6-K 1 b326852_6k.txt 6-K ================================================================================ FORM 6-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF THE SECURITIES EXCHANGE ACT OF 1934 August 29, 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 (Address of principal executive offices) Indicate by check mark whether the registrant files or will file annual reports under cover 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, S.A. TABLE OF CONTENTS Item ---- 1. Report on the Financial Statements for the six-month periods ended June 30, 2002 and 2003 Item 1. COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES REPORT ON THE FINANCIAL STATEMENTS for the six month periods ended June 30, 2002 and 2003 (CONSOLIDATED) (Translation of financial statements originally issued in Spanish) COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------ CONTENTS Independent Accountants' Review Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements ThCh$: Thousands of Chilean pesos UF : The Unidad de Fomento, or UF, is an inflation-indexed peso denominated monetary unit in Chile. The daily UF rate is fixed in advance based on the change in the Chilean Consumer Price Index of the previous month ThUS$: Thousands of US dollars [DELOITTE & TOUCHE LOGO] Independent Accountants' Review Report To the Chairman and Members of the Board of Directors of Compania de Telecomunicaciones de Chile S.A. We have reviewed the accompanying interim consolidated balance sheet of Compania de Telecomunicaciones de Chile S.A. and subsidiaries as of June 30, 2003, and the related interim consolidated statements of income and cash flows for the six-month period then ended. These interim financial statements (including the related notes) are the responsibility of the management of the Company. The interim consolidated financial statements for the six-month period ended June 30, 2002 were reviewed by other auditors whose report, dated July 21, 2002, stated they were not aware of any material modifications that should be made to those statements for them to be in conformity with accounting principles generally accepted in Chile. The accompanying Management's Discussion and 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 review in accordance with auditing standards established in Chile for a review of interim financial information. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Chile, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the 2003 interim consolidated financial statements referred to above for them to be 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 -------------------------- July 24, 2003 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND 2003 (Restated for general price-level changes and expressedin thousands of constant Chilean pesos as of June 30, 2003)
---------------------------------------------------------------------------------------------------------------------- A S S E T S Notes 2002 2003 ----------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ ------------ ------------ CURRENT ASSETS Cash and bank 14,327,092 10,367,787 Time deposits Marketable securities (net) 13,702,092 267,769 Trade accounts receivable, net of allowance for doubtful accounts of ThCh$ 72,491,954 and ThCh$ 89,097,817, respectively (4) 73,410,187 42,445,214 Notes receivable, net of allowance for doubtful notes (5) 247,720,677 205,479,313 of ThCh$ 8,341,742 and ThCh$ 6,933,253, respectively (5) 8,026,817 5,183,879 Miscellaneous accounts receivable (5) 30,471,029 12,217,104 Notes and accounts receivable from related companies (6a) 19,826,272 18,651,396 Inventories (net) 25,402,765 18,736,499 Recoverable taxes 17,764,279 21,344,415 Prepaid expenses 10,003,086 9,238,237 Deferred taxes (7b) 53,226,457 28,567,318 Other current assets (8) 140,390,872 33,189,776 -------------- -------------- TOTAL CURRENT ASSETS 654,271,625 405,688,707 -------------- -------------- PROPERTY, PLANT AND EQUIPMENT Land (9) 29,808,243 27,667,278 Constructions and -- -- infrastructure works 199,963,526 186,258,179 Machinery and equipment 3,289,001,067 3,410,794,925 Other property, plant and equipment 441,968,496 378,476,278 Technical revaluation 9,230,699 9,230,850 Accumulated depreciation (less) 1,915,891,857 2,112,525,021 -------------- -------------- TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 2,054,080,174 1,899,902,489 -------------- -------------- OTHER NON-CURRENT ASSETS Investment in related companies (10) 14,180,094 41,427,201 Investment in other companies 10,981 3,858 Goodwill (11a) 203,735,723 173,843,984 Negative goodwill (11b) 72,893 -- Long-term debtors (5) 44,591,914 40,676,550 Intangibles (12) 22,063,818 34,452,427 Accumulated amortization (less) (12) 1,945,416 3,529,689 Others (13) 22,772,021 11,366,283 -------------- -------------- TOTAL OTHER ASSETS 305,336,242 298,240,614 -------------- -------------- -------------- -------------- TOTAL ASSETS 3,013,688,041 2,603,831,810 ============== ==============
