disruptions. Lasting 28 days, the strike came to an end when the labor unions acted to postpone the dispute until December 2003 pursuant to article 369 of the Labor Code. Despite the significant number of employees involved in this strike, Telefonica CTC Chile continued to operate at adequate efficiency levels as a result of contingency plans implemented in all the areas of the Company. 2002 Annual Report Telefonica CTC Chile_7 The rapid changes taking place in the industry led to the restructuring announced in October 2002, which involved the reduction of 1,070 employees of both the parent company and subsidiaries. Beyond the adjustment in personnel, the aim of this restructuring process is to revitalize the Company's operations. In addition to being the country's leading telecommunications company, we seek to become a company that, by focusing on customers and their needs and by being innovative and capable of generating a multiplicity of solutions and services, can make a major contribution to the development of Chile. Thus, our five business areas have been reorganized into three major units on the basis of customer categories: Consumer and Small Business Communications, focused on providing all services required by households and by small and medium-sized companies; Corporate Communications, addressing all the needs of corporate customers; and Mobile Communications, aimed at mobility and portability of wireless technologies. These changes are designed to build a new kind of relationship with each of our various types of customers and make optimal use of our strengths, such as our widespread geographical commercial presence and powerful nationwide network. The strategy of Telefonica CTC Chile during the past years has been to concentrate exclusively on the telecommunications business in Chile. In this context, two events are worth noting. The first is the sale of a 25% stake in Sonda, an information technology provider, to its original founder in order to focus on investing in assets that are essential for the development of our core businesses. The second is the sale of our cable television business in mid-2000, when we decided to concentrate all our efforts on broadband development through ADSL, thus taking advantage of our extensive fixed network infrastructure, which covers the entire country and includes approximately 2.7 million lines in service. A major event for our Company, in 2002, was the acquisition by our subsidiary Telefonica Movil of two of the three licenses to operate nationwide PCS networks. The total cost of the licenses, close to US$13 million for 20 MHz spectrum, is very reasonable when compared to the figures paid in other mobile spectrum bidding processes elsewhere in the world. The build out of a more modern mobile communications network, with GSM technology, provides our Company a significant opportunity to satisfy customer demand and offer new and improved services. We estimate that this project will require an initial investment of roughly US$150 million between 2002-2004. Regarding Telefonica CTC Chile's financial results, operating revenues decreased 6.2% in 2002 as compared to 2001, amounting to US$1,201 million, mainly due to lower revenues from the fixed telephony and long distance businesses. This decrease was offset by the continuous growth of the mobile and corporate communications businesses, as well as by the Company's efforts aimed at commercial innovation, which has led to the introduction of many new products and services. Additionally, operating revenues were impacted by the deconsolidation of Sonda as of September 2002 and lower revenues from the new contract subscribed with Publiguias, the directory advertising business, in August 2001. Excluding these two effects, total revenues increased 0.7% in 2002 as compared to 2001 On the other hand, the 5.9% decrease in operating costs during 2002, reflects the Company's efforts at cost control, as well as the impact of Sonda's deconsolidation since September 2002. As a result, EBITDA margin over revenues grew from 43.1% in 2001 to 45.4% in 2002, with a cash flow generation (EBITDA) totaling US$545 million in the year. The cash flow generated during 2002 was allocated by Telefonica CTC Chile to finance its investment plan, that reached US$204 million for the year, as well as to reduce US$381 million in debt. Consequently, the 8_Telefonica CTC Chile 2002 Annual Report Company has achieved a 48% reduction of its interest-bearing debt, from its maximum levels in July 1999, down to US$1,550 million in December 2002. Also, the Company has improved its leverage levels from 1.34 times, in December 2001, to 1.09 times at year-end 2002. Telefonica CTC Chile closed the year with a net loss of US$25 million in fiscal year 2002, compared to a net income of US$6 million in 2001. It is important to note that this result was impacted by an extraordinary charge of US$21 million, derived from the restructuring plan implemented in October 2002, as well as by the lower market value of the Company's investment in Terra Networks, which meant a charge of US$11 million in the year. During the past three years, the Company's strategy has focused on increasing its levels of efficiency and on improving its organizational structure. We have also made significant efforts to reduce capital expenditures and to improve our financial health, positioning the Company to operate competitively and efficiently within the new regulatory framework of 2004. Additionally, a leaner and more efficient structure will be a key factor in meeting the challenges imposed by the environment. I would like to point out that the Company's efforts have been recognized by both domestic and international credit rating agencies. In November, Standard & Poor's improved Telefonica CTC Chile's international debt rating outlook from "stable" to "positive", keeping such rating at BBB. In December, the local rating agency Humphreys improved Telefonica CTC Chile's local bond rating outlook from "stable" to "favorable", keeping such rating for the time being at A+. Looking forward, we expect that certain distortions introduced by the 1999 tariff setting process will be corrected, that during 2003 an objective analysis of competition in the telecommunications market will be developed, and that the tariff setting process for 2004 will be based on technical criteria. Once again I would like to thank all shareholders, employees and executives of Telefonica CTC Chile for their support and commitment in the process of adapting to increasingly demanding and changing scenarios. /s/ Bruno Philippi Irarrazabal Bruno Philippi Irarrazabal Chairman 2002 Annual Report Telefonica CTC Chile_9 [GRAPHIC OMITTED] 10_Telefonica CTC Chile 2002 Annual Report this is Telefonica CTC Chile [GRAPHIC OMITTED] 2002 Annual Report Telefonica CTC Chile_11 history of the company [GRAPHIC OMITTED] 12_Telefonica CTC Chile 2002 Annual Report History of the Company The history of Compania de Telecomunicaciones de Chile S.A., or Telefonica CTC Chile, as it is known today, goes back to 1880 when telephony services first became available in the country, upon the creation of Compania de Telefonos Edison in the city of Valparaiso. Officially, the Company was organized as a public corporation in accordance with private law, pursuant to a public deed executed on November 18, 1930, before Notary Javier Echeverria and entered in the Commercial Register of Santiago in 1931. The Bylaws of the Company were approved by Supreme Decree 599 of the Ministry of Finance on January 23, 1931. In 1971, the Company was taken over by the Chilean Government, and was later privatized, in August 1987, by means of a public bidding process ending in January 1988. Through a contribution of capital and subsequent additional purchases, Bond Corporation Chile S.A. came to hold approximately 50% of the issued and outstanding capital stock of the Company. In April 1990, Telefonica Internacional Chile S.A., an indirect subsidiary of Telefonica S.A., acquired a 49.2% equity interest in Telefonica CTC Chile from Bond Corporation plus an option to purchase an additional 1.2%, thus becoming the majority and controlling shareholder. After completing a placement of Company shares on the international market, Telefonica Internacional Chile S.A. reduced its equity interest to 43.6% of the capital stock, which is the stake that it currently holds. 2002 Annual Report Telefonica CTC Chile_13 [GRAPHIC OMMITED] [GRAPHIC OMMITED] 1988 1989 Privatization of the Telefonica CTC Company Chile began to operate in mobile telephony through its subsidiary CTC Celular S.A. [GRAPHIC OMMITED] [GRAPHIC OMMITED] 1990 1993 ADRs listed on Telefonica CTC Chile the NYSE achieves 100% digitalization of its nationwide local telephony network Investment grade rating assigned by international rating agencies [GRAPHIC OMMITED] [GRAPHIC OMMITED] 1994 1996 In the framework of Startel, today the LD market Telefonica Movil, is liberalization, CTC created through the Mundo, today merger of CTC 188 Telefonica Mundo, Comunicaciones obtains license to Moviles S.A. (55%) and offer long distance VTR Celular S.A. (45%) services within the new "Multicarrier CTC Mundo's fiber System" optic network is completed, becoming the largest in the country HIGHLIGHTS 2002: MARCH: - - On March 12, 2002, Telefonica CTC Chile files a lawsuit for damages against the State of Chile. This legal action alleges serious errors in calculation and improper application of economic criteria in Tariff Decree No. 187, which establishes the maximum rates that the Company may charge for local telephony and interconnection services during the period between May 1999 and May 2004. The total amount of claimed damages is approximately US$274 million, which includes losses incurred and yet to be incurred by the Company as a result of the application of the Tariff Decree until May 2004. JUNE: - - In June 2002, Telefonica CTC Chile conducts a collective bargaining process aimed at renewing employee labor contracts that had been in effect since June 1998 and adjusting them to reflect market conditions. As of June 30, 2002 an agreement is reached with 1,330 employees, who signed new collective labor contracts for periods of two or three years, depending on their labor union. Subsequent agreements are reached with 331 employees, thus adding up to 1,661 employees. Nevertheless, 3,445 employees called a legal strike against the Company which lasts 28 days. This group finally decides to end the strike invoking Article 369 of the Chilean Labor Law. This Article allows the employees to freeze the conditions of the previous labor contracts for a period of 18 months. JULY: - - Through a public bidding process conducted on July 18, 2002, Telefonica Movil, a subsidiary of Telefonica CTC Chile, acquires two of the three 10-MHz licenses with nationwide coverage offered in the 1900 MHz (PCS) frequency range. The total cost of these licenses was UF544,521 (approximately US$12.8 million). 14_Telefonica CTC Chile 2002 Annual Report [GRAPHIC OMMITED] [GRAPHIC OMMITED] 1997 Telefonica CTC Chile 1998 achieves nationwide Acquisition of 99.9% of coverage in fixed VTR Larga Distancia S.A., telephony, with the which changes its name start of operations in to Globus Region XI Acquistion of 45% of Startel from VTR S.A., achieving total control of the mobile subsidiary [GRAPHIC OMMITED] [GRAPHIC OMMITED] 1999 2000 Acquisition of 60% Sale of 40% of cable TV of Sonda S.A. company, Metropolis Intercom and 100% of Change of corporate cable TV network image and brand name Sale of 2.22% stake in Sale of ISP, Telefonica CRT Fija (Brazil) Net, to Terra Networks [GRAPHIC OMMITED] 2001 Telemergencia subsidiary is created Launching of TIC (Telefonica Data Internet Center) t-gestiona is created, subsidiary that offers administration and support services to the business areas (shared services) Directors Committee is created, according to Law N(o) 19,705 AUGUST: - - On August 24, 2002, the Ministries of Telecommunications and Economy issue Decree N(o)455 which approves a High Usage plan for residential clients and a Very High Usage plan for companies, both based on a monthly flat fee structure. SEPTEMBER: - - On September 26, 2002, Telefonica CTC Chile, through its subsidiary Telefonica Empresas, sells a 25% equity interest in Sonda S.A. to Mr. Andres Navarro H. (founder of Sonda) for Ch$27,921 million (approximately US$37.3 million). In addition, Telefonica CTC Chile obtains a put option on the 35% equity interest in Sonda that it continues to hold, which may be exercised in July 2005, and Mr. Navarro obtains a call option on the aforementioned 35% of Sonda still held by Telefonica CTC Chile, which may be exercised in July 2003, July 2004 or August 2005. (For further details on this transaction, see "Material Events"). OCTOBER: - - On October 28, 2002, Telefonica CTC Chile reorganizes its business structure into three business units: Consumer and Small Business Communications; Corporate Communications; and Mobile Communications. In addition, two Corporate Departments (Customer Service and Sales and Network Services) are reorganized as support areas. This restructuring also involves a reduction of personnel totaling 1,070 employees from both the parent company and subsidiaries. 2002 Annual Report Telefonica CTC Chile_15 economic environment and telecommunications sector [GRAPHIC OMITTED] 16_Telefonica CTC Chile 2002 Annual Report Economic Environment and Telecommunications Sector ECONOMIC ENVIRONMENT The Chilean economy is integrated into international commerce, exporting 30% of its production. For this reason, the global economic downturn in 2002 quelled a recovery in the Chilean economy, which has been reflected in the 4.4% GDP growth in 2000, 2.8% in 2001 and a 1.9% projected growth rate in 2002. This rate resulted from lower prices for Chilean exports, which have declined some 1.5% on average in 2002, in addition to the 11% drop experienced in 2001. Nevertheless, expected GDP growth for 2003 is 3.1%, one of the highest rates in Latin America. In line with the country's commitment to a policy of open borders, a political and economic association agreement was entered into with the European Union in 2002 and is scheduled to take effect in early 2003. Furthermore, Chile reached bilateral trade agreements with the United States and South Korea which should be in effect early in 2004, once the negotiations are approved by the respective legislative bodies. All these agreements provide for gradual and reciprocal liberalization of access to goods, services and government purchases, with a view towards achieving customs tariffs of 0% within a period not exceeding 12 years. It is estimated that these agreements will have a positive effect on the potential GDP of Chile of no less than 1.5% as of 2004. Unemployment declined from 9.2% in 2001 to 9.0% in 2002, a level at which it is expected to remain in 2003. These levels of unemployment have led to a great deal of caution in spending during 2002, although an increase was observed in the fourth quarter which is expected to continue during 2003. Consequently, domestic demand in terms of current expenses should grow by about 3.2% in 2003. During the year 2002, inflation (Consumer Price Index), on the average reached 2.5% and closed the year at 2.8%. The Central Bank policy aims at inflation in the range of 3% (+/- 1%) for 2003 and for the Current Account Deficit it forecasts a maximum of 3% of GDP. The Current Account Deficit should remain low, and easily funded with international reserves, allowing increases of expenses without damaging the external accounts equilibrium. Furthermore, the current policy considers that the exchange rate will experience high volatility, similar to the Euro and the Yen. In 2002 the Chilean peso devalued by 9.7% with respect to the US Dollar in nominal terms, which meant a 6.6% real devaluation of the peso with respect to 2001. During 2002, the price of copper was lower than estimated by international experts. As a result, the Government cut back on spending during the second half of the year by the equivalent of 0.4% of GDP in order to keep the fiscal deficit at or below 1% of GDP and as much as possible to approach the rule calling for a structural budget surplus of 1% of GDP. Expected GDP growth for 2003 is 3.1%, one of the highest rates in Latin America 2002 Annual Report Telefonica CTC Chile_17 GDP growth and GDP per capita (nominal US$) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- GDP per capita 4,123 4,315 4,927 4,864 5,355 GDP growth % 1.9% 2.8% 4.4% -1.0% 3.2% The country's foreign accounts are healthy. This assessment is corroborated by the spread on the Sovereign Bond which, at around 170 basis points over the 10-year U.S. Treasury Bonds, is one of the three lowest in the Emerging Markets. The internationalization of Chile is clear from the balance in capital flows. With a GDP that is equivalent to US$64 billion, foreign debt stands at US$41 billion, Chilean investments abroad are in the order of US$33 billion, and international reserves amount to US$15 billion. The country's financial solvency contributed to Chile being invited by the International Monetary Fund "IMF" to enter into a select group of 28 countries who contribute to a special emergency credit fund created by this institution, having permanently at the disposal of the IMF the amount of US$500 million. This invitation is the first in the last 30 years. National savings, which remained at 19.6% of GDP in 2002, are estimated to grow to 20.7% in 2003 and 20.8% in 2004. Uncertainty in the international markets has not led to significant changes in foreign investment in Chile, which amounted to 1.8% of GDP in 2000, 1.1% in 2001, and is estimated at 1.3% for 2002 and 1.4% for 2003. Total investment totaled 20.2% of GDP in 2002, rising to 20.4% in 2003. Telefonica CTC Chile continues to be one of the driving forces behind the country's economic development, offering telecommunications services supported by a modern infrastructure based on a fully digitalized network. It is estimated that the Company contributes approximately 55% of the communications industry's GDP and 1.1% of the national GDP. TELECOMMUNICATIONS SECTOR The growth of this sector is intrinsically tied to the state of the country's economy, particularly consumer spending levels, and to the development of communications-related technologies such as mobile telephony, data transmission and broadband. Sales in the sector increased by 4.5% in 2002, totaling some US$2,540 million. This growth was driven primarily by the mobile, data and Internet businesses. 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. Furthermore, the local operators don't have incentives to invest in the fixed lines business due to the unfavorable current regulatory framework. 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 18_Telefonica CTC Chile 2002 Annual Report Chilean Telecommunications Sector (as of December 31, 2002)
Business Operators Telefonica CTC Chile Market Size Market Share - ---------------------------------------------------------------------------------------------------------------------- Fixed Telephony (1) 7 22.5 lines per 100 inhabitants 76.0% of lines in service Long Distance (2) Domestic 12 122.1 minutes per inhabitant per year 38.7% of total market traffic International 12 13.2 minutes per inhabitant per year 29.4% of total market traffic Mobile Telephony 4 38.8 lines per 100 inhabitants 30.4% of customers Pay-Phones 7 Approx. 52,000 lines (3) 23% of pay phones (3) Data transmission 8 Revenues of US$251 million (4) 49% of revenues Paid TV 4 21.1 connections per 100 households - Internet Access 33 19.6 Internet accesses per 100 households - Broad Band 6 182,000 connections 30% of total connections Home Assistance 3 3.3 security systems per 100 households 24% of all security systems
(1) There are 4 additional companies which operate only in rural telephony. In total, there are 11 fixed telephony companies operating with 12 brands. (2) There are 39 operators authorized to offer LD services, although only 20 of them were in operation as of December 2002 and 12 operators concentrate 99% of total LD traffic. (3) Third party telephony is not included. (4) Calculated with the exchange rate for December 2002. operators, by a rationalization of investment (with a decline of 38% with respect to 2001), by changes in financing structure, and by the rollout of new technologies. Telefonica CTC Chile has 76% market share in the national fixed telephony segment, where eleven operators hold licenses, including 4 rural operators. Market penetration in terms of lines in service per 100 residents stood at 22.5, on a par with the 2001 figures. Additionally, operators intensified their rollout of Internet access broadband technologies. These include ADSL (Asymmetric Digital Subscriber Line), led by Telefonica CTC Chile, cable modem, provided by the country's two major cable providers, and wireless telephony or WLL (Wireless Local Loop), offered by only one of the two companies that were awarded licenses. Growth in long distance telephone services remained stagnant, due primarily to substitution by mobile telephony. During 2002, outgoing International Long Distance (ILD) traffic and Domestic Long Distance (DLD) traffic are estimated to have decreased nationwide by 1.6% and 9.3%, respectively. In this market there are twelve relevant operators which concentrate 99% of total long distance traffic. Given the strong competition and shifts in demand, operators have focused on reducing operating costs, offering new products via multi-service platforms, and providing transport for other operators, such as ISPs, data transmission companies, and mobile companies. For its part, during 2002, the mobile market increased its user base by 22%, reaching 6.1 million customers as of December 31, 2002, which translates into a density of 38.8 mobile lines per 100 residents. This growth took place primarily in population segments with lower discretionary income and, consequently, it has led to a decrease in traffic per mobile subscriber. Revenues from corporate communication and data transmission services shows a positive evolution in 2002, with a estimated growth of 10% as compared to 2001. This is due to the increasing demand for corporate data transmission connectivity and the introduction of Internet protocol-based services. Although there are currently 8 operators competing in the country's major cities, the competitive advantage goes to those able to provide connectivity from one end of the country to the other and to offer a range of integrated advanced telecommunications services, as is the case with Telefonica CTC Chile. The Internet business continued to grow in 2002 in terms of total access points (residences, companies and Government), achieving an estimated 19.6% rate of household penetration, the highest in Latin America. Switched Internet traffic in the market grew 9% during 2002. On an industry-wide level, broadband Internet accesses grew by 206% with respect to 2001, reaching a total of 182,000 connections at year-end 2002. 2002 Annual Report Telefonica CTC Chile_19 REGULATORY FRAMEWORK Tariff Structure Pursuant to article 29 of Law No.18,168 ("General Telecommunications Law"), telecommunications services are subject to free pricing. However, this law provides two exceptions to this basic free pricing principle: i) Services provided by means of interconnection (including network use paid through access charges), which pursuant to article 25 are at all times subject to regulated maximum rates; and ii) services provided to the public, in the specific event that the Antitrust Commission created in 1973 under Executive Decree No. 211 ("Antitrust Law") rules the level of competition in the market is insufficient to guarantee a system of free pricing, in which case the rates for certain telecommunications services, to the exclusion of mobile telephony, shall likewise be subject to regulation. The maximum rates set forth in Law No.18,168 are to be set every five years, which is the effective period thereof according to this law. Notwithstanding the foregoing, in the case of services subject to rate regulation pursuant to an Antitrust Commission ruling, the Antitrust Commission may review and amend such ruling prior to the conclusion of the relevant five-year period, thus restoring the general free-pricing rule. Pursuant to the General Telecommunications Law, the structure, level and indexing of the maximum rates that may be charged for regulated services are determined pursuant to a joint decree issued by the Ministry of Transportation and Telecommunications and the Ministry of Economy, Development and Reconstruction. This decree is issued at the conclusion of a procedure described in Title V of the aforementioned law. Maximum rates are determined on the basis of the principle of necessary costs of providing service, and these costs are arrived at by applying an efficient company model. By means of Resolution No. 515 of April 1998, the Antitrust Commission ruled that local services, public telephone service, line connections, and other services related to local telephony were to be subject to rate regulation, further indicating certain guidelines for the administrative authority implementing such regulation. The rate regulation imposed in 1998, with respect to local telephone services to the public applies only to the rates charged by those operators deemed dominant in any given geographical area. Accordingly, it was determined that only Telefonica CTC Chile would, in its capacity as "dominant operator", be regulated as to rate levels and structure throughout Chile, with the exception of Regions X and XI and Easter Island, where other companies are the dominant operators. Multicarrier System Law No. 19,302, enacted on March 10, 1994, amended the General Telecommunications Law to introduce a new regulatory framework, the Multicarrier System, for long distance telephone services. The Multicarrier System, among other provisions, allows local telephone service providers to obtain licenses to offer domestic and 20_Telefonica CTC Chile 2002 Annual Report [GRAPHIC OMITTED] international long distance services through a subsidiary or associated company organized as a public corporation. Calling Party Pays Calling Party Pays (CPP) was implemented in Chile on February 23, 1999. Under this system, local telephone companies pay mobile telephone companies an access charge for calls made from fixed networks to mobile networks. Local telephone companies may pass this access charge through to their subscribers. Therefore, under the CPP system, a fixed network customer who calls a mobile telephone may pay the local telephone company a charge comprised of a local tranche, which is part of the basic local telephone service, plus a fee for access from the fixed network to the mobile network. Tariff Decree for Telefonica CTC Chile Decree No. 187, in effect since May 5, 1999, provides the maximum rates that Telefonica CTC Chile may charge for local and interconnection telephone services, including access charges, for a period of five years ending May 4, 2004. The major services subject to rate regulation according to what is established in article 29 of the law are the Telephone Line Service (formerly Fixed Charge), Local Measured Service, Local Tranche, and Communications from Pay Telephones. According to article 25 of the law, the most important interconnection services subject to tariff regulation are access charges. Additionally the decree regulates the services subject to tariff regulation according to the article 24 bis of the law, such as measurement, valuation, billing, and collection. Tariff Decree for Telefonica Movil Decree No. 97, in effect since February 12, 1999, provides the maximum rates that Telefonica Movil may charge for interconnection services, including the Mobile Access Fee, for a period of five years ending February 12, 2004. Request to Deregulate Local Rates to the Public On January 18, 2001, Telefonica CTC Chile filed a request with the Antitrust Commission to deregulate local telephone rates charged to the public. This action was based on the following grounds: i) The increased competition in fixed telephony and the growth of the mobile telephony sector have changed market conditions to the extent that continuing the regulation of fixed rates is no longer warranted; and ii) the inflexibility of the rate decree prevents Telefonica CTC Chile from properly reacting to offers by the competition. On July 11, the Antitrust Commission, in its Resolution No. 611, rejected the request filed by Telefonica CTC Chile, indicating that current market conditions did not warrant such deregulation in the entire country. Nevertheless, the Commission entrusted the National Economic Supervisor with special oversight to monitor changes in market conditions with a view to identifying changes warranting rate deregulation in certain geographical areas for specific services. 2002 Annual Report Telefonica CTC Chile_21 [GRAPHIC OMITTED] Furthermore, the Commission ruled that Telefonica CTC Chile may submit alternative rate plans and request additional administrative actions by the authorities to supplement Tariff Decree No.187 allowing for cost-based rate distinctions within each tariff area for categories of users classified by volume. Flexibility of Rates Charged to the Public Within the framework of Antitrust Commission Resolution No. 611, on September 4, 2001, Telefonica CTC Chile petitioned the Undersecretary of Telecommunications (Subtel) to approve the following alternative rate plans: Low Usage Plan, High Usage Plan, and Very High Usage Plan. On August 24, 2002, the Ministry of Transport and Telecommunications and the Ministry of Economy, Development and Reconstruction issued Decree No. 455 approving the High Usage (oriented to residential customers) and Very High Usage (oriented to corporate customers) Plans, which are based on a flat monthly fee. Furthermore, the Undersecretary of Telecommunications approved the standard contracts to be signed by customers selecting the aforementioned alternative rate plans. Telefonica CTC Chile began marketing the High Usage Plan in December 2002. The Undersecretary of Telecommunications also authorized Telefonica CTC Chile to sell prepaid local telephone service for lower-income segments. Request for Administrative Action to Modify Tariff Decree N(o)187 of 1999 On October 31, 2001, Telefonica CTC Chile filed an administrative motion for reconsideration with the Ministry of Transportation and Telecommunications and the Ministry of Economy, Development and Reconstruction, to correct the following errors in the issuance of the Tariff Decree N(o)187 of 1999: a mathematical error in determining the fixed monthly charge for telephone line service; unlawful application of the depreciation method; failure to consider the costs of telephone directories; reduction in investment due to efficient location of switching centers; erroneous application of the same local telephone service non-payment rate to the Calling Party Pays service; and failure to scale access fees and local tranche fees. On November 16, 2001, the Ministers asked the Office of the General Controller of the Republic to rule on the lawfulness of, and need for, correcting such errors if confirmed, pursuant to the relevant technical-economic and legal criteria and any administrative measures that should be dictated for such purpose. In its response dated December 10, 2001, the Office of the General Controller noted that the Ministries have the authority and the duty to correct the Tariff Decree N(o)187, subject to the following conditions: Within the framework of Antitrust Commission Resolution No. 611, Decree No. 455 approved two alternative tariff plans, which are based on a flat monthly fee 22_Telefonica CTC Chile 2002 Annual Report [GRAPHIC OMITTED] - - That legal defects exist or that the provisions are based on erroneous estimates. - - That any defects or irregularities are so significant or relevant that they warrant the nullification and subsequent correction of the Decree. - - These defects or irregularities must be evidenced so that there is no doubt as to their existence. For this purpose, the Administration must conduct a thorough study of the background information. - - That any potential correction may not affect the rights which were previously unequivocally incorporated into third party assets in good faith. - - Said correction would have to be enacted via a decree subject to review and approval. In January 29, 2002, in a joint response, failing to respect the criteria established by the General Controller, the aforementioned Ministries replied to the administrative motion, maintaining that after having carefully evaluated solely the viability and timeliness of the request and having considered the contributing circumstances and the prudence which should guide public action, they had decided to reject the petition to correct the Telefonica CTC Chile Tariff Decree. Lawsuit against the State of Chile Upon exhausting the administrative recourses to correct the illegal actions taken in the tariff setting process, in March 2002 Telefonica CTC Chile filed a lawsuit for damages against the State of Chile. This legal action seeks damages in the amount of US$274 million, plus adjustments and interests, covering past and prospective losses through May 2004 arising from errors incurred in the Tariff Decree. The Third Civil Court of Santiago admitted the lawsuit and notified the State for its response. Upon receipt of the State's answer to the lawsuit, followed by the plaintiff's reply and the defendant's rejoinder, the process of claim and reply was completed. Consequently, the Court issued an order to produce evidence, establishing the relevant, material and contested facts and thereby initiating the evidence submission stage of the proceedings, which is currently in process. Allocation of Mobile Telephone Spectrum in the 1900 MHz Frequency On July 18 the bidding process was held for the three 10-MHz frequencies in the 1900 MHz band, and Telefonica Movil was awarded two frequencies (20 MHz) for a total amount of UF544,521, equivalent to US$12.8 million. The corresponding concession decree was published in the Official Newspaper on November 16, 2002. 2002 Annual Report Telefonica CTC Chile_23 corporate and business strategy [GRAPHIC] 24_Telefonica CTC Chile 2002 Annual Report Corporate and Business Strategy Telefonica CTC Chile's strategic goal is to maintain leadership in the domestic market as an integrated telecommunications solutions provider. In this context, the focus is on offering customers the most advanced solutions appropriate for their needs, while contributing to the sustained economic development of the country. Ultimately, the Company's commitment extends to its shareholders, with the goal of ensuring adequate profitability of its operations, in line with market demands. To meet these commitments, during 2002 Telefonica CTC Chile completed a restructuring of its business aimed at better understanding and serving customers as well as continuously improving processes and making optimum use of Company resources. The new business structure is thus divided into three areas with a basic focus on the customer: (I) Consumer and Small Business Communications, focused on providing all Telefonica CTC Chile products and services to homes and to small and medium-sized businesses; (II) Corporate Communications, aimed at delivering communications services and data solutions to companies and corporations; and (III) Mobile Communications, dedicated to providing communications services to individuals. These areas are focused on the relation with the client, identifying their profiles and developing products and services which satisfy their current and future communication needs. Additionally, two support units were defined: (I) Management of Customer Service and Sales, responsible for the nationwide marketing and distribution of all Company products, for billing, and for customer relations and service. This area is currently supported by 39 agencies strategically located throughout the country and six specialized central customer service platforms. 2002 Annual Report Telefonica CTC Chile_25 [GRAPHIC OMITTED] (II) Management of Network Services, responsible for developing and maintaining the Company's telecommunications infrastructure as well as operating the networks and providing services in order to maximize fixed network availability and thus offer excellent service to the end user. This area also manages the network operation business, whose revenue is associated with interconnection services (access charges); and services to long distance carriers such as measurement, charging, billing and collections. As a result of this reorganization, Telefonica CTC Chile currently benefits from a structure that is better adapted to support the Company's leadership position in a competitive market and anticipate future market changes. Telefonica CTC Chile's strategy is based on the following pillars: I. Profitable Growth in the Current Businesses In Consumer and Small Business Communications, corporate goals include: - - Profitable leadership in the development of broadband access and services, with a focus on ADSL technology. - - Focus on higher value customers more vulnerable to competition. - - Development of services that drive the need for greater bandwidth, including virtual private networks (VPNs) for small and medium-sized businesses, videoconferencing over ADSL and Viginet, a video-monitoring digital system which can be operated on-line with a broadband Internet connection. - - Promoting value-added services that leverage customer connectivity. These services seek to generate an increase in direct customer revenues through services such as equipment leasing, and to increase traffic generated through services such as call waiting and voice mail, among others. - - Leveraging capacity in the Company's infrastructure, offering products to low-end customer segments. - - Expanding prepaid products, aimed at minimizing non-payment risks; - - Customer segmentation and the resulting adaptation of business, post-sales and billing processes. In Corporate Communications, efforts are aimed at: - - Positioning the Company as a leader in the corporate segment of the market through the consolidation of outsourcing projects and IP solutions. - - Differentiation through technological leadership with the deployment of the IP Network and of 26_Telefonica CTC Chile 2002 Annual Report the Telefonica Data Internet Center (TIC) and the development and implementation of multiple customized applications. In Mobile Communications, given the stiff competition in the sector, strategic aims include: - - Leadership with profitable growth based on the new business generated by the availability of a new 1900 MHz GSM frequency. - - Segmentation and adaptation of the customer portfolio, with a special focus on maintaining the loyalty of the most profitable customers. - - Development and rollout of new value-added services. - - Quality assurance in business and customer service processes. II. Regulatory Framework One of the Company's main focuses during 2003 will be to defend its positions and contribute ideas for the development of new regulatory frameworks for Fixed and Mobile Telephony, which will take effect in 2004. Company goals will also include the timely proposal of alternative tariff plans to the regulatory authorities for local service and sustained active participation in the general development of the telecommunications industry. III. Consolidation of Solid Financial Position Telefonica CTC Chile plans to consolidate a strong financial position by continuing with the reduction of debt undertaken in recent years, in addition to the strict control and tracking of investments, the leveraging of economies of scale with the Telefonica Group and the divestment in non-strategic Company assets. In line with this conservative financial strategy, the Company has reduced its interest-bearing debt by 48% from its peak in July 1999. The benefits of this course of action have been reflected in decreased interest expenses, which have dropped 15% in 2001 and another 15% in 2002, as well as in improved leverage and interest coverage ratios. Furthermore, these achievements have been recognized by credit rating agencies. Humphrey's (in the local market) and Standard and Poor's (international), have both improved the Company's rating outlook from "stable" to "positive". One of the Company's main focuses during 2003 will be to contribute ideas for the development of new regulatory frameworks for Fixed and Mobile Telephony 2002 Annual Report Telefonica CTC Chile_27 [GRAPHIC OMITTED] the company 28_Telefonica CTC Chile 2002 Annual Report The Company BUSINESS AREAS: PRODUCTS / SERVICES AND CLIENTS Consumer and Small Business Communications This business unit is centered on homes and small and medium-sized businesses. The current customer base has been divided into Premium, Small Business, Consumer and Low Use segments, facilitating the provision of differentiated services to each. The services offered to these customers are described below: Basic Telephone Service Basic Telephony is the traditional telephone service, which includes the telephone line (fixed monthly fee), local traffic (Local Measured Service or LMS), public network connections, and indoor installation. In this business, Telefonica CTC Chile competes with 10 other local operators, including 4 rural telephony operators. As of December 31, 2002, it had achieved a 76% market share. During 2002 Telefonica CTC Chile connected 340,419 lines, closing out the year with 2,686,695 lines in service, down 1.3% from December 2001, due to the disconnection of the lines with unpaid debt. Traffic per line per day fell 0.5%, compared to 2001. This unit's revenue represented 37.3% of the Company's total consolidated revenues, totaling Ch$322,140 million (US$448.3 million) for the year 2002, down 5.1% compared to 2001. As a result of the Company's product and service innovation and diversification initiatives, the decline in basic telephone service revenues was offset in part by growth in other services, such as Broadband (ADSL), Prepaid, Internet Flat Fees and Telemergencia services. Advanced Services Telefonica CTC Chile markets advanced or value-added services to enhance communications options for its customers and assist in completing their calls. To do this, it has developed a broad array of services, including voice mail, call-forwarding, call-waiting, caller-ID, outbound traffic control, CiberRing (call-waiting notice for Internet users), and information and entertainment services (600 and 700 numbers). These services represent 2.0% of total consolidated revenues. Advanced Equipment Marketing Telefonica CTC Chile sells advanced telephone and telecommunications equipment for the residential market. Its product offering includes: fax equipment, telephones with multiple lines, advanced telephones, wireless phones, caller-ID equipment, and other similar devices. This equipment enhances customer communications and allows access to the various value-added services offered by the Company. In 2002, the Equipment Marketing business produced Ch$4,967 million (US$6.9 million) in revenues, equivalent to 0.6% of consolidated revenues. To facilitate the provision of differentiated services, the current customer base has been divided into premium, small business, consumer and low use segments 2002 Annual Report Telefonica CTC Chile_29 Lines in service and line connections [GRAPH] 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Lines connections (thousands) 340 331 288 316 465 Line in service (thousands) 2,687 2,723 2,701 2,592 2,650 Prepaid Services and Prepaid Card The prepaid card ("TLP") is a product that allows users to make calls from any fixed phone, including those blocked for long distance calls or calls to cellular phones, as well as from public phones and from cellular phones of Telefonica Movil and other mobile service providers. All types of calls can be made with the TLP: local, domestic and international long distance, calls to any company's cellular phones, even calls for Internet connections and for access to information and entertainment services through 600 and 700 numbers. This product meets people's needs for a virtual and portable personal telephone line, and also allows the customer to control and manage telecommunications expenses. Since its launch in 2000, the TLP has proven successful, showing a sustained increase in market penetration. Currently, over one million TLP cards, equivalent to Ch$1,000 (US$1.39) each, are sold on a monthly basis. In 2002, 12,216,816 (one-thousand-peso-equivalent) TLP cards were sold, representing an increase of 50.2% as compared to 2001. Telefonica CTC Chile also offers local communications service for customers whose normal service is suspended or disconnected due to late payment. It consists of a telephone line only authorized for prepaid traffic. This system allows the customer to control the use of the line based on his or her own ability to pay and gradually resolves late payment problems through a monthly charge. Among the services offered under these conditions are the Plan Solucion (Solution Plan), Servicio Activo (Active Service), Cuenta Segura (Secure Account), and Linea Prepago (Prepaid Line). In addition, Subtel authorized Telefonica CTC Chile to offer the prepaid telephone service to low usage segments. This service consists of a flat fee which is paid through TLP cards. This flat fee includes a limited number of minutes, to be used during the month. In case of requiring additional traffic, the customer has to buy additional cards. This service began to be offered in Santiago and the rest of the country as of October 2002. As of December 31, 2002, revenues from prepaid traffic represented Ch$11,871 million (US$16.5 million), with a growth of 106.5% as compared to 2001. Alternative Plans for High Usage Customers Since November 2002, the Company is authorized to market two new plans: (i) "Plan Full Voz" (Full Voice Plan), for high usage residential customers with over 2,800 minutes per month, consists of a flat fee which includes the fixed charge and unlimited local traffic for the month (subject to a set traffic distribution between peak and off-peak hours defined by the plan); and (ii) a plan for corporate customers with very high usage, consisting of a monthly flat rate based on the historical average of traffic, which is reviewed every 6 to 12 months. These flat rates do not include mobile access charges, variable Internet charges collected by ISPs or surcharges for complementary and directory information services. These new plans give the Company 30_Telefonica CTC Chile 2002 Annual Report Access charge traffic (1) (Telefonica CTC Chile network) [GRAPH] 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- millions of minutes 6,788 7,251 6,493 6,147 6,240 (1) On February 2000, the per second billing system was implemented. Information for 1998-1999 is shown in rounded minutes. greater flexibility to compete on the local market by offering customers volume discounts. Internet Flat Fee This service provides Internet access to the Public Internet Network over an analog or digital (ISDN) line for a flat monthly fee. Two plans are available: (i) "Renta Plana Nocturna" (Night Flat Fee), an Internet access plan where a flat monthly rate is paid for unlimited connection during off-peak hours (between 8:00 p.m. and 8:59 a.m.), and (ii) "Renta Plana Total" (Total Flat Fee), allowing Internet access 24 hours a day, with a flat rate. These plans may be enhanced with the "Internet Call-Waiting" or CiberRing service that allows the customer using the Internet to know a voice call is being received and the number of the caller, allowing the user to accept the call and talk over the IP network by disconnecting from Internet, or transfer the call to a voice mailbox or another phone number, or simply not answer the call. During 2002 the "Linea Exclusiva Internet" (Exclusive Internet Line) service was launched. This is a second line exclusively for Internet browsing, available on a flat rate basis 24 hours a day. It does not allow the user to make or receive calls and only allows access through the contracted ISP, providing unlimited Internet browsing for a fixed monthly rate, and freeing the regular telephone line for making and receiving calls. The number of customers with flat rates for Internet services in 2002 totaled 33,295, representing a growth of 93.1% compared to December 2001. ADSL Telefonica CTC Chile offers the ADSL (Asymmetric Digital Subscriber Line) product as its consumer broadband technology, allowing access to broadband services over a traditional telephone line, turning it into a last generation network. The primary features of ADSL are high-speed transmission, simultaneous voice and data communications, always-on service, a flat rate, and access to exclusive broadband content. During 2002, the Company focused on the expansion of broadband service, reaching as of December 31, 2002, 54,163 customers nationwide, who enjoy transmission speeds of over 256 kbps. This represents a 265.8% increase with respect to the subscriber base at the end of December 2001. To date, the Company has a 30% share of the domestic broadband market. Telefonica CTC Chile markets its ADSL broadband services through two types of plans: "Speedy" and "Speedy Business," both aimed at end users, whether households or businesses, and "Megavia," where the Company acts as a wholesaler, offering the technology to Internet Service Providers (ISPs), who then resell it to their respective customers. This product is currently used primarily for high-speed Internet access, though it also allows the Company to offer customers other services, such as virtual private networks (VPNs), security systems with remote monitoring from anywhere in the world (Viginet), e-learning, IP telephony and other multimedia applications. In the near future this technology will make it possible to deliver new services such as interactive 2002 Annual Report Telefonica CTC Chile_31 [GRAPHIC OMITTED] television, service portals, interactive games and domotics. In Chile, the broadband market is made up of six operators, which use different technologies, including ADSL, cable modem and WLL (Wireless Local Loop). Broadband access currently accounts for 30.8% of all Internet access. For its part, ADSL penetration on the total number of fixed lines increased from 0.8% in 2001 to 2.0% at the end of 2002, and it is estimated that it will reach 4.7% by the end of 2003. Telefonica Internet Empresas (TIE) Telefonica Internet Empresas (TIE) provides Internet access to corporate clients and small and medium-sized businesses over dedicated and switched lines and through ADSL. In 2002, Telefonica Internet Empresas focused on increasing Internet access penetration in companies, primarily small and medium-sized businesses, given the low penetration in this segment. This was achieved by highlighting the advantages of this tool for users, such as cost savings and the ability to stay up-to-date on technology developments. As of December 31, 2002, TIE had 1,890 dedicated lines, representing a growth of 14% over 2001, and an average of 28,320 switched lines, up 32% over 2001. TIE has market shares of 37% in dedicated Internet access, 15% in the switched market, and 42% in the corporate broadband access market. Telemergencia The Telemergencia business offers home security services and home assistance through monitoring and alarm systems connected through the telephone line to the Telemergencia security platform. It offers a wide variety of plans adapted to customers' needs and budgets, ranging from the Viginet plan, a digital video-surveillance system that can be operated online from a broadband Internet connection, to the simplest plan, which is a "panic button" called "Boton de Seguridad". In 2002, this business grew by 292.8% in number of customers, reaching 31,863 subscribers as of December 31, 2002. Telemergencia is currently the second largest alarm monitoring company on the market and the only one with plans for all socio-economic segments. With this cutting-edge product, Telefonica CTC Chile has managed to develop a new business niche, expanding its traditional horizons. Public Telephones Telefonica CTC Chile is responsible for the installation and operation of its own public telephones on public roadways (avenues and streets), as well as in indoor areas, such as airports, ground transportation terminals, malls and service stations, among others. The Company also markets public telephone equipment to be operated by private third parties. The public telephony market is made up of seven operators and numerous private parties. Telefonica CTC Chile's market share in this category is approximately 23% of installed lines. Through the Telemergencia business, Telefonica CTC Chile has managed to develop a new business niche, expanding its traditional horizons 32_Telefonica CTC Chile 2002 Annual Report DLD traffic (188 Telefonica Mundo+Globus 120) [GRAPH] 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- millions of minutes 717 799 712 836 921 Outgoing ILD traffic (188 Telefonica Mundo+Globus 120) [GRAPH] 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- millions of minutes 65 63 56 54 54 This business includes revenues generated by traffic on public phones owned by Telefonica CTC Chile, maintenance agreements for indoor installations, and service agreements for maintenance and commercial support provided to third parties (owners of public telephones purchased from the Company). The Company ended the year with a total of 11,834 public telephones, a decrease of 8.1% compared to the previous year. In addition, Telefonica CTC Chile provides community lines for low and medium income segments, which amounted to 23,840 lines as of December 31, 2002. For the year, revenues from the public telephone business totaled Ch$40,321 million (US$56.1 million), representing 4.7% of consolidated revenues. Rural Telephony Telefonica CTC Chile participates in this business using primarily its own resources. The Chilean Government, through the Undersecretary of Telecommunications, also provides funding through the Telecommunications Development Fund. Over the course of this year, no bidding process was undertaken through the Telecommunications Development Fund in the area of Rural Public Telephony. In the event of future bids, the Company will carefully consider its involvement since the integration of new geographical areas implies higher costs in terms of installation, maintenance and operation. Long Distance In the long distance business, Telefonica CTC Chile operates through its subsidiaries 188 Telefonica Mundo and Globus 120, which meet their customers' various needs through a broad offering of public and private voice, data and video services, both domestically and internationally. In 2002, both subsidiaries' market shares represented approximately 38.7% of the market's domestic long distance voice traffic and 29.4% of outgoing international long distance voice traffic. Thus, they maintained market leadership in domestic long distance (DLD), while holding the number two position in international long distance (ILD). As of December 2002, 12 companies, from the total of 20 operative long distance companies in the market, concentrate 99% of the long distance traffic. Only three of the companies, including 188 Telefonica Mundo, have their own long distance networks. These three operators account for nearly 88% of the domestic DLD traffic and 70% of the outgoing ILD traffic. In 2002, the substitution by mobile telephones and the blocking of fixed lines for long distance calls had a negative impact on both the DLD market in general and the traffic of the Company's long distance subsidiaries. Telefonica CTC Chile's DLD traffic dropped 10.3% during 2002, as compared to the previous year. The success of the "Papa Contento" (Happy Father) plan partially offset this negative situation. This plan allows a fixed line client to assign a specified monthly amount of expense to each of the different persons who use that fixed line. As of December 31, 2002, this plan had 337,835 clients. In the context of continuously meeting customer needs through innovation and with the goal of expanding the international long distance market, 2002 Annual Report Telefonica CTC Chile_33 [GRAPHIC OMITTED] Mobile customers (as of December 31) [GRAPH] (thousands of customers) 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- millions of minutes 1,849.3 1,570.1 1,224.5 1,153.8 554.2 especially from mobile phones, the "El Mundo a Llamada Local" (The World at Local Rates) service was launched in June 2002. This plan consists of a monthly fixed charge which gives the customer a certain number of minutes of ILD at the local call rate (MLS), while a preferential tariff is offered for the additional traffic. Telefonica CTC Chile's outgoing ILD traffic increased 5.2% in 2002 over the previous year. In order to increase the profitability of 188 Telefonica Mundo's domestic and international network, this subsidiary serves other telecommunications operators' needs in voice transport and capacity, including both intermediate service companies with their own networks and those without networks, as well as mobile companies and Internet service providers (ISPs). During 2002, pricing for transport of voice and data traffic continued on a downward trend, which was partially offset by an increase in capacity and by the introduction of new businesses, such as "Nationwide IP Switched Service" which provides access to ISPs through 188 Telefonica Mundo. The long distance business represents 8.7% of Telefonica CTC Chile's consolidated revenues, contributing with Ch$19,397 million (US$27.0 million) to the consolidated net result in 2002. The business's EBITDA margin reached 46.5% for the full year 2002, compared to 50.9% in 2001, with 188 Telefonica Mundo leading the industry in operating income. Mobile Communications Chile is the Latin American country with the highest level of competition in mobile communications, also showing high levels of penetration and growth. As of year-end 2002, mobile subscription density had reached 38.8%, with almost 6.1 million users in the country. By contrast, at year-end 1998 the figure was a mere 7%. Four companies are active in this market, three of which are subsidiaries of telecommunications multinationals (BellSouth, TIM and Telefonica), the fourth being a subsidiary of the electric utility Endesa Espana. Telefonica CTC Chile operates its 34_Telefonica CTC Chile 2002 Annual Report mobile communications business through its subsidiary Telefonica Movil de Chile, which offers mobile voice and data services on a contract (post-paid) and prepaid basis along with a wide range of value-added services, such as messaging, roaming, and automatic collect calls, among others. Telefonica Movil is now firmly positioned as one of the leading operators in the Chilean market, having reached a customer base of 1,849,283 at year-end 2002, which represents a growth of rate of 17.8% with respect to the previous year. This translates into a market share of approximately 30.4%. Of the total subscribers, 76.3% are prepaid customers and 23.7% are contract customers. The primary accomplishment in 2002 was the acquisition of two 10-MHz PCS licenses in the 1900 MHz frequency range, with nationwide coverage. The total cost to the Company for these licenses was UF 544,521 (approximately US$12.8 million), with an estimated investment of US$150 million for the 2002-2004 period. The Company will develop the new spectrum using GSM technology. The additional spectrum represents a significant opportunity to meet customer demand and provide new and better services using a more developed and less expensive technology. The year 2002 stood out as a year of consolidation of various Company initiatives, framed within the strategy of "Profitable Growth" implemented in the last years. Telefonica Movil's accomplishments during the year include: (i) attaining a net profit and achieving an increase from 16.3% to 31.3% in EBITDA margin in 2002 as compared to 2001; (ii) consolidating the commercial network, with nearly 1,500 points of sale throughout the country; (iii) liquidating all businesses other than the Company's primary business activities (Trunking, Paging and Trek); (iv) optimizing the workforce and establishing a new corporate organizational structure; and (v) consolidating the internal control processes. In terms of new services, the launch of interconnection among mobile operators for text messaging services has been significant in that it enables the roughly 6.1 million mobile telephone users in the country to communicate with each other in that manner. In addition, Telefonica Movil has launched family-oriented services (service packages for the nuclear family unit) and a "full hogar" service (full home service), which allows the family group to be linked via mobile communications to their home phone. Various messaging services were also added; these integrate features provided by third parties, data transmission, mobile mail and other features. With the introduction of GSM technology during the first half of next year, Telefonica Movil will have the opportunity to introduce into the Chilean market the entire range of services that the Telefonica Group has developed and is successfully marketing. These services include Internet, WAP and "movipag" (payment of domestic bills through mobile telephones), among others. Consolidated revenues of the mobile business reached Ch$206,932 million (US$288.0 million), which represents a 12.4% increase over 2001 and 24% of the total consolidated revenues. EBITDA, which amounted to Ch$67,552 million (US$94.0 million), reached 31.3% of revenues. Investment was practically put on hold during the year, pending publication of the license decrees for the two new 10-MHz frequency bands in the 1900-MHz range, and finally totaled US$71 million for 2002, or 24% of revenues. The year 2003 will be a time of great challenges, two of which merit mention: (i) the launching of the new network within the period required by the authority (six months following publication of the license decrees) and implementing customer management and invoicing systems that enable the entire operation to be supported in TDMA and GSM (ii) the negotiation of new rates for regulated services, which will take effect in February 2004. All of this must be done in an extremely competitive environment, maintaining profitable growth and commercial presence. Corporate Communications Telefonica CTC Chile serves Corporate Customers and Large Corporations through its subsidiary Telefonica Data. Telefonica Data has specialized Telefonica Movil acquired two 10-Mhz PCS licenses in the 1900 Mhz frequency range. The Company will develop the new spectrum using GSM technology 2002 Annual Report Telefonica CTC Chile_35 units for customer service, product and/or service development and operations management, allowing it to offer customers solutions that are tailored to their needs. Corporate Communications serves approximately 5,000 customers, including close to 350 large corporations, ministries and government agencies. This business unit's activities include the delivery of advanced telephony solutions and voice equipment, such as PABX, videoconferencing, and point-to-point data circuits for corporate customers in all segments. In 2002, the GPS service was rolled out with the aim of meeting the needs of companies requiring support and management for vehicle fleets using digital maps over the Internet. The unit also launched the first National Videoconferencing Network and the Contact Center line, providing Internet access to call centers, which has received an excellent market response. Corporate Communications also provides communications solutions, data transmission and value-added services to all its customers through advanced data connections such as Frame Relay, ATM and the IP Network, among others. In addition, it offers advanced telecommunications solutions through consulting, professional services and outsourcing to corporate customers, and offers ADSL as a wholesaler to all Internet service providers (ISPs) on the market, who in turn, market it to their customers. In May 2002, the VPN IP service was launched, expanding the business and service offering for customers, and providing flexible and adjustable (connections can be increased or decreased based on the customer's needs) data connection services with broad coverage and presence in over 400 locations throughout the country. This business unit also has a specialized IP Solutions division whose primary goal is to develop new Internet, IP Network, Data Center and Network Outsourcing businesses, offering customers new value-added and integrated services based on their corporate communications needs. In 2002, the Corporate Communications business generated Ch$86,206 million (US$120.0 million) in revenues, representing 10.0% of total consolidated revenues. This figure reflects a growth of 19.2% over the previous year, when the unit's revenues represented 7.9% of the Company's total consolidated revenues. Other Business Areas t-gestiona Little more than a year after its official start as a wholly-owned subsidiary of Telefonica CTC Chile, Telefonica Gestion de Servicios Compartidos Chile S.A. (t-gestiona) has positioned itself as the Group's provider of support services, delivering logistics, fund management, insurance, collection, personnel, tax, real estate management, and general services. t-gestiona provides clearly defined services to all business areas of the Company. It is responsible for managing the cost, quality and promptness of its services, administering its own personnel and technological resources, and establishing agreements with its customers. In the course of 2002, Telefonica Group companies other than Telefonica CTC Chile have joined the t-gestiona customer portolio, taking advantage of synergies, economies of scale, an attractive price/quality ratio, and the opportunity to concentrate their efforts and resources on their main business activities. In addition, t-gestiona has started to provide certain services, such as logistics and e-learning, to third parties and thus contribute to the Group's earnings. Moreover, customers have responded favorably to the introduction of client satisfaction measurement tools and to the increase in transparency and efficiency of operating expenses, which has been reflected by a 12% average decrease in prices during the second half of 2002. These facts have been valued positively by the clients. 36_Telefonica CTC Chile 2002 Annual Report [GRAPHIC OMITTED] Atento Chile Atento Chile S.A. was created on May 5, 1999 as part of the Atento Group, a subsidiary of Telefonica S.A. Atento specializes in providing customer care services though contact centers or multi-channel platforms (telephone, fax, Internet). Ownership of Atento Chile is held by Atento Holding Chile S.A. (70%), a subsidiary (99.9%) of Atento Holding Inc., itself a subsidiary (99.9%) of Telefonica S.A. Telefonica CTC Chile owns 27.41% of Atento Chile, while Publiguias owns 1.16%, Telefonica Empresas 0.96% and Telefonica Mundo 0.47%. The success of Atento is based on its role as strategic partner of its corporate customers, designing tailor-made solutions for each. Through its network of contact centers, Atento offers services aimed at helping companies to focus on and improve customer care by outsourcing communications management, thus allowing them to properly address customers' needs and increase efficiency. Currently, Atento has a leadership position in the Spanish- and Portuguese-speaking world, with revenues of Eur570 million in 2002, and a global network with over 27,000 million customer service points. The Atento Group is now present in Spain, Mexico, Brazil, Peru, Chile, Argentina, Colombia, El Salvador, Guatemala, Puerto Rico, Venezuela, Morocco, and Japan. Atento will continue to develop services designed to bring companies closer to their customers, constantly striving to maintain a technological edge and improve both quality of service and the training of its personnel. Directory Advertising Impresora y Comercial Publiguias S.A (Publiguias) prints and distributes the telephone directories for the customer database provided by Telefonica CTC Chile. The Company holds a 9% interest in Publiguias along with Telefonica S.A., which holds 51%, with other shareholders controlling the remaining 40%. In August 2001, the Company signed a new agreement with Publiguias, effective through June 2006, whereby it receives a percentage of the revenues generated by the sale of advertisements in the Yellow Pages and in the White Pages. For 2002, the operating revenues from the Publiguias business totaled Ch$4,844 million (US$6.7 million), equivalent to 0.6% of total consolidated revenues. These revenues fell 73.3% as compared to the year 2001, due to lower revenues generated by the new contract, as well as certain one-time payments made in 2001 as a result of the early termination of the previous contract. ANALYSIS OF CONSOLIDATED RESULTS Telefonica CTC Chile's consolidated revenues decreased 6.2% in 2002 as compared to 2001, amounting to Ch$863,149 million (US$1,201 million). The continuous downward trend in revenues from the fixed telephony and long distance businesses was offset by new revenues obtained from innovative products and services, by a sustained growth in mobile telephony and higher revenues from corporate communications and data transmission businesses. Consolidated revenues were also impacted by a decline in operating revenues from Sonda's activities, the deconsolidation of this subsidiary since September 2002, and lower revenues derived from the new agreement with Publiguias subscribed in August 2001. Without all these effects, Telefonica CTC Chile's consolidated revenues show a 0.7% increase as compared to the previous year. Revenues from Fixed Telephony, which represented 44.2% of total consolidated revenues, decreased by 7.6% in 2002 as compared to 2001, mainly as a consequence of a 4.6% fall in revenues from the primary service (including fixed and variable charge, connections and other installations, value added services, equipment marketing and other revenues), a 4.1% decrease in revenues from access charges and interconnections, and a 73.3% decrease in revenues derived from directory advertising. Revenues from Primary Service, which represented The downward trend in fixed telephony and long distance revenues was offset by innovative products and services, and sustained growth in mobile telephony and corporate communications and data transmission 2002 Annual Report Telefonica CTC Chile_37 Contribution to 2002 net income by business (1) (millions of Ch$ as of 12/31/02) [GRAPHIC] Fixed Long Corporate Telephony Distance Mobile Communications Others --------- -------- ------ -------------- ------ -52,162 19,397 3,899 15,793 -5,608 (1) Consolidated figures 2002 revenues by business (millions of Ch$ as of 12/31/02) [GRAPHIC] Other business 5.9% Information systems services (Sonda) 7.2% Corproate communications 10.0% Mobile communications 24.0% Fixed telephony 44.2% Long distance 8.7% 40.9% of total consolidated revenues, were mainly impacted by a drop of 3.3% in revenues from telephone line service fee (fixed monthly charge) and a 6.6% decrease in revenues from variable charge, given a 0.2% decrease in average lines in service and a drop of traffic per line per day during the year. Revenues from access charges and interconnections, which represented 2.7% of total consolidated revenues, dropped 4.1% due to lower long distance traffic in the market. Revenues from Long Distance services, which represented 8.7% of total consolidated revenues, decreased by 8.8% in 2002, amounting to Ch$74,731 million (US$104.0 million). This decrease was principally due to lower domestic long distance traffic and a lower international long distance average price per minute. Domestic long distance traffic from 188 Telefonica Mundo and Globus 120 dropped 10.3% due to market conditions and the mobile substitution effect. Outgoing international long distance traffic increased 5.2%, due to commercial efforts of 188 Telefonica Mundo to introduce innovative tariff plans such as "Papa Contento", "Mundo Movil" and "El Mundo a Llamada Local". Revenues from Mobile Communications and Corporate Customer Communications show a sustained growth. Revenues from the mobile business, which represented 24.0% of total consolidated revenues, increased 12.4% mainly due to a 22.5% growth in average mobile customers and partially offset by lower average revenues per user (ARPUs). Moreover, revenues from Corporate Customer Communications grew 19.2% in 2002 as compared to the previous year, basically as a consequence of a growth in the number of links and increased services to corporate customers, including broadband and ISP services. Revenues from Other Businesses, which represented 13.1% of total consolidated revenues, decreased by 32.6% in 2002 as compared to 2001. These revenues include Sonda (-44.8%), public telephones (-24.8%) and revenues from other subsidiaries such as t-gestiona and Telemergencia. Operating Costs and Expenses decreased 5.9% in 2002, amounting to Ch$732,651 million (US$1,019.5 million). Lower costs are mainly a result of a 21.3% reduction in salaries, as a consequence of the corporate reorganization processes implemented in June 2001 and October 2002, as well as a 9.9% decline in other operating costs. The latter was mainly due to lower mobile subscriber acquisition costs and lower costs from information system services and from contracts with third parties, consistent with the cost control policy applied by the Company in recent years. The cost reduction was also affected by a 0.7% decrease in administrative and selling expenses. The above was partially offset by a 2.2% increase in depreciation as a consequence of an increase in the Company's assets in operation. Additionally, costs were impacted in 2002 by lower costs from Sonda and by the deconsolidation of this subsidiary as of September 2002. Consolidated Operating Income reached Ch$130,498 million (US$181.6 million) in 2002, a 7.8% decrease as compared to 2001. The operating margin (operating income / total consolidated 38_Telefonica CTC Chile 2002 Annual Report Capital expenditures (millions of nominal US$) [GRAPH] 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- 204 291 349 589 615 revenues) reached 15.1%, similar to the 15.4% achieved in 2001. Furthermore, EBITDA (operating income + depreciation) reached Ch$391,533 million (US$544.8 million) in 2002 with a 45.4% EBITDA margin (EBITDA / total consolidated revenues), a 2.3 percentage point improvement compared to 2001. Non-Operating Income amounted to a negative result of Ch$120,699 million (US$168.0 million) in 2002, similar to the previous year. This deficit was particularly impacted by an extraordinary charge of Ch$15,224 million (US$21.2 million) derived from the corporate reorganization process in October 2002, which implied personnel reductions of 1,070 employees from Telefonica CTC Chile and its subsidiaries, as well as by a lower market value of the investment in Terra Networks shares which represented a charge of Ch$7,567 million (US$10.5 million). The above was positively offset by a decrease of 15.4% in interest expenses due to a significant reduction of interest-bearing debt, the renegotiation of outstanding loans and a drop in market interest rates. Monetary Correction amounted to a loss of Ch$8,953 million (US$12.5 million), including the effects of the devaluation of Sonda's investments in Argentina and Brazil, as well as the cost of forward hedging contracts acquired in the period. The 100% foreign exchange hedging policy has allowed the Company to neutralize most of the effect of the foreign exchange fluctuations in 2001 and 2002. Telefonica CTC Chile's net result amounted to a loss of Ch$17,680 million (US$24.6 million) in 2002, as compared to a net income of Ch$4,235 million (US$5.9 million) registered the previous year. INVESTMENT AND FINANCING Investments During 2002, Telefonica CTC Chile's investments continued the downward trend observed in recent years, due primarily to the decline in profitability of the local business as a result of Tariff Decree No. 187. An additional factor has been Chile's slow economic recovery, involving low levels of consumption and increased non-payment, generating available fixed line capacity, the utilization of which has been a Company priority. Remaining capital expenditures were aimed primarily at those business areas presenting greater potential for growth and development, especially the mobile and broadband communications businesses. Thus, 2002 investments totaled US$204 million, compared to average annual investments of US$510 million in the last 5 years. This year, the following projects have been the focal points for growth: o Mobile Telephony: Investment in acquisition of mobile frequencies (US$12.8 million) and network deployment with GSM technology, aimed at greater growth, technological development and lower equipment costs. o Broadband: Investment related to ADSL service growth based on high-speed Internet connections. New broadband services are currently being Utilization of available fixed line capacity has been a Company priority 2002 Annual Report Telefonica CTC Chile_39 Capital Expenditures 2002 Business Area Millions of US$ - -------------------------------------------------------------------------------- Primary projects Basic Telephone Service 35.8 - -------------------------------------------------------------------------------- Installed capacity utilization, sale of lines and service maintenance Mobile Communications 71.1 - -------------------------------------------------------------------------------- Acquisition of 1900 MHz licences and deployment of GSM network,quality of service Long Distance 6.2 - -------------------------------------------------------------------------------- Increase in fiber optic capacity, incorporation of IP technology into the current network Equipment 9.4 - -------------------------------------------------------------------------------- Terminal and public telephone equipment Broadband Services 18.3 - -------------------------------------------------------------------------------- ADSL Services Corporate Communications 27.5 - -------------------------------------------------------------------------------- Private and IP Network Services, acquisition of PABX equipment Information Technology 21.9 - -------------------------------------------------------------------------------- Billing system and information systems services Other 13.3 - -------------------------------------------------------------------------------- Corporate systems, customer service and others Total 203.5 - -------------------------------------------------------------------------------- developed, and will be offered in 2003, such as domotic services, television through PCs and other services. Furthermore, the Company currently offers other services that use the ADSL infrastructure, which include Viginet, a security monitoring service over an Internet connection, and Virtual Private Networks (VPN). o Alarms and Surveillance Service: Expansion of the customer base. o Customer data access: Expansion of the IP Network to deliver VPN, switched IP and data transmission services. A breakdown of investment by business is shown in the table above. Financing In the year 2002, Telefonica CTC Chile continued to pursue its strategy to improve its financial structure. This was made possible by reducing investments, generating greater cash flow, and reducing existing debt through prepayment of bank loans and repurchase of bonds in the national and international markets. In addition, the Company renegotiated loans, obtaining reduced interest rates and extended maturities. In line with its objectives, during the year 2002 the Company invested US$204 million, amortized debt in the amount of US$70 million, and prepaid debt for US$311 million. The detail of the debt prepayments is the following: US$105 million correspond to syndicated loans, US$93 million to repurchase local bonds, US$41 million to the repurchase of eurobonds and US$72 million to bilateral loans. The funds used to finance these obligations came mainly from the Company's own operating cashflow and from the refinancing of a syndicated loan. In July 2002, the terms of a syndicated loan for US$180 million were renegotiated as follows: (i) reduction in the loan amount to US$150 million, by prepayment of US$30 million; (ii) extension of the maturity from February 2003 to April 2007; and (iii) decrease in the annual interest rate from LIBOR + 1.375% to LIBOR + 1.0%, subject to changes in the risk rating of the Company's long term foreign currency debt. As a result of all these actions, as of December 31, 2002, the Company's interest-bearing debt totaled US$1,550 million, a reduction of 21% as compared to the US$1,950 million of debt outstanding at year-end 2001. In this way, the Company continued improving its financial indicators, reaching as of December 31, 2002 a leverage ratio of 1.09 times, compared to 1.34 times at the close of 2001, and an interest coverage indicator (EBITDA /net interest expenses) of 6.38 times compared to 5.52 times at the close of 2001. 40_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] Foreign Exchange and Interest Rate Risk Management The Company is exposed to financial risks related to fluctuations in exchange and/or interest rates, since a significant portion of its indebtedness comes from abroad and is therefore foreign currency-denominated and/or subject to floating interest rates. In this regard, the Company periodically reviews its exposure to foreign exchange and interest rate risk to determine the levels of hedging required for each period. In 2002 the dollar once again showed high volatility, with an upward trend that resulted in a peso depreciation in real terms of 6.6% against the dollar between year end 2001 and year end 2002. Thus, amid uncertainty regarding exchange rate performance, the Company continued to pursue a conservative foreign-currency debt hedging policy, hedging 100% of its interest-bearing debt, in order to neutralize the impact of exchange-rate fluctuations. Furthermore, hedging against interest rate fluctuations reached 80.6% of total interest-bearing debt. For hedging purposes, the Company uses derivative financial instruments available on the national and international markets. At December 31, 2002, Telefonica CTC Chile had entered into foreign currency forward contracts covering dollar-denominated liabilities in the amount of US1,158 million. In addition, the Company maintained US$572 million in collars in order to hedge against interest rate (LIBOR) fluctuations certain obligations subject to floating interest rates. PROPERTY, SUPPLIERS, LOGISTICS AND INSURANCE Property Property, plant and equipment owned by Telefonica CTC Chile to conduct its activities, such as buildings, switching centers, external networks, customer terminal equipment, furniture and office equipment and other work-related items, are distributed throughout Chile. The Company also operates public and private switching exchange networks, external plant networks, fixed and wireless (mobile) circuits, local and long distance fiber optic, radio and microwave circuits. Suppliers During 2002, Telefonica CTC Chile had approximately 1,500 active domestic and international suppliers. The primary vendors included Alcatel, Unisys and Ericsson for network infrastructure products; Redes de Chile and Dragados for services and construction; Nokia for cellular equipment; Alcatel for ADSL equipment; IBM and Accenture for information systems; and Punto de Vista and ADN S.A. for advertising and marketing. Towards the end of the year, for the third consecutive year, a collaborative workshop for suppliers was conducted in Chile by experts from Telefonica S.A. in conjunction with Chilean professionals from Telefonica CTC Chile. This initiative consisted of presenting and applying on-site methods intended to facilitate the implementation of continuous improvement Amid uncertainty regarding exchange rate performance, the Company continued to pursue a conservative foreign-currency debt hedging policy, hedging 100% of its interest-bearing debt 2002 Annual Report Telefonica CTC Chile_41 processes, identifying processes where suppliers could reduce costs and optimize competitiveness, and thus adding value for Telefonica CTC Chile and its end users. The relationship between Telefonica CTC Chile and its suppliers is governed by internal regulations establishing that any action or contract presenting a conflict of interest must be reported to the Company's Director's Committee and subsequently approved by the Board of Directors, in order to maintain transparency in procurement and project performance. Logistics Telefonica CTC Chile has set up a Logistics Center with a storage capacity of up to 5,000 square meters. For larger volume products there is an adjacent area of 1,000 square meters. All processes carried out in the Logistics Center are supported by radio-frequency technology and bar codes. During the year, the first external customer was incorporated into this center, for storage services, D&S S.A., who receives storage services since September 2002. In terms of operation, the Logistics Center doubled its traffic volume in orders, shipments and storage with respect to the fourth quarter of 2001, when operations commenced. Other achievements include a considerable decrease in inventory and optimization of space usage for the Company as a whole. Insurance According to Telefonica CTC Chile's Risk Management Policy, the Company decides whether to transfer risks to insurance companies on a case-by-case basis. If it elects to do so, standard coverage available on the market is applied or coverage is adapted to the specific risk in particularly complex cases. The Company's assets are fully insured against physical damage and lost income due to service shutdown. This coverage includes, among others, the risk of earthquakes and other natural disasters, shipment, political risk, theft and domestic transport. The insured amount totals approximately US$3,297.2 million. For work performed by independent contractors on the Company's network infrastructure and for outsourced collection centers, overall insurance quotes are requested, adjusting coverage to the activities performed by the contractors with a view to obtaining preferred premiums and rates due to the large volumes. Furthermore, the Company has liability insurance for damage/injury to third parties in addition to other insurance covering executives, personnel, vehicles and imports of equipment and materials. 42_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] RISK FACTORS Chilean Economy Since Company operations are located in Chile, they are sensitive to and depend on the country's level of economic activity. Given the national economic slowdown and the resulting contraction of domestic demand in recent years, the Company has been affected by a decrease in demand for local and long distance traffic. In addition, customer non-payment levels have increased. Regulation of the Telecommunications Industry Certain telecommunications services are subject to tariff regulation, since the authorities believe that in some parts of this sector sufficient conditions do not yet exist to ensure free competition. Current Tariff Decree N(o)187 sets maximum prices for local telephone services for a period of 5 years, effective through May of 2004. In 2002, approximately 41% of the Company's total revenues were regulated by this Decree, and could be affected by a new tariff setting process. (See "Regulatory Framework"). Competition Telefonica CTC Chile faces strong competition in all business areas, as does any company which operates in a free market environment. The Company estimates that a high degree of competition will continue to exist in the main segments of the business, particularly in domestic and international long distance services, mobile communications, local telephone services, data transmission and public telephones. Technological Changes The telecommunications industry is subject to rapid and significant technological advances and the introduction of new products and services. Although the Company believes that for the foreseeable future existing and developing technologies will not have a substantial negative impact on the viability and competitiveness of its telecommunications business, it is impossible to accurately predict the effect of these technological changes on the Company, or the need to invest in developing or implementing new competitive technologies. Financial Risk The Company maintains a significant portion of its debt in foreign currency and at variable interest rates. Therefore the volatility and fluctuation of the peso with respect to other currencies, and changes in domestic and international interest rates, may affect the Company's earnings (See "Foreign Exchange and Interest Rate Risk Management"). Events occurring in other developing markets, especially in Latin America, may adversely affect the market where Telefonica CTC Chile's stock is traded, the availability of foreign capital in Chile and the value of the domestic currency. 2002 Annual Report Telefonica CTC Chile_43 shareholder information [GRAPHIC] 44_Telefonica CTC Chile 2002 Annual Report Shareholder Information COMPOSITION OF EQUITY CAPITAL At December 31, 2002, the capital stock of the Company was composed of 957,157,085 fully subscribed and paid-in shares, divided into 873,995,447 Series A and 83,161,638 Series B shares. SHAREHOLDERS' MEETINGS Telefonica CTC Chile's General and Extraordinary Shareholders' Meetings were held on April 5, 2002, and all items submitted to a vote were approved. At the General Shareholders Meeting, shareholders approved the 2001 Annual Report and Financial Statements of the Company, as well as the distribution of a final dividend in the aggregate amount of Ch$1,233 million (30% of the fiscal-year profit, corresponding to the legal minimum required), equivalent to Ch$1.29 per share. Other relevant items approved at such meeting included the appointment of account inspectors and local credit rating agencies. The items approved at the Extraordinary Shareholders' Meeting were related to an amendment of the Company's Bylaws in order to adapt the existing text, in effect since 1982, to reflect the current legal framework. The General Shareholders Meeting approved the distribution of a final dividend based on 2001 results, equivalent to Ch$ 1.29 per share 2002 Annual Report Telefonica CTC Chile_45 PRINCIPAL SHAREHOLDERS Millions of Millions of Shares Shares 12/31/02 % 12/31/01 % - -------------------------------------------------------------------------------- Telefonica Internacional Chile S.A 417.7 43.6% 417.7 43.6% Citibank N.A. (1) 193.5 20.2% 211.0 22.0% Chilean Pension Funds 236.0 24.7% 222.2 23.2% Life Insurance Companies 11.4 1.2% 11.8 1.2% Foreign Capital Investment Funds 12.2 1.3% 13.0 1.4% Employees 4.7 0.5% 5.0 0.5% Other Shareholders 81.7 8.5% 76.5 8.1% Total Shares 957.2 100.0% 957.2 100.0% - -------------------------------------------------------------------------------- Twelve Major Series A Shareholders % over % over Number of Series A Total Shares Shares Shares - -------------------------------------------------------------------------------- Telefonica Internacional Chile S.A. 375,993,524 43.0% 39.3% Citibank N.A. (1) 193,472,387 22.1% 20.2% AFP Provida S.A. (2) 59,673,747 6.8% 6.2% AFP Habitat S.A. (2) 50,855,651 5.8% 5.3% AFP Cuprum S.A. (2) 38,692,407 4.4% 4.0% AFP Summa Bansander S.A. (2) 29,374,450 3.4% 3.1% AFP Santa Maria S.A. (2) 28,219,686 3.2% 2.9% AFP Plan Vital S.A. (2) 5,923,139 0.7% 0.6% The Chile Fund Inc. 4,869,151 0.6% 0.5% AFP Magister S.A. (2) 3,455,000 0.4% 0.4% Consorcio Nacional de Seguros S.A 3,075,912 0.4% 0.3% Genesis Chile Fund Limited 2,842,316 0.3% 0.3% Subtotal 796,447,370 91.1% 83.2% Other shareholders 77,548,077 8.9% 8.1% Total 873,995,447 100.0% 91.3% - -------------------------------------------------------------------------------- Twelve Major Series B Shareholders % over % over Number of Series B Total Shares Shares Shares - -------------------------------------------------------------------------------- Telefonica Internacional Chile S.A 41,739,487 50.2% 4.4% AFP Provida S.A. (2) 5,647,260 6.8% 0.6% AFP Habitat S.A. (2) 4,715,985 5.7% 0.5% AFP Cuprum S.A. (2) 3,878,246 4.7% 0.4% AFP Santa Maria S.A. (2) 2,425,691 2.9% 0.3% AFP Summa Bansander S.A. (2) 2,217,399 2.7% 0.2% Moneda S.A. A.F.I P/Pionero F.I.M 1,750,812 2.1% 0.2% Petrizzio Monserrat, Luisa Gloria 903,452 1.1% 0.1% Bancard S.A. 764,446 0.9% 0.1% Ballarin Lopez, Miguel 627,417 0.8% 0.1% Fundacion Arturo Irarrazabal Correa 626,072 0.8% 0.1% Compania de Inversiones La Espanola S.A 616,873 0.7% 0.1% Subtotal 65,913,140 79.3% 6.9% Other shareholders 17,248,498 20.7% 1.8% Total 83,161,638 100.0% 8.7% - -------------------------------------------------------------------------------- (1) Depositary Bank acting on behalf of the ADR holders. (2) Investment made on behalf of the Pension Fund. 46_Telefonica CTC Chile 2002 Annual Report Ownership structure (as of December 31, 2002) [GRAPHIC]