----------------------------------------------------------------------------------------------------------------------- L I A B I L I T I E S Notes 2002 2003 ----------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ ------------ ------------ CURRENT LIABILITIES Short-term obligations with banks and financial institutions (14) 35,449,162 9,299,134 Short-term portion of long-term obligations with banks and financial institutions (14) 174,023,275 67,646,636 Obligations with the public (Promissory notes) (16a) -- 19,783,488 Obligations with the public (Bonds payable) (16b) 42,659,184 19,131,519 Long-term obligations maturing -- -- within a year 526,641 470,556 Dividends payable 211,723 149,388 Trade accounts payable (33) 163,088,446 128,318,227 Notes payable 946,592 152,804 Other creditors 12,818,217 23,052,924 Notes and accounts payable to related companies (6b) 17,056,729 21,981,442 Accruals (17) 10,580,875 6,596,666 Withholdings taxes 12,831,592 10,706,026 Unearned income 3,437,165 7,623,096 Other current liabilities 15,055,113 2,871,223 -------------- -------------- TOTAL CURRENT LIABILITIES 488,684,714 317,783,129 -------------- -------------- LONG-TERM LIABILITIES Obligations with banks and financial institutions (15) 471,338,842 394,723,547 Bonds payable (16b) 581,719,906 471,662,234 Notes and accounts payable to related companies (6b) 23,635,437 23,870,901 Miscellaneous accounts payable 6,244,090 11,991,200 Accruals (17) 22,503,166 18,604,264 Deferred taxes (7b) 50,430,886 50,452,594 Other liabilities 11,433,405 4,818,840 -------------- -------------- TOTAL LONG-TERM LIABILITIES 1,167,305,732 976,123,580 -------------- -------------- -------------- -------------- MINORITY INTEREST (19) 37,914,091 1,168,755 -------------- -------------- SHAREHOLDERS' EQUITY (20) Paid-in capital 740,128,498 736,468,120 Reserve - equity indexation 4,440,771 8,101,149 Share premium 115,771,992 115,771,992 Other reserves 1,624,605 1,641,917 Retained earnings 457,817,638 446,773,168 Accumulated earnings 456,435,603 438,556,474 Net income for the period 1,382,035 8,216,694 -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 1,319,783,504 1,308,756,346 -------------- -------------- -------------- -------------- TOTAL LIABIABILITIES AND SHAREHOLDERS' EQUITY 3,013,688,041 2,603,831,810 ============== ==============
The accompanying notes 1 to 33 are an integral part of these consolidated financial statements COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2003 (Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2003)
2002 2003 OPERATING RESULTS: ThCh$ ThCh$ Operating revenues 435,092,150 400,309,311 Operating costs (less) 300,047,521 276,207,708 ------------ ------------ Gross profit (21a) 135,044,629 124,101,603 Administrative and selling expenses (less) 68,599,787 63,774,712 ------------ ------------ OPERATING RESULTS 66,444,842 60,326,891 NON-OPERATING RESULTS: Financial income 6,923,488 4,587,108 Net income from investments in related companies (10) 117,025 484,467 Other non-operating income (21b) 3,666,577 6,755,703 Loss from investments in related companies (less) (10) 407,242 273,636 Amortization of goodwill (less) (11a) 7,939,279 7,537,560 Financial expenses (less) 40,102,289 34,601,554 Other non-operating expenses (less) (21c) 9,735,890 4,496,303 Price-level restatement (22) (3,686,508) (1,268,462) Exchange differences (23) (2,029,441) 952,503 ------------ ------------ NON-OPERATING LOSS, NET (53,193,559) (35,397,734) ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 13,251,283 24,929,157 Income taxes (7c) (11,250,774) (16,699,964) CONSOLIDATED INCOME 2,000,509 8,229,193 Minority interest (19) (618,474) (12,499) ------------ ------------ NET INCOME FOR THE PERIOD 1,382,035 8,216,694 ------------ ------------
The accompanying notes 1 to 33 are an integral part of these consolidated financial statements COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2003 (Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2003)
2002 2003 ThCh$ ThCh$ NET CASH FLOWS FROM OPERATING ACTIVITIES 123,754,508 156,602,637 Net income for the period 1,382,035 8,216,694 Result on sales of assets : (2,069,334) 27,524 Loss on sales of property, plant and equipment 321,226 27,524 Gain on sales of investments (1,804,959) -- Loss on sales of investments (585,601) -- Debits ( credits ) to income that do not represent cash flows : 166,159,963 152,216,988 Depreciation for the period 133,504,719 132,790,967 Amortization of intangibles 349,317 867,760 Provisions and write offs 10,812,812 15,403,361 Net income from investments in related companies (117,025) (484,467) Loss from investments in related companies 407,242 273,636 Amortization of goodwill 7,939,279 7,537,560 Price-level restatement 3,686,508 1,268,462 Exchange differences 2,029,441 (952,503) Other credits to income that do not represent cash flows (18,743,403) (6,977,852) Other debits to income that do not represent cash flows 26,291,073 2,490,064 Changes in operating assets Decrease 7,540,358 6,137,999 Trade accounts receivable 3,872,317 (15,924,712) Inventories 7,824,601 (6,398,969) Other assets (4,156,560) 28,461,680 Changes in operating liabilities Increase (decrease) (49,876,988) (10,009,067) Accounts payable related to operating activities (67,459,759) (16,614,930) Interest payable 1,626,055 1,489,131 Income taxes payable (net) 24,298,662 9,407,757 Other accounts payable related to non-operating activities (9,412,446) (7,691,667) V.A.T. and other similar taxes payable 1,070,500 3,400,642 Minority interest 618,474 12,499