Telefonica Foreign Life insurance Chilean Internacional Citibank Others Employees investment funds companies pension funds Chile S.A. N.A.(1) - ----------------------------------------------------------------------------------------------------- 8.5% 0.5% 1.3% 1.2% 24.7% 43.6% 20.2%
(1) Depositary bank acting on behalf of the ADR holders. The controlling shareholder of Telefonica CTC Chile S.A. is the Chilean corporation Telefonica Internacional Chile S.A., which holds a 43.64% equity interest. The shareholders of Telefonica Internacional Chile S.A. are Telefonica Chile Holding B.V. (99.99%) and Telefonica Internacional Holding B.V. (0.01%), both companies being controlled by Telefonica S.A. Telefonica S.A., a Spanish telecommunications company, is a public corporation listed on the securities exchanges of Madrid, London, Paris, Frankfurt, Tokyo, New York, Lima, Sao Paulo, and Buenos Aires. Ownership of these shares is highly diluted, with shareholders rarely owning more than 5% of the capital stock. Therefore, it is not possible to obtain details on individual owners of Telefonica S.A. shares. Share Transactions of Related Parties
Series A share transactions Number of Shares Price per Total Date of the Unit Amount Name transaction Purchase Sale Ch$ Ch$ - -------------------------------------------------------------------------------------------------- Oscar Marquez Benavides (1) Mar-13-02 2,000 2,440 4,880,000 Francisco Cabanas Gutierrez (2) Apr-29-02 2,900 2,410 6,989,000 Sergio Badiola Broberg (3) May-15-02 17,885 2,430 43,460,550 Hilda Caceres Jofre (4) Dec-27-02 10,600 1,700 18,020,000 - --------------------------------------------------------------------------------------------------
Series B share transactions Number of Shares Price per Total Date of the Unit Amount Name transaction Purchase Sale Ch$ Ch$ - -------------------------------------------------------------------------------------------------- Sergio Badiola Broberg (3) May-15-02 10 1,750 17,500
All the transactions were performed as financial investments. (1) Corporate Manager of Telefonica CTC Chile. (2) General Manager of Telefonica Empresas until June 1st., 2002. (3) Alternate Director of Telefonica CTC Chile. (4) Wife of a Telefonica CTC Chile Director. 2002 Annual Report Telefonica CTC Chile_47 Quarterly Traded Volumes and Average Prices CTC-A Santiago Stock Exchange N(o)of shares Ch$ millions Average Share Price (Ch$) - -------------------------------------------------------------------------------- 1Q00 37,604,798 99,936 2,682 2Q00 49,136,828 124,360 2,543 3Q00 29,217,491 69,143 2,358 4Q00 33,380,291 70,146 2,121 1Q01 29,695,537 60,439 2,044 2Q01 22,989,835 49,064 2,141 3Q01 23,478,018 46,839 2,040 4Q01 53,239,033 103,017 1,938 1Q02 22,563,727 53,139 2,325 2Q02 14,350,138 32,761 2,305 3Q02 26,097,797 48,200 1,838 4Q02 67,913,318 110,683 1,633 - -------------------------------------------------------------------------------- CTC-B Santiago Stock Exchange N(o)of shares Ch$ millions Average Share Price (Ch$) - -------------------------------------------------------------------------------- 1Q00 3,328,370 7,086 2,185 2Q00 1,944,615 4,360 2,255 3Q00 924,626 1,817 2,015 4Q00 347,254 571 1,668 1Q01 553,951 894 1,622 2Q01 1,197,571 2,003 1,661 3Q01 846,907 1,278 1,579 4Q01 1,479,390 2,139 1,489 1Q02 518,392 869 1,633 2Q02 843,069 1,431 1,727 3Q02 625,584 843 1,362 4Q02 738,436 919 1,231 - -------------------------------------------------------------------------------- ADRs New York Stock Exchange N(o)of ADRs US$ millions Average ADR Price (US$) - -------------------------------------------------------------------------------- 1Q00 52,660,100 531 20.94 2Q00 18,428,900 360 19.45 3Q00 14,160,200 240 17.05 4Q00 12,774,500 190 14.82 1Q01 12,473,400 177 14.25 2Q01 9,423,800 133 14.12 3Q01 10,081,000 119 12.20 4Q01 22,996,000 258 11.25 1Q02 19,555,900 272 13.94 2Q02 15,646,200 222 14.04 3Q02 7,626,200 79 10.32 4Q02 24,028,600 215 9.11 - -------------------------------------------------------------------------------- 48_Telefonica CTC Chile 2002 Annual Report 2002 ADR Price Performance (New York Stock Exchange) CTC ADR (US$) / ADRian Index (Base=13.55 at 1-2-02) [GRAPHICS] Volume Traded (millions of ADRs) Despite a fourth-quarter reversal in the downward trend of the Chilean economy, the local stock market also lost ground in 2002, although much more moderately than its neighbors, with the IPSA falling 15.5% SHARE PRICE PERFORMANCE For securities exchanges worldwide, 2002 was a negative year. All stock indices, whether in Asia, Europe, the U.S. or Latin America, showed important declines, beset with uncertainty in the major exchanges. This was particularly true in Latin America, where the biggest losses for the year in real terms were recorded in Argentina and Brazil, countries where the stock price indices declined 48% and 46% respectively. Despite a fourth-quarter reversal in the downward trend of the Chilean economy, the local stock market also lost ground in 2002, although much more moderately than its neighbors, with the IPSA falling 15.5%. An excessively high exchange rate and only mild signs of economic recovery toward the end of the year did not allow Chile to remain immune to the influences of an adverse global scenario. However, certain macroeconomic indicators did rally in the final months of 2002, heralding a brighter economic picture for 2003. Underpinning this forecast is the belief that the international treaties entered into with the U.S., South Korea and the European Union should lead to higher growth in Chile and make the country more attractive to foreign investment. Telefonica CTC Chile shares fell victim to the shakeout in the global telecommunications industry, brought about by the Enron and WorldCom financial scandals. In the local context, telecommunications companies' results were adversely affected by the high costs of personnel restructurings implemented during the year. CTC-A shares were the most traded securities of the year on the Bolsa de Comercio de Santiago (Santiago Stock Exchange), with an annual volume of Ch$244,784 million (US$340.6 million). Yet the price of CTC-A shares declined by 22.1% for the year, closing at Ch$1,700 on December 31, 2002. The CTC-B shares also declined in 2002 by 18.0%, closing out the year at Ch$1,271. The CTC-A shares are one of the most liquid stocks in Chile, as well as one of the most representative of the Chilean market, with a 12% weight in the local IPSA index. Therefore, the Company's stock price has been affected more rapidly and to a higher degree than most other Chilean stocks by downturns in the domestic and international markets. The ADRian index, which charts the performance of Chilean shares traded as ADRs, showed a 20% decline for the year, faring significantly worse than the IPSA. In the U.S. market, the Dow Jones finished the year with a 16.8% loss, while the Nasdaq declined 31.5% in the same period. The Company's ADRs, which have been traded on the New York Stock Exchange since 1990, ended 2002 at US$9.59, 28.8% lower in nominal terms as compared to year-end 2001. The 9.7% nominal devaluation of the Chilean peso against the U.S. dollar in 2002 had an impact on the differential between the price drop in the Chilean share and in the ADR. The overall volume of shares traded on the Santiago Stock Exchange in 2002 was 10.4% lower than in 2001. At the same time, the number of trades decreased by 21.0%. On the other hand, the volume of Telefonica CTC Chile shares (CTC-A and CTC-B) traded on this exchange in 2002 reached 134 million shares, slightly higher than in 2001, and equivalent to Ch$248,845 million. This volume 2002 Annual Report Telefonica CTC Chile_49 [GRAPHIC] accounted for 10.3% of the total volume traded on the Santiago Stock Exchange. With regards to Telefonica CTC Chile's ADRs, total volume traded on the NYSE in 2002 was US$788.7 million, 14.6% higher than in 2001. ADR holders reduced their equity interest in Telefonica CTC Chile from 22.0% at the end of 2001 to 20.2% at year-end 2002. This was due to a increased flowback operations (conversion of ADRs into shares for return to the local exchanges), equivalent to 12.8 million ADRs, as compared to the 8.4 million ADRs inflow operations (purchase of shares in local exchanges to be exchanged for ADRs). In addition, it is worth noting that Chilean AFPs (Pension Fund Managers) increased their equity interest in the Company from 23.2% in 2001 to 24.7% in 2002. 2002 DIVIDEND DISTRIBUTION POLICY Following is the text of the 2002 dividend policy informed at the Annual Shareholders' Meeting held on April 5, 2002: 1. For Fiscal Year 2002, the Company will distribute at least 30% of the Company's profits of that year, which is the minimum percentage required by law. This will be done through a final dividend to be paid in May 2003, which will be submitted for approval at the Annual General Shareholders Meeting. 2. The dividend policy for 2002 and subsequent years will be in keeping with the objectives set forth in the Company's Financial Plan, which is focused primarily on reducing debt to adjust the Company's financial structure. 3. This policy reflects the intentions of the Board of Directors. Implementation thereof will be dependent upon the actual profit obtained, on the Company's periodic projections, or on the presence of certain conditions, as the case may be. 4. The dividend payment procedure is as follows: 4.1 To collect dividends, Shareholders may choose one of the following alternatives: a) Direct payment by check or cashier's check (for any dividend amount). For Shareholders residing in Santiago, payment will be made at a centrally located bank designated for this purpose and identified on the dividend announcement. Uncollected payments will be handled by the Shareholder Services Office of Telefonica CTC Chile located at Av. Providencia 111, 2nd floor, or by a bank designated for such purpose, subject to prior notification to Shareholders. For Shareholders residing outside Santiago, dividends will be paid at the Company's regional offices. ADR Holders will be paid through the Depositary Bank, according to the provisions of Title I, Chapter XXVI, of the Compendio de Normas de Cambios Internacionales [Compendium of International Foreign-Exchange Regulations] of the Central Bank of Chile and of the Deposit Agreement between Citibank N.A. 50_Telefonica CTC Chile 2002 Annual Report Gross Dividends Paid During The Last 5 Years Figures are expressed in nominal Chilean pesos per share (1) Interim Interim Interim Interim Final Dividend Dividend Dividend Dividend Dividend Fiscal year 1998 9.9 13.4 5.0 5.0 7.5 Fiscal year 1999 (2) -- 2.0(3) -- Fiscal year 2000 -- -- -- -- -- Fiscal year 2001 -- -- -- -- 1.29 Fiscal year 2002 (4) -- -- -- -- -- (1) 1 ADR corresponds to 4 Series A common shares. (2) As of 1999, the number of interim dividends was modified from 4 to 3. (3) Charged to prior retained earning. (4) As of 2002, the Company will only pay a final dividend, which will be presented to the corresponding shareholders' meeting for approval. and Compania de Telecomunicaciones de Chile S.A. b) Deposits to checking accounts. c) Deposits to savings accounts. d) Payment by check or cashier's check sent by registered mail to the Shareholder's address. 4.2 Shareholders will be asked to choose one of these four, mutually-exclusive alternatives, giving preference to those not involving direct payment at the Company's offices or through third parties. 4.3 In order for payment to proceed and to prevent improper collection of payments, the following precautions have been taken: a) Direct payment will require: - The Shareholders' identification card when payment is personally collected. - Power of attorney certified by notary when an attorney-in-fact appears on behalf of the Shareholder. Such person will also be required to prove his or her identity b) For payment by deposit made to a checking or savings account, the account must be in the name of the Shareholder. c) For checks or cashier's checks to be issued for direct payment or payment by registered mail, the following requirements shall apply: - All checks and cashier's checks will be made payable to the Shareholder, unless otherwise requested in writing by the Shareholder. - All checks made out to legal entities (regardless of amount) and to individuals (when in an amount greater than Ch$500,000) will be for deposit only, unless the Shareholder requests otherwise in writing. DIVIDEND INFORMATION Distributable Income for 2002 The Company obtained a net loss of Ch$17,680 million (US$24.6 million) in 2002, which meant that it did not have a distributable income for dividend payment purposes during this period. In accordance with the existing dividend policy, Telefonica CTC Chile will not distribute dividends based on the results of the year 2002. 2003 Dividend Policy The Board will maintain a dividend policy that will allow the Company to cover its self-financing needs and comply with the current regulations. The dividend policy for year 2003 contemplates the distribution of the minimum percentage required by the Law (currently 30% of net income). The dividend policy for year 2003 will be informed at the General Shareholders Meeting. 2002 INVESTMENT AND FINANCING POLICY OF COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES Following is the text of the investment and financing policy approved at the Annual Shareholders' Meeting held on April 5, 2002: 2002 Annual Report Telefonica CTC Chile_51 General Policy In 2002, Compania de Telecomunicaciones de Chile S.A (hereinafter, "Telefonica CTC Chile" or the "Company") will focus on investing in all areas of business described in its Bylaws, with particular emphasis on the following objectives: - - Meeting the communication needs of current and prospective customers of the Company and its Subsidiaries by providing telecommunications, information and audiovisual services along the range of available technology, provided that the regulatory framework allows for adequate profitability for shareholders. - - Expanding the Company's activities domestically and internationally through new business opportunities in markets in which its telecommunications knowledge and experience provide a competitive advantage. - - Introducing a modern management strategy aimed at maximizing Company value while innovatively and efficiently organizing employees and resources involved in operating and developing the telecommunications business. - - Ensuring that invested funds are appropriately allocated and solvency indicators are met, consistent with domestic and international economic conditions. This policy framework has been implemented through the creation of the Telefonica CTC Chile Group, in which each company independently manages and optimizes its own businesses within the Group's general policies and financial controls, subject to the decisions of its own Board of Directors. I. Investment Policy As described in the General Policy, Telefonica CTC Chile will make the necessary investments to fulfill its corporate objective, pursuant to its Bylaws and the preceding list of goals. To this end, the Company's Management will have sufficient power and authority to invest in the telecommunications business on the basis of the current regulatory framework. This means offering services in accordance with existing installed capacity and developing expansion plans for any new services that allow for adequate levels of profitability based on technical-financial criteria. Telefonica CTC Chile will invest in telecommunications-related businesses by undertaking projects directly through the Parent Company or Subsidiaries and, as the case may be, by creating and/or participating in professional partnerships or corporations. Following is a description of the principal investment projects being considered for 2002 by the Telefonica CTC Chile Group. 1. Areas of Investment a) Network Infrastructure The network infrastructure of Telefonica CTC Chile comprises Fixed Telephony, Mobile Telephony, Data, Long Distance and IP Network Platforms. These networks include telecommunications systems and equipment as well as associated intangible assets and provide integrated physical, technological and operational support for the services that the Corporation offers its customers. The investments in networks are described below: Line Expansion Plan In 2002, Telefonica CTC Chile will continue using available installed capacity to expand service according to the tariff and regulatory environment, achieving complete coverage of the domestic market in Fixed Telephony. Associated investments involve minor work on network infrastructure and equipment to be performed when demand so requires and when the return on such investment warrants it. Quality of Service This investment plan includes a series of tasks aimed at replacing outdated equipment, providing support for networks, performing preventive maintenance, and providing tools to better manage the use of network capacity, thereby ensuring reliability in line with international standards. Long-distance Voice and Data Network Investments to be undertaken under this category include the ongoing development of a domestic 52_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] and international fiber-optic network designed to expand capacity and increase the quality of long-distance communications. They also include the roll-out of a Multiservice Network, allowing creation of the infrastructure required to support current and future bandwidth needs and maintain current levels of service quality. Corporate Communications The Company will continue developing Data Network projects and setting up Private Networks according to customer requirements and demand, and will provide integrated solutions on the basis of dedicated and switched communications services and products. The IP Network will also continue to be developed, thereby allowing the Company to efficiently offer services using Internet protocols. Mobile Communications The year 2002 will see continued investment in Mobile Telephony aimed at expanding service and at maintaining and improving quality-of-service standards. Likewise, efforts to strengthen Value-added, Data, and Internet Services will continue. b) Sale of Lines This includes investments related to connection of lines, transfer and extension of lines, and others. c) Public Telephony and Terminal Equipment The Company will invest as needed to maintain the number of existing Pay Telephones and to acquire Terminal Equipment to sell lines and equipment with new features in order to offer new services. d) Interconnections This covers investment in interconnection links to long-distance carriers, fixed telephone companies, mobile telephone companies and Internet service providers (ISPs). It also includes investments in the various services related to Network Unbundling. e) Computer Services Through the subsidiary Sonda, resources will be focused on information systems services, with a view to leading the way in technological development in Latin America. f) e-Business This includes the investment needed to provide Telefonica CTC Chile with an Internet infrastructure to automate its business processes and better serve its customers in line with the most efficient global practices. g) Broadband and Internet Expansion Telefonica CTC Chile will continue introducing broadband technologies by integrating ADSL platforms and technologies, remote monitoring and security services, and other features. In addition, investment in Community Internet Centers will assist in placing Internet technology and applications within reach of the community and in developing community-specific content. h) Other Investments This includes investments in office and computer equipment for administrative areas and improving administrative and customer service spaces, as well as healthcare-related and other small investments. 2. Estimated Investment The Group's maximum investment amount will be based on the cost of implementing the aforementioned projects within the regulatory framework. These projects are aimed at making it possible to meet new customer demand using existing capacity and ensure an adequate return for the Company, as well as to provide new services as required by corporate customers, maintain quality-of-service standards, and support the operational and administrative management efforts that the Company's increased subscriber base demands. The maximum amount to be invested to create and/or hold an interest in professional partnerships or corporations, both domestically and internationally, is set at 25% of the shareholders' equity according to the latest quarterly consolidated balance sheet presented to the Superintendencia de Valores y Seguros. 3. Investment in Financial Instruments The Company will also invest in financial assets to maximize the yield from cash surpluses and properly hedge foreign exchange and interest rate 2002 Annual Report Telefonica CTC Chile_53 risk associated with the Company's liabilities. The investment portfolio will be diversified along liquidity, return and issuer risk parameters, as determined by Company Management, while also taking into account the hedging of liabilities. 4. Role in Controlling Areas of Investment Since its investment projects are predominantly related to its line of business, the Telefonica CTC Chile Group has control over their different stages of development. Should the participation of third parties be required in new business ventures, the Company will in due course enter into agreements governing its relationship with such third parties. II. Financing Policy In 2002, emphasis will be placed on seeking alternatives to improve the Company's financial structure through new financing and by renegotiating the current debt. Sources of financing for the 2002 investments will be determined according to the Company's long-term Financial Plan. Financial resources required in 2002 will be obtained internally; through traditional borrowing; from the sale and leasing of real estate and other property, with or without a purchase option; from public or private debt instruments, whether or not convertible in Chile or abroad; through loans from financial institutions; from supplier credit; from the securitization of assets; and by capital contributions, if strategic considerations so advise. Other financing alternatives available on the local and international financial markets may be considered if found appropriate for the Company following an economic and financial assessment. Internal resources may consist of accounting depreciation, other amortization and net profits for the period. Profits for the period constitute a net source of financing in the proportion approved for retention at the Annual Shareholders' Meeting. The Group's maximum consolidated debt-to-equity ratio may not exceed 1.6 times unless the most restrictive limit provided in the applicable covenants with lenders exceeds 1.6, in which case the most restrictive limit agreed upon with lenders will apply. However, this limit may not exceed 1.75 times. For purposes of computing the debt-to-equity ratio, "debt" will be defined as total consolidated liabilities and "equity" will be defined as the difference between total consolidated assets and total consolidated liabilities. All figures used in computing this ratio will be for the same date and in constant currency. III. Management's Authority to Enter into Agreements with Creditors Providing for Guarantees and Restrictions on the Distribution of Dividends Notwithstanding applicable restrictions established by law or the Bylaws, the Company's Management may not agree to furnish collateral or security interests to secure the obligations of the Company or third parties other than subsidiaries except following approval at a Special Shareholders' Meeting. These restrictions shall not apply to monetary obligations resulting from balances on the purchase price of chattels or real estate if 54_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] secured by means of the asset being purchased. The Company may only agree with lenders to restrict the distribution of dividends after approval at an Annual or Extraordinary Shareholders' Meeting. IV. Assets Essential to the Operation of Compania de Telecomunicaciones de Chile S.A. Assets essential to the operation of Compania de Telecomunicaciones de Chile S.A. include all networks and switching centers, and the principal facilities and equipment in service, including land and easements required for operating such facilities and protected under the respective license decrees. Notwithstanding the foregoing, such assets may be modified or replaced in the event of technical or economic obsolescence. In addition, the essential assets of Compania de Telecomunicaciones de Chile S.A. include 51% of the shares of Telefonica Movil de Chile S.A., Compania de Telefonos de Chile-Transmisiones Regionales S.A. and Compania de Telecomunicaciones de Chile Equipos y Servicios S.A., as well as the assets required to operate these companies, whether owned by them or leased from Compania de Telecomunicaciones de Chile S.A. and protected under the respective license decrees, as such assets may from time to time be modified or replaced due to technical or economic obsolescence. Moreover, in the event that any of Telefonica Movil de Chile S.A., Compania de Telefonos de Chile-Transmisiones Regionales S.A. or Compania de Telecomunicaciones de Chile Equipos y Servicios S.A. calls an Extraordinary Shareholders' Meeting to dispose of all or any portion of such aforementioned assets, Compania de Telecomunicaciones de Chile S.A. shall call an Extraordinary Shareholders' Meeting of its own to decide how its representatives are to vote at the subsidiary's Extraordinary Shareholders' Meeting. V. Management's Authority to Execute, Amend, or Terminate a Purchase, Sale or Lease Agreement for Goods and Services Required for the Normal Operation of Compania de Telecomunicaciones de Chile S.A. Apart from its inherent power and authority, the Company's Management shall, pursuant to the Bylaws, have sufficient authority to execute, amend or terminate any purchase, sale or lease agreement for goods and services required for normal Company operation, within the applicable legal framework and on prevailing market terms for goods or services of the same type, quality, characteristics and condition. However, Management may not dispose of any goods or property rights declared essential to the Company without prior approval provided at an Extraordinary Shareholders' Meeting. 2002 Annual Report Telefonica CTC Chile_55 [PHOTO] management organization and human resources 56_Telefonica CTC Chile 2002 Annual Report Management Organization and Human Resources BOARD OF DIRECTORS The Company is governed by a Board of Directors, which pursuant to the Company Bylaws, is comprised of seven directors and their respective alternates. Directors are elected to a three-year term at a General Annual Shareholders Meeting. Six of the directors and their alternates are elected by holders of Series A Common Stock. Holders of Series B Common Stock elect one director and one alternate director. If a vacancy occurs on the Board of Directors, the relevant alternate director serves as director for the remainder of the term. If this alternate director resigns, dies or is barred by law from serving as a director, the Board then appoints a replacement to serve until the date of the next General Annual Shareholders' Meeting, on which occasion elections are held for the entire Board of Directors. The current Board of Directors was elected at the General Annual Shareholders' Meeting held on April 26, 2001 for a three-year term expiring in 2004. Alternate directors participate in discussions at Board meetings but are entitled to vote only when their respective directors are absent. Pursuant to the Bylaws, directors and alternate directors elected by the holders of Series B Common Stock are required to be shareholders of the Company. The Board of Directors may delegate a portion of its responsibilities to the Chief Executive Officer. Pursuant to the Chilean Law of Public Corporations, the Chief Executive Officer of a public company may not simultaneously serve as director of such company. At December 31, 2002, the Board of Directors of Telefonica CTC Chile consists of the following directors and alternate directors: 2002 Annual Report Telefonica CTC Chile_57 - -------------------------------------------------------------------------------- Series A Directors - -------------------------------------------------------------------------------- Chairman - -------------------------------------------------------------------------------- BRUNO PHILIPPI IRARRAZABAL Civil Engineer, Universidad Catolica de Chile Masters Degree in Operations Research, Stanford University Ph.D. in Engineering Economic Systems, Stanford University Deputy Chairman - -------------------------------------------------------------------------------- JACINTO DIAZ SANCHEZ Attorney-at-Law, Universidad Complutense de Madrid Series A Directors - ------------------------------------------------------------------------------- ANDRES CONCHA RODRIGUEZ Commercial Engineer, Universidad de Chile FERNANDO BUSTAMANTE HUERTA General Accountant, Universidad de Chile FELIPE MONTT FUENZALIDA Commercial Engineer, Universidad Catolica de Chile Ph.D. in Economics, University of Minnesota NICOLAS MAJLUF SAPAG Civil Industrial Engineer, Universidad Catolica de Chile Masters Degree in Operations Research, Stanford University Ph.D. in Management, Massachusetts Institute of Technology - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Series B Director - -------------------------------------------------------------------------------- LUIS CID ALONSO Entrepreneur - -------------------------------------------------------------------------------- 58_Telefonica CTC Chile 2002 Annual Report - -------------------------------------------------------------------------------- Alternate Series A Directors - -------------------------------------------------------------------------------- ANTONIO VIANA-BAPTISTA Bachelors Degree in Economics, Universidad Catolica Portuguesa MBA, INSEAD, Fontainebleau JUAN CLARO GONZALEZ Civil Industrial Engineer, Universidad Catolica de Chile Masters Degree in Theoretical Physics, Universidad Catolica de Chile JUAN CARLOS ROS BRUGUERAS Attorney-at-Law, Universidad Central de Barcelona GUILLERMO FERNANDEZ VIDAL Telecommunications Engineer, Universidad Politecnica de Madrid SERGIO BADIOLA BROBERG Army Officer - Major General (Ret.), Telecommunications Specialist General Accountant AUGUSTO IGLESIAS PALAU Commercial Engineer, Universidad Catolica de Chile Masters Degree in Economics, University of California, Los Angeles - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Alternate Series B Director - -------------------------------------------------------------------------------- ALFONSO FERRARI HERRERO Industrial Engineer, Universidad Politecnica de Madrid MBA, Harvard University - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Secretary of the Board of Directors - -------------------------------------------------------------------------------- CRISTIAN ANINAT SALAS Attorney-at-Law, Universidad Catolica de Chile - -------------------------------------------------------------------------------- 2002 Annual Report Telefonica CTC Chile_59 Compensation of Directors Each director and alternate director receives monthly compensation (fees) equal to 120 UTM (Chilean inflation-adjusted monetary unit), approximately equivalent to Ch$3,526,680 or US$4,907.6, for attending Board meetings, being required to attend at least one such meeting per month. The Chairman of the Board of Directors receives twice the compensation amount received by each director, while the Vice Chairman of the Board of Directors receives 1.5 times the compensation amount received by each director. All such compensation amounts are approved at the General Annual Shareholders' Meeting. Year 2002 Board of Director Expenses No expenses were recorded in 2002 other than the directors' fees and expenses associated with cellular equipment assigned to each Board member. The Company has not entered into any service agreements with its directors. Compensation of Directors of Telefonica CTC Chile During the period from January 1 to December 31, 2002 and 2001, the Board of Directors received the following gross compensation amounts:
Directors of Compania de Position Total Total Telecomunicaciones de Chile S.A. Compensation 2002 Compensation 2001* (in Ch$ as of 12.31.02) (in Ch$ as of 12.31.01) - ------------------------------------------------------------------------------------------------------------------------------ Bruno Philippi Irarrazabal (1) Chairman of the Board 84,201,167 68,267,247 Jacinto Diaz Sanchez (2) Deputy Chairman of the Board 62,964,577 54,680,215 Andres Concha Rodriguez (3) Series A Director 38,573,903 27,309,828 Fernando Bustamante Huerta (3) Series A Director 42,100,583 27,309,828 Nicolas Majluf Sapag Series A Director 42,100,583 40,976,366 Felipe Montt Fuenzalida Series A Director 42,100,583 40,976,366 Luis Cid Alonso Series B Director 42,100,583 40,976,366 Antonio Viana-Baptista Alternate Series A Director 10,443,573 32,482,253 Juan Claro Gonzalez (3) Alternate Series A Director 31,582,236 23,909,745 Juan Carlos Ros Brugueras Alternate Series A Director 38,507,572 37,618,932 Guillermo Fernandez Vidal Alternate Series A Director 35,015,387 29,059,489 Augusto Iglesias Palau Alternate Series A Director 42,100,583 40,976,366 Sergio Badiola Broberg Alternate Series A Director 42,100,583 40,976,366 Alfonso Ferrari Herrero (3) Alternate Series B Director 34,902,336 27,297,187 Javier Aguirre Nogues (4) 13,664,430 Hans Eben Oyanedel (5) 20,499,807 Claudio Undurraga Abbot (5) 13,666,538 Andres Navarro Haeussler (6) 10,275,616 Fernando Fournon Gonzalez-Barcia (5) 6,881,211 Total 588,794,251 597,804,156 - ------------------------------------------------------------------------------------------------------------------------------
* The compensations paid in the year 2001 to Mr. Andres Concha, Fernando Bustamante, Juan Claro and Alfonso Ferrari, correspond to the period between April 26, 2001 and December 31, 2001. (1) Mr.Bruno Philippi Irarrazabal was designated as Series A Director and Chairman of the Board on March 29, 2001. (2) Mr. Jacinto Diaz Sanchez was designated Series A Director and Deputy Chairman of the Board in the Annual General Shareholders Meeting celebrated on April 26, 2001. Before this date, he was the Alternate Series B Director. (3) Elected in the Annual General Shareholders Meeting celebrated on April 26, 2001. (4) Mr. Javier Aguirre Nogues resigned as Series A Director and Chairman as of February 28, 2001. (5) Board members until April 26, 2001, when the Annual General Shareholders Meeting elected the new Board members. (6) Mr. Andres Navarro Haeussler resigned as Series A Director as of April 25, 2001. 60_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] Compensation of Directors of Subsidiaries As of April 2001, it was resolved at Shareholders' Meetings at each of the Company's subsidiaries to eliminate directors' fees. Consequently, during 2002 no fees were paid to those directors of subsidiaries who are also directors and/or executives of Telefonica CTC Chile Directors of the Company's Subsidiaries (1) Total Total Compensation 2002 Compensation 2001* (in Ch$ as of 12.31.02) (in Ch$ as of 12.31.01) - -------------------------------------------------------------------------------- Javier Aguirre Nogues (2) 0 17,086,278 Claudio Munoz Zuniga (3) 0 23,067,360 Claudio Undurraga Abbott (4) 0 1,710,848 Paul Fontaine Benavides (5) 0 3,423,451 Ismael Vasquez Rozas (6) 0 2,276,002 Jacinto Diaz Sanchez (7) 0 2,322,034 Raimundo Beca Infante (8) 0 6,832,479 Diego Barros Aspillaga (3) 0 3,416,266 Julio Covarrubias Fernandez (3) 0 3,989,426 Franco Faccilongo Forno (3) 0 2,278,578 Oscar Marquez Benavides (3) 0 2,278,578 Luis Cid Alonso (7) 0 3,416,213 Antonio Viana-Baptista (7) 0 2,278,422 Rafael Zamora Sanhueza (3) 0 1,710,848 Francisco Cabanas Gutierrez (9) 0 1,710,848 Total 0 77,797,631 - -------------------------------------------------------------------------------- *: The compensations paid in the year 2001 correspond to the period between January 1, 2001 and April 30, 2001. (1) The detail of the composition of the Subsidiary Board of Directors is included in the "Additional Information" Chapter of this annual report. (2) Mr. Javier Aguirre Nogues resigned as Series A Director as of February 28, 2001. (3) Executive of Compania de Telecomunicaciones de Chile S.A. as of December 31, 2002. (4) On April 26, 2001 Mr. Claudio Undurraga Abbot left his position as Series A Director. (5) On May 31, 2001 Mr. Paul Fontaine Benavides resigned from Compania de Telecomunicaciones de Chile S.A. (6) On June 12, 2001, Mr. Ismael Vasquez Rozas resigned from Compania de Telecomunicaciones de Chile S.A. (7) Director of Compania de Telecomunicaciones de Chile S.A. as of December 31, 2002. (8) On July 1, 2002, Mr. Raimundo Beca Infante resigned from Compania de Telecomunicaciones de Chile S.A. (9) On May 31, 2002, Mr. Francisco Cabanas Gutierrez resigned from Compania de Telecomunicaciones de Chile S.A. 2002 Annual Report Telefonica CTC Chile_61 [GRAPHIC] CORPORATE GOVERNANCE Directors Committee Pursuant to Law 19,705, all publicly held companies having a market capitalization equal to or higher than UF1,500,000 (approximately US$35 million) must appoint a "directors committee" comprised of three regular and three alternate members, the majority of whom must be independent from the controlling shareholder. The principal functions of the Directors Committee are to review the reports prepared by account inspectors and external auditors, and to review and comment on the balance sheet and other financial statements presented by management, before their presentation to the shareholders. In addition, the Directors Committee must propose to the Board the external auditors and credit rating agencies, which are presented to the General Shareholders Meeting, examine and issue a report of all transactions pursuant to articles 44 and 89 of Chilean Corporate Law, and review executive salaries and bonuses. Current members of the Company's Directors Committee were elected by the Board at a meeting held April 26, 2001. The Directors Committee is comprised of the following persons: - -------------------------------------------------------------------------------- Regular Member Alternate Member - -------------------------------------------------------------------------------- Bruno Philippi Irarrazabal Antonio Viana-Baptista Nicolas Majluf Sapag Augusto Iglesias Palau Felipe Montt Fuenzalida Sergio Badiola Broberg - -------------------------------------------------------------------------------- The budget of the Directors Committee and monthly compensation of its members for 2002 were approved at the General Shareholders Meeting held April 5, 2002. Each regular and alternate member of the Directors Committee receives compensation equal to 30 UF monthly (approximately US$745), provided they have attended at least one meeting a month.