The accompanying notes 1 to 33 are an integral part of these consolidated financial statements COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2003 (Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of June 30, 2003)
2002 2003 ThCh$ ThCh$ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (69,635,030) (116,858,417) Proceeds from loans 16,049,034 -- Obligations with the public -- 19,776,009 Dividends paid ( less ) (1,277,971) -- Loans paid ( less ) (50,502,150) (89,124,136) Obligations with the public paid ( less ) (22,699,108) (47,510,290) Payment of other loans from related companies ( less ) (10,184,021) -- Other financing disbursments ( less ) (1,020,814) -- NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES (25,783,515) (39,508,646) Sales of property, plant and equipment 547,336 -- Sales of permanent investments 27,155 -- Sales of other investments 10,822,938 49,700,127 Other investment income 4,704,591 205 Acquisition of property, plant and equipment ( less ) (34,710,937) (72,547,698) Payment of capitalized interest ( less ) (3,437,501) -- Permanent investments ( less ) (1,872,423) -- Investments in financial instruments ( less ) (647,402) (14,902,176) Other investment activities ( less ) (1,217,272) (1,759,104) ------------ ------------ NET CASH FLOWS FOR THE PERIOD 28,335,963 235,574 EFFECT OF INFLATION ON CASH AND CASH EQUIVALENTS (642,245) (531,522) ------------ ------------ NET INCREASE ( DECREASE ) OF CASH AND CASH EQUIVALENTS 27,693,718 (295,948) ------------ ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 87,840,620 21,264,559 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD 115,534,338 20,968,611 ------------ ------------
The accompanying notes 1 to 33 are an integral part of these consolidated financial statements 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 a public corporation registered in the Securities Registry under No. 009 and therefore is subject to oversight by the Chilean Superintendency of Securities and Insurance. b) Subsidiaries registered in the Securities Registry: As of June 30, 2003 the following subsidiaries of the consolidated group are registered with the Securities Registry:
----------------------------------------------------------------------------------------------------------------------------------- Participation Registration (direct & indirect) SUBSIDIARIES TAXPAYER Number % No. 2002 2003 ----------------------------------------------------------------------------------------------------------------------------------- CTC Transmisiones Regionales S.A.(188 Mundo Telefonica) 96.551.670-0 456 99.16 99.16 Globus 120 S.A. 96.887.420-9 694 99.99 99.99 -----------------------------------------------------------------------------------------------------------------------------------
2. Significant Accounting Principles: (a) Accounting period: The interim consolidated financial statements cover the SIX-month periods ended as of June 30, 2003 and 2002. (b) Basis of preparation: These interim consolidated financial statements (hereafter, the interim 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 generally accepted accounting principles issued by the Chilean Accountants Association and the standards set forth by the Chilean Superintendency of Securities and Insurance, for the Company, the standards of the Superintendency shall prevail over the former. The interim consolidated financial statements of the Company as of June 30 and December 31 of each year are prepared in order to be reviewed and audited respectively in accordance with current legal requirements. The Company has voluntarily adopted the practice of submitting the quarterly financial statements as of March and September to a review of the interim financial information in accordance with standards established for this type of review, as described in generally accepted auditing standard No. 45, Section No. 722, issued by the Chilean Accountants Association. (c) Basis of preparation: Certain reclassifications have been made to the 2002 financial statements for comparative purposes. The interim 2002 consolidated financial statements and their notes have been restated off-the-books by 3.5% in order to allow comparison with the 2003 financial statements. (d) Basis of consolidation: These interim consolidated financial statements include assets, liabilities, income and cash flows of the Parent Company and subsidiaries. Significant transactions involving assets, liabilities, income and cash flows between consolidated companies have been eliminated and the participation of minority interests has been reflected and is presented under Minority Interest (see Note 19). 7 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: Companies included in consolidation: As of June 30, 2003 the consolidated group (The Company) is composed of Compania de Telecomunicaciones de Chile S.A. and the following subsidiaries:
--------------------------------------------------------------------------------------------------------------------- Participation Percentage TAXPAYER NO. Company Name ----------------------------------------- 2002 2003 Total Direct Indirect Total --------------------------------------------------------------------------------------------------------------------- 79.727.230-2 CTC Isapre S.A. 99.99 99.99 - 99.99 96.545.500-0 CTC Equipos y Servicios de Telecomunicaciones S.A. 99.99 99.99 - 99.99 96.551.670-0 CTC Transmisiones Regionales S.A.(188 Mundo Telefonica) 99.16 99.16 - 99.16 96.961.230-5 Telefonica Gestion de Servicios Compartidos Chile S.A. 99.99 99.90 0.09 99.99 Foreign CTC International S.A. (3) 100.00 - - - 96.786.140-5 Telefonica Movil S.A. 99.99 99.99 - 99.99 74.944.200-k Fundacion Telefonica Chile 50.00 50.00 - 50.00 96.887.420-9 Globus 120 S.A. 99.99 99.99 - 99.99 96.919.660-3 Telemergencia S.A. 99.99 99.67 0.32 99.99 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 96.834.320-3 Infoera S.A. 99.99 - 99.99 99.99 78.703.410-1 Tecnonautica S.A. (5) 99.99 - 99.99 99.99 96.934.950-7 Portal de Pagos e Informacion S.A. (6) 99.99 - 99.99 99.99 96.893.540-2 Infochile S.A. 99.99 - 99.99 99.99 96.700.900-8 Telefonica Data Chile S.A.(4) 99.99 - - - 96.833.930-3 Comunicaciones Empresariales S.A. (2) 99.99 - - - 83.628.100-4 Sociedad Nacional de Procesamiento de Datos S.A. 59.99 - - - (Sonda S.A.) (1) 95.191.000-7 Logica S.A. 52.78 - - - 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. 59.99 - - - Foreign Sonda Guatemala S.A. 30.59 - - - Foreign Sonda Venezuela. 59.99 - - - Foreign Westham S.A. de C.V. (Mexico) 59.99 - - - Foreign Microcomputacion S.A. 59.99 - - - ---------------------------------------------------------------------------------------------------------------------
8 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- Significant Accounting Principles, continued: (d) Basis of consolidation, continued: Companies included in consolidation, continued:
------------------------------------------------------------------------------------------------------------------- RUT Company Name Participation Percentage ---------------------------------------------- 2002 2003 Total Direct Indirect Total ------------------------------------------------------------------------------------------------------------------- Foreign Sonda Colombia 59.99 - - - Foreign Sonda Computacion S.A.(Argentina) 59.99 - - - Foreign Westham Trade Corp. 59.99 - - - Foreign Sonda Uruguay S.A. 59.99 - - - 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) 50.99 - - - Foreign Softtek Tec Aplicaciones Integrales 29.99 - - - Foreign Integracion Global de Procesos S.A. (Peru) 52.78 - - - 98.001.500-9 Inversiones Columba 41.96 - - - -------------------------------------------------------------------------------------------------------------------
1) As of June 30, 2003, since Telefonica CTC Chile no longer had a majority participation or control over the administration of Sonda, only 35% of Sonda's net income has been recognized as equity value in its financial statements. Consolidation with that Company was performed until August 31, 2002. 2) The Extraordinary Shareholders' Meeting of Telefonica Data Chile S.A., held in November 2002, approved the incorporation by absorption of the subsidiary Comunicaciones Empresariales S.A. 3) The board of directors' meeting of CTC International S.A., held in December 2002, approved the liquidation of this company. 4) The Extraordinary Shareholders' Meeting of Telefonica Empresas CTC Chile S.A., held on January 28, 2003, approved the merger by incorporation of the subsidiary Telefonica Data Chile S.A., increasing the capital of Telefonica Empresas CTC Chile S.A. by ThCh$ 414 equivalent to the issuance of 2,878 shares. 5) On May 2, 2003, Telefonica Empresas S.A. sold its holding in Tecnonautica S.A. to Infoera S.A., which became owner of 99.99% of the shares of that company. 6) On May 2, 2003, Tecnonautica S.A. sold its holding in Infochile S.A. to Portal de Pagos e Informacion S.A., which became owner of 99.98% of the shares of that company. 9 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (d) Basis of consolidation, continued: During September 2002, Telefonica CTC Chile sold and transferred 25% ownership of Sonda S.A. to Inversiones Pacifico Limitada and Inversiones Santa Isabel Limitada, companies associated with Mr. Andres Navarro H. This transaction caused the purchasing companies to disburse ThCh$ 27,920,701 (historical), generating a net loss, of ThCh$ 1,136,160 (HISTORICAL), due to extraordinary proportional amortization of goodwill in relation to the percentage sold and to the difference between the book value of the investment and the amount received. After completing this operation, Telefonica CTC Chile through its subsidiary Telefonica Empresas CTC Chile S.A., holds 35% owner ship of that company. Additionally, on September 26, 2002, Telefonica Empresas signed an agreement with Inversiones Santa Isabel Limitada, which grants it a sales option for 35% of Sonda, which it can exercise between July 16 and 25 2005, at investment book value as of June 30, 2005, plus a premium 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 through issuance of performance bonds (see Note 28b). Should Telefonica Empresas decide not to exercise the sales option between July 26 and August 5, 2005 Inversiones Santa Isabel Limitada has a purchase option for the same 35% of Sonda, under the same conditions mentioned above. 