Directors Position Total Total Compensation 2002 Compensation 2001* (in Ch$ as of 12.31.02) (in Ch$ as of 12.31.01) - ------------------------------------------------------------------------------------------------------------ Bruno Philippi Irarrazabal Series A Director 4,504,141 3,411,215 Nicolas Majluf Sapag Series A Director 5,007,362 2,924,195 Felipe Montt Fuenzalida Series A Director 5,007,362 3,411,215 Antonio Viana-Baptista Alternate Series A Director - 1,463,624 Augusto Iglesias Palau Alternate Series A Director 5,007,362 974,901 Sergio Badiola Broberg Alternate Series A Director 5,007,362 3,411,215 - ------------------------------------------------------------------------------------------------------------
* Compensations received since April 26, 2001 to December 31, 2001. 62_Telefonica CTC Chile 2002 Annual Report Organizational Structure ------------------ Shareholders ------------------ | | ------------------ Board of Directors ------------------ | | ------------------ CEO Claudio Munoz ------------------ | | Management Areas | | | -------------------- | -------------------- Planning and Control -------------|---------------- Regulation Rafael Zamora | Humberto Soto -------------------- | -------------------- | | -------------------- | -------------------- Finance -------------|--------------- Human Resources Julio Covarrubias | Mauricio Malbran -------------------- | -------------------- | | -------------------- | -------------------- Systems | Internal Auditing Oscar Marquez | Marcel Mancilla -------------------- | -------------------- | | | -------------------- | General Counsel ----------------| Cristian Aninat | -------------------- | | - ---------------------------------------| | | | Business Areas | | | | | |------------------------- ------------------- --------------------- | Corporate Communications Consumers and Mobile Communications | (Telefonica Data) Small Businesses (Telefonica Movil) | Ricardo Majluf Velko Petric Jose Moles |------------------------- ------------------- --------------------- | |Support Areas | | -------------------------- |-------------------------- Customer Service and Sales | Diego Barros | -------------------------- | | | -------------------------- |-------------------------- Network Services Franco Faccilongo -------------------------- 2002 Annual Report Telefonica CTC Chile_63
- ----------------------------------------------------------------------------------------- SENIOR EXECUTIVES - ----------------------------------------------------------------------------------------- Claudio Munoz Zuniga Chief Executive Officer Civil Industrial Engineer, Universidad de Chile Management Areas Cristian Aninat Salas General Counsel Attorney-at-Law, Universidad Catolica de Chile Julio Covarrubias Fernandez Chief Financial Officer and General Manager of t-gestiona Civil Industrial Engineer, Universidad Catolica de Chile MBA, Cornell University, USA Mauricio Malbran Hourton Corporate Manager, Human Resources Civil Electrical Engineer, Universidad de Chile Marcel Mancilla Bravo Corporate Manager, Internal Auditing General Accountant, Universidad de Chile Oscar Marquez Benavides Corporate Manager, Systems Civil Electrical Engineer, Universidad Federico Santa Maria Humberto Soto Velasco Corporate Manager, Regulation Civil Electrical Engineer, Universidad de Chile Rafael Zamora Sanhueza Corporate Manager, Planning and Control Civil Industrial Engineer, Universidad de Chile Masters Degree in Industrial Engineering, Universidad de Chile - --------------------------------------------------------------------------------------------
64_Telefonica CTC Chile 2002 Annual Report [GRAPHIC]
- -------------------------------------------------------------------------------------------- Business Areas - -------------------------------------------------------------------------------------------- Velko Petric Cabrales Corporate Manager, Consumer and Small Business Communications Civil Industrial Engineer, Universidad Catolica de Chile Ricardo Majluf Sapag General Manager, Telefonica Data and Telefonica Empresas Civil Industrial Engineer, Universidad Catolica de Chile Jose Moles Valenzuela General Manager, Telefonica Movil Industrial Engineer, Universidad Politecnica de Barcelona MBA, Deusto University, Spain Support Areas Diego Barros Aspillaga Corporate Manager, Customer Service and Sales Civil Electrical Engineer, Universidad Catolica de Chile Franco Faccilongo Forno Corporate Manager, Network Services Civil Electronic Engineer, Universidad Federico Santa Maria Masters Degree in Sciences, Imperial College of London - --------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_65 [GRAPHIC] Management Compensation and Incentive Plans Management Compensation Executives of the Company and its subsidiaries, including General Managers, Corporate Managers and Area Managers, received gross compensation including bonuses in the aggregate amount of Ch$7,937.6 million (US$11.0 million). In addition, during the 2002 fiscal year, executives of the Company and its subsidiaries received severance indemnities in the aggregate amount of Ch$762.8 million (US$1.1 million). Incentive Plans Telefonica CTC Chile has an annual incentive plan for its executive officers based on the fulfillment of targets, personal performance, and contributions to Company profits. HUMAN RESOURCES At December 31, 2002, Telefonica CTC Chile personnel included 2,540 permanent employees at the parent company and 2,031 permanent employees at the subsidiaries. Thus, the Company's total personnel amounted to 4,571 employees. Following is a breakdown of employees by category:
Parent Company Subsidiaries Total 2002 Total 2001 Var 02/01 - -------------------------------------------------------------------------------------------------------- Managerial and Highly Specialized 166 120 286 390 -26.7% Direct Supervisors and Specialized 523 445 968 1,298 -25.4% Professional 792 946 1,738 2,610 -33.4% Technical and Operational 1,059 520 1,579 3,422 -53.9% Total 2,540 2,031 4,571 7,720 -40.8% - --------------------------------------------------------------------------------------------------------
66_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] With the sale of 25% of Sonda S.A. in September 2002, this company ceased to be a subsidiary of Telefonica CTC Chile and the 2,347 Sonda employees were removed from our payroll. This reduction, added to the 1,070 employees who left the Company as part of the restructuring process last October, resulted in a 41% decrease in Company personnel compared to last year. The number of lines in service per employee at Telefonica CTC Chile grew from 845 at year-end 2001 to 1,058 in December 2002, one of the highest efficiency indicators in the industry in Latin America and worldwide. In the second quarter of 2002, the Company conducted its collective bargaining process with non-executive employees of CTC S.A. and subsidiaries. Within the normal time frame, an agreement was reached with 1,330 employees, and later, the Company signed contracts with an additional 331 employees. Thus, the total number of signed contracts was 1,661. These collective labor contracts were signed for a period of either two or three years, depending on the workers' union affiliation, and included clauses providing for greater flexibility and ease of adaptation to the labor market. On the other hand, following a legal strike lasting 28 days, a total of 3,445 employees elected to invoke the provisions of Article 369 of the Chilean Labor Code, thus extending their previous contracts for 18 months without a readjustment clause. Human Resource Development Based on the results of a 360(o) evaluation process of the Company's executive personnel, implemented in December 2001, a series of workshops was conducted to promote leadership, innovation and communications skills among Company executives. In the 360(o) evaluation process, each executive is evaluated by a group of people, including his superior, coworkers, clients, subordinates and himself. The objective of this process is to receive broader and more objective feedback which can be used to improve current performance. In addition, during 2002 the Company continued to offer programs aimed at strengthening the professional skills of its employees, especially knowledge of new technologies and commercial skills, using on site learning methods as well as e-learning. These workshops and programs resulted in over 110,000 man/hours of training, during 2002. It is also important to mention that the Company carried out various courses oriented towards the rejoining to the workforce of those employees who left the Company as a result of the restructuring process implemented in October 2002. The courses and seminars offered covered issues such as rejoining the workforce, entrepreneurship, development of new entrepreneurial initiatives, and early retirement. This resulted in over 50,000 man/hours of training. The number of lines in service per employee reached 1,058 in December 2002, one of the highest efficiency indicators in the industry in Latin America and worldwide 2002 Annual Report Telefonica CTC Chile_67 additional information 68_Telefonica CTC Chile 2002 Annual Report Additional Information Organization of Subsidiaries and Affiliates --------------------------- Telefonica Movil 99.9% --------------------------- --------------------------- 188 Telefonica Mundo 99.2% --------------------------- --------------------------- --------------------------- Telefonica Empresas Telefonica Data 99.9% 99.9% --------------------------- --------------------------- --------------------------- --------------------------- Isapre Istel Comunicaciones Mundiales 99.9% 99.7% --------------------------- --------------------------- --------------------------- --------------------------- Globus 120 Sonda 99.9% 35.0% --------------------------- --------------------------- --------------------------- --------------------------- CTC-Equipos Telepeajes 99.9% 80.0% --------------------------- --------------------------- --------------------------- --------------------------- CTC Internacional Infoera 100.0% 99.9% - ----------------- --------------------------- --------------------------- Telefonica CTC Chile - ----------------- --------------------------- --------------------------- ------------- t-gestiona Tecnonautica Infochile 99.9% 99.9% 99.9% --------------------------- --------------------------- ------------- --------------------------- ------------ Telemergencia Todocuenta 99.7% 90.0% --------------------------- ------------ ------------------------------ Fundacion Telefonica Chile 50.0% ------------------------------ ------------------------------ Tarjetas Inteligentes 20.0% ------------------------------ ------------------------------ Atento Chile* 27.4% ------------------------------ ------------------------------ Publiguias 9.0% ------------------------------ ------------------------------ TBS Celular Participacoes S.A. 2.6% ------------------------------
(*) Telefonica CTC Chile controls 28.84% of Atento Chile through additional participations of its subsidiaries Telefonica Mundo and Telefonica Empresas. 2002 Annual Report Telefonica CTC Chile_69 INFORMATION OF SUBSIDIARIES AND AFFILIATES AND INVESTMENT IN OTHER COMPANIES General Information Agreements and contracts: as of December 31, 2002 the Company does not have any commercial agreements or contracts with its subsidiaries or affiliates which materially impact its operations and financial results. Commercial relations with subsidiaries: the commercial relationships of the Company's subsidiaries and affiliates, with the exception of t-gestiona, are mainly with third parties other than Telefonica CTC Chile, its subsidiaries and affiliates. Subsidiaries - -------------------------------------------------------------------------------- Telefonica Movil de Chile S.A. - -------------------------------------------------------------------------------- (Telefonica Movil) Corporate objective: Setting up, installing, managing, marketing and developing facilities, equipment, systems and terminals for the provision and operation of telecommunications services. Preference will be given to the telecommunications needs in economic and social development centers, in rural and remote locations, and generally in all communities. Paid-in-capital (in thousands): Ch$199,991,563 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Investment as a percentage of parent company assets: 7.72% - --------------------------------------------------------------------------------
Board of Directors - ------------------------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Directors: Claudio Munoz Z.(3) Felix Ivorra C.(6) Alfonso Ferrari H.(6) Francisco Martinez D.(6) Alternate Directors: Andres Concha R.(2) Raimundo Beca I. Luis Cid A.(2) Julio Covarrubias F.(4) Javier Manzanares G.(6) CEO: Jose Moles V. (4) - -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Compania de Telefonos de Chile - Transmisiones Regionales S.A. - -------------------------------------------------------------------------------- (188 Telefonica Mundo) (Public company inscribed and regulated by the Superintendencia de Valores y Seguros) Corporate objective: Setting up, installing, managing, marketing and developing facilities, equipment, systems and terminals for the provision and operation of telecommunications services. Preference will be given to the telecommunications needs in economic and social development centers, in rural and remote locations, and generally in all communities. The company may also provide management or management consulting services in connection with information, communications, and telecommunications networks, systems and services, and generally any other activity permitted under its concession agreement. In addition, the company may participate in academic, union-based, business, or other organizations, institutions, forums and study groups directly or indirectly related to the company's corporate objective. In performing the activities falling within its corporate objective, the company may act either abroad or domestically at the local or national level, either directly or indirectly through a majority or minority interest in third parties, whether companies or other legal entities having a similar or identical objective, and either on its own behalf or for third parties. Paid-in-capital (in thousands): Ch$39,217,063 Equity interest of Telefonica CTC Chile (direct and indirect): 99.2% Investment as a percentage of parent company assets: 4.11% Board of Directors - -------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Vice-chairman: Claudio Munoz Z.(3) Directors: Jacinto Diaz S.(2) Diego Barros A.(4) Raimundo Beca I. Juan Claro G.(2) Velko Petric C.(4) CEO: Pablo Frias R.(4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 70_Telefonica CTC Chile 2002 Annual Report - -------------------------------------------------------------------------------- Telefonica Empresas CTC Chile S.A. - -------------------------------------------------------------------------------- (Telefonica Empresas) Corporate objective: Providing, developing and marketing all manner of general telecommunications, computer, and business processing services and/or marketing all manner of in-house or third-party telecommunications and/or computer products and equipment; and buying, selling, installing and/or operating, leasing, importing and exporting equipment, materials, components, accessories or any other telecommunications- or computer-related item on its own behalf or for third parties. In addition, the company may, either individually or with third parties, operate any business in connection with fixed or mobile telecommunications, data transmission, computer, television, electronic data intermediation and other electronic messaging services, education and/or training, content development, systems, projects, advisory and/or consulting services, and design, assembly and/or development of facilities, equipment and systems for operating services aimed at providing access or connectivity to local, national, international or universal networks over the Internet or through other existing or future technologies. Paid-in-capital (in thousands): Ch$46,510,249 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Investment as a percentage of parent company assets: 2.18% Board of Directors - -------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Directors: Rafael Zamora S.(4) Fernando Bustamante H.(2) Claudio Munoz Z.(3) Vacant CEO: Ricardo Majluf S. (4) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Telefonica Data Chile S.A. - -------------------------------------------------------------------------------- (Telefonica Data) Corporate objective: Performing any and all industrial, commercial or other acts, contracts, services and business activities directly or indirectly related to any telecommunications medium, whether domestically or abroad, particularly activities relating to the provision, operation and marketing of public data transmission services. The company may also provide outsourcing services aimed at securing access or connectivity to local, national or international networks over the Internet or through other technologies. Paid-in-capital (in thousands): Ch$4,354,940 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Board of Directors - -------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Directors: Claudio Munoz Z.(3) Rafael Zamora S.(4) Fernando Bustamante H. (2) Mateo Budinich D.(6) CEO: Ricardo Majluf S.(4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 2002 Annual Report Telefonica CTC Chile_71 - -------------------------------------------------------------------------------- Compania de Telecomunicaciones de Chile - Isapre S.A. - -------------------------------------------------------------------------------- (Isapre Istel) Corporate objective: The company's sole objective and activity is financing or directly providing health benefits, and performing any activity related or supplementary thereto, pursuant to Article 22 of Law 18,933. Paid-in-capital (in thousands): Ch$1,315,066 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Investment as a percentage of parent company assets: 0.02% Board of Directors - -------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Directors: Claudio Munoz Z.(3) Julio Covarrubias F.(4) Oscar Marquez B.(4) Vacant CEO: Ines Naddaf J.(4) - -------------------------------------------------------------------------------- Globus 120 S.A. - -------------------------------------------------------------------------------- (Globus) (Public company inscribed and regulated by the Superintendencia de Valores y Seguros) Corporate objective: Performing any and all acts, contracts, services and business activities related to telecommunications services either domestically or abroad. In general, the company provides public and private domestic and international long-distance services. Paid-in-capital (in thousands): Ch$279,350 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Investment as a percentage of parent company assets: 0.07% Board of Directors - -------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Vice-chairman: Claudio Munoz Z.(3) Directors: Juan Claro G.(2) Raimundo Beca I. Velko Petric C.(4) CEO: Manuel Canon P.(4) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Compania de Telecomunicaciones de Chile - Equipos y Servicios S.A. - -------------------------------------------------------------------------------- (CTC-Equipos) Corporate objective: Providing installation, connection, disconnection, maintenance and modification services and similar activities for telecommunications networks, including multimedia networks; and manufacturing, arranging, purchasing, selling, marketing, importing and exporting materials, components, equipment and accessories used for the aforementioned purposes. The company may also issue and make available to the public prepaid and rechargeable multi-use cards for the payment of telephone or other services. Paid-in-capital (in thousands): Ch$374,761 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Investment as a percentage of parent company assets: 0.88% Board of Directors - -------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Directors: Claudio Munoz Z.(3) Francisco Cabanas G.(6) Luis Cid A.(2) Cristian Aninat S.(4)(5) CEO: Velko Petric C. (4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 72_Telefonica CTC Chile 2002 Annual Report - -------------------------------------------------------------------------------- CTC Internacional S.A. - -------------------------------------------------------------------------------- Corporate objective: Foreign investment. Paid-in-capital (in thousands): Ch$0 Equity interest of Telefonica CTC Chile (direct and indirect): 100.0% Investment as a percentage of parent company assets: 0.0% Directors: Claudio Munoz Z.(3) Julio Covarrubias F.(4) Cecilia Araya C.(4) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Comunicaciones Mundiales S.A. - -------------------------------------------------------------------------------- Corporate objective: Setting up, installing, developing, operating, purchasing, leasing and supplying telecommunications systems, including all manner of transmission, broadcast or reception of signs, signals, text, images, sounds or data of any kind through physical lines, radio, electricity, fiber optics or other electromagnetic systems currently in use or to be developed in the future, whether in connection with public or private, domestic or international services. Paid-in-capital (in thousands): Ch$298,588 Equity interest of Telefonica CTC Chile (direct and indirect): 99.7% Board of Directors - -------------------------------------------------------------------------------- Chairman: Claudio Munoz Z.(3) Directors: Rafael Zamora S.(4) Julio Covarrubias F.(4) Francisco Cabanas G.(6) Vacant CEO: Francisco Zuniga C.(4) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Telefonica Gestion de Servicios Compartidos Chile S.A. - -------------------------------------------------------------------------------- (t-gestiona) Corporate objective: Providing management, administration and advisory services in connection with invoicing, accounting, tax matters, treasury, finance, human resources, real estate management, security, logistics, distribution, technology, and information systems, and generally any other related consulting or advisory services. Paid-in-capital (in thousands): Ch$1,047,510 Equity interest of Telefonica CTC Chile (direct and indirect): 99.9% Investment as a percentage of parent company assets: 0.02% Board of Directors - -------------------------------------------------------------------------------- Chairman: Rafael Zamora S.(4) Directors: Jose Moles V.(4) Velko Petric C.(4) Pedro Anton L.(6) Pedro Villar I.(6) Cristian Aninat S.(4)(5) Oscar Marquez B.(4) CEO: Julio Covarrubias F.(4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 2002 Annual Report Telefonica CTC Chile_73 Exhibits shown in the Fundacion Telefonica Art Gallery during 2002 [GRAPHIC] Selection of works from the National Museum Queen Sofia of Spain, October 9 to December 31, 2002. [GRAPHIC] Works of 30 prominent Chilean sculptors, April 5 to June 2, 2002. [GRAPHIC] Interdisciplinary exhibit of sculpture, painting and poety, January 1 to March 10, 2002. [GRAPHIC] Art and technology exhibit, June 14 to July 21, 2002. - -------------------------------------------------------------------------------- Telefonica Asistencia y Seguridad S.A. - -------------------------------------------------------------------------------- (Telemergencia) Corporate objective: Marketing and installing alarm equipment and stations for homes and businesses, providing alarm monitoring service through fixed and mobile communications networks, providing home and business surveillance services by means of mobile response units, and marketing and providing any similar service related to home and business needs. Paid-in-capital (in thousands): Ch$1,125,000 Equity interest of Telefonica CTC Chile (direct and indirect): 99.67% Investment as a percentage of parent company assets: 0.0% Board of Directors - -------------------------------------------------------------------------------- Chairman: Claudio Munoz Z.(3) Directors: Diego Barros A.(4) Mauricio Malbran H.(4) CEO: Maria Fernandez de Cordoba M.(4) - -------------------------------------------------------------------------------- Administradora de Sistemas de Telepeajes de Chile S.A. - -------------------------------------------------------------------------------- (Telepeajes) Corporate objective: Directly or indirectly, on its own behalf or on behalf of third parties, installing, administering, developing and operating electronic, computerized or manual toll collection and similar services on a national and/or international level in connection with urban or intercity road concessions or otherwise. Paid-in-capital (in thousands): Ch$996,625 Equity interest of Telefonica CTC Chile (direct and indirect): 80.0% Board of Directors - -------------------------------------------------------------------------------- Chairman: Alberto Etchegaray A. Directors: Ricardo Majluf S.(4) Francisco Zuniga C.(4) Raul Ciudad de la Cruz Ximena Onate G. Diego Barros A.(4) Claudio Munoz Z.(3) CEO: Jorge Vizcaya G.(4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 74_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] Exhibit of sculptures of Osvaldo Pena, January 1 to March 27 2002. [GRAPHIC] Exhibit of Chilean poet and artist Nicanor Parra, shown during 2002 in various Chilean cities. [GRAPHIC] Exposition of the works of a group of blind persons, August 14 to September 29, 2002. [GRAPHIC] Exposition "50 years in Retrospect: Ricardo Yrarrazaval", July 31 to September 29, 2002. - -------------------------------------------------------------------------------- Fundacion Telefonica Chile - -------------------------------------------------------------------------------- Corporate objective: Contributing to improving the living conditions of the most vulnerable social groups, such as children, the elderly or the handicapped, by studying and developing social and health telecommunications applications. Encouraging the development of education and equal opportunity by applying new information technologies to the learning process. Contributing to information programs as part of the learning process. Contributing to development programs aimed at the most disadvantaged members of society and organized by highly reputable non-profit institutions active in the community in which such programs are conducted. Contributing to, conducting and promoting research, development and dissemination of science, technology, culture and art. Paid-in-capital (in thousands): Ch$400,928 Equity interest of Telefonica CTC Chile (direct and indirect): 50.0% Investment as a percentage of parent company assets: 0.01%
Board of Directors - ----------------------------------------------------------------------------------------------------- Chairman: Bruno Philippi I.(1) Executive Director: Francisco Aylwin O.(4) Directors: Claudio Munoz Z.(3) Pedro Villar I.(6) Jorge Martina A.(6) Juan Claro G. (2) Arturo Fontaine T. David Gallagher P. Alberto Etchegaray A. Fernando Labad S.(6) Fernando Villalonga C. (6) Maria Antonia Juste P.(6) - -----------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Desarrollo de Servicios de Informacion S.A. - -------------------------------------------------------------------------------- (Infoera S.A.) Corporate objective: Creating, providing, importing, exporting, maintaining, marketing and distributing electronic data services, goods, products and media, as well as providing training and advisory services and otherwise engaging in related activities. Paid-in-capital (in thousands): Ch$1,464,833 Equity interest of Telefonica CTC Chile (direct and indirect): 99.99% Board of Directors - -------------------------------------------------------------------------------- Chairman: Claudio Munoz Z.(3) Directors: Julio Covarrubias F.(4) Rafael Zamora S.(4) Oscar Marquez B. (4) Ricardo Majluf S.(4) Vacant Vacant CEO: Arturo Alba G.(4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 2002 Annual Report Telefonica CTC Chile_75 - -------------------------------------------------------------------------------- Tecnonautica S.A. - -------------------------------------------------------------------------------- Corporate objective: Providing computer, multimedia, network, information system, and content structuring design, development, management, training, advisory and consulting services aimed at developing innovation capabilities and skills in organizations and individuals; marketing goods and services over the Internet or through other media; and generally performing any acts, agreements or contracts directly or indirectly relating to its line of business. Paid-in-capital (in thousands): Ch$2,316,741 Equity interest of Telefonica CTC Chile (direct and indirect): 99.99% Board of Directors - -------------------------------------------------------------------------------- Chairman: Claudio Munoz Z.(3) Directors: Ricardo Majluf S.(4) Oscar Marquez B.(4) Rafael Zamora S. (4) Vacant CEO: Arturo Alba G. (4) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Infochile S.A. - -------------------------------------------------------------------------------- Corporate objective: Providing services and products in the area of information and content technology, marketing such services and products on its own behalf or for third parties, providing technological support platforms for commerce involving companies, organizations and individuals with a view to coordinating supply and demand within Chile or abroad. Providing computer, multimedia, network, and information system design, development, management, training, advisory and consulting services. Designing and building content aimed at developing innovative capabilities and skills in organizations and individuals. Paid-in-capital (in thousands): Ch$1,369,320 Equity interest of Telefonica CTC Chile (direct and indirect): 99.99% Board of Directors - -------------------------------------------------------------------------------- Chairman: Claudio Munoz Z.(3) Directors: Rafael Zamora S.(4) Julio Covarrubias F.(4) Ricardo Majluf S. (4) Oscar Marquez B.(4) Jorge Falaha H.(4) Vacant CEO: Arturo Alba G. 4) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Portal de Pagos e Informacion S.A. - -------------------------------------------------------------------------------- (Todocuenta) Corporate objective: Operating technological systems and equipment for telectronic payment of documents. Paid-in-capital (in thousands): Ch$332,626 Equity interest of Telefonica CTC Chile (direct and indirect): 90.0% Board of Directors - -------------------------------------------------------------------------------- Chairman: Claudio Munoz Z.(3) Directors: Rafael Zamora S.(4) Oscar Marquez B.(4) CEO: Leonardo Diaz R.(4) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 76_Telefonica CTC Chile 2002 Annual Report [GRAPHIC] Affiliates - -------------------------------------------------------------------------------- Empresa de Tarjetas Inteligentes S.A. - -------------------------------------------------------------------------------- (Tarjetas Inteligentes) Corporate objective: Providing services associated with smart cards, other than those related to the sourcing of electronic funds, by operating and generally administering the system as well as its technological infrastructure and platform, its business policies, and its operating procedures, and developing financial and non-financial applications for smart cards, including telecommunications, certifying such applications, and conducting marketing and promotion, training, support, and international brand name-related activities. Paid-in-capital (in thousands): Ch$1,268,010 Equity interest of Telefonica CTC Chile (direct and indirect): 20.0% Investment as a percentage of the assets of Telefonica CTC Chile: 0.004% Board of Directors - -------------------------------------------------------------------------------- Chairman: Luis Alberto Rojas L. Directors: Cecilia Gutierrez M. Roberto Bustos K. Ingrid Kollner O. Juan Carlos Moller M. Eduardo Sturla M. Ricardo Majluf S.(4) CEO: Fernando Casasbellas G. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Atento Chile S.A. - -------------------------------------------------------------------------------- Corporate objective: Providing all manner of marketing services, particularly any type of call center services, whether for its own or for third-party customers, by means of operators and any other existing or future means, whether proprietary or third-party, as well as developing staff training and consulting services in all related fields. The company may also develop, process and administer its own or third-party databases, and may implement, combine, improve or use any communications media it deems appropriate and generally take any legal action necessary or relevant to accomplish its corporate objective. This objective may be pursued directly and/or through subsidiaries or associated companies. Paid-in-capital (in thousands): Ch$11,127,939 Equity interest of Telefonica CTC Chile (direct and indirect): 28.84% Investment as a percentage of the assets of Telefonica CTC Chile: 0.1% Board of Directors - -------------------------------------------------------------------------------- Chairman: Alberto Horcajo A.(6) Directors: Pedro Villar I.(6) Ainhoa Santamaria B. Claudio Munoz Z.(3) Enrico Gatti S.(6) Alternates: Felipe Tomic E.(6) Vacant Paola Sirandoni J.(6) Bruno Philippi I.(1) Jose Fernando Ontiveros B.(6) CEO: Pedro Villar I.(6) - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 2002 Annual Report Telefonica CTC Chile_77 - -------------------------------------------------------------------------------- Sonda S.A. - -------------------------------------------------------------------------------- Corporate objective: Providing computer services, including traditional processing and outsourcing services, system integration and the development of solutions, hardware and software marketing, and the corresponding installation, maintenance and support services. Paid-in-capital (in thousands): Ch$23,915,288 Equity interest of Telefonica CTC Chile (direct and indirect): 35.0% Board of Directors - -------------------------------------------------------------------------------- Chairman: Andres Navarro H. Directors: Claudio Munoz Z.(3) Rafael Zamora S.(4) Claudio Orrego L. Rafael Osorio P. Pablo Navarro H. Mario Pavon R. Daniel Silva S. CEO: Mario Pavon R. - -------------------------------------------------------------------------------- Sonda S.A. has the following subsidiaries: Subsidiary Tax ID % - -------------------------------------------------------------------------------- Logica S.A 95.191.000-7 87.99 Servicios Educacionales SONDA S.A. 78.072.130-8 89.55 Tecnopolis S.A. 96.590.960-5 100.00 SONDA Internacional S.A. 78.214.420-0 100.00 SONDA Sistemas Gestion Ltda. 78.249.750-2 100.00 SONDA Bancos S.A. 78.534.270-4 100.00 Factoring General S.A 96.803.810-9 97.06 Infopyme S.A. 96.527.020-5 99.00 Activos Financieros S.A. 96.858.720-K 80.00 Asicom Internacional S.A. 96.572.460-5 100.00 BAC Servicios Computacionales Ltda. 79.900.420-8 50.10 Setco S.A.(Uruguay) Foreign 100.00 SONDA del Peru. S.A. (Peru) Foreign 100.00 SONDA Guatemala S.A. (Guatemala) Foreign 51.00 SONDA Venezuela S.A. (Venezuela) Foreign 100.00 Westham S.A. de C.V. (Mexico) Foreign 100.00 SONDA Colombia S.A. (Colombia) Foreign 100.00 SONDA Computacion S.A. (Argentina) Foreign 100.00 Westham Trade Corp. (USA) Foreign 100.00 SONDA Uruguay S.A. (Uruguay) Foreign 100.00 SONDA del Ecuador EcuaSONDA S.A. (Ecuador) Foreign 100.00 SONDA do Brasil Ltda. (Brazil) Foreign 85.00 - -------------------------------------------------------------------------------- Investment in Other Companies - -------------------------------------------------------------------------------- Impresora y Comercial Publiguias S.A. - -------------------------------------------------------------------------------- (Publiguias) Principal activity: Operating the directory business, including telephone directories and Yellow Pages. Equity interest of Telefonica CTC Chile (direct and indirect): 9.0% Investment as a percentage of the assets of Telefonica CTC Chile: 0.09% - -------------------------------------------------------------------------------- (1) Chairman of the Board of Directors of Telefonica CTC Chile (2) Director of Telefonica CTC Chile (3) Chief Executive Officer of Telefonica CTC Chile (4) Executive Officer of Telefonica CTC Chile (5) Secretary of the Board of Directors of Telefonica CTC Chile (6) Executive Officer of the Telefonica Group 78_Telefonica CTC Chile 2002 Annual Report - -------------------------------------------------------------------------------- TBS Celular Participacoes S.A. - -------------------------------------------------------------------------------- Principal activity: The primary objective and activity of the company is to hold the shares of Compania Riograndense de Telecomunicaciones (CRT) purchased during the international bidding process conducted pursuant to Edital COD 04/96 or any other shares that may be offered in the future, and to perform any and all activities pertaining to the management of CRT, as well as to acquire an interest in other companies, as partner or shareholder, in connection with its primary activities. Equity interest of Telefonica CTC Chile (direct and indirect): 2.6% Investment as a percentage of the assets of Telefonica CTC Chile: 0.19% - -------------------------------------------------------------------------------- MATERIAL EVENTS Reporting Requirements: In accordance with the provisions of Article 9 and Article 10, subparagraph two, of Law 18,045 and of Section II, letter B, of General Regulation No. 30 issued by the Superintendencia de Valores y Seguros (Chilean Securities and Exchange Commission), transcribed below are the Material Events reported to the aforementioned Commission in 2002. Material Events of Compania de Telecomunicaciones de Chile S.A. Suspension of Payment of February 2002 Interim Dividend In a January 10, 2002 meeting, the Board of Directors of Compania de Telecomunicaciones de Chile S.A. resolved to suspend payment of the third interim dividend for February 2002 due to accumulated losses amounting to Ch$9,392 million at September 30, 2001. Reported to the Superintendencia de Valores y Seguros on January 24, 2002. Lawsuit against the State of Chile By unanimous decision of the Board of Directors, adopted at a meeting held on March 7, 2002, Compania de Telecomunicaciones de Chile S.A. filed a civil lawsuit for damages against the State of Chile on March 12, 2002. The lawsuit alleges serious ilegallities and errors in calculation and improper application of economic criteria in Decree No. 187, which regulates the tariffs of Compania de Telecomunicaciones de Chile S.A. ("The Company") for the 1999-2004 period. In particular, such errors relate to the following: a decrease in technical investment costs; an unfounded decrease in taxable costs as a result of applying the wrong depreciation methodology; a reduction in the delinquency rate for calls from fixed to mobile networks; failure to consider the cost of editing, printing and free distribution of the White Pages telephone directories; and an error in setting the fixed charges for telephone line service, all of which have resulted in serious losses to the Company. The total amount of claimed damages is Ch$181,038,411,056 (roughly equivalent to US$ 274 million), which includes losses incurred and yet to be incurred by the Company as a result of the application of the Tariff Decree until May 2004. Reported to the Superintendencia de Valores y Seguros on March 12, 2002. Sale of 25% Stake in Sonda S.A. On September 26, 2002, Compania de Telecomunicaciones de Chile S.A. (hereinafter referred to as "Telefonica CTC Chile"), through its subsidiary Telefonica Empresas CTC Chile S.A. (hereinafter "Telefonica Empresas"), sold and transferred a 25% interest in Sonda S.A. (hereinafter "Sonda") for Ch$27,921 million (approximately US$ 37.5 million) in cash. Eleven percent was sold to Inversiones Pacifico II Limitada, which currently owns 30% of Sonda, and fourteen percent was sold to Inversiones Santa Isabel 2002 Annual Report Telefonica CTC Chile_79 Limitada (hereinafter "Santa Isabel"); both companies are related to Andres Navarro, founder of Sonda, who now controls Sonda with 65%, while Telefonica Empresas retains the remaining 35%. On the same date, Telefonica Empresas executed an agreement with Santa Isabel whereby Telefonica Empresas was given a put option on its 35% stake in Sonda. The put is exercisable in July 2005 at the book value of the investment as of June 30, 2005 plus a UF142,021 (approximately US$3.1 million) premium, subject to a UF2,048,885 (approximately US$45.2 million) minimum price. Pursuant to this agreement, Santa Isabel holds a call option for the aforementioned 35% of Sonda that is exercisable in August 2005 under the same terms as set forth above. Moreover, Santa Isabel may anticipate the exercise of the call option to July 2003, at book value as of June 30, 2003 plus a UF96,000 (approximately US$2.1 million) premium, subject to a UF1,983,185 (approximately US$43.8 million) minimum price, or in July 2004 at book value as of June 30, 2004 plus a UF119,000 (approximately US$2.6 million) premium, subject to a UF2,003,260 (approximately US$44.2 million) minimum price. To secure full and timely performance under the option agreement, Santa Isabel furnished performance bonds in the form of bank certificates of deposit in favor of Telefonica Empresas. As a result of this transaction, Telefonica CTC Chile recorded the following extraordinary items in the third quarter of 2002: (i) Nonrecurring income of Ch$6,788 million (US$9.1 million) resulting from the sale of 25% of Sonda at a price higher than book value, by way of a control premium. (ii) A one-time charge of Ch$8,884 million (US$11.9 million) for the proportion of goodwill corresponding to the 25% stake in Sonda, which was being amortized over a 7-year period. In addition, as of September 30, 2002, as a result of no longer having a majority interest in or management control of Sonda, the financial statements of Telefonica CTC Chile will only recognize 35% of the net profit or loss of Sonda as its proportional equity participation. Telefonica CTC Chile will continue to amortize goodwill on the 35% interest in Sonda that it continues to hold. The goodwill amount to be amortized totals approximately Ch$12,438 million (US$16.7 million). This amount will, after deducting the UF142,021 (approximately US$3.1 million) premium, be amortized over a period of 34 months. In the event that Andres Navarro exercises his call option early, a one-time charge will be made to the profit and loss account of approximately Ch$9,000 million (US$12.1 million) if said option is exercised in July 2003, or of approximately Ch$5,600 million (US$7.5 million) if it is exercised in July 2004. If the option is exercised in July 2005, the Company considers that there will be no material effect on results. The sale of Sonda is in line with Telefonica CTC Chile's interest to focus its investments on assets that are essential to the development of the telecommunications business. Reported to the Superintendencia de Valores y Seguros on September 30, 2002. Material Events of Compania de Telefonos de Chile - Transmisiones Regionales S.A. Change of CEO of Compania de Telefonos de Chile - - Transmisiones Regionales The Board of Directors of the Company, at a meeting held on October 25, 2002, agreed: To accept the resignation of the CEO, Mr. Velko Petric Cabrales, and appoint Mr. Pablo Frias Rillon as the new CEO. Reported to the Superintendencia de Valores y Seguros on October 25, 2002 Material Events Globus 120 S.A. Change of CEO of Globus 120 S.A. The Board of Directors of the Company, at a meeting held on October 25, 2002, agreed: To accept the resignation of the CEO, Mr. Pablo Frias Rillon, and appoint Mr. Manuel Canon Pino as the new CEO. Reported to the Superintendencia de Valores y Seguros on October 25, 2002. 80_Telefonica CTC Chile 2002 Annual Report Declaration of Responsibility The Directors and the CEO of Compania de Telecomunicaciones de Chile S.A. who subscribe this declaration, become responsible, under oath, with respect to the veracity of the information provided in this Annual Report, in accordance with Capital Markets Law N(o) 18,045 and General Regulation N(o) 129 issued by the Superintendencia de Valores y Seguros (Chilean Securities and Exchange Commission). /s/ Bruno Philippi ------------------------------ Mr. Bruno Philippi Irarrazabal Mr. Antonio Viana-Baptista Chairman Alternate Director Mr. Jacinto Diaz Sanchez Mr. Juan Claro Gonzalez Vice Chairman Alternate Director /s/ Andres Concha Rodriguez ------------------------------ Mr. Andres Concha Rodriguez Mr. Juan Carlos Ros Brugueras Director Alternate Director /s/ Fernando Bustamante Huerta ------------------------------ Mr. Fernando Bustamante Huerta Mr. Guillermo Fernandez Vidal Director Alternate Director /s/ Felipe Montt Fuenzalida /s/ Sergio Badiola Broberg ------------------------------ ------------------------------ Mr. Felipe Montt Fuenzalida Mr. Sergio Badiola Broberg Director Alternate Director /s/ Nicolas Majluf Sapag /s/ Augusto Iglesias Palau ------------------------------ -------------------------- Mr. Nicolas Majluf Sapag Mr. Augusto Iglesias Palau Director Alternate Director /s/ Luis Cid Alonso ------------------------------ Mr. Luis Cid Alonso Mr. Alfonso Ferrari Herrero Director Alternate Director /s/ Claudio Munoz Zuniga ------------------------------ Mr. Claudio Munoz Zuniga Chief Executive Officer 2002 Annual Report Telefonica CTC Chile_81 [GRAPHIC OMITTED] 82_Telefonica CTC Chile 2002 Annual Report report on the financial statements for the years ended December 31, 2002 and 2001 2002 Annual Report Telefonica CTC Chile_83 consolidated financial statements for the years ended December 31, 2002 and 2001 CONTENTS Independent Auditors' Report Consolidated Financial Statements Notes to the Consolidated Financial Statements Analysis of the Consolidated Financial Statements ThCh$: Thousands of Chilean pesos UF: Unidad de Fomento, inflation-indexed peso denominated monetary unit in Chile. 84_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. and Subsidiaries Independent Auditors' Report Deloitte & Touche To the Shareholders of Compania de Telecomunicaciones de Chile S.A.: We have audited the accompanying consolidated balance sheet of Compania de Telecomunicaciones de Chile S.A. and subsidiaries as of December 31, 2002 and the related consolidated statements of income and of cash flows for the year then ended. These financial statements (including the related notes) are the responsibility of the management of Compania de Telecomunicaciones de Chile S.A. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Compania de Telecomunicaciones de Chile S.A. and subsidiaries for the year ended December 31, 2001 were audited by other auditors whose report, dated January 21, 2002 (except for note 32, dated January 30, 2002), contained an explanatory paragraph related to the recognition of a loss amounting to ThCh$982,366 (historic) caused by the conversion of monetary assets and liabilities of the subsidiary Sonda Argentina. The accompanying Analysis of the Consolidated Financial Statements is not an integral part of these financial statements, and, therefore, this report does not cover this item. We conducted our audit in accordance with auditing standards generally accepted in Chile. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements present fairly, in all material respects, the financial position of Compania de Telecomunicaciones de Chile S.A. and subsidiaries as of December 31, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in Chile. The accompanying financial statements have been translated into English for the convenience of readers outside Chile. /s/ Deloitte & Touche January 27, 2003 2002 Annual Report Telefonica CTC Chile_85 Compania de Telecomunicaciones de Chile S.A. and Subsidiaries Consolidated Balance Sheets As of December 31, 2002 and 2001
Assets notes 2002 2001 ThCh$ 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 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 33 are an integral part of these financial statements. 86_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. and Subsidiaries Consolidated Balance Sheets As of December 31, 2002 and 2001
Liabilities 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 Liabilities 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 Liabilities & Shareholders' Equity 2,688,373,305 3,090,300,813 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 33 are an integral part of these financial statements. 2002 Annual Report Telefonica CTC Chile_87 Compania de Telecomunicaciones de Chile S.A. and Subsidiaries Consolidated Statements of Income For the years ended as of December 31, 2002 and 2001
Operating income notes 2002 2001 ThCh$ ThCh$ - ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues 863,148,681 920,034,653 Operating costs (less) 602,236,149 647,194,118 Gross Margin (21 a) 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. 88_Telefonica CTC Chile 2002 Annual Report 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 increase (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. 2002 Annual Report Telefonica CTC Chile_89 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 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. 90_Telefonica CTC Chile 2002 Annual Report 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 Chilean Superintendency of Securities and Insurance. b) Subsidiaries registered in the Securities Registry: As of December 31, 2002 the following subsidiaries of the consolidated group are registered with the Securities Registry::
Subsidiaries Taxpayer No Number Participation (direct & indirect) Inscription % 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ CTC Transmisiones Regionales S.A. (188 Telefonica Mundo) 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 Chilean Superintendency of Securities and Insurance. In case of discrepancies between accounting principles generally accepted by the Chilean Accountants Association and the standards set forth by the Chilean Superintendency of Securities and Insurance, the standards of the Superintendency 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). 2002 Annual Report Telefonica CTC Chile_91 Notes to the Consolidated Financial Statements, continued 2.Significant Accounting Principles, continued: (d) Basis of consolidation, 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:
Taxpayer No Company Name Participation Percentage 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 Telefonica Mundo) 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) - - 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 - -----------------------------------------------------------------------------------------------------------------------------------
92_Telefonica CTC Chile 2002 Annual Report
Taxpayer No Company Name Participation Percentage 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 its 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. 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 UF 2,048,885. 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%. 2002 Annual Report Telefonica CTC Chile_93 Notes to the Consolidated Financial Statements, continued 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 - -------------------------------------------------------------------------------- (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), and 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 Chilean Superintendency of Securities and Insurance. 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. (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. 94_Telefonica CTC Chile 2002 Annual Report (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. (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 the real interest rate originated in the transaction is deferred and amortized over the term of the respective bond. (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 Superintendency of Securities and Insurance. On September 28, 2001 Law No. 19,753 was published, increasing the income tax rate to 16% in 2002, 16.5% in 2003 and 17% in 2004 and thereafter. As of December 31, 2001 the accumulated balances of temporary differences, include the increased income tax rate. Deferred income taxes arising due to the increase in the income tax rate, are recorded in accordance with Technical Bulletin No. 71 issued by the Chilean Accountants Association (see Note 7). (s) Staff severance indemnities: The Company's staff severance indemnities obligation 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 union 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 29, 2002, with the application of Article 369 of the Labor Code by the unions. This article allows employees to freeze the same conditions of the labor contract prior to collective negotiation for a period of 18 months. (t) Operating revenues: Then Company's revenues are recorded on an 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. (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 loans scovered 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. 2002 Annual Report Telefonica CTC Chile_95 Notes to the Consolidated Financial Statements, continued 2. Significant Accounting Principles, continued: (y) Accumulated deficit development period of subsidiaries: In accordance with Circular No. 981 issued by the Superintendency of Securities and Insurance, 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. (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). 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 Sonda S.A.. It has recorded its 35% interest in Sonda under the equity method. Sonda's finnancial 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 & 132,777,801 Shareholders' Equity - ------------------------------------------------------------------------------------------------------------------------------------
96_Telefonica CTC Chile 2002 Annual Report 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) N.A. 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) N.A. - -----------------------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_97 Notes to the Consolidated Financial Statements, continued 4. Marketable Securities, continued:
Shares Unit Investment Taxpayer No. Company Name Number Holding % Trading Value Trading Value Trading Value of 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)
Date Par Book Value Market Instrument Purchase Maturity Value Amount Value Provision 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 -- - ------------------------------------------------------------------------------------------------------------------------------------
5. Short and long-term receivables: The breakdown of short and long-term receivables is as follows:
Current Description Up to 90 days Over 90 up to 1 year Subtotal 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 -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total long-term receivables - -----------------------------------------------------------------------------------------------------------------------------------
Description Total Current (net) Long-term 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 - -----------------------------------------------------------------------------------------------------------------------------------
98_Telefonica CTC Chile 2002 Annual Report 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 -- -- Foreign 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. 2002 Annual Report Telefonica CTC Chile_99 Notes to the Consolidated Financial Statements, continued 6. Balances and transactions with related companies, continued: 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 -- -- Foreign Unisel Argentina -- -- -- 235,050 79.688.080-5 Unisel Chile -- 636,623 -- -- Foreign Westham Trade Co Ltda. -- 201,486 -- -- 78.214.420-0 Orden Integracion -- 30,176 -- -- 96.725.400-2 Solex -- 1,349 -- -- Total 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. 100_Telefonica CTC Chile 2002 Annual Report c) Transactions
- 2002 2001 Nature Description ThCh$ ThCh$ Company Tax No. of of Effect on Effect on Relationship transaction Amount income Amount income - ------------------------------------------------------------------------------------------------------------------------------------ Telefonica Espana Foreign Parent Co. Purchases and Services 26,263 26,263 -- -- Rendered Telefonica Internacional 96.527.390-5 Parent Co. Purchases and Services 521,961 521,961 522,362 522,362 Chile S.A. Rendered Financial Expenses 838,560 838,560 2,230,347 2,230,347 Impresora y Comercial 93.541.000-2 Associate Sales and Services 4,844,225 4,844,225 -- -- Publiguias S.A. Purchases and Services 5,048,653 5,048,653 25,883,996 25,883,996 Rendered 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 356,102 356,102 -- -- Rendered 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 12,508,479 12,508,479 -- -- Rendered 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 42,843 42,843 44,492 44,492 Rendered Other Non-operating Income 12,342 12,342 -- -- Datadec Foreign Associate Purchases and Services -- -- 54,448 54,448 Rendered Orden S.A. 94.071.000-6 Associate Purchases and Services -- -- 10,328 10,328 Rendered Servibanca 96.571.690-4 Associate Purchases and Services -- -- 5,690 5,690 Rendered Unisel Argentina Foreign Associate Purchases and Services -- -- 46,536 46,536 Rendered Unisel Chile 79.688.080-5 Associate Purchases and Services -- -- 917,426 917,426 Rendered Ediciones Financieras 96.539.380-3 Associate Purchases and Services -- -- 15,066 15,066 Rendered Inversiones Pacifico 84.267.000-4 Associate Other Non-operating -- -- 826,879 826,879 Expenses Atento Recursos Ltda. 78.868.200-k Associate Purchases and Services 344,378 344,378 -- -- Rendered Telefonica. Procesos y Tecnologia de Informacion S.A. Foreign Common Parent Other Non-operating Income 412,646 412,646 -- -- Orden Gestion 96.703.200-k Associate Purchases and Services -- -- 26,948 26,948 Rendered Orden Integracion 78.214.420-0 Associate Purchases and Services -- -- 74,980 74,980 Rendered Atento Educacion 78.868.230-1 Associate Sales and Services -- -- 27,810 27,810 Solex 96.725.400-2 Associate Purchases and Services -- -- 224 224 Rendered Almacenes Paris S.A. 81.201.000-k Associate Purchases and Services -- -- 8, 992,403 8,992,403 Rendered Servicios de Outsourcing 96.900.580-8 Associate Purchases and Services -- -- 35,175 35,175 Logistica S.A Rendered T-Data Corp Foreign Associate Purchases and Services 1,320,918 1,320,918 -- -- Rendered - ------------------------------------------------------------------------------------------------------------------------------------
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. 2002 Annual Report Telefonica CTC Chile_101 Notes to the Consolidated Financial Statements, continued 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:
Subsidiaries Taxable Net Taxable Net Taxable Net Amount of Income with Income with Income Credit 15% Credit 16% Credit Without Credit ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ CTC Equipos y Servicios de Telecomunicaciones S.A -- 2,265,438 -- 362,470 CTC Transmisiones Regionales S.A -- 18,717,996 -- 2,994,879 Globus 120 S.A 2,031,364 1,208,705 402 551,867 Telefonica Empresas CTC Chile S.A -- 8,592,484 16,422 1,374,797 - ------------------------------------------------------------------------------------------------------------------------------------
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:
2002 2001 ---- ---- Deferred tax assets Deferred tax Deferred tax assets Deferred tax liabilities liabilities Descriptions Short-term Long-term Short-term Long-term Short-term Long-term Short-term Long-term - ------------------------------------------------------------------------------------------------------------------------------------ Temporary differences Allowance for doubtful accounts 18,523,109 -- -- -- 16,188,434 -- -- -- Vacation provision 780,222 -- -- -- 818,246 -- -- -- Tax loss 333,509 37,934,435 -- -- 36,836,369 23,521,982 -- -- Difference in value of -- 1,024,959 -- -- 3,900 1,554,921 -- -- activated I.A.S. Leased assets and liabilities 61,788 750,079 -- 150,960 60,281 902,987 -- -- Reappraisal of property, plant -- 3,628,454 -- -- -- 4,881,018 -- -- and equipment Depreciation of property, plant -- -- -- 207,594,668 -- -- -- 219,672,604 and equipment Staff severance indemnities -- 10,737 -- 6,162,642 -- -- -- 7,537,748 Deferred charge on sale of -- -- -- 667,867 -- -- -- 737,927 assets Software development -- -- -- 5,828,114 -- -- -- 6,919,600 Deferred charges for activated -- -- -- 3,605,825 -- -- -- 1,524,758 disbursements Difference in value of 3,207,509 -- -- -- 1,699,692 -- -- -- temporary investments Other events 2,282,337 1,422,776 -- 1,125,892 2,581,943 1,256,267 13,141 2,179,496 Subtotal 25,188,474 44,771,440 -- 225,135,968 58,188,865 32,117,175 13,141 238,572,133 - ------------------------------------------------------------------------------------------------------------------------------------ Complementary accounts net of -- (13,528,465) -- (157,902,312) (1,594,227) (16,074,530) -- (175,411,836) accumulated amortization Valuation provision -- -- -- -- -- -- -- -- Subtotal 25,188,474 31,242,975 -- 67,233,656 56,594,638 16,042,645 13,141 63,160,297 - ------------------------------------------------------------------------------------------------------------------------------------ Tax reclassification -- (31,242,975) -- (31,242,975) (13,140) (16,042,645) (13,141) (16,042,645) Total 25,188,474 -- -- 35,990,681 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. 102_Telefonica CTC Chile 2002 Annual Report 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) - -----------------------------------------------------------------------------------------------------------------------------------
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. 2002 Annual Report Telefonica CTC Chile_103 Notes to the Consolidated Financial Statements, continued 9. Property, plant and equipment: The breakdown of property, plant and equipment is as follows:
2002 2001 Accumulated Gross prop., plant Accumulated Gross prop., 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 materials -- 135,303,278 -- 223,209,260 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 out of 11,135,132 23,549,726 6,330,659 14,291,533 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:
Net Accumulated Property, plant Property, plant Balance Depreciation and equipment and equipment Description 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. 104_Telefonica CTC Chile 2002 Annual Report 10. Investments in Related Companies:
Holding Shareholders' equity Country Controlling No. percentage of the companies Income for the year of the of 2002 2001 2002 2001 2002 2001 Taxp. No. Company origin investment shares % % ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brazil Dollar 48,950,000 2.61 2.61 196,384,751 168,919,272 2,978,314 -10,851,533 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 45,648 9.00 9.00 25,013,978 18,116,689 6,897,278 6,939,111 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. Chile Pesos 271,615 20.20 20.00 582,290 526,125 -540,600 -164,135 96.895.220-K Atento Chile S.A. Chile Pesos 3,209,374 28.84 28.84 9,102,320 9,064,005 38,377 432,164 96.725.400-2 Sonda S.A.(2) Chile Pesos 35,500 35.00 -- 91,055,240 -- 4,673,789 -- In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos -- 19.00 19.00 2,063,500 2,063,500 -- -- In development Time Interating Chile Pesos -- 10.25 10.25 734,361 734,361 -- -- 96.725.400-2 Solexe S.A. Chile Pesos 80 -- 40.00 -- 528,173 -- 48,845 96.571.690-4 Servibanca S.A. Chile Pesos 1,200 43.33 43.33 -- 4,261,142 214,673 446,146 96.768.410-4 Payroll S.A. Chile Pesos 1,989,591 33.33 33.33 -- 522,952 81,278 164,605 96.539.380-3 Ediciones Financieras S.A. Chile Pesos 580 6.66 718 -- 58,231 -29,910 19,916 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos -- -- 33.33 -- 5,724,758 -- -- 94.071.000-6 Orden S.A. Chile Pesos -- -- 33.33 -- 4,393,522 -- 260,798 Foreign SBS Ltda. Guatemala Dollar -- -- 49.00 -- 156,992 -- -- Foreign AGROSYS Guatemala Dollar -- -- 50.00 -- 6,122 -- -- Foreign Sonda El Salvador El Salvador Dollar -- -- 49.00 -- 29,000 -- -- Foreign Chiptech Guatemala Dollar -- -- 50.00 -- 15,284 -- -- 96.894.490-8 Puerto Norte S.A. Chile Pesos -- -- 50.00 -- 161,020 -- 22,266 96.900.580-8 Servicios de Outsourcing Logistica S.A. Chile Pesos -- -- 48.33 -- 135,502 -- -68,887 96.929.090-1 Compania de Procesos y Servicios CPS S.A. Chile Pesos -- -- 16.67 -- 6 -- -168,914 96.916.540-6 Bazuca Internet Partners S.A. Chile Pesos -- -- 39.80 -- 1,711,128 -- -240,673 96.941.290-K Sustentable.cl S.A. Chile Pesos -- -- 20.96 -- 59,685 -- -- 96.967.100-K Novis S.A. Chile Pesos -- -- -- -- -- -- -- Foreign Bismark Telecomunicaciones Mexico Pesos -- -- 49.90 -- 99,287 -- -- Foreign Westham Trade Co. Ltda. USA Dollar -- -- 20.00 -- 461,985 -- -219,190 Foreign Data Dec S.A. Costa Rica Dollar -- -- 40.00 -- 917,233 -- 77,559 Total - ------------------------------------------------------------------------------------------------------------------------------------
Accrued income Equity Value Unearned Income Investment book value 2002 2001 2002 2001 2002 2001 2002 2001 Taxp. No. Company ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Foreign Consorcio Telefonica de Brasil Celular Holding (1) 77,734 -283,225 5,125,642 4,408,793 -- -- 5,125,642 4,408,793 93.541.000-2 Impresora y Comercial Publiguias S.A. 620,755 624,520 2,251,258 1,630,502 -- -- 2,251,258 1,630,502 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. -108,120 -32,827 116,458 105,225 -- -- 116,458 105,225 96.895.220-K Atento Chile S.A. 11,068 124,636 2,625,109 2,614059 -- -- 2,625,109 2,614,059 96.725.400-2 Sonda S.A.(2) 1,635,826 -- 31,869,334 -- -- -- 1,869,334 -- In development Bolsa de Oportunidades de Negocios S.A. -- -- 392,065 92,065 -- -- 92,065 392,065 In development Time Interating -- -- 75,272 75,272 -- -- 75,272 75,272 96.725.400-2 Solexe S.A. -- 19,538 -- 211,269 -- -- -- 211,269 96.571.690-4 Servibanca S.A. 93,018 193,315 -- 1,846,353 -- -- -- 1,846,353 96.768.410-4 Payroll S.A. 27,090 54,863 -- 174,300 -- -- -- 174,300 96.539.380-3 Ediciones Financieras S.A. -1,992 1,430 -- 4,181 -- -- -- 4,181 96.831.860-8 Inversiones Valparaiso S.A. -- 3,841 -- 1,908,062 -- -- -- 1,908,062 94.071.000-6 Orden S.A. -- 86,924 -- 1,464,361 -- -- -- 1,464,361 Foreign SBS Ltda. -- -- -- 76,926 -- -- -- 76,926 Foreign AGROSYS -- -- -- 3,061 -- -- -- 3,061 Foreign Sonda El Salvador -- -- -- 14,210 -- -- -- 14,210 Foreign Chiptech -- -- -- 7,642 -- -- -- 7,642 96.894.490-8 Puerto Norte S.A. -- -11,133 -- 80,510 -- -- -- 80,510 96.900.580-8 Servicios de Outsourcing Logistica S.A. -- -33,293 -- 65,488 -- -- -- 65,488 96.929.090-1 Compania de Procesos y Servicios CPS S.A. -- -28,158 -- 1 -- -- -- 1 96.916.540-6 Bazuca Internet Partners S.A. -- -95,788 -- 681,029 -- -- -- 681,029 96.941.290-K Sustentable.cl S.A. -- -- -- 12,510 -- -- -- 12,510 96.967.100-K Novis S.A. -- -- -- 28,945 -- -- -- 28,945 Foreign Bismark Telecomunicaciones -- -- -- 49,544 -- -- -- 49,544 Foreign Westham Trade Co. Ltda. -- -43,838 -- 92,397 -- -- -- 92,397 Foreign Data Dec S.A. -- 31,024 -- 366,893 -- -- -- 366,893 Total 42,455,138 16,313,598 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 company 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. 2002 Annual Report Telefonica CTC Chile_105 Notes to the Consolidated Financial Statements, continued 11. Goodwill and negative goodwill: (a) Goodwill: The breakdown of goodwill is as follows:
2002 2001 Taxpayer Company Year Amount Amount No. amortized Balance of amortized Balance of in the year Goodwill in the year Goodwill ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Foreign Consorcio Telefonica do Brasil 2001 173,938 2,840,195 455,049 3,014,133 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 S.A 2001 -- -- 5,826 -- 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. 106_Telefonica CTC Chile 2002 Annual Report (b) Negative goodwill: The breakdown of negative goodwill is as follows:
2002 2001 Taxpayer Company Year Amount Balance of Amount Balance of No. 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 (1,592,181) (1,063,390) year 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 9,498,563 -- space (gross) Amortization for the year (26,385) -- Total Net Intangibles 29,673,083 15,389,578 - -----------------------------------------------------------------------------------------------------------------------------------
13. Others (from Other Assets):
2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Disbursements for obtaining external financing to be amortized (see note 8b) 1,914,264 1,270,594 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 - ------------------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_107 Notes to the Consolidated Financial Statements, continued 14. Short-term obligations with banks and financial institutions: The breakdown of short-term obligations with banks and financial institutions is as follows:
US$ U.F. Ch$ Total Taxp. No. 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 BANCOESTADO -- -- 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 DE CREDITO E INVERSIONES -- -- -- 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 BANCO 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 and 62.30% for 2001 Percentage of obligations in national currency: 12.24% for 2002 and 37.70% for 2001
108_Telefonica CTC Chile 2002 Annual Report 15. Long-term obligations with banks and financial institutions: Long-term obligations with banks and financial institutions:
Currency or Years to maturity LT portion Long-term Long-term Bank or Financial Indexation portion as of portion as of Taxp. No. Institution Index 1 to 2 2 to 3 3 to 5 31/12/02 31/12/01 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 - ------------------------------------------------------------------------------------------------------------------------------------ Percentage of obligations in foreign currency: 85.71% in 2002 and 84.83% in 2001 Percentage of obligations in national currency: 14.29% in 2002 and 15.17% in 2001
2002 Annual Report Telefonica CTC Chile_109 Notes to the Consolidated Financial Statements, continued 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:
Registration number or Current nominal Bond readjustment Interest Final identification of the instrument Series amount placed unit rate % deadline - ------------------------------------------------------------------------------------------------------------------------------------ Short-term portion of long-term bonds 143.27.06.91 E 156,250 U.F. 6.000 Apr.2003 143.27.06.91 F 71,429 U.F. 6.000 Apr.2016 177.12.08.94 H(a) -- U.F. 5.800 Aug.2006 177.12.08.94 I 125,000 U.F. 5.500 Aug.2015 203.23.04.98 J(b) -- U.F. 6.750 Feb.2010 203.23.04.98 K -- U.F. 6.750 Feb.2020 Issued in New York Yankee Bonds -- US$ 7.625 Jul.2006 Issued in New York Yankee Bonds -- US$ 8.375 Jan.2006 Issued in Luxemburg Eurobonos(c) -- EURO 5.375 Aug.2004 Total - ------------------------------------------------------------------------------------------------------------------------------------ Long-term bonds 143.27.06.91 E -- U.F. 6.000 Apr.2003 143.27.06.91 F 892,857 U.F. 6.000 Apr.2016 177.12.08.94 H(a) -- U.F. 5.800 Aug.2006 177.12.08.94 I 1,437,500 U.F. 5.500 Aug.2015 203.23.04.98 J(b) -- U.F. 6.750 Feb.2010 203.23.04.98 K 4,000,000 U.F. 6.750 Feb.2020 Issued in New York Yankee Bonds 200,000,000 US$ 7.625 Jul.2006 Issued in New York Yankee Bonds 200,000,000 US$ 8.375 Jan.2006 Issued in Luxemburg Eurobonos(c) 157,800,000 EURO 5.375 Aug.2004 Total - ------------------------------------------------------------------------------------------------------------------------------------
Periodicity Par value Placement Registration number or Interest 2002 2001 In Chile identification of the instrument payment Amortizations ThCh$ ThCh$ or abroad - ------------------------------------------------------------------------------------------------------------------------------------ Short-term portion of long-term bonds 143.27.06.91 Biannual Biannual 2,648,222 5,330,441 National 143.27.06.91 Biannual Biannual 1,393,207 1,408,354 National 177.12.08.94 Biannual Biannual -- 8,641,818 National 177.12.08.94 Biannual Biannual 2,268,699 2,283,629 National 203.23.04.98 Biannual Biannual -- 6,084,352 National 203.23.04.98 Biannual Biannual 1,660,837 1,661,474 National Issued in New York Biannual Final 6,030,394 4,799,720 Foreign Issued in New York Biannual Final 5,079,754 5,773,902 Foreign Issued in Luxemburg Biannual Final 2,623,126 2,667,462 Foreign Total 21,704,239 38,651,152 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term bonds 143.27.06.91 Biannual Biannual -- 2,617,272 National 143.27.06.91 Biannual Biannual 14,950,107 16,152,037 National 177.12.08.94 Biannual Biannual -- 29,313,445 National 177.12.08.94 Biannual Biannual 24,069,673 26,172,718 National 203.23.04.98 Biannual Biannual -- 37,688,715 National 203.23.04.98 Biannual Biannual 66,976,480 67,002,158 National Issued in New York Biannual Final 143,722,000 134,886,740 Foreign Issued in New York Biannual Final 143,722,000 134,886,740 Foreign Issued in Luxemburg 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. 110_Telefonica CTC Chile 2002 Annual Report 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 Interest Interest Interest Liabilities Interest Income Subsidiaries 2002 2001 2002 2001 2002 2001 ThCh$ ThCh$ 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). 2002 Annual Report Telefonica CTC Chile_111 Notes to the Consolidated Financial Statements, continued 20. Shareholders' Equity: During 2002 and 2001, changes in shareholders' equity accounts are as follows:
Accumulated (Loss) deficis Net income Total Paid-in Contribut Other Retained development for shareholders' capital surplus reserves earnings period the year equity 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 subsidiaries -- -- -- (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. (a) Capital: As of December 31, 2002, the Company's paid-in capital is as follows:
Number of shares: Series No. of shares No. of No. of shares subscribed paid shares with voting rights - -------------------------------------------------------------------------------- A 873,995,447 873,995,447 873,995,447 B 83,161,638 83,161,638 83,161,638 - --------------------------------------------------------------------------------
Capital (ThCh$): Series Subscribed Paid-in capital capital - -------------------------------------------------------------------------------- A 672,480,822 672,480,822 B 63,987,298 63,987,298 - --------------------------------------------------------------------------------
112_Telefonica CTC Chile 2002 Annual Report (b) Shareholder distribution: In accordance with Circular No. 792 issued by the Chilean Superintendence of Securities and Insurance, the distribution of shareholders according to their participation in the Company as of December 31, 2002 is as follows:
Type of shareholder Percentage of total Number of holdings shareholders % - -------------------------------------------------------------------------------- 10% holding or more 63.85 2 Less than 10% holding: Investment equal to or exceeding UF 200 35.40 2,441 Investment under UF 200 0.75 12,258 Total 100.00 14,701 - -------------------------------------------------------------------------------- Company controller 43.64 1 - --------------------------------------------------------------------------------
(c) Dividends: As established in Law No. 18, 046, except otherwise agreed upon at the General Shareholders' Meeting by unanimous vote of the outstanding shares, when there is net income, at least 30% of it should be distributed as dividends. On April 5, 2002, the Ordinary Shareholders Meeting was informed of the dividend distribution policy proposed by the Board of Directors for 2002. Distribute for 2002, at least 30% of net income generated in the same year - percentage equal to that required by law - by means of a final dividend in May 2003, which will be proposed at the corresponding General Shareholders' Meeting. On April 5, 2002, the General Shareholders Meeting agreed to pay a dividend of ThCh$ 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.
Amount Balance as of Company 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. 2002 Annual Report Telefonica CTC Chile_113 Notes to the Consolidated Financial Statements, continued 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. (b) Other non-operating income: The breakdown of non-operating income is as follows: Other Income:
2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ 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 materials 912,077 404,067 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 114_Telefonica CTC Chile 2002 Annual Report (c) Other non-operating income and expenses: The breakdown of other non-operating income and expenses is as follows: Other Expenses:
2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ 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 and equipment (2) 2,002,190 2,169,904 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. 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 Indexation 2002 2001 (charges) 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 - ------------------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_115 Notes to the Consolidated Financial Statements, continued 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 - --------------------------------------------------------------------------------
24. Issuance and placement of share titles and debt titles expense: The breakdown of this item is as follows:
Short-term (ThCh$) Long-term (ThCh$) 2002 2001 2002 2001 - -------------------------------------------------------------------------------- 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 Total 2,459,860 3,043,151 8,801,263 13,459,591 - --------------------------------------------------------------------------------
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 - --------------------------------------------------------------------------------
116_Telefonica CTC Chile 2002 Annual Report 26. Derivative Contracts: The breakdown of derivative contracts is as follows:
Maturity Purchase Protected Item Type of Type of Contract or Specific Sale or Transaction Derivate Contract Value Expiration Item 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 - ------------------------------------------------------------------------------------------------------------------------------------
Affected Accounting Accounts Value of Asset/Liability Effect on Income Type of Type of Protected Derivate Contract Item Name Amount Realized Unrealized Thch$ Thch$ 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 (11,144,72) 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 insurance to be amortized activo 2,036,110 (3,535,079) (4,096,940) - ------------------------------------------------------------------------------------------------------------------------------------ Exchange insurance expired during the year (net) 29,554,173 - ------------------------------------------------------------------------------------------------------------------------------------ Total 16,478,979 43,010,265 - ------------------------------------------------------------------------------------------------------------------------------------
Types of derivatives: Type of Contract: FR: Forward CCPE: Hedge contract for existing items S : Swap CCTE: Hedge contract for expected transactions CI : Investment contract 2002 Annual Report Telefonica CTC Chile_117 Notes to the Consolidated Financial Statements, continued 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 of Metropolitan Customs Directorate 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. (v) Complaint against the State of Chile: 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 State 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 State. Once the answer from the State 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. 118_Telefonica CTC Chile 2002 Annual Report 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, 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 Telefonia 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. 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. 2002 Annual Report Telefonica CTC Chile_119 Notes to the Consolidated Financial Statements, continued 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 Other currencies - 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$ 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 Dollars - 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 Other currencies - 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. 120_Telefonica CTC Chile 2002 Annual Report The breakdown of current liabilities is as follows:
Up to 90 days 90 days up to 1 year 2002 2001 2002 2001 Average Average Average Average Description Currency Amount annual Amount annual Amount annual Amount annual interest interest interest interest ThCh$ % ThCh$ % ThCh$ % ThCh$ % - ------------------------------------------------------------------------------------------------------------------------------------ Short-term obligations with banks and financial institutions Indexed Ch$ - - 11,960,365 5.97 9,191,446 0.78 8,510,325 5.39 Dollars - - 181,423 4.50 - - - - Short-term portion of obligations with banks and financial institutions Indexed Ch$ 114,586 - 28,026,165 4.36 9,726,643 0.90 2,653,101 3.99 Dollars 24,798,977 2.30 10,682,048 4.08 111,650,599 2.40 71,596,233 3.70 Obligations with the public (bonds) Indexed Ch$ - - 5,233,246 6.75 7,970,964 5.78 20,176,822 6.75 Dollars 11,110,148 - 10,573,622 - - - - - Euros - - - - 2,623,127 - 2,667,462 - Long-term obligations maturing within a year Indexed Ch$ 428,856 8.95 593,750 9.40 60,903 8.89 548,822 8.51 Notes and accounts payable to related parties Indexed Ch$ - - 10,523,562 - - - - - Non-indexed Ch$ 8,992,723 - 260,597 - 2,983,473 - - - Dollars - - 297,835 - - - 6,490,631 3.00 Other current liabilities (d) Indexed Ch$ 1,666,936 - 15,113,635 - 388,567 - 21,837,585 - Non-indexed Ch$ 180,983,741 - 222,716,033 - 1,108,166 - 24,892,864 - Dollars 5,621,194 - 15,425,707 - - - 371,618 - Total current liabilities: 233,717,161 - 331,587,988 - 145,703,888 - 159,745,463 - - ------------------------------------------------------------------------------------------------------------------------------------ Subtotal by currency Indexed Ch$ 2,210,378 - 71,450,723 - 27,338,523 - 53,726,655 - Non-indexed Ch$ 189,976,464 - 222,976,630 - 4,091,639 - 24,892,864 - Dollars 41,530,319 - 37,160,635 - 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. 2002 Annual Report Telefonica CTC Chile_121 Notes to the Consolidated Financial Statements, continued 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 5 to 10 years Over 10 years Average Average Average Average Currency Amount annual Amount annual Amount annual Amount annual interest interest interest interest Long-Term Liabilities rate rate rate rate ThCh$ % ThCh$ % ThCh$ % ThCh$ % - ------------------------------------------------------------------------------------------------------------------------------------ Obligations with banks and financial institutions Indexed Ch$ 59,525,347 0.52 111,650,600 2.38 - - - - Dollars 245,391,595 2.73 - - - - - - Obligations with the public (bonds) Indexed Ch$ 7,339,142 5.78 9,368,733 5.8 532,301,289 6.17 56,987,096 6.57 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 - 8,041,989 - 11,305,189 - Non-indexed Ch$ 3,132,239 - 444,293 - 1,094,840 - 18,618,784 - Dollars 24,214,112 3.00 - - - - - - Total Long-Term Liabilities 478,268,026 - 414,502,728 - 41,438,118 - 86,911,069 - - ------------------------------------------------------------------------------------------------------------------------------------ Indexed Ch$ 86,777,690 - 126,614,435 - 40,343,278 - 68,292,285 - Non-indexed Ch$ 3,132,239 - 444,293 - 1,094,840 - 18,618,784 - Dollars 269,605,707 - 287,444,000 - - - - - Euro 118,752,390 - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
122_Telefonica CTC Chile 2002 Annual Report The breakdown of long-term liabilities for 2001 is the following:
1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Average Average Average Average Currency Amount annual Amount annual Amount annual Amount annual interest interest interest interest Long-Term Liabilities rate rate rate rate ThCh$ % ThCh$ % ThCh$ % ThCh$ % - ------------------------------------------------------------------------------------------------------------------------------------ Obligations with banks Indexed Ch$ 79,559,340 3.57 3,757,097 4.39 -- -- -- -- and financial Dollars 224,577,206 3.47 215,818,784 3.21 25,353,034 4.29 -- -- institutions Other currencies 13,489 -- 33,048 -- -- -- -- -- Obligations with the Indexed Ch$ 36,125,603 6.05 30,970,371 6.12 47,243,395 6.35 64,607,246 6.51 public (bonds) Dollars -- -- 269,773,480 8.00 -- -- -- -- Euros 119,105,286 5.38 -- -- -- -- -- -- Other long-term Indexed Ch$ 36,492,392 7.60 4,580,110 -- 14,087,233 -- 17,190,372 -- liabilities (e) Non-indexed Ch$ 13,371,687 -- 6,594,459 -- 6,488,558 -- 15,713,085 -- Dollars 25,534,900 -- 7,419 -- -- -- -- -- Total Long-Term 534,779,903 -- 531,534,768 -- 93,172,220 -- 97,510,703 -- Liabilities - ------------------------------------------------------------------------------------------------------------------------------------ Indexed Ch$ 152,177,335 -- 39,307,578 -- 61,330,628 -- 81,797,618 -- Non-indexed Ch$ 13,371,687 -- 6,594,459 -- 6,488,557 -- 15,713,085 -- Dollars 250,112,106 -- 485,599,683 -- 25,353,035 -- -- -- Euros 119,105,286 -- -- -- -- -- -- -- Other currencies 13,489 -- 33,048 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------
(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. 30. Sanctions: Neither the Company, nor its Directors and Managers have been sanctioned by the Superintendency of Securities and Insurance or any other administrative authority during this year. 2002 Annual Report Telefonica CTC Chile_123 Notes to the Consolidated Financial Statements, continued 31. Subsequent Events: a) VTR access charges lawsuit On January 20, 2003, the Sixth Court of Appeals decided not to accept the protection recourse filed by the Company against Resolution 1726 dictated by the Telecommunications Subsecretary on October 2, 2002. In this resolution, the Subsecretary stated that the Company had to pay VTR the debt for interconnection access charges set since the publication of the rate decree on June 25, 2002. The Company shall appeal the resolution of the Court of Appeals in the Supreme Court, notwithstanding other necessary actions and recourses to obtain compliance with the "interconnection agreement". b) Labor Lawsuit SINATE and others against CTC On January 22, the Court of Appeals dictated sentence rejecting the executive complaint filed by Intercompany Unions 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 unions 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 unions 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. 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 Chief Executive Officer 124_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. and Subsidiaries Analysis of the Consolidated Financial Statements As of December 31, 2002 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. - -------------------------------------------------------------------------------- (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. 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 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 2002 Annual Report Telefonica CTC Chile_125 Analysis of the Consolidated Financial Statements, continued 1. Highlights, continued: Regulatory Issues, continued: 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 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 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 UF 1,983,185 (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 UF 2,003,260 (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. 126_Telefonica CTC Chile 2002 Annual Report 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 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. 2. Volume Statistics, Property, Plant and Equipment and Statements of Income Table No 1 Volume Statistics
Description December December Variation 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 December 31, 2002
Description December December Variation 2001 2002 Ch$ % - ------------------------------------------------------------------------------------------------------------------------------------ Land, Infrastructure, Machinery and Equipment and Others 3,694,955 3,772,606 77,651 2.1% 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% - ------------------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_127 Table No 3 Consolidated Statement of Income for the years ended as of December 31, 2002 and 2001 Figures in millions of pesos as of December 31, 2002
Jan-Dec Jan-Dec Variation (2002/2001) Decription 2001 2002 Ch$ % - ------------------------------------------------------------------------------------------------------------------------------------ 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) n.a. - ------------------------------------------------------------------------------------------------------------------------------------ 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) n.a. - ------------------------------------------------------------------------------------------------------------------------------------
(*) 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 of 188 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. 128_Telefonica CTC Chile 2002 Annual Report 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 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. 2002 Annual Report Telefonica CTC Chile_129 Analysis of the Consolidated Financial Statements, continued 3. Analysis of Results for the year, continued: 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. 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, 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: 130_Telefonica CTC Chile 2002 Annual Report Revenues and Costs by Business as of December 31, 2002 and 2001 Figures in millions of pesos as of December 31, 2002
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) (10,89) (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 [GRAPHIC OMITTED] 2002 Annual Report Telefonica CTC Chile_131 Analysis of the Consolidated Financial Statements, continued 5. Statement Of Cash Flows Table No 4 Consolidated Cash Flows Figures in millions of pesos as of December 31, 2002
Jan-Dec Jan-Dec Variation (2002/2001) Description 2001 2002 Ch$ % - ------------------------------------------------------------------------------------------------------------------------- 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 equivalents (5,502) (2,244) 3,258 -59.2% Net change in cash and cash equivalents for the year (49,289) (65,982) (16,693) 33.9% - -------------------------------------------------------------------------------------------------------------------------
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. 132_Telefonica CTC Chile 2002 Annual Report 6. Financial Indicators Table No 5 Consolidated Financial Indicators
Description Jan-Dec Jan-Dec 2001 2002 - --------------------------------------------------------------------------------------------------------------------------- Liquidity Ratios Current Liquidity (Current Assets/Current Liabilities) 1.34 1.18 Acid Ratio (Most liquid assets/Current Liabilities) 0.19 0.25 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 (Operating Income/Operating Revenues) 15.4% 15.1% Operating Income Return (Operating Income/Net Property, Plant and Equipment (1)) 6.4% 6.1% Net Income per Share (Net Income/Amount of average paid shares each year) Ch$4.4 -Ch$18.5 Return on Equity (Net Result/Average shareholders' equity) 0.3% -1.4% Return on Assets (Net Result/Average assets) 0.14% -0.61% Operating Assets Yield (Net Result/Average operating assets (2)) 0.20% -0.87% Dividends Return (Dividends paid (3)/Market Price per Share) N.A. 0.1% Activity Indicators - --------------------------------------------------------------------------------------------------------------------------- Total Assets (millions of pesos as of 12/31/02) 3,090,301 2,688,373 Sale of Assets (millions of pesos as of 12/31/02) 4,888 21,576 Investments in other companies and property, plant and equipment (millions of pesos as of 201,503 146,376 12/31/02) Inventory Turnover (Cost of Sales/Average Inventory) 2.5 2.6 Inventory Permanence (Average Inventory/Cost of sales times 360 days) 143 140 - ---------------------------------------------------------------------------------------------------------------------------