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 premium 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 premium of UF 119,000, with a minimum price of UF 2,003,260. Telefonica CTC Chile will continue to amortize goodwill for its remaining 35% holding in Sonda. Goodwill to be amortized is ThCh$ 9,808,256 (see Note 11a) as of June 30, 2003. It is being amortized discounting the premium of UF 142,021, over a period of 34 months starting as of September 2002. Given the conditions contemplated in the contract, recovery of the equity value of this investment is completely assured, while 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 net 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 June 30, 2002, were consolidated by their Parent Company, Sonda S.A., in which the Company participated with a percentage exceeding 50%. 10 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (e) Time deposits: Time deposits are presented at the value of the invested capital plus readjustments, if applicable, and accrued interest as of period end. (f) Price-level restatement: The interim consolidated financial statements have been price-level restated using price-level restatement methodology in accordance with generally accepted accounting principles in Chile, in order to reflect the variation of the currency's purchasing power during both periods. The accumulated variation in the CPI as of June 30, 2003 and 2002, for beginning balances was 1.1% and 0.6%, respectively. (g) Basis of conversion: Assets and liabilities in US$ (United States dollars), Euros, UF (Unidad de Fomento) and Pound (Sterling Pound), have been translated into Chilean pesos at the exchange rates at each period closing date: --------------------------------------------------------- YEAR US$ EURO UF --------------------------------------------------------- 2002 688.05 681.912 16,355.20 2003 699.12 803.860 16,959.67 --------------------------------------------------------- The exchange differences are charged or credited to income for the period. (h) Marketable securities: Fixed income securities are carried at their price-level restated purchase price plus accrued interest as of closing date of each period, based on the real interest rate determined on the purchase date or their market value, whichever is less. Investments in mutual funds units are carried at the value of the unit at each periods closing date. Investments 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 study of materials with slow turnover. 11 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (j) Subsidies on sale of cellular telephones: Represents the difference between the cost at which the cellular equipment is acquired from suppliers and their resale value to customers. The amounts for equipment with prepayment plans are charged to income at the time they are sold. Equipment with a contract has been commercialized as being on loan (commodate), a legal figure in which the equipment is given to subscribers to use free of charge. The purchase cost of this equipment is capitalized as property, plant and equipment (subscriber equipment), and is depreciated over a period of 24 month from the date of the contract. As of June 1, 2002, a customer loyalty policy was implemented and which consists of replacing equipment related to contracts that are more than 18 months old. Based on the above, depreciation provisions have been established for probable early write-off of equipment. (k) Allowance for doubtful accounts: Differentiated percentages are applied when calculating the allowance for doubtful accounts, taking into account age factors and eventual collection management factors until 100% is reached for debts over 120 days and 180 days for large customers (corporations). (l) Property, plant and equipment: Property, plant and equipment is presented at price-level restated purchase and/or construction cost. Property, plant and equipment purchased until December 31, 1979 are presented at 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 for those assets that are presented at their appraisal value recorded as of June 30, 1986, in accordance with Circular No. 550 issued by the Chilean Superintendency of Securities and Insurance. All these values have been price-level restated. Until December 31, 2002, works in progress included the real financial cost of the loans relating to their financing, originated during the construction stage and which could have been avoided had these disbursements not been made. Based on the above financial cost has been capitalized for ThCh $ 5,867,238 in 2002. As described in Note 3a, as of January 1, 2003 the Company decided not to capitalize the real financial cost of loans in the cost of construction and/or acquisition of property, plant and equipment. (m) Depreciation: Depreciation has been calculated and recorded based on the values stated above, by applying set factors determined on the basis of the estimated useful lives of the assets. The average annual financial depreciation rate of the Company is approximately 8.05%. 12 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (n) Leased assets: i) Leased assets with a purchase option. Leased assets with a purchase option, whose contracts have the characteristics of a financial lease, are carried in a manner similar to the purchase of property, plant and equipment, recording the full obligation and interest on an accrual basis. The Company does not legally own those assets and as long as it does not exercise the purchase option, it cannot freely dispose of them. (n) 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. 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 wireless. They are shown at price-level restated value and are amortized over the concession period (30 years from publication of the decrees covering the respective licenses in the "Diario Oficial"). (o) Investments in related companies: These investments are carried under the equity method, recognizing their income on an accrual basis. Foreign investments have been valued following Technical Bulletin No. 64. Those investments are controlled in dollars, since they are in countries considered unstable under said Bulletin, and their activities are not an extension of the operations of the Parent Company. (p) Goodwill and negative goodwill: Goodwill and negative goodwill are differences arising upon adjustment of the investment cost, at the time 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 arising on foreign investments is controlled in US dollars (the same currency in which the investment is controlled), as per Technical Bulletin No. 64 of the Chilean Accountants Association (see Note 11). (q) Transactions with resale or repurchase agreements: Purchases of financial instruments with resale agreements are recorded as a fixed rate placement and classified in Other Current Assets. Financial instrument sales with repurchase agreements are recorded in a manner similar to that when obtaining a loan with investments as guarantees and are shown in Other Current Liabilities. 13 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (r) Obligations with the public: o Obligations from bond issuance are presented in liabilities at the par value of the subscribed bonds. The difference between par value and placement value, determined on the basis of real interest originated in the transaction, is deferred and amortized during the term of the respective bond (see Note 16). o Obligations from issuance of promissory notes: Are presented in liabilities at their placement value, plus accrued interest (see note 16a). Direct costs related to bond placement are capitalized and amortized using the straight-line method over the term of the respective bond. (s) Income tax and deferred income tax: Income tax is calculated on the basis of taxable net income. Deferred taxes arising from all temporary differences, tax benefits for tax losses, and other events that create differences between the tax base of assets and liabilities and their accounting basis are recorded in accordance with Technical Bulletins Nos. 60, 68, 69 and 73 issued by the Chilean Accountants Association and in accordance with Circular 1,466 dated January 27, 2000 issued by the Superintendency of Securities and Insurance. On September 28, 2001 Law No. 19753 was published, increasing the corporate income tax rate to 16% in 2002, 16.5% in 2003 and 17% in 2004 and thereafter. As of June 30 of each year, the accumulated balances of temporary differences include the increase in the 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). (t) Staff severance indemnities: The Company's staff severance indemnities obligation is accrued applying the net present 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 18). Expenses for past services rendered by employees resulting from changes in the actuarial base, are capitalized and amortized over the average length of future permanence of the employees. (u) Operating revenues: The Company's revenues are recorded on the accrual basis in accordance with generally accepted accounting principles in Chile. Since invoices are issued on dates other than accounting cut-off dates, as of the date of preparation of these financial statements, services rendered and not invoiced have been accrued, and determined on the basis of the contracts and traffic at the 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 revenues from projects, these are recorded according to the progress payments reports by the customers and which consider the degree of completion of the respective projects. 