(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. 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 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. 2002 Annual Report Telefonica CTC Chile_133 Analysis of the Consolidated Financial Statements, continued 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. 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. 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. 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. 134_Telefonica CTC Chile 2002 Annual Report 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 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). 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. 2002 Annual Report Telefonica CTC Chile_135 Analysis of the Consolidated Financial Statements, continued 9.Analysis of Markets, Competition and Relative Participation, continued: Local Telephone Service, continued: 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 188 Telefonica Mundo 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). 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 licenses 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 Metropolis-Intercom 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. 136_Telefonica CTC Chile 2002 Annual Report 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 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. 2002 Annual Report Telefonica CTC Chile_137 individual financial statements for the years ended December 31, 2002 and 2001 CONTENTS Independent Auditors' Report Individual Financial Statements Notes to the Individual Financial Statements Analysis of the Individual Financial Statements ThCh$: Thousands of Chilean pesos UF: Unidad de Fomento, inflation-indexed peso denominated monetary unit in Chile 138_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. Independent Auditors' Report [Deloitte & Touche LOGO] To the Shareholders of Compania de Telecomunicaciones de Chile S.A.: We have audited the accompanying balance sheet of Compania de Telecomunicaciones de Chile S.A. as of December 31, 2002 and the related statements of income and of cash flows for the year then ended. These financial statements (including the related notes) are the responsibility of the management of Compania de Telecomunicaciones de Chile S.A. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Compania de Telecomunicaciones de Chile S.A. for the year ended December 31, 2001 were audited by other auditors whose report, dated January 21, 2002 (except for note 31, dated January 30, 2002), contained an explanatory paragraph related to the recognition, through its subsidiary Telefonica Empresas CTC Chile S.A., of a loss amounting to ThCh$982,366 (historic) caused by the devaluation of the Argentine peso. The accompanying Analysis of the Individual Financial Statements is not an integral part of these financial statements, and, therefore, this report does not cover this item. We conducted our audit in accordance with auditing standards generally accepted in Chile. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The abovementioned financial statements have been prepared to reflect the individual financial position of Compania de Telecomunicaciones de Chile S.A. on the basis of the criteria set forth in Note 2, prior to consolidating line by line the financial statements of the subsidiaries detailed in Note 10. Therefore, in order to be properly understood, these individual financial statements should be read and analyzed in conjunction with the consolidated financial statements of Compania de Telecomunicaciones de Chile S.A. and subsidiaries, which are required by accounting principles generally accepted in Chile. In our opinion, the 2002 financial statements present fairly, in all material respects, the financial position of Compania de Telecomunicaciones de Chile S.A. as of December 31, 2002 and the results of its operations and its cash flows for the year then ended in conformity with the basis of accounting described in Note 2. The accompanying financial statements have been translated into English for the convenience of readers outside Chile. /s/ Deloitte & Touche January 27, 2003 2002 Annual Report Telefonica CTC Chile_139 Compania de Telecomunicaciones de Chile S.A. Balance Sheet As of December 31, 2002 and 2001
Assets notes 2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Current Assets Cash 10,979,020 10,335,273 Time deposits 2,155.830 -- Marketable securities (net) (4) 67,072,070 32,723,967 Trade accounts receivable (net) (5) 110,075,853 112,747,078 Notes receivable (net) (5) 2,336,672 1,687,319 Other receivables (net) (5) 20,346,589 24,091,932 Notes and accts. receivable from related companies (6 a) 123,089,340 128,750,376 Inventories (net) 7,969,874 17,966,955 Recoverable taxes 12,498,983 35,882,839 Prepaid expenses 4,030,062 5,486,626 Deferred taxes (7 b) 15,224,737 47,194,028 Other current assets (8) 23,181,195 116,120,198 Total Current Assets 398,960,225 532,986,591 - ------------------------------------------------------------------------------------------------------------------------------------ Property, Plant and Equipment (9) Land 24,664,400 24,661,083 Constructions and infrastructure works 173,526,807 173,840,549 Machinery and equipment 2,570,177,972 2,522,619,430 Other property, plant and equipment 231,878,267 244,150,851 Higher value for technical reappraisal of property, plant and equipment 6,609,613 6,609,668 Depreciation (less) 1,632,828,993 1,467,539,569 Total Property, Plant and Equipment 1,374,028,066 1,504,342,012 - ------------------------------------------------------------------------------------------------------------------------------------ Other Assets Investment in related companies (10) 406,729,475 334,360,793 Investment in other companies 3,816 3,816 Goodwill (11) 165,928,707 177,292,632 Long-term debtors (5) 31,732,180 37,590,482 Notes and accts. receivable from related companies (6 a) 243,759,247 287,146,875 Intangibles 2,083,683 -- Amortization (less) 259,517 -- Others (12) 17,822,581 25,067,383 Total Other Assets 867,800,172 861,461,981 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets 2,640,788,463 2,898,790,584 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 31 are an integral part of these financial statements. 140_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. Balance Sheet As of December 31, 2002 and 2001
Liabilities notes 2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Current Liabilities Short-term obligations with banks and financial institutions (13) 9,191,446 10,791,371 Short-term portion of long-term obligations with banks and financial institutions (13) 146,290,805 98,928,093 Obligations with the public (bonds) (15) 21,704,239 38,651,152 Long-term obligations maturing within a year 115,289 739,662 Dividends payable 176,400 252,658 Accounts payable (31) 74,047,123 84,032,554 Other creditors 6,379,150 27,556,036 Notes and accounts payable to related companies (6 b) 67,807,691 61,740,474 Provisions (16) 4,572,778 6,011,943 Withholdings 6,242,842 8,534,614 Unearned income 3,768,492 1,607,780 Other current liabilities 4,610,536 30,697,427 Total Current Liabilities 344,906,791 369,543,764 - ------------------------------------------------------------------------------------------------------------------------------------ Long-Term Liabilities Obligations with banks and financial institutions (14) 416,567,542 525,297,193 Obligations with the public (bonds) (15) 512,192,650 567,825,381 Other long-term creditors 5,701,649 29,868,479 Notes and accounts payable to related companies (6 b) 29,313,820 37,159,927 Long-term provisions (16) 13,497,883 15,575,824 Long-term deferred taxes (7 b) 29,804,691 43,823,992 Other long-term liabilities 2,113,385 4,399,531 Total Long-Term Liabilities 1,009,191,620 1,223,950,327 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' Equity (18) 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 Liabilities and Shareholders' Equity 2,640,788,463 2,898,790,584 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 31 are an integral part of these financial statements. 2002 Annual Report Telefonica CTC Chile_141 Compania de Telecomunicaciones de Chile S.A. Statements of Income For the years ended December 31, 2002 and 2001
Operating Income notes 2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Operating revenues 433,090,369 461,963,596 Operating costs (less) 324,181,146 321,924,588 Gross Margin (19 a) 108,909,223 140,039,008 - ------------------------------------------------------------------------------------------------------------------------------------ Administration and selling expenses (less) 57,081,539 67,093,335 Operating Income 51,827,684 72,945,673 - ------------------------------------------------------------------------------------------------------------------------------------ Non-Operating Income Financial income 32,303,051 34,364,797 Net income from investments in related companies (10) 34,152,853 50,142,744 Other non-operating income (19 b) 5,952,585 18,062,381 Loss from investments in related companies (less) (10) 2,568,084 27,067,030 Amortization of goodwill (less) (11) 11,363,925 11,472,577 Financial expenses (less) 82,884,030 95,595,379 Other non-operating expenses (less) (19 b) 21,472,052 31,747,753 Price-level restatement (20) (5,631,478) 4,061,864 Exchange differences (21) (935,182) (1,581,670) Non-Operating Income (52,446,262) (60,832,623) - ------------------------------------------------------------------------------------------------------------------------------------ (Loss) Income before Income Tax (618,578) 12,113,050 - ------------------------------------------------------------------------------------------------------------------------------------ Income tax (7 c) (17,061,798) (7,878,042) Net (Loss) Income for the year (17,680,376) 4,235,008 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 31 are an integral part of these financial statements. 142_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. Statements of Cash Flows For the years ended December 31, 2002 and 2001
2002 2001 ThCh$ ThCh$ - ----------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities 232,603,412 200,216,868 - ----------------------------------------------------------------------------------------------------------------------------------- Net (Loss) Income for the year (17,680,376) 4,235,008 Loss from sale of assets 111,365 72,953 - ----------------------------------------------------------------------------------------------------------------------------------- Loss on sale of property, plant and equipment 111,365 72,953 Charges to income that do not represent cash flows 224,143,038 181,411,543 - ----------------------------------------------------------------------------------------------------------------------------------- Depreciation for the year 173,009,680 165,979,394 Amortization of intangibles 259,517 -- Provisions and write offs 20,254,116 14,887,870 Net income from investments in related companies (less) 34,152,853 50,142,744 Loss from investments in related companies 2,568,084 27,067,030 Amortization of goodwill 11,363,925 11,472,577 Net price-level restatement 5,631,478 (4,061,864) Net exchange differences 935,182 1,581,668 Other credits to income that do not represent cash flows (less) 578,768 18,534,107 Other charges to income that do not represent cash flows 44,852,677 33,161,719 Changes in assets that affect cash flows (increase) decrease (78,534,420) 22,534,244 - ----------------------------------------------------------------------------------------------------------------------------------- Increase in trade accounts receivable (18,873,122) (35,187,631) Decrease (Increase) in inventories 9,331,368 (5,918,048) (Increase) Decrease in other assets (68,992,666) 63,639,923 Changes in liabilities that affect cash flows increase (decrease) 104,563,805 (8,036,880) - ----------------------------------------------------------------------------------------------------------------------------------- Increase in accounts payable related to operating income 82,645,152 2,714,057 Decrease in interest payable (1,159,320) (3,254,312) Increase (Decrease) in income taxes payable net 23,077,973 (3,573,823) (Decrease) in Value Added Tax and other similar taxes payable net -- (3,922,802) - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 31 are an integral part of these financial statements. 2002 Annual Report Telefonica CTC Chile_143 Compania de Telecomunicaciones de Chile S.A. Statements of Cash Flows For the years ended December 31, 2002 and 2001
2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Net negative cash flows from financing activities (226,775,654) (119,941,637) - ------------------------------------------------------------------------------------------------------------------------------------ Proceeds from loans 13,815,654 110,111,735 Dividends paid (less) 1,263,146 -- Loans paid (less) 113,627,892 208,180,151 Obligations with the public paid (less) 115,634,382 21,873,221 Payment of documented loans from related companies (less) 10,065,888 -- Net negative cash flows from investment activities (51,393,728) (126,573,646) - ------------------------------------------------------------------------------------------------------------------------------------ Sale of property, plant and equipment 730,269 124,888 Sale of permanent investments -- 1,636,280 Sale of other investments -- 11,157,021 Collection of other loans to related companies 89,778,066 -- Purchase of property, plant and equipment (less) 32,265,976 29,598,557 Capitalized interest paid (less) 4,348,983 15,470,463 Permanent investments (less) 75,116,842 1,472,118 Investments in financial instruments (less) 30,170,262 -- Other loans to related companies (less) -- 92,950,697 Total net cash flows used for the year (45,565,970) (46,298,415) - ------------------------------------------------------------------------------------------------------------------------------------ Effect of inflation on cash and cash equivalents (1,689,307) (4,610,159) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash and cash equivalents used for the year (47,255,277) (50,908,574) - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents beginning of year 61,890,261 112,798,835 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents end of year 14,634,984 61,890,261 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes 1 to 31 are an integral part of these financial statements. 144_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. Notes to the Financial Statements (Translation of financial statements originally issued in Spanish) 1. Registration in the Securities Registry: The Company is an open stock corporation registered in the Securities Registry under No. 009 and is therefore subject to oversight by the Chilean Superintendency of Securities and Insurance. 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 Chilean Superintendency of Securities and Insurance, except for investments in subsidiaries, which are recorded on a single line of the balance sheet at equity value, and therefore have not been consolidated line-by-line. This treatment does not modify net income for the year or shareholders' equity. In case of discrepancies between accounting principles generally accepted by the Chilean Accountants Association and the standards set forth by the Chilean Superintendency of Securities and Insurance, the standards of the Superintendency will prevail. These individual financial statements have been issued only for the purposes of making an individual analysis of the Company, and therefore should be read together with the consolidated financial statements, which are required by generally accepted accounting principles in Chile. (c) Basis of presentation: Certain reclassifications have been made to the 2001 financial statements for comparison purposes. The financial statements for 2001 and their notes have been restated by 3.0 % in order to allow comparison with the 2002 financial statements. (d) 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. (e) 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 ----------------------------------------------------------- (f) Time deposits: Time deposits are carried at the value of the capital invested plus readjustments, if applicable and accrued interest as of year-end. (g) 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. (h) 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. (i) Allowance for doubtful accounts: Differentiated percentages are applied in the calculation of allowance for doubtful accounts, taking into consideration age factors and eventual collections costs, of up to 100% for debts exceeding 120 days. (j) 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 Chilean Superintendency of Securities and Insurance. 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. 2002 Annual Report Telefonica CTC Chile_145 Notes to the Financial Statements, continued 2. Significant accounting principles, continued: (j) Property, plant and equipment, continued: In accordance with the above, there has been a capitalization of the financial cost during the period of ThCh$ 4,348,983 and ThCh$ 15,470,463 in 2002 and 2001, respectively. (k) 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 7.19%. (l) Leased assets: Rented assets with a purchase option, whose contracts 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, while it does not exercise the purchase option it cannot freely dispose of them. (m) 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. (n) Goodwill: Goodwill corresponds to the debit differences that arise when adjusting the investment cost, at the moment of adopting the equity method or when making a new purchase. The 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. (n) 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 to obtaining a loan with investment guarantees and are shown in Other Current Liabilities (o) 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 bond (see Note 15). (p) Income taxes and deferred income taxes: 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 Superintendency of Securities and Insurance. On September 28, 2001 Law No. 19,753 was published, increasing the income tax rate to 16% in 2002, 16.5% in 2003 and 17% in 2004 and thereafter. As of December 31, 2001 the accumulated balances of temporary differences, include the increased income tax rate. Deferred income taxes arising due to the increase in the income tax rate, are recorded in accordance with Technical Bulletin No. 71 issued by the Chilean Accountants Association. (see Note 7). (q) Staff severance indemnities: The Company's staff severance indemnities obligation is accrued applying the net present value method to the accrued benefit, using an annual discount rate of 7%, considering a future permanence until the retirement date of each employee (see Note 17). (r) Operating revenues: The Company revenues are recorded on an 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. (s) 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 24. 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. (t) Interest rate coverage: Interest on loans 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 24). 146_Telefonica CTC Chile 2002 Annual Report (u) Computer software: The software's purchase cost is deferred and amortized using the straight-line method over a four-year period. (v) Research and development expenses: Research and development expenses are charged to income in the period they are incurred. Such expenses have not been significant in the last few years. (w) Accumulated deficit development period of subsidiaries: In accordance with Circular No. 981 issued by the Superintendency of Securities and Insurance, 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 their operations (x) 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 (y) 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". (z) Software licenses: 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. 3. Accounting Changes: Accounting principles have been consistently applied during the years covered by these financial statements.. 4. Marketable Securities: The breakdown of marketable securities is as follows: 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Mutual funds units 1,500,133 -- Public offer promissory notes 65,571,937 32,723,967 Total Marketable Securities 67,072,070 32,723,967 - -------------------------------------------------------------------------------- Public offer instruments (Fixed Income)
Date Book value Market Instrument Purchase Maturity Par value Amount Rate Value Provision ThCh$ 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 -- - ------------------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_147 Notes to the Financial Statements, continued 5. Short and long-term receivables: The breakdown of short and long-term receivables is as follows:
Current ----------------------------------------------------------------------------------- Description Up to 90 days Over 90 days up to 1 year Subtotal 2002 2001 2002 2001 2002 ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------ Trade accts receivable 166,129,362 149,402,044 6,593,435 5,464,130 172,722,797 Allow. for Doubtful Acct (59,350,227) (37,705,739) (3,296,717) (4,413,357) (62,646,944) Notes receivable 7,501,192 6,793,046 224,621 -- 7,725,813 Allow. for Doubtful Acct (5,389,141) (5,105,727) -- -- (5,389,141) Other receivables 13,526,686 19,665,291 6,819,903 4,426,641 20,346,589 Allow. for Doubtful Acct -- -- -- -- -- Total long-term receivables Current Long-term ----------------------------- -------------------------- Description Total Current (net) 2002 2001 2002 2001 ThCh$ ThCh$ ThCh$ ThCh$ - -------------------------------------------------------------------------------------------- Trade accts receivable 110,075,853 112,747,078 5,590,125 7,926,022 Allow. for Doubtful Acct -- -- -- -- Notes receivable 2,336,672 1,687,319 -- -- Allow. for Doubtful Acct -- -- -- -- Other receivables 20,346,589 24,091,932 26,142,055 29,664,460 Allow. for Doubtful Acct -- -- -- -- Total long-term receivables 31,732,180 37,590,482
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$ - ------------------------------------------------------------------------------------------------------------------------ 90.430.000-4 Telefonica Empresas CTC Chile S.A. 38,912,474 32,542,487 36,533,058 45,533,094 96.700.900-8 Telefonica Data CTC Chile S.A. 20,285,293 13,995,405 -- -- 96.545.500-0 CTC Equipos y Servicios de Telecom. S.A. 15,133,688 17,895,345 9,386,727 5,714 96.551.670-0 CTC Transmisiones Regionales S.A. 11,897,508 37,061,385 54,510,173 99,664,576 Foreign Telefonica Procesos y Tecnologia de Informacion S.A. 11,779,407 -- -- -- 96.786.140-5 Telefonica Movil S.A. 10,391,026 11,218,064 143,329,289 141,943,491 9.6919.660-3 Telemergencia Chile S.A. 5,624,197 -- -- -- 96.961.230-5 Telefonica Gestion de Servicios Compartidos S.A. 3,518,378 892,306 -- -- 83.628.100-4 Sonda S.A. 1,507,077 1,600,669 -- -- 93.541.000-2 Impresora y Comercial Publiguias S.A. 839,469 441,211 -- -- Foreign Telefonica Internacional de Espana S.A. 780,518 742,134 -- -- 96.834.320-3 Infoera S.A. 585,694 340,897 -- -- 78.703.410-1 Tecnonautica S.A. 553,379 2,056,862 -- -- 96.895.220-k Atento Chile S.A 438,697 708,285 -- -- 74.944.200-k Fundacion Telefonica Chile 250,853 128,642 -- -- 96.887.420-9 Globus 120 S.A. 193,590 631,140 -- -- 96.893.540-2 Infochile S.A. 143,552 15,235 -- -- 79.727.230-2 CTC Isapre S.A. 91,916 411,636 -- -- 96.934.950-7 Portal de Pagos e Informacion S.A. 69,967 2,984 -- -- 90.184.000-8 Comunicaciones Mundiales S.A. 51,976 25,328 -- -- 96.834.230-4 Terra Networks Chile S.A. 23,009 1,389,039 -- -- 96.910.730-9 Emergia Chile S.A. 10,891 116,602 -- -- Foreign Telefonica Espana 6,648 6,847 -- -- 59.083.900-0 Telefonica Mobile Solutions Chile S.A. 133 -- -- -- Foreign CTC Internacional S.A. -- 26,049 -- -- 88.269.200-0 Comunicaciones Intercom S.A. -- 772,054 -- -- 96.720.710-1 Invercom S.A. -- 2,503 -- -- 96.833.930-3 Telefonica Comunicaciones Empresariales S.A. -- 5,727,267 -- -- Total 123,089,340 128,750,376 243,759,247 287,146,875
There have been charges and credits to current accounts with these companies due to billing for sales of material, equipment and services. In addition there is a mercantile mandate contract through which Telefonica CTC Chile S.A. administrates the cash surplus of each one and a mercantile current account contract signed with all subsidiaries. 148_Telefonica CTC Chile 2002 Annual Report b) Notes and Accounts Payable:
Tax No. Company Short Term Long Term 2002 2001 2002 2001 ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------- 90.430.000-4 Telefonica Empresas CTC Chile S.A. 17,971,581 -- 2,426,156 9,844,357 96.551.670-0 CTC Transmisiones Regionales S.A. 16,131,993 9,179,725 -- -- 96.786.140-5 Telefonica Movil S.A. 15,221,773 4,784,393 -- -- 96.545.500-0 CTC Equipos y Servicios de Telecom. S.A. 7,008,762 10,679,482 -- -- 96.895.220-k Atento Chile S.A 2,807,235 2,968,747 -- -- 96.834.230-4 Terra Networks Chile S.A. 2,322,748 1,353,718 -- -- 96.961.230-5 Telefonica Gestion de Servicios Compartidos S.A. 1,939,523 1,876,799 2,673,552 1,780,669 96.700.900-8 Telefonica Data CTC Chile S.A. 1,271,712 156,672 -- -- 79.727.230-2 CTC Isapre S.A. 590,750 130,403 -- -- 96.887.420-9 Globus 120 S.A. 586,708 472,914 -- -- 90.184.000-8 Comunicaciones Mundiales S.A. 501,802 431,828 -- -- 93.541.000-2 Impresora y Comercial Publiguias S.A. 332,256 892,221 -- -- 96.834.320-3 Infoera S.A. 327,949 732 -- -- 96.971.150-8 Telemergencia Chile S.A. 289,109 -- -- -- 96.527.390-5 Telefonica Internacional Chile S.A. 261,208 6,761,979 24,214,112 25,534,901 83.628.100-4 Sonda S.A. 196,526 8,768,746 -- -- 96.910.730-9 Emergia Chile S.A. 43,376 2,399,750 -- -- 78.703.410-1 Tecnonautica S.A. 2,680 -- -- -- 88.269.200-0 Comunicaciones Intercom S.A. -- 10,314,099 -- -- 96.720.710-1 Invercom S.A. -- 481,632 -- -- 96.833.930-3 Telefonica Comunicaciones Empresariales S.A. -- 86,634 -- -- Total 67,807,691 61,740,474 29,313,820 37,159,927
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. 2002 Annual Report Telefonica CTC Chile_149 Notes to the Financial Statements, continued 6. Balances and transactions with related companies, continued: c) Transactions
Nature Description 2002 2001 of the of ThCh$ ThCh$ Company Tax No. Relationship transaction Effect on Effect on Amount Income Amount Income - ----------------------------------------------------------------------------------------------------------------------------------- CTC Isapre S.A. 79.727.230-2 Subsidiary Purchases and Services Rendered 862,392 862,392 1,043,071 1,043,071 Financial Income 6,783 6,783 -- -- Financial Expenses -- -- 13,126 13,126 Other Non-operating Income 216,128 216,128 207,671 207,671 Telefonica Empresas CTC Chile S.A. 90.430.000-4 Subsidiary Sales and Services 11,747,384 11,747,384 11,803,469 11,803,469 Purchases and Services Rendered 23,224,904 23,224,904 19,933,355 19,933,355 Financial Income 2,396,090 2,396,090 3,704,280 3,704,280 Financial Expenses 930,897 930,897 -- -- Other Non-operating Income 3,042,683 3,042,683 3,138,574 3,138,574 CTC Transmisiones Regionales S.A. 96.551.670-0 Subsidiary Sales and Services 8,630,806 8,630,806 9,054,555 9,054,555 Purchases and Services Rendered 12,767,081 12,767,081 19,774,391 19,774,391 Financial Incomes 4,707,735 4,707,735 4,008,335 4,008,335 Financial Expenses -- -- 608,239 608,239 Other Non-operating Income 1,321,300 1,321,300 1,379,540 1,379,540 CTC Equipos y Servicios de Telecom. S.A. 96.545.500-0 Subsidiary Sales and Services 15,146,475 15,146,475 14,663,369 14,663,369 Purchases and Services Rendered 4,138,760 4,138,760 3,825,594 3,825,594 Financial Incomes 434,970 434,970 204,669 204,669 Other Non-operating Income 347,860 347,860 663,292 663,292 Telefonica Movil S.A. 96.786.140-5 Subsidiary Sales and Services 3,909,115 3,909,115 4,109,629 4,109,629 Purchases and Services Rendered 6,612,854 6,612,854 6,455,402 6,455,402 Financial Incomes 9,465,185 9,465,185 10,017,995 10,017,995 Other Non-operating Expenses 75,500 75,500 629,756 629,756 Fundacion Tele- fonica Chile 74.944.200-k Subsidiary Other Non-operating Expenses -- -- 661 661 Comunicaciones Intercom S.A. 88.269.200-0 Subsidiary Financial Expenses 1,144 1,144 656,150 656,150 Financial Incomes -- -- 123,173 123,173 Infoera S.A. 96.834.320-3 Subsidiary Purchases and Services Rendered 387,031 387,031 -- -- Financial Incomes 15,950 15,950 2,930 2,930 Other Non-operating Income 1,303 1,303 8,064 8,064 Telefonica Data Chile S.A. 96.700.900-8 Subsidiary Sales and Services 9,100,351 9,100,351 4,570,944 4,570,944 Purchases and Services Rendered 3,021,437 3,021,437 2,021,602 2,021,602 Financial Incomess 521,016 521,016 345,961 345,961 Other Non-operating Income 620,839 620,839 310,858 310,858 Comunicaciones Mundiales S.A. 90.184.000-8 Subsidiary Financial Expenses 10,578 10,578 11,250 11,250 Other Non-operating Income 183 183 432 432 Tecnonautica S.A. 78.703.410-1 Subsidiary Financial Incomess 66,782 66,782 94,737 94,737 Globus 120 S.A. 96.887.420-9 Subsidiary Sales and Services 453,607 453,607 522,701 522,701 Purchases and Services Rendered 431,873 431,873 30,666 30,666 Financial Incomess -- -- 51,724 51,724 Financial Expenses 6,688 6,688 -- -- Other Non-operating Income 101,046 101,046 34,642 34,642 Sonda S.A. 83.628.100-4 Associate Purchases and Services Rendered 396,530 396,530 19,140,033 19,140,033 Financial Expenses -- -- 1,168,211 1,168,211 Other Non-operating Expenses -- -- 5,684,679 5,684,679 Telefonica Comunicaciones Empresariales S.A. 96.833.930-3 Subsidiary Financial Incomes 157,635 157,635 91,128 91,128 Other Non-operating Income 10,218 10,218 2,211 2,211 Portal de Pagos e Informacion S.A. 96.934.950-7 Subsidiary Financial Incomes 1,311 1,311 -- -- Infochile S.A. 96.893.540-2 Subsidiary Financial Incomes 1,644 1,644 -- -- Other Non-operating Expenses -- -- 442 442 Telefonica Gestion de Servicios Compartidos S.A. 96.961.230-5 Subsidiary Purchases and Services Rendered 6,798,065 6,798,065 2,028,825 2,028,825 Financial Expenses 19,190 19,190 9,862 9,862 Other Non-operating Income 212,545 212,545 178,576 178,576 Telemergencia Chile S.A. 9.6919.660-3 Subsidiary Sales and Services 146,705 146,705 -- -- Financial Incomes 31,379 31,379 -- -- Other Non-operating Income 491,725 491,725 -- -- Telefonica Espana Foreign P.C. Shareholder Purchases and Services Rendered 26,263 26,263 -- -- Telefonica Internacional Chile S.A. Foreign Parent Company Purchases and Services Rendered 521,961 521,961 522,362 522,362 Financial Expenses 838,560 838,560 2,230,347 2,230,347 Atento Chile S.A Foreign Associate Purchases and Services Rendered 10,094,367 10,094,367 4,454,110 4,454,110 Emergia Chile S.A. Foreign Associate Sales and Services 81,396 81,396 -- -- Purchases and Services Rendered -- -- 2,221,955 2,221,955 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 Expenses -- -- 11,389,049 11,389,049
The conditions of the Mercantile Mandate are short-term and the mercantile current accounts are long-term, both in unidades de fomento, accruing interest at a variable market rate (UF + Market spread). 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. 150_Telefonica CTC Chile 2002 Annual Report 7. Income taxes and deferred income taxes a) General information: The Company has not made a first category income tax provision as it has accumulated tax losses at each year-end. Such tax losses were determined according to current legal regulations, and amount to approximately ThCh$ 88,608,304 and ThCh$ 204,413,894 for 2002 and 2001, respectively. b) Deferred taxes: As of December 31, 2002 and 2001, the accumulated balances of temporary differences originated net deferred tax liabilities (assets in 2001) of ThCh$ 14,579,954 and ThCh$ 3,370,036 respectively. Their breakdown is as follows:
Deferred Taxes 2002 Deferred Taxes 2001 Assets Liabilities Assets Liabilities Temporary differences S/T L/T S/T L/T S/T L/T S/T L/T ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ - ----------------------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts 14,523,482 -- -- -- 11,630,137 -- -- -- Vacation provision 420,391 -- -- -- 481,112 -- -- -- Leased assets and liabilities -- 149,225 -- 150,960 -- 457,551 -- 29,188 Property, plant and equipment -- 3,628,454 -- 169,400,793 -- 4,881,018 -- 181,873,767 Staff severance indemnities -- 1,024,959 -- 4,961,980 -- 1,543,400 -- 6,097,561 Tax loss -- 14,892,363 -- -- 34,750,362 -- -- -- Deferred charges for activated disbursements -- -- -- 3,262,086 -- -- -- 3,720,669 Software development -- -- -- 5,828,114 -- -- -- 6,891,784 Def. charges for sale of assets to subsidiaries -- -- -- 632,088 -- -- -- 737,927 Other events 288,366 313,471 7,502 54,327 342,354 411,478 9,937 -- Subtotal 15,232,239 20,008,472 7,502 184,290,348 47,203,965 7,293,447 9,937 199,350,896 Complementary accounts net of accumulated amortization -- (4,507,916) -- (138,985,101) -- (5,154,770) -- (153,388,227) Total 15,232,239 15,500,556 7,502 45,305,247 47,203,965 2,138,677 9,937 45,962,669 Tax reclassi- fications (7,502) (15,500,556) (7,502) (15,500,556) (9,937) (2,138,677) (9,937) (2,138,677) Total 15,224,737 -- -- 29,804,691 47,194,028 -- -- 43,823,992
c) Income tax: The income tax expense recorded by the Company in 2002 and 2001, is originated from the following items: (Charges) Credits to income for income tax are as follows
2002 2001 ThCh$ ThCh$ - ------------------------------------------------------------- Current tax expense (Article 21 income tax 35%) (240,479) (230,347) Recovery of tax losses from dividends received from subsidiaries 5,348,208 5,118,927 - ------------------------------------------------------------- Subtotal income tax 5,107,729 4,888,580 Effect of deferred tax assets or liabilities for the year (8,405,911) (23,927,745) Tax loss benefit -- 13,062,550 Effect of amortization of deferred tax assets or liabilities complementary accounts (13,763,616) (1,901,427) Subtotal deferred taxes (22,169,527) (12,766,622) - ------------------------------------------------------------- Total income tax expense (17,061,798) (7,878,042) - -------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_151 Notes to the Financial Statements, continued 8. Other Current Assets: The breakdown of other current assets is as follows:
2002 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------- Fixed income securities purchased with resale agreement -- 29,945,797 Fixed income securities sold with repurchase agreements -- 51,554,992 Exchange rate insurance premiums to be amortized 1,600,862 4,085,549 Collective negotiation bonus to be amortized (a) 408,278 1,058,455 Telephone directories for connection program 4,439,338 2,488,808 Higher discount rate of bonds to be amortized (note 22) 697,793 1,253,042 Disbursements for placement of bonds to be amortized (note 22) 1,762,067 1,790,109 Exchange insurance receivables (net of partial liquidations) 12,626,720 20,626,301 Disbursements for foreign financing proceeds to be amortized 489,094 2,111,125 Deferred charge from modification of discount rate for staff severance indemnities (net) 506,747 117,119 Others 650,296 1,088,901 Total 23,181,195 116,120,198
(a) During June and July 2002 the Company negotiated a 2-year collective agreement with some of its employees, granting them, among other benefits, a special negotiation bonus. That bonus was paid in one installment in July 2002. The total benefit amounting to ThCh$ 796,600 (historical), is deferred using the straight-line method over 24 months, which is the term of the collective contract. The long-term portion is shown under "Others" under Long-term (note 12). 9. Property, plant and equipment: The breakdown of property, plant and equipment is as follows:
2002 2001 Gross property, Gross property, Accumulated plant and Accumulated plant and Description Depreciation equipment Depreciation equipment ThCh$ ThCh$ ThCh$ ThCh$ - --------------------------------------------------------------------------------------------------------------- Land -- 24,664,400 -- 24,661,083 Construction and infrastructure works 66,767,437 173,526,807 63,229,356 173,840,549 Machinery and equipment 1,473,194,774 2,570,177,972 1,338,414,504 2,522,619,430 Central office telephone equipment 726,497,237 1,047,884,419 651,389,874 1,024,968,177 External plant 577,899,229 1,276,456,716 530,494,655 1,261,286,225 Subscriber equipment 137,848,564 211,844,786 125,864,688 201,513,275 General equipment 30,949,744 33,992,051 30,665,287 34,851,753 Other property, plant and equipment 82,998,399 231,878,267 55,971,384 244,150,851 Office furniture and equipment 57,849,555 98,596,752 44,553,954 94,054,484 Projects, works in progress and their materials -- 64,869,756 -- 88,159,296 Leased assets 90,040 582,765 70,075 582,765 Out of service property, plant and equipment 3,871,845 10,602,706 3,172,514 10,602,707 Software and others 21,186,959 57,226,288 8,174,841 50,751,599 Circular 550 reappraisal 9,868,383 6,609,613 9,924,325 6,609,668 - --------------------------------------------------------------------------------------------------------------- Total 1,632,828,993 3,006,857,059 1,467,539,569 2,971,881,581 - ---------------------------------------------------------------------------------------------------------------
The balance of gross property, plant and equipment includes capitalized interest in the amount of ThCh$ 177,601,329 and ThCh$ 173,252,346 in 2002 and 2001, respectively. Accumulated depreciation of this interest is ThCh$ 73,529,605 and ThCh$ 58,238,182 in 2002 and 2001, respectively. Operating costs include a depreciation charge for the year of ThCh$ 172,310,350 and ThCh$ 165,254,206 for 2002 and 2001, respectively. Property, plant and equipment temporarily out of service, made up mainly of the cable TV network in La Serena and Concepcion not transferred in the sale of assets to Cordillera Comunicaciones, generated depreciation charges of ThCh$ 699,330 and ThCh$ 725,188 in 2002 and 2001 respectively, which are classified under Other Non-operating Expenses. 152_Telefonica CTC Chile 2002 Annual Report The breakdown by caption of the Circular 550 reappraisal is as follows:
Property, Property, Net Accumulated plant and plant and Description Balance equipment 2002 equipment 2001 ThCh$ ThCh$ ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------- Land (2,103,404) -- (2,103,404) (2,103,404) Constructions and infrastructure works (1,498,218) (3,926,300) (5,424,518) (5,424,518) Machinery and equipment 342,852 13,794,683 14,137,535 14,137,590 Total (3,258,770) 9,868,383 6,609,613 6,609,668 - ----------------------------------------------------------------------------------------------------
Depreciation for higher value of technical reappraisal for the year amounts to ThCh$ (55,902) in 2002 and ThCh$ (59,059) in 2001. Gross property, plant and equipment includes assets that have been totally depreciated in the amount of ThCh$ 513,297,071 in 2002 and ThCh$ 350,058,056 in 2001, which includes ThCh$ 11,923,585 and ThCh$ 12,068,124, respectively, for Circular 550 reappraisal. 10. Investments in related companies:
Shareholders' Currency Holding equity Country Number of percentage of companies Tax No. Company of Controlling Shares 2002 2001 2002 2001 origin Investment % % ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------- Foreign Consorcio Telefonica de Brasil Celular Holding (1) Brasil Dollar 48.950,000 2.61 2.61 196,384,751 168,919,275 79.727.230-2 CTC-Isapre S.A. (3) Chile Pesos 3,535,740 99.99 99.99 536,694 151,826 96.786.140-5 Telefonica Movil S.A. (4) Chile Pesos 2,500,842,467 99.99 99.99 203,908,945 127,159,603 96.545.500-0 CTC-Equipos y Servicios de Telecomuni- caciones S.A. Chile Pesos 999,999 99.99 99.99 23,329,930 29,171,728 96.551.670-0 CTC-Transmisiones Regionales S.A. Chile Pesos 56,518,424 99.16 99.16 109,570,448 102,187,814 96.895.220-K Atento Chile S.A. Chile Pesos 3,049,998 27.41 27.41 9,102,317 9,064,003 96.887.420-9 Globus 120 S.A. Chile Pesos 141,999,998 99.99 99.99 1,962,611 851,098 74.944.200-K Fundacion Telefonica Chile Pesos -- 50.00 50.00 366,894 342,480 96.961.230-5 Telefonica Gestion de Serv. Compartidos Chile S.A. Chile Pesos 99,900 99.90 99.90 547,254 688,199 90.430.000-4 Telefonica Empresas CTC Chile S.A.(5) Chile Pesos 400,999,739 99.99 99.99 57,651,521 66,207,734 Foreign CTC Internacional S.A. (6) Chile Pesos -- -- 100.00 -- 7,674 93.541.000-2 Impresora y Comercial Publiguias S.A. Chile Pesos 45,648 9.00 9.00 25,013,978 18,116,693 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. (7) Chile Pesos 271,615 20.00 20.00 582,290 526,125 96.691.760-6 Informatica Telecomunicaciones y Sistemas S.A. (8) Chile Pesos -- -- 50.00 -- -- 96.971.150-8 Telefonica Asistencia y Seguridad S.A. (2) (*) Chile Pesos 10,964 99.67 -- (564,578) -- Totales Unearned Investment Income for the year Accrued income Equity Value income book value Tax No. 2002 2001 2002 2001 2002 2001 2002 2001 2002 2001 ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------------- Foreign 2,978,314 (10,851,542) 77,734 (283,225) 5,125,642 4,408,793 -- -- 5,125,642 4,408,793 79.727.230-2 (635,238) (174,267) (635,174) (174.265) 536,640 151,824 -- -- 536,640 151,824 96.786.140-5 3,898,333 (26,542,389) 3,897,943 (26,542,263) 203,888,554 127,158,997 -- -- 203,888,554 127,158,997 96.545.500-0 3,462,234 7,518,486 3,461,888 7,518,479 23,327,597 29,171,700 -- -- 23,327,597 29,171,700 96.551.670-0 18,387,113 30,987,950 18,232,661 30,726,141 108,650,056 101,324,460 -- -- 108,650,056 101,324,460 96.895.220-K 38,314 432,166 10,502 118,457 2,494,945 2,484,443 -- -- 2,494,945 2,484,443 96.887.420-9 1,111,428 531,883 1,111,317 531,883 1,962,415 851,097 -- -- 1,962,415 851,097 74.944.200-K 24,416 (58,448) 12,208 (29,224) 183,447 171,240 -- -- 183,447 171,240 96.961.230-5 (140,944) 7,166 (140,803) 7,159 546,707 687,511 -- -- 546,707 687,511 90.430.000-4 6,728,518 10,456,294 6,727,845 10,456,231 57,645,756 66,207,327 -- -- 57,645,756 66,207,327 Foreign -- (5,226) -- (5,226) -- 7,674 -- -- -- 7,674 93.541.000-2 6,897,278 6,939,108 620,755 624,520 2,251,258 1,630,502 -- -- 2,251,258 1,630,502 96.922.950-1 (540,600) (164,136) (108,120) (32,827) 116,458 105,225 -- -- 116,458 105,225 96.691.760-6 -- -- -- 159,874 -- -- -- -- -- -- 96.971.150-8 (1,689,563) -- (1,683,987) -- -- -- -- -- -- -- Totales 406,729,475 334,360,793 406,729,475 334,360,793 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Recognition of income for this company is that accrued for November 2002. (2) On March 28, 2002 Telefonica CTC Chile contributed ThCh$ 299,000 (historical), equivalent to 2,990 shares representing 99.67% ownership in Sociedad Telefonica Asistencia y Seguridad S.A. (Telemergencia S.A.). On August 30, 2002 Telefonica CTC Chile contributed ThCh$ 797,360 (Historical), equivalent to 7,974 shares to increase capital of the same company. After the contribution Telefonica CTC Chile holds 99.67% ownership in that company (3) On August 30, 2002 Telefonica CTC Chile contributed ThCh$ 999,990 (historical), equivalent to 2,748,396 shares maintaining its participation. (4) On September 12, 2002 Telefonica CTC Chile contributed ThCh$ 71,684,658 (historical), equivalent to 971,995,367 shares to increase shareholders' equity of the same company maintaining its participation. These contributions were made though capitalization of part of the debt of the mercantile current account that Telefonica CTC Chile S.A. maintained with that company. (*) Investments for which a provision has been set up equivalent to the percentage of participation of the company in the negative shareholders' equity of this related company. These provisions are shown under "Other Current Liabilities". (5) During September of 2002, Telefonica Empresas sold and transferred 25% ownership inSonda S.A., to Inversiones Pacifico Limitada and Inversiones Santa Isabel Limitada, companies linked to Mr. Andres Navarro. This transaction meant disbursements on the part of the purchasing companies in the amount of ThCh$ 27,920,701 (historical), affecting the net income (loss) of Telefonica Empresas in the amount of ThCh$ 1,889,316, due to the the proportional extraordinary amortization of goodwill in relation to the percentage sold and the difference between the book value of the investment and the amount received. Once this transaction was completed, Telefonica Empresas maintains 35% ownership of said company. Additionally, on September 26, Telefonica Empresas signed an agreement with Inversiones Santa Isabel Limitada, granting a purchase option for 35% of Sonda, that can be exercised between July 16 and 25 at the investment's book value as of June 30, 2005, plus a bonus of UF 142,021, with a minimum value of UF 2,048,885. In case Telefonica Empresas does not exercise that sale option, between July 26 and August 5, 2005, Inversiones Santa Isabel Limitada has an option to purchase the same 35% of Sonda, under the same previous conditions. Likewise, Inversiones Santa Isabel Limitada can exercise the purchase option in advance between July 26 and July 31 of 2003, at book value as of 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 book value on June 30, 2004, plus a bonus of UF 119,000 with a minimum price of UF 2,003,260. As of December 31, 2002, since Telefonica Empresas does not have majority holdings or control over the administration of Sonda, they have only recognized in their financial statements, equity value of 35% of Sonda's net income for the period from September to December 2002, maintaining consolidation with that company until August 31, 2002. Telefonica Empresas is amortizing goodwill for the remaining 35% ownership of Sonda. Goodwill to be amortized reaches Thch$ 12,487,808, which is being amortized discounting the bonus of UF 142,021, in a period of 34 months, as of September of 2002. Given the conditions contained 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 not made any provision to cover eventual losses in the recovery of goodwill, since it is estimated that the future income of the related company will be sufficient to cover amortization of the mentioned goodwill. (6) During December of 2002 subsidiary CTC Internacional was closed. (7) On February 26, 2002 Telefonica CTC Chile contributed ThCh$ 96,002 (historical) corresponding to 59,252 shares and subsequently on May 30, ThCh$ 20,170 (historical) equivalent to 12,360 shares to increase shareholders' equity of the same company maintaining its participation in it. (8) On October 19, 2001 Telefonica CTC Chile sold its participation in this company for ThCh$ 1,475,736 obtaining non-operating net income of ThCh$ 22,833. 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 foreing investments on a permanent basis, therefore there is no net income that is potentially remittable. 2002 Annual Report Telefonica CTC Chile_153 Notes to the Financial Statements, continued 11. Goodwil:
2002 2001 Amount Amount amortized amortized Tax. No. Company Year in the Goodwill in the Goodwill year balance year balance ThCh$ ThCh$ ThCh$ ThCh$ - --------------------------------------------------------------------------------------------------------- 96.786.140-5 Telefonica Movil S.A 1997 9,765,112 146,128,884 9,765,112 155,893,996 90.430.000-4 Globus S.A 1998 1,073,136 16,959,628 1,073,136 18,032,764 Foreign Consorcio Telefonica de Brasil Celular Holding 2001 173,938 2,840,195 455,049 3,014,133 96.895.220-K Atento Chile S.A 2001 351,739 -- 179,280 351,739 Total 11,363,925 165,928,707 11,472,577 177,292,632
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. 12. Others (from Other Assets): The breakdown of Others is as follows:
2002 2001 ThCh$ ThCh$ - ----------------------------------------------------------------------------------------------------------- Disbursements for obtaining external financing to be amortized (a) 966,784 1,201,579 Deferred charge for transferring assets to subsidiaries (net) 3,740,166 4,418,725 Disbursements for placement of bonds to be amortized (see note 22) 4,177,432 6,103,671 Leased vehicles 329,278 1,003,964 Higher discount rate for bonds to be amortized (see note 22) 4,623,831 7,355,920 Deferred charge for modification of staff severance indemnities discount rate (net) -- 1,095,190 Deferred exchange insurance premiums to be amortized 435,248 924,581 Guarantee deposits 126,612 75,010 Rental of telephone posts paid in advance 1,338,648 2,560,642 Telephone directories for connection programs 1,880,444 -- Collective negotiation bonus (see note 8) 204,138 -- Others -- 328,101 Total 17,822,581 25,067,383
(a) This amount corresponds to the cost (net of amortization) of the reserve paid to Banco Central de Chile and disbursements incurred for foreign loans obtained by the Company to finance their investment plan. 154_Telefonica CTC Chile 2002 Annual Report 13. Short-term obligations with banks and financial institutions. The breakdown of short-term obligations with banks and financial institutions and current liabilities is as follows:
US$ U.F. Total Bank or financial institution 2002 2001 2002 2001 2002 2001 Taxp. No. Short-term (code: 5.21.10.10) ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ 97.030.000-7 BANCO ESTADO - - 9,191,446 10,791,371 9,191,446 10,791,371 Total - - 9,191,446 10,791,371 9,191,446 10,791,371 - ------------------------------------------------------------------------------------------------------------------------------------ Capital owed - - 9,178,122 10,728,721 9,178,122 10,728,721 - ------------------------------------------------------------------------------------------------------------------------------------ Average annual interest rate - - 0.78% 4.30% 0.78% 4.30% - ------------------------------------------------------------------------------------------------------------------------------------ Short-term portion of long-term (Code: 5,21,10,20) - ------------------------------------------------------------------------------------------------------------------------------------ 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 - - 18,147,934 8,736,493 97.006.000-6 BANCO CREDITO E INVERSIONES - - - 6,533,683 - 6,533,683 97.008.000-7 CITIBANK 116,381,125 8,965,833 - - 116,381,125 8,965,833 97.015.000-5 SANTANDER - - 9,841,229 351,996 9,841,229 351,996 97.036.000-K SANTIAGO - - - 9,764,132 - 9,764,132 Foreign CREDIT LYONNAIS - 2,468,166 - - - 2,468,166 Foreign MORGAN GUARANTY - 61,383,584 - - - 61,383,584 Total 36,449,576 82,278,282 9,841,229 16,649,811 146,290,805 98,928,093 - ------------------------------------------------------------------------------------------------------------------------------------ Capital owed 133,474,948 78,839,957 9,711,590 16,198,542 143,186,538 95,038,500 - ------------------------------------------------------------------------------------------------------------------------------------ Average annual interest rate 2.39% 5.09% 0.90% 4.56% 0.00% 0.00% - ------------------------------------------------------------------------------------------------------------------------------------ Percentage of obligations in foreign currency: 87.76 % for 2002 and 62.30 % for 2001 Percentage of obligations in national currency: 12.24 % for 2002 and 37.70 % for 2001
14. Long-term obligations with banks and financial institutions: Long-term obligations with banks and financial institutions:
Currency Years to maturity for long-term portion Long-term Average or portion annual Indexation as of interest Taxp. No. Bank or Financial Institution Index 1 to 2 2 to 3 3 to 5 31/12/02 rate 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% Foreign ABN AMRO BANK US$ - 143.722.000 107.791.500 251.513.500 Libor + 1,125% 97.008.000-7 CITIBANK US$ 7.718.198 7.718.198 3.859.099 19.295.495 Libor + 0,725% Foreign MORGAN GUARANTY TRUST CO. US$ - - - - - Foreign BBVA-(BANCO EXTERIOR) US$ - - - - - Foreign CREDIT LYONNAIS US$ - - - - - Subtotal 65.206.998 180.184.598 111.650.599 357.042.195 2,57% - ------------------------------------------------------------------------------------------------------------------------------------ Loans in unidades de fomento 97.015.000-5 SANTANDER US$ 59.525.347 - - 59.525.347 Tab 90+ 0,75% Total 124.732.345 180.184.598 111.650.599 416.567.542 2,33% - ------------------------------------------------------------------------------------------------------------------------------------ Total Long-term capital portion owed as of as of Taxp. No. 31/12/02 31/12/01 ThCh$ ThCh$ - -------------------------------------------- 79.561.240-8 86.233.200 80.932.044 Foreign 251.513.500 134.886.740 97.008.000-7 19.295.495 177.100.617 Foreign - 60.699.033 Foreign - 8.430.421 Foreign - 3.700.169 357.042.195 465.749.024 - -------------------------------------------- 97.015.000-5 59.525.347 59.548.169 416.567.542 525.297.193 - -------------------------------------------- Percentage of obligations in foreign currency: 85.71% for 2002 and 88.66% for 2001 Percentage of obligations in national currency: 14.29% for 2002 and 11.34% for 2001 - ------------------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_155 Notes to the Financial Statements, continued 15. Obligations with the public: The breakdown of obligations with the public for bond issuance, classified in the short and long-term is as follows:
Registration number Current Bond Interest Periodicity Par value Placement or identification of nominal readjust. rate Final in Chile the instrument Series amount unit % deadline Interest 2002 2001 or abroad placed payment Amortizations ThCh$ ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ Short-term portion of 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 Total 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 this 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. 156_Telefonica CTC Chile 2002 Annual Report 16. Provision and write offs: The breakdown of the provision presented in liabilities is as follows: 2002 2001 Current ThCh$ ThCh$ - ----------------------------------------------------------------- Staff severance indemnities 62,454 90,354 Accrued vacation cost provision 2,367,522 3,006,947 Accrued for other emplayer benefits 3,551,771 4,790,445 Other provisioned benefits (1,408,969) (1,875,803) SubTotal 4,572,778 6,011,943 - ----------------------------------------------------------------- Long-term Staff severance indemnities 13,497,883 15,575,824 SubTotal 13,497,883 15,575,824 - ----------------------------------------------------------------- Total 18,070,661 21,587,767 - ----------------------------------------------------------------- In 2002 and 2001 there were no write offs. 17. 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 2,818,659 3,459,839 Other non-operating expenses 9,915,330 16,253,805 Total 12,733,989 19,713,644 - -------------------------------------------------------------------------------- Payments for the year (a) (14,839,830) (29,273,897) - -------------------------------------------------------------------------------- (a) Includes payment and transfer of provisions corresponding to personal that was transferred to other group company. - -------------------------------------------------------------------------------- 18. Shareholders' Equity: During 2002 and 2001, changes in shareholders' equity accounts are as follows:
Accumulated (Loss) Contributed deficit Net income Paid-in surplus Other Retained development for Total capital reserves earnings period the year shareholders' ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ equity - ------------------------------------------------------------------------------------------------------------------------------------ 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 subsidiaries - - - (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 Accumulated deficit development period of 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. 2002 Annual Report Telefonica CTC Chile_157 Notes to the Financial Statements, continued 18. 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 No. of paid No. of shares subscribed shares shares with voting rights - -------------------------------------------------------------------------------- A 873,995,447 873,995,447 873,995,447 B 83,161,638 83,161,638 83,161,638 - -------------------------------------------------------------------------------- Capital (Amount ThCh$): Series Subscribed Paid-in Capital Capital - -------------------------------------------------------------------------------- A 672,480,822 672,480,822 B 63,987,298 63,987,298 - -------------------------------------------------------------------------------- (b) Shareholder distribution: In accordance with Circular No. 792 issued by the Chilean Superintendency of Securities and Insurance, the distribution of shareholders according to their participation in the Company as of December 31, 2002 is as follows: Type of shareholder Percentage of Number of total holdings shareholders % - -------------------------------------------------------------------------------- 10% holding or more 63.85 2 Less than 10% holding: Investment equal to or exceeding UF 200 35.40 2,441 Investment under UF 200 0.75 12,258 Total 100.00 14,701 - -------------------------------------------------------------------------------- Company Controller 43.64 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (c) Dividends: As established in Law No. 18, 046, except otherwise agreed upon at the General Shareholders' Meeting by unanimous vote of the outstanding shares, when there is net income, at least 30% of it should be distributed as dividends. On April 5, 2002, the Ordinary Shareholders' Meeting was informed of the dividend distribution policy proposed by the Board of Directors for 2002: Distribute for 2002, at least 30% of net income generated in the same year - percentage equal to that required by law - by means of a final dividend in May 2003, which will be proposed at the corresponding General Shareholders' Meeting. On April 5, 2002, the General Shareholders' Meeting agreed to pay a dividend of ThCh$ 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 ThCh$ Net Movement 31.12.2002 31.12.2001 Monetary ThCh$ ThCh$ Correction - ------------------------------------------------------------------------------------------------------------------------------------ 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. 158_Telefonica CTC Chile 2002 Annual Report (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. 19. Income and Expenses: (a) Operating income and cost: The breakdown of operating income and costs is as follows: 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Operating income Income from sale of services 426,123,634 454,500,260 Income from sale of equipment and products 6,966,735 7,463,336 Total operating income 433,090,369 461,963,596 - -------------------------------------------------------------------------------- Operating costs: Depreciation and amortization 172,310,350 165,254,206 Payroll 35,321,010 48,112,187 Cost of long distance services and interconnections 14,433,873 16,886,175 Cost of services and subsidiary mandates 25,865,845 25,402,277 Cost of selling telecommunications equipment 10,212,972 8,353,304 Allowance for doubtful accounts 19,186,742 14,114,361 Contracts with third parties 16,296,508 20,291,388 Vehicle, office and equipment rental 2,851,313 3,240,439 Materials (includes obsolescence provision) 1,636,988 1,561,069 Post rentals 5,411,350 5,601,700 Printing of telephone directories 5,048,653 3,634,978 Others 15,605,542 9,472,504 Total operating costs 324,181,146 321,924,588 - -------------------------------------------------------------------------------- Gross margin 108,909,223 140,039,008 - -------------------------------------------------------------------------------- Depreciation includes ThCh$ 15,291,423 and ThCh$ 11,781,724 in 2002 and 2001, respectively, for capitalized interest. (b) Other non-operating income and expenses: The breakdown of other non-operating income and expenses is as follows:
Other Income 2002 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------- Compensation for early termination of contract with Publiguias - 11,389,049 Damage indemnity and supplier fines 28,093 166,733 Administrative services 3,817,355 3,571,003 Rentals to subsidiaries 1,315,857 1,450,833 Net gain on sale of property, plant and equipment 413,010 - Others 378,270 1,484,763 Total 5,952,585 18,062,381 - ---------------------------------------------------------------------------------------------------------------- Other Expenses: Restructuring costs (1) 12,011,292 17,726,734 Lawsuit indemnities and other provisions 2,032,606 1,136,974 Depreciation and write off of out of service property, plant and equipment(2) 926,263 1,162,351 Indemnification for termination of Sonda contract - 6,043,992 Provision for lower market value - 384,719 Tax recovery difference 538,109 - Net loss on removal of obsolete plant and other costs 26,589 - Others 5,937,193 5,292,983 Total 21,472,052 31,747,753 - ----------------------------------------------------------------------------------------------------------------
(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 amount 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. 2002 Annual Report Telefonica CTC Chile_159 Notes to the Financial Statements, continued 20. Price-level restatement: The breakdown of price-level restatement is as follows: Assets (Charges) Credits Indexation 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Inventories C.P.I 261,084 447,076 Prepaid expenses C.P.I 313 - Prepaid expenses U.F. (2,523) - Other current assets C.P.I (318,318) 999,334 Other current assets U.F. (8,328,786) (17,073,220) Short and long-term deferred taxes C.P.I 4,318,121 3,871,367 Property, plant and equipment C.P.I 43,527,040 47,845,301 Investments in related companies C.P.I 10,606,292 10,652,761 Goodwill C.P.I 5,163,863 5,854,500 Long-term debtors U.F. (4,786,269) (5,529,443) Other long-term assets C.P.I 274,776 341,248 Other long-term assets U.F. 8,852,837 9,632,379 Expense accounts C.P.I 8,177,086 4,992,143 Total Credits 67,745,516 62,033,446 - -------------------------------------------------------------------------------- Liabilities - Shareholders' Equity Indexation 2002 2001 (Charges) Credits ThCh$ ThCh$ - -------------------------------------------------------------------------------- Short-term obligations C.P.I (202,032) (186,034) Short-term obligations U.F. (13,899,520) (4,989,545) Long-term obligations C.P.I (181,447) (752,247) Long-term obligations U.F. (9,266,591) (5,159,468) Shareholders' Equity C.P.I (37,962,935) (39,112,765) Revenue accounts C.P.I (11,864,469) (7,771,523) Total (Charges) (73,376,994) (57,971,582) - -------------------------------------------------------------------------------- (Loss) Net income from price-level restatement (5,631,478) 4,061,864 - -------------------------------------------------------------------------------- 21. Exchange differences: The breakdown of exchange differences is as follows: Assets Credits Currency 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Inventories US$ 29,471 - Other currents assets US$ 35,071,329 111,576,335 Other currents assets EURO (246,605) 1,626,247 Long-term debtors US$ 25,178,673 23,361,780 Other long-term assets US$ 352,955 639,320 Other long-term assets EURO 144,762 92,974 Total Credits 60,530,585 137,296,656 - -------------------------------------------------------------------------------- Liabilities (Charges) Currency 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Short-term obligations US$ (1,843,986) (15,043,728) Short-term obligations DM - (33,719) Short-term obligations EURO 10,323,604 (4,999,056) Short-term obligations OTHERS - (70,002) Long-term obligations US$ (59,782,095) (119,191,716) Long-term obligations DM - 328 Long-term obligations EURO (10,163,290) 530,492 Long-term obligations OTHERS - (70,925) Total Charges 61,465,767 (138,878,326) - -------------------------------------------------------------------------------- (Loss) on exchange differences (935,182) (1,581,670) - -------------------------------------------------------------------------------- 22. 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 Total 2,459,860 3,043,151 8,801,263 13,459,591 - -------------------------------------------------------------------------------- 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 15 "Obligations with the Public". 23. 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 13 and 14 Obligations with the public - see note 15 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 - -------------------------------------------------------------------------------- 160_Telefonica CTC Chile 2002 Annual Report 24. Derivative Contracts: The breakdown of derivative contracts is as follows:
Maturity Purchase Protected item Value Type of Type of Contract or Specific Sale or transaction of Protected Derivative Contract Value Expiration item Position Name Amount Items ThCh$ - ------------------------------------------------------------------------------------------------------------------------------------ FR CCPE 181,000,000 I Quart. 2003 Exchange rate C Oblig. in US$ 181,000,000 130,068,410 FR CCPE 160,000,000 II Quart. 2003 Exchange rate C Oblig. in US$ 160,000,000 114,977,600 FR CCPE 175,600,000 III Quart. 2003 Exchange rate C Oblig. in US$ 175,600,000 126,187,916 FR CCPE 249,000,000 IV Quart. 2003 Exchange rate C Oblig. in US$ 249,000,000 178,933,890 FR CCPE 164,800,000 I Quart.. 2004 Exchange rate C Oblig. in US$ 164,800,000 118,426,928 FR CCPE 10,000,000 II Quart.. 2004 Exchange rate C Oblig. in US$ 10,000,000 7,186,100 FR CCPE 80,000,000 III Quart.. 2004 Exchange rate C Oblig. in US$ 80,000,000 57,488,800 FR CCPE 40,000,000 IV Quart.. 2004 Exchange rate C Oblig. in US$ 40,000,000 28,744,400 FR CCPE 15,000,000 I Quart.. 2005 Exchange rate C Oblig. in US$ 15,000,000 10,779,150 FR CCPE 25,000,000 II Quart.. 2005 Exchange rate C Oblig. in US$ 25,000,000 17,965,250 FR CCPE 19,000,000 III Quart.. 2006 Exchange rate C Oblig. in US$ 19,000,000 13,653,590 FR CCPE 155,000,000 III Quart.. 2004 Exchange rate C Obligac. en EURO 155,000,000 116,645,250 FR CCPE 13,000,000 I Quart.. 2003 Exchange rate C Oblig. in US$ 13,000,000 9,341,930 FR CCPE 22,000,000 II Quart.. 2003 Exchange rate C Oblig. in US$ 22,000,000 15,809,420 FR CCPE 4,000,000 I Quart.. 2004 Exchange rate C Oblig. in US$ 4,000,000 2,874,440 Zero Cost Collar CCTE 347,591,590 I Quart.. 2003 Interest rate C Oblig. in US$ 347,591,590 - Zero Cost Collar CCTE 225,000,000 IV Quart.. 2003 Interest rate C Oblig. in US$ 225,000,000 - S CCTE 100.000.000 III Quart.. 2004 Interest rate C Oblig. in EURO 100,000,000 - - ------------------------------------------------------------------------------------------------------------------------------------
Affected Acounting Accounts Asset / Liability Effect on Income Type of Derivative Name Amount Realizaed Unrealized ThCh$ ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------------- FR asset 130,068,410 - 4,299,117 liability (127,725,942) FR asset 114,977,600 - 7,870,678 liability (110,810,209) FR asset 126,187,916 - 2,974,499 liability (124,834,491) FR asset 178,933,890 - 8,307,780 liability (178,117,650) FR asset 118,426,928 - 3,217,065 liability (117,553,457) FR asset 7,186,100 - 422,654 liability (6,931,889) FR asset 57,488,800 - 3,615,279 liability (58,165,148) FR asset 28,744,400 - 1,398,424 liability (29,259,813) FR asset 10,779,150 - 668,509 liability (11,144,728) FR asset 17,965,250 - 991,266 liability (18,744,054) FR asset 13,653,590 - 1,141,942 liability (13,382,007) FR asset 116,645,250 - 12,236,257 liability (115,672,496) FR asset 9,341,930 - 39,290 liability (9,360,340) FR asset 15,809,420 - 246,430 liability (15,801,670) FR asset 2,874,440 - 64,680 liability (2,875,400) Zero Cost Collar liability (1,151,473) (5,862,433) (1,151,473) Zero Cost Collar liability (1,518,508) (3,222,729) (1,518,508) S asset 921.679 (1.452.521) 921.679 - ---------------------------------------------------------------------------------------------------------------------------------- Income to be deferred for exchange insurance to be amortized liability (2,432,895) 1,101,066 1,361,637 Costs to be deferred for exchange insurance to be amortized asset 2,036,110 (3,535,695) (4,096,940) Exchange insurance expired during the year (net) 28,297,323 - ---------------------------------------------------------------------------------------------------------------------------------- Total 15,325,011 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 2002 Annual Report Telefonica CTC Chile_161 Notes to the Financial Statements, continued 25. 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 it 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 (Rol N(degree) 4958-1997). (ii) Complaint filed by VTR Telefonica S.A.: On June 30, 2000 VTR Telefonica S.A. filed a complaint for the collection of access charges of $ 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 passed in two of these lawsuits, accepting the complaint. They have been appealed by the Company. The Company has obtained favorable sentencing in a third lawsuit, with the Supreme Court ratifying a previous verdict by the Court of Appeal of Concepcion which accepted the Company's arguments. In addition there are other lawsuits involving 116 former employees who have been paid their staff severance indemnities and have signed their releases, who in spite of having accepted voluntary retirement plans or having been terminated due to the Company's needs, intend to obtain a declaration of nullity. Of these lawsuits, two have been decided in favor of the Company, rejecting the nullity. Certain unions have filed complaints before the Santiago Labor Courts, requesting indemnity for various concepts. 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 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. 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 13, 14 and 15), 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, 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) Other contingencies; Complaint against the State of Chile: 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 State 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 State. Once the answer from the State 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 in the evidence stage, during which Telefonica CTC Chile has provided abundant testimonial evidence. 162_Telefonica CTC Chile 2002 Annual Report 26. Third party guarantees: 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, as agreed upon in the document dated December 1999. 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. 27. National and foreign currency: The Breakdown of national and foreign currency is as follows: Description Currency 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Total current assets: 398,960,225 532,986,591 Cash Non-indexed Ch$ 10,694,166 9,238,529 Dollars 44,772 871,964 Euro 240,082 224,781 Time deposits Dollars 2,155,830 -- Marketable securities Non-indexed Ch$ 1,500,133 -- Dollars 65,571,937 32,723,967 Notes and accounts receivable (a) Non-indexed Ch$ 127,024,428 134,099,689 Indexed Ch$ 5,734,686 4,426,640 Notes and accounts receivable from related companies Non-indexed Ch$ 89,950,639 93,345,183 Indexed Ch$ 21,359,294 35,405,194 Dollars 11,779,407 -- Other current assets (b) Non-indexed Ch$ 9,375,186 147,701,617 Indexed Ch$ 37,339,840 48,509,013 Dollars 15,572,375 25,973,971 Euro 617,450 466,043 Total property, plant and equipment: 1,374,028,066 1,504,342,012 - -------------------------------------------------------------------------------- Property, plant and equipment and accumulated depreciation Indexed Ch$ 1,374,028,066 1,504,342,012 Total other long-term assets: 867,800,172 861,461,981 - -------------------------------------------------------------------------------- Investment in related companies Indexed Ch$ 406,729,475 334,360,793 Other long-term assets (c) Non-indexed Ch$ 141,755 17,876,332 Dollars 24,422,775 21,421,578 Euro 318,351 776,738 Indexed Ch$ 436,187,816 487,026,540 Total assets: 2,640,788,463 2,898,790,584 - -------------------------------------------------------------------------------- Indexed Ch$ 2,281,379,177 2,414,070,192 Non-indexed Ch$ 238,686,307 402,261,350 Dollars 119,547,096 80,991,480 Euro 1,175,883 1,467,562 - -------------------------------------------------------------------------------- (a) Includes the following balance sheet accounts: Trade accounts receivable, Notes receivable, Other receivables. (b) Includes the following balance sheet accounts: Inventories, Recoverable taxes, Prepaid expenses, Deferred taxes, Other current assets. (c) Includes the following balance sheet accounts: Investment in other companies, Goodwill, Long-term debtors, Accounts receivable related companies, Intangibles, Amortization and Others. 2002 Annual Report Telefonica CTC Chile_163 Notes to the Financial Statements, continued 27. National and foreign currency, continued: The breakdown of current liabilities is as follows:
Description Currency Up to 90 days 90 day to 1 year 2002 2001 2002 2001 ThCh$ ThCh$ ThCh$ ThCh$ Amount Int. Amount Int. Amount Int. Amount Int. ThCh$ Rate ThCh$ Rate ThCh$ Rate ThCh$ Rate - ------------------------------------------------------------------------------------------------------------------------------------ Short-term obligations with banks and financial institutions Indexed Ch$s -- - 10,791,371 6.14 9,191,446 0.78 - - Short-term portion of obligations with banks and financial institutions Indexed Ch$s 114,586 - 16,649,812 2.85 9,726,643 0.90 - - Dollars 24,798,977 2.30 10,682,048 4.08 111,650,599 2.40 71,596,233 3.70 Obligations with the public Indexed Ch$s - - 5,233,246 6.75 7,970,964 5.78 20,176,822 6.24 Dollars 11,110,148 - 10,573,622 - - - - - Euro - - - - 2,623,127 - 2,667,462 - Long-term obligations maturing within one year Indexed Ch$s 54,386 8.89 221,578 - 60,903 8.89 518,084 - Notes and accounts payable to related companies Indexed Ch$s - - 37,290,020 5.53 13,874,917 3.16 - - Non-indexed Ch$s 53,932,774 - 17,959,822 - - - - - Dollars - - - - - - 6,490,632 3.00 Other current liabilities (d) Non-indexed Ch$s 98,207,473 - 109,624,473 - - - 23,960,792 - Indexed Ch$s 1,589,848 - 5,029,561 - - - 19,582,521 - Dollars - - 495,665 - - - - - Total current liabilities: 189,808,192 - 224,551,218 - 155,098,599 - 144,992,546 - - ------------------------------------------------------------------------------------------------------------------------------------ Indexed Ch$s 1,758,820 - 75,215,588 - 40,824,873 - 40,277,427 - Non-indexed Ch$s 152,140,247 - 127,584,296 - - - 23,960,792 - Dollars 35,909,125 - 21,751,335 - 111,650,599 - 78,086,865 - Euro - - - - 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, Other current liabilities. The breakdown of long-term liabilities for 2002 is as follows:
Description Currency 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Amount Int. Amount Int. Amount Int. Amount Int. ThCh$ Rate ThCh$ Rate ThCh$ Rate ThCh$ Rate - ------------------------------------------------------------------------------------------------------------------------------------ Obligations with banks and financial institutions Indexed Ch$s 59,525,347 0.52 111,650,600 2.38 - - - - Dollars 245,391,595 2.73 - - - - - - Obligations with the public Indexed Ch$s 7,339,142 5.78 9,368,733 5.8 532,301,289 6.17 56,987,096 6.57 Dollars - - 287,444,000 8.00 - - - - Euro 118,752,390 5.38 - - - - - - Other long-term liabilities(e) Non-indexed Ch$ 1,821,059 - - - - - 13,497,883 - Indexed Ch$s 15,679,020 - 4,585,337 - 11,463,343 - 9,170,674 - Dollars 24,214,112 3.00 - - - - - - Total long-term liabilities: 472,722,665 - 413,048,670 - 43,764,632 - 79,655,653 - - ------------------------------------------------------------------------------------------------------------------------------------ Indexed Ch$s 82,543,509 - 125,604,670 - 43,764,632 - 66,157,770 - Non-indexed Ch$ 1,821,059 - - - - - 13,497,883 - Dollars 269,605,707 - 287,444,000 - - - - - Euro 118,752,390 - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
164_Telefonica CTC Chile 2002 Annual Report The breakdown of long-term liabilities for 2001 is as follows:
Description Currency 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Amount Int. Amount Int. Amount Int. Amount Int. ThCh$ Rate ThCh$ Rate ThCh$ Rate ThCh$ Rate - ------------------------------------------------------------------------------------------------------------------------------------ Obligations with banks and financial institutions Indexed Ch$ 59,548,169 2.80 - - - - - - Dollars 224,577,206 3.47 215,818,784 3.21 25,353,034 4.29 - - Obligations with the public Indexed Ch$ 36,125,603 6.05 30,970,371 6.12 47,243,395 6.35 64,607,246 6.51 Dollars - - 269,773,480 8.00 - - - - Euro 119,105,286 5.38 - - - - - - Other long-term liabilities(e) Non-indexed Ch$ - - - - - - 15,575,824 - Indexed Ch$ 40,528,579 - 6,260,571 - 15,651,428 - 15,651,424 - Dollars 37,159,927 3.00 - - - - - - Total long-term liabilities: 517,044,770 - 522,823,206 - 88,247,857 - 95,834,494 - - ------------------------------------------------------------------------------------------------------------------------------------ Indexed Ch$ 136,202,351 - 37,230,942 - 62,894,822 - 80,258,670 - Non-indexed Ch$ - - - - - - 15,575,824 - Dollars 261,737,133 - 485,592,264 - 25,353,035 - - - Euro 119,105,286 - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------
(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. 28. Sanctions: Neither the Company, nor its Directors and Managers have been sanctioned by the Superintendency of Securities and Insurance or any other administrative authority during this year. 29. Subsequent Events: a) VTR access charges lawsuit On January 20, 2003, the Sixth Court of Appeal decided not to accept the protection recourse filed by the Company against Resolution 1726 dictated by the Telecommunications Subsecretary on October 2, 2002. In this resolution, the Subsecretary stated that the Company had to pay VTR, the debt for interconnection access charges set since the publication of the rate decree on June 25, 2002. The Company shall appeal the resolution of the Court of Appeals in the Supreme Court, notwithstanding other necessary actions and recourses to obtain compliance of the "interconnection agreement". b) Labor Lawsuit SINATE and others against CTC On January 22, the Court of Appeal dictated sentence rejecting the executive complaint filed by Intercompany Unions SINATE, V Region No. 1 and Profesionales against the Company, in which they request payment of ThCh$ 7,500,000 for an incentive contemplated in Clause 4.4 of the collective contract dated June 9, 1998. The verdict accepted the exceptions presented by the Company, additionally establishing that the unions do not have the nature of creditors 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 unions 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. 2002 Annual Report Telefonica CTC Chile_165 Notes to the Financial Statements, continued 30. 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. 31. Accounts Payable: The breakdown of accounts payable is as follows: Description 2002 2001 ThCh$ ThCh$ - -------------------------------------------------------------------------------- Suppliers: National 42,544,051 45,296,023 Foreign - 495,665 Carrier services: National 3,602,333 2,192,421 Level of progress of works in progress 27,900,739 36,048,445 Total 74,047,123 84,032,554 - -------------------------------------------------------------------------------- Alejandro Espinoza Querol Claudio Munoz Zuniga General Accountant Chief Executive Officer 166_Telefonica CTC Chile 2002 Annual Report Compania de Telecomunicaciones de Chile S.A. Analysis of the Individual Financial Statements As of December 31, 2002 1. Highlights Results for the Year and Business Figures for the Company As of December 31, 2002, Telefonica CTC Chile recorded a net loss of Ch$ 17,680 million, situation that represents a greater deficit in relation to the Ch$ 4,235 million net income obtained as of December 31 of last 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. Results for 2002 are mainly due to a decrease of 29% in operating income in relation to the previous year, reaching Ch$ 51,827 million. This variation is partly compensated by a decrease of 13.8% in the non-operating loss in respect to the previous year, reaching Ch$ 52,446 million in 2002. With this, the operating margin reached 11.8%, 3.8 percentage points less than the margin obtained the previous year. Revenues decreased by 6.3%, while operating costs fell by 2.0%. The latter reflect, among other aspects, the positive effect of cost containment efforts and materialization of the personnel restructuring processes in June 2001 and October 2002. The 13.8% decrease in the non-operating loss mainly derives from increased income from investments in related companies, less financial expenses and less non-operating effects mainly associated to the costs of the personnel reduction in 2002 compared to a similar process occurring in 2001. These effects are partly offset by a decrease in non-operating income pursuant to compensation for early termination of the contract with Publiguias, received in 2001. Regarding 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. As of December 31, 2002, the Company had 2,540 employees showing a decrease of 21.2% compared to the situation as of December 31 of the previous year. 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. Of this amount Telefonica CTC S.A., recognizes at an individual level Ch$ 12,011 million in other non-operating expenses and Ch$ 3,213 million though income from investments in related companies. 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 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. 2002 Annual Report Telefonica CTC Chile_167 Analysis of the Individual Financial Statements, continued 1. Highlights, continued: 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 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 UF 1,983,185 (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: 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. 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 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. 168_Telefonica CTC Chile 2002 Annual Report 2. Volume Statistics, Property, Plant and Equipment and Statements of Income Table N(degree) 1 Volume Statistics
Description December December Variation 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% Permanent Personnel Telefonica CTC Chile 3,223 2,540 (683) -21.2% - ------------------------------------------------------------------------------------------------------------------------------
1. Does not include calls from public phones owned by the Company. 2. DLD: Domestic Long Distance. Corresponds to all the 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 N(degree) 2 Individual Property, Plant and Equipment (Figures in millions of pesos as of December 31, 2002)
Description December December Variation 2001 2002 Ch$ % - ----------------------------------------------------------------------------------------------------------------------------- Land, Infrastructure, Machinery and Equipment and Others 2,883,722 2,941,987 58,265 0.2% Projects and Works in Progress 88,159 64,870 (23,290) -26.4% Accumulated depreciation (1,467,539) (1,632,829) (165,289) 11.3% Net Property, Plant & Equipment 1,504,342 1,374,028 (130,314) -8.7% - -----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_169 Analysis of the Individual Financial Statements, continued 2. Volume Statistics, Property, Plant and Equipment and Statements of Income, continued: Table N(degree) 3 Individual Statements of Income for years ended as of December 31, 2002 and 2001 (Figures in millions of pesos as of December 31, 2002)
Description Jan - Dec Jan - Dec Variation (2002/2001) 2001 2002 Ch$ % - ----------------------------------------------------------------------------------------------------------------------------- Basic Telephone Service 369,871 361,145 (8,726) -2.4% Fixed Charge 166,038 160,740 (5,299) -3.2% Variable Charge 169,644 155,134 (14,510) -8.6% Connections and Other Installations 34,189 45,271 11,082 32.4% Access and Interconnection Charges(1) 23,516 22,236 (1,280) -5.4% Domestic long distance 14,036 13,989 (47) -0.3% International long distance 4,781 3,922 (859) -18.0% Other Charges and Interconnection Services 4,699 4,325 (374) -8.0% Directory Advertising 18,130 4,844 (13,286) -73.3% Other Local Telephone Services 50,447 44,865 (5,581) -11.1% Value Added Services 22,035 23,102 1,067 4.8% Comercialization of Equipment 8,683 5,797 (2,885) -33.2% Other Services 19,729 15,966 (3,763) -19.1% - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 461,964 433,090 (28,873) -6.3% - ----------------------------------------------------------------------------------------------------------------------------- Operating Costs (321,925) (324,181) (2,256) 0.7% Salaries (48,112) (35,321) 12,791 -26.6% Depreciation (165,254) (172,310) (7,056) 4.3% Other Operating Costs (108,559) (116,550) (7,991) 7.4% Administration And Selling Costs (67,093) (57,082) 10,011 -14.9% - ----------------------------------------------------------------------------------------------------------------------------- Total Operating Costs (389,018) (381,263) 7,755 -2.0% - ----------------------------------------------------------------------------------------------------------------------------- Operating Income(2) 72,946 51,827 (21,118) -29.0% - ----------------------------------------------------------------------------------------------------------------------------- Financial Income 34,365 32,303 (2,062) -6.0% Other Non-operating Income 18,062 5,953 (12,109) -67.0% Income from Investment in Related Companies(1) 23,076 31,585 8,509 36.9% Financial Expenses (95,595) (82,884) 12,711 -13.3% Amortization of Goodwill (11,473) (11,364) 109 -1.0% Other Non-operating Expenses (31,748) (21,472) 10,276 -32.4% Monetary Correction 2,480 (6,566) (9,046) n.a. - ----------------------------------------------------------------------------------------------------------------------------- Non-Operating Income (60,833) (52,445) 8,388 -13.8% - ----------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 12,113 (618) (12,730) n.a. - ----------------------------------------------------------------------------------------------------------------------------- Income Taxes (7,878) (17,062) (9,184) 116.6% Net Income 4,235 (17,680) (21,914) n.a. - -----------------------------------------------------------------------------------------------------------------------------
(1) For comparative analysis purposes, participation in income from investments in related companies is shown net (net income/losses). (2) Income and costs related to Calling Party Pays are presented net. 170_Telefonica CTC Chile 2002 Annual Report 3. Analysis of Results for the year 3.1 Operating Income As of December 31, 2002, operating income amounted to Ch$ 51,823 million with a 29% decrease compared to the previous year. Operating Revenues Operating revenues for the year amounting to Ch$ 433,090 million showed a 6.3% decrease compared to 2001. This decrease is mainly due to the effect of a 2.4% decrease in revenues from basic telephone service, the 5.4% decrease in access and interconnection charges, a 73.3% decrease in revenues from directory advertising due to the new contract with Publiguias and an 11.1% drop in revenues from other local telephone services represented mainly by equipment sales. Revenue from basic telephone service decreased by 2.4%, compared to the previous year. The variation in this revenue is mainly due to: (i) a 3.2% decrease in the level of income from fixed charge, pursuant to the fixed monthly charge for network connections; (ii) variable charge which decreased by 8.6% compared to the previous year, due to a decrease of 0.2% in average lines in service, to decreased traffic per line and due to a change in the composition of traffic between the local tranche and LMS (local measured service); (iii) revenues from connections and other installations increased by 32.4% mainly due to an increase in network interconnection revenues for point-to-point links, ADSL, Frame Relay and access to fiber optics. Revenues from access charges decreased by 5.4%, mainly due to the 18% drop in ILD traffic revenues and the 8% drop in service and interconnection fees. Income from the business of directory advertising decreased by 73.3%, due to a new contract signed between Telefonica CTC Chile and Publiguias as of the second half of 2001, which terminated the previous contract in advance. Other local telephone services decreased by 11.1% compared to the previous year, explained by the 33.2% drop in equipment sales, a 19.1% decrease in revenues from other services, compensated by a 4.8% increase in value added services. Operating Costs Operating costs of Ch$ 381,263 million for the period decreased by 2% compared to 2001. This decrease is mainly explained by a 26.6% decrease in salary costs, reflecting the savings effect of the workforce reduction carried out by the Company in June 2001 and October 2002. Depreciation increased by 4.3% due mainly to the operation of the Corporation's new assets. Other operating costs increased by 7.4% mainly due to increased cost of selling telecommunications equipment, telephone directory printing expenses and allowance for doubtful accounts. This was compensated in part by a drop in the cost of contracts with third parties, long distance service and interconnection costs, and savings as a result of the cost containment policy that the Company has implemented on a continuous and sustained manner during the last few years. Administration and selling costs dropped by 14.9% compared to the previous year, mainly due to salary savings related in 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 corporation's information services business (Sonda). 3.2 Non-Operating Income Non-operating result obtained in 2002 shows a loss of Ch$ 52,445 million, figure that is 13.8% less than the loss in 2001. The variation in non-operating income is broken down as follows: Financial income dropped by 6%, mainly due to less available funds, which were destined to decreasing the Company's interest-bearing debt. Other non-operating income decreased by 67% basically due to the effect of the compensation of the advanced termination of the contract with Publiguias recorded in 2001. Income from investments in related companies increased by Ch$ 8,509 million equivalent to 36.9% in respect to net income of Ch$ 23,076 million obtained in 2001. The most important effects explaining this variation are the following: - Long distance business: This business shows net income of Ch$ 19,344 million, a decrease of 38.1% in comparison to the previous year. This variation is mainly explained by a 23.4% drop in operating income together with a 32.2% increase in operating loss caused mainly by decreased value of the Terra Networks shares of Ch$ 7,567 million. - Corporate communications business: This year this business contributed net income of Ch$ 6,729 million, whereas in 2001 it recorded net income of Ch$ 10,456 million. This 35.6% decrease is mainly due to the 24.3% drop in operating income together with an increase of 11.8% in non-operating losses. - Mobile business: The mobile business contributed net income of Ch$ 3,898 million for the year, recording positive income after several years. The contribution of this income is mainly due to an improvement at an operating and non-operating level. - Public telephone business, maintenance and installation of basic equipment: The investment in this business contributed net income of Ch$ 3,462 million, 54% less than in 2001, amounting to Ch$ 7,518 million. This variation is due to a 38.2% decrease in operating income together with a 42.3% increase in non-operating losses. - Other businesses: Generated a net loss of Ch$ 2,441 million that is mainly explained by losses in Telefonica Asistencia y Seguridad, CTC Isapre and Telefonica Gestion de Servicios Compartidos. 2002 Annual Report Telefonica CTC Chile_171 Analysis of the Individual Financial Statements, continued 3. Analysis of Results for the year, continued: 3.2 Non-Operating Income, continued: - Financial expenses decreased by 13.3% in 2002, mainly associated to a smaller interest-bearing debt, renegotiation of rates for current loans and a drop in the market interest rates. - Other non-operating expenses decreased by 32.4% derived mainly from fewer expenses in 2002 associated to the personnel reduction plan in relation to expenses incurred for this concept in 2001, and the indemnity cost for termination of the contract with Sonda, recorded in 2001. - Monetary correction recorded a loss of Ch$ 6,566 million, figure that partly reflects the effects of devaluation of investments of Sonda in Argentina and Brazil. It should be noted that a 100% hedge has been maintained for exchange rate fluctuations and 81% for interest rate fluctuations. 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 Net result reached a loss of Ch$ 17,680 million, in comparison with net income of Ch$ 4,235 million recorded the previous year. The loss obtained in the year derives from the 29% decrease in operating income and from higher taxes of Ch$ 9,184 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 implemented at the end of October 2002, as well as a decrease in the value of Terra Networks shares of Ch$ 7,567 million. - -------------------------------------------------------------------------------- 4. Statement of Cash Flows Table N(degree) 4 Individual Cash Flows (Figures in millions of pesos as of December 31, 2002)
Description Jan - Dec Jan - Dec Variation 2001 2002 Ch$ % - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities 200,217 232,603 32,386 16.2% Cash flows from financing activities (119,942) (226,776) (106,834) 89.1% Cash flows from investment activities (126,574) (51,394) 75,180 -59.4% Effect of inflation on cash and cash equivalents (4,610) 1,689 6,299 n.a. Net change in cash and cash equivalents for the year (50,909) (47,255) 3,654 -7.2% - -----------------------------------------------------------------------------------------------------------------------------
The Ch$ 47,255 million decrease in cash flows for 2002 compared to the Ch$ 50,909 million decrease in 2001, is mainly due to greater cash flows from operating activities, together with higher cash flows from amortization and prepayments destined to decrease the interest-bearing debt of Telefonica CTC Chile during 2002 in comparison to the previous year. The negative change in cash flows was compensated in part by a decrease in cash flows destined to investment activities. 172_Telefonica CTC Chile 2002 Annual Report 5. Financial Indicators Table N(degree) 5 Individual Financial Indicators
Description Jan - Dec Jan - Dec 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------- Liquidity Ratio Current Liquidity (Current Assets/Current Liabilities) 1.44 1.16 Acid Ratio (Most liquid assets/Current Liabilities) 0.09 0.23 Debt Ratios Leverage Ratio (Total Liabilities/Shareholders' Equity) 1.22 1.05 Long-term Debt Ratio (Long-term Liabilities/Total Liabilities) 0.77 0.75 Interest Coverage (Income Before Taxes and Interest / Financial Expenses) 0.767 0.603 Profitability Ratios And Net Income Per Share Operating Margin (Operating Income/Operating Revenues) 15.8% 12.0% Operating Income Return (Operating Income/Net Property, Plant and Equipment(1)) 1.2% 0.9% Net Income per Share (Net Income / Amount of average paid shares each year) Ch$ 4.42 -Ch$ 18.47 Return on Equity (Net Result/Average shareholders' equity) 0.3% -1.4% Return on Assets (Net Result/Average assets) 0.15% -0.67% Operating Assets Yield (Net Result/Average operating assets (2)) 0.27% -1.23% Dividends Return (Dividends paid (3)/Market Price per Share) n.a. 0.1% Activity Indicators - ----------------------------------------------------------------------------------------------------------------------------- Total Assets (millions of pesos as of 12/31/02) 2,898,791 2,640,789 Sale of Assets (millions of pesos as of 12/31/02) 124,864 730 Investments in other companies and property, plant and equipment (millions of pesos as of 12/31/02) 92,355 53,131 Inventory Turnover (Cost of Sales/Average Inventory) 0.55 0.79 Inventory Permanence (Average Inventory/Cost of sales times 360 days) 666 463 - -----------------------------------------------------------------------------------------------------------------------------