14 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (v) Foreign currency futures contracts: The Company has entered into foreign currency futures contracts, representing a hedge against changes in the exchange rate of its obligations in foreign currency. These instruments are valued in accordance with Technical Bulletin No. 57 issued by the Chilean Accountants Association. The rights acquired and obligations incurred are detailed in Note 26. The balance sheet only reflects the net right or obligation as of period-end, classified according to the maturity date of each of the contracts, in Other Current Assets or Other Creditors, as applicable. The contract's implicit insurance premium is deferred and amortized using the straight-line method over the term of the contract. (w) Interest rate coverage: Loan interest covered by interest rate swaps is recorded recognizing the effect of the contracts on the interest rate established in the loans. Rights and obligations for this concept are shown in Other Current Assets or in Other Creditors, as applicable (see Note 26). (x) Computer software: Software purchase cost is deferred and amortized using the straight-line method over a four-year period. (y) 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 recent periods. (z) Accumulated deficit in development period of subsidiaries: In accordance with Circular No. 981 of the Superintendency of Securities and Insurance, the Company has included all disbursements or obligations arising during the development and start up stage of its subsidiaries and which are not assignable to the cost of tangible or nominal assets. This deficit has been absorbed by net income earned by the Company during operations. (aa) Accumulated adjustment for conversion differences: The Company recognizes the difference between the variation in the exchange rate and the consumer price index arising on the price-level restatement of its investments abroad, controlled in US dollars, as well as adjustments for translation differences arising from subsidiaries and related companies that have been recognized for their foreign investments. The balance in this account is credited (charged) to income in the same period in which the gain or loss on the complete or partial disposal of these investments is recognized. 15 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 2. Significant Accounting Principles, continued: (ab) 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 and with Circular No. 1,312 issued by the Chilean Superintendency of Securities and Insurance, 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 "Net Cash Flows from Operating Activities". (ac) Correspondents: The Company has current agreements with foreign correspondents, in which the conditions that regulate international traffic are set, charged or paid according to net traffic exchanges (imbalance) and to the rates set in each agreement. This exchange is accounted for on an 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 "Trade Accounts Receivable" or "Accounts Payable" as applicable. 16 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 3. Accounting Changes: a) Property, plant and equipment financing cost: As of January 2003, the Company changed the criteria for capitalizing the real financing costs of the loans related to financing the property, plant and equipment works in progress. This change has meant recognizing a higher charge to income for the period, of approximately ThCh$ 2,200,000, in comparison to 2002. b) Change in the reporting entity: At June 30, 2003, since Telefonica CTC Chile does not have a majority holding in Sonda S.A., it has recorded its 35% interest in Sonda under the equity method. Sonda's financial statements were consolidated until August 31, 2002. As of June 30, 2002 this investment was shown consolidated line by line, with the balance sheet of Sonda S.A. at that time was as follows:
--------------------------------------------------------------------------------------------------------------------- Assets 2002 Liabilities 2002 ThCh$ ThCh$ --------------------------------------------------------------------------------------------------------------------- Current Assets 57,817,088 Current Liabilities 21,700,403 Property, Plant and Equipment 35,695,206 Long-term Liabilities 4,859,040 Other Assets 19,530,918 Shareholders' Equity 86,483,769 --------------------------------------------------------------------------------------------------------------------- Total Assets 113,043,212 Total Liabilities & Shareholders' Equity 113,043,212 ---------------------------------------------------------------------------------------------------------------------
For a comparative analysis of the figures, a consolidated statement of income is presented, assuming that for the six month period ended June 30, 2002, the investment in Sonda S.A. was recorded using only the equity method.