(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 From the previous table, we emphasize the following: Notwithstanding that the debt level of the Company is lower in 2002, the distribution between short and long-term debts produce a decrease in the liquidity ratio compared to 2001. Likewise, the debt ratio decreased due to lower levels of financial liabilities compared to 2001. 2002 Annual Report Telefonica CTC Chile_173 Analysis of the Individual Financial Statements, continued 6. 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. 7. 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. 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. 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 Antimonopolios) 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. 174_Telefonica CTC Chile 2002 Annual Report 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 of 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 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. 2002 Annual Report Telefonica CTC Chile_175 Analysis of the Individual Financial Statements, continued 8. 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). 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). 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. 176_Telefonica CTC Chile 2002 Annual Report 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 Metropolis Intercom 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. 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. 2002 Annual Report Telefonica CTC Chile_177 Analysis of the Individual Financial Statements, continued 9. Analysis of Market Risk Financial Risk Coverage 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. 178_Telefonica CTC Chile 2002 Annual Report summarized financial statements of subsidiaries for the years ended December 31, 2002 and 2001 [PHOTO OMITTED] CONTENTS Compania de Telefonos de Chile - Transmisiones Regionales S.A. Telefonica Empresas CTC Chile S.A. and Susidiaries Compania de Telecomunicaciones de Chile - Equipos y Servicios S.A. Compania de Telecomunicaciones de Chile - Isapre S.A. Telefonica Movil de Chile S.A. Fundacion Telefonica Chile Globus 120 S.A. Telefonica Gestion de Servicios Compartidos Chile S.A. Telemergencia S.A. ThCh$: Thousands of Chilean pesos UF: Unidad de Fomento, inflation-indexed peso denominated monetary unit in Chile 2002 Annual Report Telefonica CTC Chile_179 Summarized Financial Statements of Subsidiaries Compania de Telefonos de Chile - Transmisiones Regionales S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 79,886,479 108,589,202 Property, Plant and Equipment 99,499,484 105,989,069 Other Assets 22,270,438 93,075,157 Total Assets 201,656,401 307,653,428 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 26,917,623 90,844,229 Long-term Liabilities 65,162,948 114,621,384 Capital and Reserves 41,561,592 41,561,592 Retained Earnings 49,626,224 29,638,273 Net Income for the Year 18,388,014 30,987,950 Total Liabilities and Shareholders' Equity 201,656,401 307,653,428 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 95,907,292 109,921,817 Operating Costs (Less) 44,634,454 48,638,776 Gross Margin 51,272,838 61,283,041 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 17,770,314 16,947,771 Operating Income 33,502,524 44,335,270 - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 4,041,824 3,739,445 Non-operating Expenses (Less) 14,527,478 10,003,722 Price-level Restatement (308,466) (1,444,903) Non-operating Income (10,794,120) (7,709,180) - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes 22,708,404 36,626,090 - ---------------------------------------------------------------------------------------------------------------------------- Income Tax 3,400,242 3,961,979 Deferred Income Tax 920,148 1,676,161 Net Income for the year 18,388,014 30,987,950 - ----------------------------------------------------------------------------------------------------------------------------
180_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Compania de Telefonos de Chile - Transmisiones Regionales S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year 18,388,014 30,987,950 Charges (credits) to income that do not represent cash flows 12,890,855 9,851,710 (Increase) decrease in assets, that affect cash flows 55,813,394 (1,599,745) Increase (decrease) in liabilities, that affect cash flows (64,764,413) (4,199,454) Net cash provided by (used in) operating activities 22,327,850 35,040,461 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities (64,187,701) 9,128,494 Net cash flows provided by (used in) investment activities 40,993,760 (44,402,511) Net cash flows (used) in the year (866,091) (233,556) - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (52,384) (102,532) Net change in cash and cash equivalents (918,475) (336,088) - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 1,508,115 1,844,203 Cash and cash equivalents - end of year 589,640 1,508,115 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_181 Summarized Financial Statements of Subsidiaries Telefonica Empresas CTC Chile S.A. and Subsidiaries As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 59,314,554 125,778,531 Property, Plant and Equipment 72,472,954 102,779,367 Other Assets 52,121,991 59,708,080 Total Assets 183,909,499 288,265,978 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 87,242,868 117,507,460 Long-term Liabilities 38,970,145 68,912,455 Minority Interest 50,672 35,638,330 Capital and Reserves 48,243,496 48,757,203 Retained Earnings 2,674,466 6,994,236 Net Income for the Year 6,727,852 10,456,294 Total Liabilities and Shareholders' Equity 183,909,499 288,265,978 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 174,105,043 244,145,066 Operating Costs (Less) 135,700,612 192,810,642 Gross Margin 38,404,431 51,334,424 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 19,506,848 26,356,383 Operating Income 18,897,583 24,978,041 - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 15,039,053 7,595,507 Non-operating Expenses (Less) 21,548,707 13,100,996 Price-level Restatement (1,664,901) (1,803,342) Non-operating Income (8,174,555) (7,308,831) - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes 10,723,028 17,669,210 - ---------------------------------------------------------------------------------------------------------------------------- Income Tax 3,285,876 2,955,424 Deferred Income Tax 104,542 415,016 Minority Interest (604,758) (4,678,693) Amortization Negative Goodwill -- 6,185 Net Income for the year 6,727,852 10,456,294 - ----------------------------------------------------------------------------------------------------------------------------
182_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Telefonica Empresas CTC Chile S.A. and Subsidiaries As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year 6,727,852 10,456,294 Income from sale of assets (7,871,918) (1,193,162) Charges (credits) to income that do not represent cash flows 29,453,234 43,450,603 (Increase) decrease in assets, that affect cash flows (189,732) 23,268,790 Increase (decrease) in liabilities, that affect cash flows (6,295,806) 6,621,266 Net cash provided by (used in) operating activities 21,823,630 82,603,791 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities (36,064,113) (40,464,630) Net cash flows provided by (used in) investment activities (4,610,863) (40,173,413) Net cash flows (used) in the year (18,851,346) 1,965,747 - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (377,233) (727,837) Net change in cash and cash equivalents (19,228,579) 1,237,910 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 20,652,303 19,414,394 Cash and cash equivalents - end of year 1,423,724 20,652,303 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_183 Summarized Financial Statements of Subsidiaries Compania de Telecomunicaciones de Chile - Equipos y Servicios S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 12,477,364 15,839,145 Property, Plant and Equipment 41,213,928 45,048,228 Other Assets 36,084 153,507 Total Assets 53,727,376 61,040,880 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 18,907,131 25,608,137 Long-term Liabilities 11,492,624 6,260,282 Capital and Reserves 374,761 374,760 Retained Earnings 19,490,968 21,278,848 Net Income for the Year 3,461,892 7,518,486 Cumulative Deficit Development Period -- 367 Total Liabilities and Shareholders' Equity 53,727,376 61,040,880 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 52,926,980 49,957,509 Operating Costs (Less) 43,801,367 35,837,830 Gross Margin 9,125,613 14,119,679 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 2,110,273 2,759,631 Operating Income 7,015,340 11,360,048 - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 83,729 54,485 Non-operating Expenses (Less) 2,019,558 1,551,411 Price-level Restatement 80 136,703 Non-operating Income (1,935,749) (1,360,223) - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes 5,079,591 9,999,825 - ---------------------------------------------------------------------------------------------------------------------------- Income Tax 974,834 1,628,132 Deferred Income Tax 642,865 853,207 Net Income for the year 3,461,892 7,518,486 - ----------------------------------------------------------------------------------------------------------------------------
184_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Compania de Telecomunicaciones de Chile - Equipos y Servicios S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year 3,461,892 7,518,486 Charges (credits) to income that do not represent cash flows 12,122,906 11,961,909 (Increase) decrease in assets, that affect cash flows (3,679,369) 17,314,301 Increase (decrease) in liabilities, that affect cash flows (5,643,704) (10,525,695) Net cash provided by (used in) operating activities 6,261,725 26,269,002 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities (341,362) (19,702,663) Net cash flows provided by (used in) investment activities (5,769,876) (6,902,431) Net cash flows (used) in the year 150,487 (336,092) - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (12,245) (14,494) Net change in cash and cash equivalents 138,242 (350,586) - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 194,116 544,702 Cash and cash equivalents - end of year 332,358 194,116 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_185 Summarized Financial Statements of Subsidiaries Compania de Telecomunicaciones de Chile - Isapre S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 1,067,727 786,923 Property, Plant and Equipment 236,240 246,596 Other Assets 488,555 505,341 Total Assets 1,792,522 1,538,860 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 1,203,313 1,328,350 Long-term Liabilities 52,564 58,684 Capital and Reserves 1,315,066 295,066 Retained Earnings (143,240) 31,027 Net Loss for the year (635,181) (174,267) Total Liabilities and Shareholders' Equity 1,792,522 1,538,860 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 6,094,744 7,299,474 Operating Costs (Less) 5,821,965 6,346,275 Gross Margin 272,779 953,199 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 1,030,753 993,604 Operating Income (757,974) (40,405) - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 186,166 316,225 Non-operating Expenses (Less) 123,898 499,230 Price-level Restatement 3,271 5,529 Non-operating Income 65,539 (177,476) - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes (692,435) (217,881) - ---------------------------------------------------------------------------------------------------------------------------- Deferred Income Tax (57,254) (43,614) Net loss for the year (635,181) (174,267) - ----------------------------------------------------------------------------------------------------------------------------
186_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Compania de Telecomunicaciones de Chile - Isapre S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year (635,181) (174,267) Charges (credits) to income that do not represent cash flows 137,670 15,730 (Increase) decrease in assets, that affect cash flows (313,443) (265,907) Increase (decrease) in liabilities, that affect cash flows 649,761 (30,948) Net cash provided by (used in) operating activities (161,193) (455,392) - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities 730,563 -- Net cash flows provided by (used in) investment activities (523,844) 352,424 Net cash flows (used) in the year 45,526 (102,968) - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (2,422) (1,856) Net change in cash and cash equivalents 43,104 (104,824) - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 50,139 154,964 Cash and cash equivalents - end of year 93,243 50,139 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_187 Summarized Financial Statements of Subsidiaries Telefonica Movil de Chile S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 70,252,131 62,239,552 Property, Plant and Equipment 336,146,900 353,023,799 Other Assets 13,175,795 13,896,753 Total Assets 419,574,826 429,160,104 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 68,243,468 72,582,752 Long-term Liabilities 147,441,833 229,417,747 Capital and Reserves 199,991,563 175,484,046 Retained Earnings -- (21,782,053) Net income (loss) for the year 3,897,962 (26,542,388) Total Liabilities and Shareholders' Equity 419,574,826 429,160,104 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 215,483,413 192,407,892 Operating Costs (Less) 151,666,716 155,275,300 Gross Margin 63,816,697 37,132,592 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 47,261,497 50,204,351 Operating Income 16,555,200 (13,071,759) - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 1,546,308 852,253 Non-operating Expenses (Less) 12,935,518 24,052,890 Price-level Restatement (610,348) 2,997,067 Non-operating Income (11,999,558) (20,203,570) - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes 4,555,642 (33,275,329) - ---------------------------------------------------------------------------------------------------------------------------- Income Tax 34,675 -- Deferred Income Tax 623,005 (6,732,941) Net income (loss) for the year 3,897,962 (26,542,388) - ----------------------------------------------------------------------------------------------------------------------------
188_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Telefonica Movil de Chile S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year 3,897,962 (26,542,388) Charges (credits) to income that do not represent cash flows 59,342,134 49,296,020 (Increase) decrease in assets, that affect cash flows (10,578,541) 54,586,195 Increase (decrease) in liabilities, that affect cash flows (2,568,769) (33,788,290) Net cash provided by (used in) operating activities 50,092,786 43,551,537 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities 731,187 90,877,894 Net cash flows provided by (used in) investment activities (49,550,683) (133,436,542) Net cash flows (used) in the year 1,273,290 992,889 - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (90,938) (28,587) Net change in cash and cash equivalents 1,182,352 964,302 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 2,001,417 1,037,115 Cash and cash equivalents - end of year 3,183,769 2,001,418 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_189 Summarized Financial Statements of Subsidiaries Fundacion Telefonica Chile As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 648,016 491,049 Total Assets 648,016 491,049 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 281,122 148,568 Capital and Reserves 400,928 400,929 Accumulated loss (58,449) -- Net income (loss) for the year 24,415 (58,448) Total Liabilities and Shareholders' Equity 648,016 491,049 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Costs (Less) 415 19 Gross Margin (415) (19) - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 604,295 336,625 Operating Income (604,710) (336,644) - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 632,143 282,671 Price-level Restatement (3,018) (4,476) Non-operating Income 629,125 278,195 - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes 24,415 (58,448) - ---------------------------------------------------------------------------------------------------------------------------- Net Income (loss) for the year 24,415 (58,448) - ----------------------------------------------------------------------------------------------------------------------------
190_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Fundacion Telefonica Chile As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year 24,415 (58,448) Charges (credits) to income that do not represent cash flows 3,017 4,476 (Increase) decrease in assets, that affect cash flows (116,278) 359,595 Increase (decrease) in liabilities, that affect cash flows 10,875 73,970 Net cash provided by (used in) operating activities (77,971) 379,593 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities 120,221 -- Net cash flows provided by (used in) investment activities -- (127,516) Net cash flows (used) in the year 42,250 252,077 - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (15,687) (13,073) Net change in cash and cash equivalents 26,563 239,004 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 491,049 252,045 Cash and cash equivalents - end of year 517,612 491,049 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_191 Summarized Financial Statements of Subsidiaries Globus 120 S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 3,547,806 3,140,542 Property, Plant and Equipment 8,248,543 8,666,187 Other Assets 266,199 394,561 Total Assets 12,062,548 12,201,290 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 7,069,409 7,148,588 Long-term Liabilities 3,030,724 4,201,606 Capital and Reserves 279,350 279,350 Accumulated Loss 571,748 39,864 Net Income for the Year 1,111,317 531,882 Total Liabilities and Shareholders' Equity 12,062,548 12,201,290 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 5,384,569 6,027,487 Operating Costs (Less) 3,031,235 3,726,223 Gross Margin 2,353,334 2,301,264 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 1,152,550 1,332,065 Operating Income 1,200,784 969,199 - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 105,704 47,634 Non-operating Expenses (Less) 150,583 253,633 Price-level Restatement 77,664 (226,321) Non-operating Income 32,785 (432,320) - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes 1,233,569 536,879 - ---------------------------------------------------------------------------------------------------------------------------- Income Tax 193,393 209,422 Deferred Income Tax (71,141) (204,425) Net Income for the year 1,111,317 531,882 - ----------------------------------------------------------------------------------------------------------------------------
192_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Globus 120 S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year 1,111,317 531,882 Charges (credits) to income that do not represent cash flows 394,294 692,256 (Increase) decrease in assets, that affect cash flows 568,968 4,988,120 Increase (decrease) in liabilities, that affect cash flows (199,924) (5,219,107) Net cash provided by (used in) operating activities 1,874,655 993,151 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities (1,172,388) (1,045,370) Net cash flows provided by (used in) investment activities (652,979) -- Net cash flows (used) in the year 49,288 (52,219) - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (1,294) (1,628) Net change in cash and cash equivalents 47,994 (53,847) - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 34,545 88,392 Cash and cash equivalents - end of year 82,539 34,544 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_193 Summarized Financial Statements of Subsidiaries Telefonica Gestion de Servicios Compartidos Chile S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 3,331,590 2,019,954 Other Assets 2,789,661 1,794,991 Total Assets 6,121,251 3,814,945 - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 4,135,837 1,254,164 Long-term Liabilities 1,438,160 1,872,582 Capital and Reserves 1,047,510 1,047,510 Accumulated loss (359,312) (366,477) Net income (loss) for the year (140,944) 7,166 Total Liabilities and Shareholders' Equity 6,121,251 3,814,945 - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 Operating Income Operating Income 11,403,132 2,180,837 Operating Costs (Less) 8,632,798 2,176,069 Gross Margin 2,770,334 4,768 - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 2,620,096 -- Operating Income 150,238 4,768 - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income Non-operating Income 23,645 16,247 Non-operating Expenses (Less) 361,187 31 Price-level Restatement 14,580 (11,162) Non-operating Income (322,962) 5,054 - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes (172,724) 9,822 - ---------------------------------------------------------------------------------------------------------------------------- Deferred Income Tax (31,780) 2,656 Net income (loss) for the year (140,944) 7,166 - ----------------------------------------------------------------------------------------------------------------------------
194_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Telefonica Gestion de Servicios Compartidos Chile S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year (140,944) 7,166 Charges (credits) to income that do not represent cash flows (990,210) 453,289 (Increase) decrease in assets, that affect cash flows (464,681) (780,840) Increase (decrease) in liabilities, that affect cash flows 2,479,029 549,076 Net cash provided by (used in) operating activities 883,194 228,691 - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities -- (199,413) Net cash flows provided by (used in) investment activities (892,883) -- Net cash flows (used) in the year (9,689) 29,278 - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (1,485) (59) Net change in cash and cash equivalents (11,174) 29,219 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - beginning of year 29,218 -- Cash and cash equivalents - end of year 18,044 29,219 - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_195 Summarized Financial Statements of Subsidiaries Telemergencia S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Balance Sheets as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Assets Current Assets 2,532,741 -- Property, Plant and Equipment 3,958,089 -- Total Assets 6,490,830 -- - ---------------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current Liabilities 7,055,409 -- Capital and Reserves 1,125,000 -- Loss for the Year (1,689,579) -- Total Liabilities and Shareholders' Equity 6,490,830 -- - ---------------------------------------------------------------------------------------------------------------------------- Summarized Statements of Income as of December 31, 2002 and 2001 - ---------------------------------------------------------------------------------------------------------------------------- Operating Income Operating Income 2,335,878 -- Operating Costs (Less) 1,750,570 -- Gross Margin 585,308 -- - ---------------------------------------------------------------------------------------------------------------------------- Administration and Selling Expenses (Less) 2,712,623 -- Operating Income (2,127,315) -- - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income - ---------------------------------------------------------------------------------------------------------------------------- Non-operating Income 2,584 -- Non-operating Expenses (Less) 33,927 -- Price-level Restatement 104,652 -- Non-operating Income 73,309 -- - ---------------------------------------------------------------------------------------------------------------------------- Income before Taxes (2,054,006) -- - ---------------------------------------------------------------------------------------------------------------------------- Deferred Income Tax (364,427) -- Loss for the year (1,689,579) -- - ----------------------------------------------------------------------------------------------------------------------------
196_Telefonica CTC Chile 2002 Annual Report Summarized Financial Statements of Subsidiaries Telemergencia S.A. As of December 31, 2002 and 2001
2002 2001 Summarized Statement of Cash Flows as of December 31, 2002 and 2001 ThCh$ ThCh$ - ---------------------------------------------------------------------------------------------------------------------------- Net income (Loss) for the year (1,689,579) -- Charges (credits) to income that do not represent cash flows 667,639 -- (Increase) decrease in assets, that affect cash flows (6,804,024) -- Increase (decrease) in liabilities, that affect cash flows 7,419,836 -- Net cash provided by (used in) operating activities (406,128) -- - ---------------------------------------------------------------------------------------------------------------------------- Net cash flows provided by (used in) financing activities 5,528,129 -- Net cash flows provided by (used in) investment activities (5,094,807) -- Net cash flows (used) in the year 27,194 -- - ---------------------------------------------------------------------------------------------------------------------------- Effect of inflation on cash and cash equivalents (49) -- Net change in cash and cash equivalents 27,145 -- - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - end of year 27,145 -- - ----------------------------------------------------------------------------------------------------------------------------
2002 Annual Report Telefonica CTC Chile_197 financial review and exhibits [PHOTO OMITTED] 198_Telefonica CTC Chile, S. A. 2002 Annual Report Financial Review and Exhibits Selected Financial Data - Consolidated (Millions of Chilean pesos as of 12/31/02)
1998 1999 2000 2001 2002 2002 US$ (4) - ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues 863,170 945,398 899,054 920,035 863,149 1,201.1 Operating costs and expenses (594,563) (819,104) (830,149) (778,558) (732,651) (1,019.5) Financial expenses (77,467) (97,723) (111,149) (96,255) (81,472) (113.4) EBITDA 462,895 357,683 318,252 396,981 391,533 544.8 Depreciation y amortization (1) (207,080) (247,315) (305,891) (271,715) (285,697) (397.6) Operating income 268,606 126,294 68,905 141,477 130,498 181.6 Net income 148,413 (56,107) (121,086) 4,235 (17,680) (24.6) Cash flow (2) 443,480 335,545 314,714 362,684 331,206 460.9 Paid-in capital 736,469 736,469 736,469 736,469 736,469 1,024.9 Equity 1,487,983 1,422,076 1,300,814 1,305,297 1,286,690 1,790.5 Long term liabilities 1,158,430 1,484,093 1,241,499 1,256,997 1,021,120 1,421.0 Capital expenditures (US$ millions) (3) 615 589 349 291 204 -- - -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes amortization of negative goodwill. (2) Consolidated income + Depreciation + Amortization of negative goodwill - Monetary correction from balance sheet accounts - Financial income + Financial expenses - Results from related companies + Dividend received. (3) Expressed in millions of nominal US dollars. Including investment in fixed assets. (4) Figures in millions of US dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$718.61. Operating costs and expenses (millions of Ch$ as of 12/31/02) [GRAPH OMITTED] Other operating Depreciation costs and expenses ------------ ------------------ 261,035 471,616 2002 255,504 523,055 2001 249,347 601,403 2000 231,390 587,715 1999 194,289 400,274 1998 EBITDA and EBITDA margin (millions of Ch$ as of 12/31/02) [GRAPH OMITTED] EBITDA EBITDA Margin ------ ------------- 391,533 45.4% 2002 396,981 43.1% 2001 318,251 35.4% 2000 357,683 37.8% 1999 462,895 53.6% 1998 2002 Annual Report Telefonica CTC Chile_199 Consolidated Operating Revenues (Millions of Chilean pesos as of 12/31/02)
1998 1999 2000 2001 2002 Change (%) 2002 02/01 US$ (1) - -------------------------------------------------------------------------------------------------------------------------------- Fixed Telephony 543,018 473,592 429,099 412,467 381,227 -7.6% 530.5 - -------------------------------------------------------------------------------------------------------------------------------- Primary Service 475,061 423,667 388,003 370,070 353,118 -4.6% 491.4 Telephone line service fee 191,387 175,714 169,695 164,094 158,733 -3.3% 220.9 Variable charge 212,869 185,369 174,137 167,464 156,447 -6.6% 217.7 Connections & Instalations 18,784 9,510 8,886 8,021 6,960 -13.2% 9.7 Value added services 22,258 21,785 17,720 17,473 17,163 -1.8% 23.9 Terminal equipment marketing 19,855 17,785 8,498 7,388 4,967 -32.8% 6.9 Other fixed telephony revenues 9,908 13,505 9,068 5,630 8,848 57.2% 12.3 Access charges and interconnections 50,064 33,671 26,379 24,267 23,265 -4.1% 32.4 long distance interconncetions 30,620 16,031 12,687 13,617 12,949 -4.9% 18.0 International long distance 19,445 17,640 13,693 10,650 10,316 -3.1% 14.4 Directory advertising 17,892 16,253 14,717 18,130 4,844 -73.3% 6.7 Long Distance 107,662 82,730 76,328 81,900 74,731 -8.8% 104.0 - -------------------------------------------------------------------------------------------------------------------------------- Mobile Communications 94,067 171,881 183,147 184,173 206,932 12.4% 288.0 - -------------------------------------------------------------------------------------------------------------------------------- Outgoing traffic, equipment sales and other revenues 94,067 117,170 105,657 102,955 120,894 17.4% 168.2 Interconnection from Calling Party Pays -- 54,711 77,490 81,218 86,038 5.9% 119.7 Corporate Customer Communications (2) -- 41,774 59,710 72,335 86,206 19.2% 120.0 - -------------------------------------------------------------------------------------------------------------------------------- Other Business 118,424 175,422 150,769 169,160 114,053 -32.6% 158.7 - -------------------------------------------------------------------------------------------------------------------------------- Public Telephones 23,131 22,890 19,761 16,056 12,078 -24.8% 16.8 Interior installation and equipment marketing 34,182 27,799 26,842 26,371 28,243 7.1% 39.3 Information System Services (Sonda) -- 102,039 96,826 112,828 62,322 -44.8% 86.7 Other operating revenues 61,111 22,694 7,341 13,905 11,410 -17.9% 15.9 Total Operating Revenues 863,170 945,398 899,054 920,035 863,149 -6.2% 1,201.1 - --------------------------------------------------------------------------------------------------------------------------------
(1) Figures in millions of US dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$ 718,61. (2) In 1998, revenues from Corporate Customer Communications are included under Terminal Equipment Marketing and Other Operating Revenues. 200_Telefonica CTC Chile 2002 Annual Report Consolidated Income Statement (Millions of Chilean pesos as of 12/31/02)
Description 1998 1999 2000 2001 2002 Change (%) 2002 02/01 US$ (1) - ---------------------------------------------------------------------------------------------------------------------------------- + Operating revenues 863,170 945,398 899,054 920,035 863,149 -6.2% 1,201.1 - - Operating expenses (400,274) (587,715) (580,803) (523,055) (471,616) -9.8% (656.3) Salaries (70,959) (106,295) (103,372) (101,149) (79,566) -21.3% (110.7) Other operating costs (181,210) (334,307) (344,309) (285,426) (261,635) -8.3% (364.1) Sales and administrative expenses (148,106) (147,113) (133,121) (136,479) (130,415) -4.4% (181.5) = EBITDA 462,895 357,683 318,252 396,981 391,533 -1.4% 544.8 - - Depreciation (194,289) (231,390) (249,347) (255,504) (261,035) 2.2% (363.2) = Operating income 268,606 126,294 68,905 141,477 130,498 -7.8% 181.6 + Financial income 11,766 15,232 12,414 18,743 16,691 -10.9% 23.2 +/- Results from related companies 2,656 1,794 (981) 612 2,355 284.9% 3.3 - - Amortization of negative goodwill (12,792) (15,926) (56,545) (16,211) (24,662) 52.1% (34.3) - - Financial expenses (77,467) (97,723) (111,149) (96,255) (81,472) -15.4% (113.4) + Other non-operating income 14,355 46,339 45,361 15,572 13,222 -15.1% 18.4 - - Other non-operating expenses (20,494) (50,962) (49,202) (45,133) (37,880) -16.1% (52.7) + Monetary correction (32,833) (62,337) (32,590) 2,131 (8,953) -520.1% (12.5) = Income before tax 153,797 (37,290) (123,787) 20,935 9,799 -53.2% 13.6 - - Income tax (5,062) (13,351) (5,764) (11,769) (26,717) 127.0% (37.2) = Consolidated income 148,735 (50,641) (118,023) 9,166 (16,918) -284.6% (23.5) - - Minority interest (369) (5,527) (3,270) (4,938) (762) -84.6% (1.1) = Realized net income 148,366 (56,168) (121,294) 4,228 (17,680) -518.1% (24.6) + Amortization of positive goodwill 47 61 207 6 0 n.a. 0.0 = Net income 148,413 (56,107) (121,086) 4,235 (17,680) -517.5% (24.6) - ---------------------------------------------------------------------------------------------------------------------------------- Consolidated income 148,735 (50,641) (118,023) 9,166 (16,918) -284.6% (23.5) + Depreciation 194,289 231,390 249,346 255,504 261,035 2.2% 363.2 + Amortization of negative goodwill 12,792 15,926 56,545 16,211 24,662 52.1% 34.3 - - Monetary correction from balance sheet accounts 24,073 57,669 26,687 6,705 (2,047) -130.5% (2.8) - - Financial income (11,766) (15,232) (12,414) (18,743) (16,691) -10.9% (23.2) + Financial expenses 77,467 97,723 111,149 96,255 81,472 -15.4% 113.4 - - Results from related companies (2,656) (1,794) 981 (612) (2,355) 284.9% (3.3) + Dividends received 547 503 441 0 45 n.a. 0.1 = Cash flow 443,481 335,543 314,712 364,487 329,203 -9.7% 458.1 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Figures in millions of US dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$ 718,61. 2002 Annual Report Telefonica CTC Chile_201 Consolidated Balance Sheet (Millions of Chilean pesos as of 12/31/02)
1998 1999 2000 2001 2002 2002 US$ (1) - ----------------------------------------------------------------------------------------------------------------------------------- Current assets 501,425 604,944 630,670 657,216 446,384 621.2 Cash 6,514 18,285 18,910 19,324 16,842 23.4 Time deposits and marketable securities 41,360 47,209 127,872 71,585 79,231 110.3 Accounts receivable 184,163 183,771 130,560 251,114 206,606 287.5 Notes receivable 10,897 12,393 5,237 5,260 6,024 8.4 Sundry debtors 21,984 39,034 39,030 35,609 25,071 34.9 Accounts and notes receivable from related companies 10,188 33,597 13,895 5,582 17,114 23.8 Inventories 30,664 24,124 27,212 32,378 14,360 20.0 Other current assets 195,655 246,533 267,956 236,365 81,135 112.9 Property, plant and equipment 2,246,064 2,365,388 2,212,891 2,124,009 1,939,044 2,698.3 Gross property, plant and equipment 3,486,171 3,785,400 3,843,065 3,918,164 3,907,909 5,438.2 Accumulated depreciation (1,240,107) (1,420,013) (1,630,174) (1,794,155) (1,968,865) (2,739.8) Other assets 387,614 428,404 326,748 309,075 302,946 421.6 Investment in related companies 32,853 37,326 14,466 16,313 42,455 59.1 Other 354,761 391,078 312,282 292,762 260,491 362.5 Total assets 3,135,103 3,398,735 3,170,309 3,090,301 2,688,373 3,741.1 - ----------------------------------------------------------------------------------------------------------------------------------- Current liabilities 487,734 456,215 591,146 491,334 379,421 528.0 Bank borrowings - short term 37,132 15,921 21,424 20,652 9,191 12.8 Current maturities of long term debt 231,329 104,693 212,605 112,958 146,291 203.6 Debentures 29,521 34,748 37,535 38,651 21,704 30.2 Accounts and notes payable 91,734 194,598 214,128 236,944 158,862 221.1 Due to related companies 39,452 47,825 55,489 17,573 11,976 16.7 Other current liabilities 58,567 58,430 49,965 64,557 31,396 43.7 Long term liabilities 1,158,430 1,484,093 1,241,499 1,256,997 1,021,120 1,421.0 Bank borrowings 625,697 742,982 550,117 549,112 416,568 579.7 Debentures 324,888 572,601 558,936 567,826 512,193 712.8 Other long term liabilities 207,845 168,510 132,446 140,059 92,360 128.5 Minority interest 956 36,352 36,850 36,673 1,142 1.6 Equity 1,487,983 1,422,076 1,300,814 1,305,297 1,286,690 1,790.5 Paid-in capital 736,469 736,469 736,469 736,469 736,469 1,024.9 Reserves 114,567 115,083 114,972 115,712 116,437 162.0 Accumulated earnings 524,931 628,780 570,459 448,881 451,465 628.2 Net income 148,413 (56,106) (121,086) 4,235 (17,680) (24.6) Interim dividends (36,396) (2,150) -- -- -- -- Total liabilities 3,135,103 3,398,735 3,170,309 3,090,301 2,688,373 3,741.1 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Figures in millions of US$ dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$ 718,61. 202_Telefonica CTC Chile 2002 Annual Report Economic / Financial Indicators- Consolidated
1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------------- EBITDA margin (1) 53.6% 37.8% 35.4% 43.1% 45.4% Financial expenses / Operating revenues -9.0% -10.3% -12.4% -10.5% -9.4% Return on assets (2) 12.9% 5.6% 2.9% 6.4% 6.1% Return on equity (3) 12.5% -3.8% -8.5% 0.3% -1.4% Liquidity (times) (4) 1.03 1.33 1.07 1.34 1.18 Self-financing of investment (5) 114.3% 92.1% 148.2% 184.8% 225.1% Leverage ratio (times) (6) 1.11 1.36 1.41 1.34 1.09 Debt repayment capacity (times) (7) 2.6 4.4 3.9 3.5 3.1 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Operating income + Depreciation / Operating revenues (2) Opearting income / Property, plant and equipment (beginning of period) (3) Net income / Equity (beginning of period) (4) Current assets / Current liabilities (5) Cash flow - Dividends paid / Capital expenditures (6) Current liabilities + Long term liabilities / Equity (7) Long term liabilities / Cash flow Chilean Economy (Revised series)
1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Gross domestic product (billions of Ch$ of each year) 36,535 37,164 40,436 42,192 44,284 Gross domestic product (billions of Ch$ as of 1996) 34,377 34,041 35,533 36,533 37,241 Gross domestic product per capita (nominal US$) 5,355 4,864 4,927 4,315 4,123 Gross domestic product growth (%) 3.2% -1.0% 4.4% 2.8% 1.9% Current account / GDP (%) -5.1% -0.4% -1.4% -1.9% -0.6% Domestic savings / GDP (%) 21.8% 21.2% 20.7% 19.6% 19.6% Investment / GDP (%) 26.1% 21.1% 21.0% 21.4% 20.2% Net debt / GDP (%) 39.9% 46.8% 49.2% 56.9% 64.1% Short term liabilities / Reserves (%) 26.0% 27.2% 43.4% 45.4% 41.9% Annual average exchange rate (Ch$ / US$) 460.29 508.78 539.49 634.88 688.94 Unemployement (%) 6.2% 9.7% 9.2% 9.2% 9.0% Index (1) GDP deflactor 513.74 531.54 550.96 562.79 579.36 Consumer prices (Annual average) 97.78 101.04 104.93 108.67 111.38 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Growth rates. 2002 Annual Report Telefonica CTC Chile_203 Selected Financial Data - Individual (Millions of Chilean pesos as of 12/31/02)
1998 1999 2000 2001 2002 2002 US$ (4) - ----------------------------------------------------------------------------------------------------------------------------------- Operating revenues 602,663 518,026 466,834 461,964 433,090 602.7 Operating costs and expenses (407,869) (474,759) (452,249) (389,019) (381,263) (530.6) Financial expenses (77,153) (95,992) (104,765) (95,595) (82,884) (115.3) EBITDA 354,944 211,598 185,318 238,200 224,137 311.9 Depreciation and amortization (1) (171,989) (181,671) (222,261) (176,727) (183,674) (255.6) Operating income 194,795 43,267 14,585 72,945 51,827 72.1 Net income 148,413 (56,106) (121,086) 4,235 (17,680) (24.6) Cash flow (2) 335,833 277,857 287,475 248,356 217,108 302.1 Paid-in capital 736,468 736,468 736,468 736,468 736,468 1,024.9 Equity 1,487,983 1,422,076 1,300,814 1,305,296 1,286,690 1,790.5 Long term liabilities 1,087,175 1,348,221 1,088,813 1,223,950 1,009,192 1,404.4 Capital expenditures (US$ millions) (3) 412 303 151 137 72 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Includes amortization of negative goodwill. (2) Consolidated income + Depreciation + Amortization of negative goodwill - Monetary correction from balance sheet accounts - Financial income + Financial expenses - Results from related companies + Dividend received. (3) Expressed in millions of nominal US dollars. Including investment in fixed assets. (4) Figures in millions of US dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$ 718,61. 204_Telefonica CTC Chile 2002 Annual Report Individual Income Statement (Millions of Chilean pesos as of 12/31/02)
Description 1998 1999 2000 2001 2002 Change (%) 2002 02/01 US$ (1) - ---------------------------------------------------------------------------------------------------------------------------------- + Operating revenues 602,663 518,026 466,834 461,964 433,090 -6.3% 602.7 - - Operating expenses (247,719) (306,428) (281,517) (223,765) (208,953) -6.6% (290.8) Salaries (55,903) (65,190) (53,125) (48,112) (35,321) -26.6% (49.2) Other operating costs (110,094) (128,260) (146,170) (108,559) (116,550) 7.4% (162.2) Sales and administrative expenses (81,722) (112,979) (82,221) (67,093) (57,082) -14.9% (79.4) = EBITDA 354,944 211,598 185,318 238,200 224,137 -5.9% 311.9 - - Depreciation (160,150) (168,331) (170,733) (165,254) (172,310) 4.3% (239.8) = Operating income 194,795 43,267 14,585 72,946 51,827 -29.0% 72.1 + Financial income 20,314 25,731 25,170 34,365 32,303 -6.0% 45.0 +/- Results from related companies 64,702 55,985 (12,915) 23,076 31,585 36.9% 44.0 - - Amortization of negative goodwill (11,840) (13,341) (51,528) (11,473) (11,364) -1.0% (15.8) - - Financial expenses (77,153) (95,992) (104,765) (95,595) (82,884) -13.3% (115.3) + Other non-operating income 9,427 22,310 62,108 18,062 5,953 -67.0% 8.3 - - Other non-operating expenses (22,176) (39,803) (32,145) (31,748) (21,472) -32.4% (29.9) + Monetary correction (29,482) (53,976) (27,498) 2,480 (6,566) -364.7% (9.1) = Income before tax 148,586 (55,819) (126,989) 12,113 (618) -105.1% (0.9) - - Income tax (173) (287) 5,903 (7,878) (17,062) 116.6% (23.7) = Net income 148,413 (56,106) (121,086) 4,235 (17,680) -517.4% (24.6) + Depreciation 160,150 168,331 170,733 165,254 172,310 4.3% 239.8 + Amortization of negative goodwill 11,840 13,341 51,528 11,473 11,364 -1.0% 15.8 - - Monetary correction from balance sheet accounts 22,744 51,378 24,007 5,259 (2,879) -154.7% (4.0) - - Financial income (20,314) (25,731) (25,170) (34,365) (32,303) -6.0% (45.0) + Financial expenses 77,153 95,992 104,765 95,595 82,884 -13.3% 115.3 +/- Results from related companies (64,702) (55,985) 12,915 (23,076) (31,585) 36.9% (44.0) + Dividends received 548 86,637 69,783 23,981 34,997 45.9% 48.7 = Cash flow 335,833 277,857 287,475 248,356 217,108 -12.6% 302.1 - ----------------------------------------------------------------------------------------------------------------------------------
(1) Figures in millions of US dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$ 718,61. 2002 Annual Report Telefonica CTC Chile_205 Individual Balance Sheet (Millions of Chilean pesos as of 12/31/02)
1998 1999 2000 2001 2002 2002 US$ (1) - ----------------------------------------------------------------------------------------------------------------------------------- Curent assets 434,497 423,753 507,791 532,986 398,960 555.2 Cash 1,912 6,391 10,665 10,335 10,979 15.3 Time deposits and marketable securities 41,323 27,479 90,194 32,724 69,228 96.3 Accounts receivable 107,025 110,130 59,096 112,747 110,076 153.2 Notes receivable 4,355 6,865 1,615 1,687 2,337 3.3 Sundry debtors 13,874 22,667 30,121 24,092 20,347 28.3 Accounts and notes receivable from related companies 149,858 133,125 133,216 128,750 123,089 171.3 Inventories 12,098 6,963 12,527 17,967 7,970 11.1 Other current assets 104,053 110,133 170,357 204,684 54,935 76.4 Property, plant and equipment 1,820,809 1,770,172 1,579,777 1,504,342 1,374,028 1,912.1 Gross property, plant and equipment 2,907,632 2,963,488 2,910,916 2,971,882 3,006,857 4,184.3 Accumulated depreciation (1,086,823) (1,193,316) (1,331,139) (1,467,540) (1,632,829) (2,272.2) Other assets 797,671 922,750 803,968 861,462 867,800 1,207.6 Investment in related companies 395,507 449,514 347,350 334,361 406,729 566.0 Negative Goodwill 250,297 237,207 184,766 177,293 165,929 230.9 Accounts and notes receivable from related companies 73,624 170,397 196,566 287,146 243,759 339.2 Other 78,243 65,633 75,286 62,662 51,382 71.5 Total assets 3,052,978 3,116,676 2,891,535 2,898,791 2,640,788 3,674.9 - ----------------------------------------------------------------------------------------------------------------------------------- Current liabilities 477,819 346,380 501,909 369,544 344,907 480.0 Bank borrowings - short term 10,974 10,749 10,750 10,791 9,191 12.8 Current maturities of long term debt 231,217 82,651 185,378 98,928 146,291 203.6 Debentures 29,521 34,748 37,535 38,651 21,704 30.2 Accounts and notes payable 23,193 76,258 77,003 112,580 80,718 112.3 Due to related companies 143,658 111,536 167,038 61,740 67,808 94.4 Other current liabilities 39,256 30,438 24,204 46,854 19,195 26.7 Long term liabilities 1,087,175 1,348,221 1,088,813 1,223,950 1,009,192 1,404.4 Bank borrowings 600,228 702,451 473,429 525,297 416,568 579.7 Debentures 324,888 572,601 558,937 567,826 512,193 712.8 Other long term liabilities 162,059 73,169 56,447 130,828 80,431 111.9 Equity 1,487,983 1,422,076 1,300,814 1,305,296 1,286,690 1,790.5 Paid-in capital 736,469 736,469 736,469 736,469 736,469 1,024.9 Reserves 114,567 115,083 114,972 115,711 116,436 162.0 Accumulated earnings 524,931 628,780 570,459 448,881 451,465 628.2 Net income 148,413 (56,106) (121,086) 4,235 (17,680) (24.6) Interim dividends (36,396) (2,150) -- -- -- -- Total liabilities 3,052,978 3,116,676 2,891,535 2,898,791 2,640,788 3,674.9 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Figures in millions of US$ dollars. Observed exchange rate as of 12/31/02, US$ 1 = Ch$ 718,61. 206_Telefonica CTC Chile 2002 Annual Report Economic / Financial Indicators - Individual
1998 1999 2000 2001 2002 - ----------------------------------------------------------------------------------------------------------------------------------- EBITDA margin (1) 58.9% 40.8% 39.7% 51.6% 51.8% Financial expenses / Operating revenues -12.8% -18.5% -22.4% -20.7% -19.1% Return on assets (2) 10.9% 2.4% 0.9% 4.6% 3.4% Return on equity (3) 12.5% -3.8% -8.9% 0.3% -1.4% Liquidity (times) (4) 0.91 1.15 1.01 1.44 1.16 Self-financing of investment (5) 131.2% 153.9% 312.5% 276.9% 419.6% Leverage ratio (times) (6) 1.05 1.21 1.22 1.30 1.09 Debt repayment capacity (times) (7) 3.2 4.9 3.8 4.9 4.6 - -----------------------------------------------------------------------------------------------------------------------------------
(1) Operating income + Depreciation / Operating revenues. (2) Opearting income / Property, plant and equipment (beginning of period). (3) Net income / Equity (beginning of period). (4) Current assets / Current liabilities. (5) Cash flow - Dividends paid / Capital expenditures. (6) Current liabilities + Long term liabilities / Equity. (7) Long term liabilities / Cash flow. 2002 Annual Report Telefonica CTC Chile_207 Layout and Production : Espacio Vital Diseno www.espaciovital.cl Photograpy : Archivo Fotografico Telefonica CTC Chile Christian MacManus FotoPlus Imagebank Printing : Quebecor World Chile S.A. 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: March 12, 2003 By: /s/ Julio Covarrubias F. ------------------------------- Name: Julio Covarrubias F. Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----