---------------------------------------------------------------------------------------------------------------- Jan-Jun Jan-Jun Variation --------------------------------- 2003 2002 ThCh$ ThCh$ ThCh$ % ---------------------------------------------------------------------------------------------------------------- Operating revenues 400,309,311 390,785,313 9,523,998 2.4 Operating costs (339,982,420) (325,655,461) (14,326,959) 4.4 Salaries and employee benefits (29,611,435) (33,655,680) 4,044,245 -12.0 Depreciation (131,022,817) (128,163,513) (2,859,304) 2.2 Goods and services (115,573,456) (103,441,324) (12,132,132) 11.7 Administrative and selling expenses (63,774,712) (60,394,944) (3,379,768) 5.6 ---------------------------------------------------------------------------------------------------------------- Operating Income 60,326,891 65,129,852 (4,802,961) -7.4 Operating Income 15.1% 16.5% 47.8% 49.2% EBITDA 191,349,708 193,293,365 (1,943,657) -1.0 Financial income 4,587,108 5,907,686 (1,320,578) -22.4 Income from investments in related companies 210,831 95,499 115,332 120.8 Amortization of goodwill (7,537,560) (7,501,122) (36,438) 0.5 Financial expenses (34,601,554) (38,568,422) 3,966,868 -10.3 Other income and expenses 2,259,400 (8,338,128) 10,597,528 - Price-level restatement (315,959) (4,079,121) 3,763,162 -92.3 ---------------------------------------------------------------------------------------------------------------- Non-operating income (loss) (35,397,734) (52,483,608) 17,085,874 -32.6 Net income before taxes and minority interest 24,929,157 12,646,244 12,282,913 97.1 Income tax (16,699,964) (11,220,408) (5,479,556) 48.8 Minority interest (12,499) (43,801) 31,302 -71.5 ---------------------------------------------------------------------------------------------------------------- Net income (loss) for the period 8,216,694 1,382,035 6,834,659 494.5 ----------------------------------------------------------------------------------------------------------------
c) Change in estimate: As of June 30, 2003, the Company accelerated the amortization of goodwill in the subsidiaries Tecnonautica S.A. and Infoera S.A. recognizing a higher charge to income for the period of ThCh $ 61,686, reducing the remaining amortization period for such goodwill from 17 to 8 years. 17 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 4. Marketable Securities: The balance of marketable securities is as follows:
----------------------------------------------------------------------- --------------------- --------------------- 2002 2003 ThCh$ ThCh$ ----------------------------------------------------------------------- --------------------- --------------------- Shares 12,827,384 13,110,151 Publicly offered promissory notes 57,952,566 29,197,847 Mutual fund units 2,543,542 130,082 Others 86,695 7,134 ----------------------------------------------------------------------- --------------------- --------------------- Total Marketable Securities 73,410,187 42,445,214 ----------------------------------------------------------------------- --------------------- ---------------------
Shares
-------------- ------------------- ----------- ------------- --------------- ---------------- --------------------- Taxpayer No. Company Number of Market Quote Market Value Restated Cost Name Shares Interest per share ThCh$ ThCh$ % ThCh$ -------------- ------------------- ----------- ------------- --------------- ---------------- --------------------- Foreign Terra Networks S.A. 2,984,986 1.1 % 4,2364 12,645,469 24,180,838 Foreign New Skies Satellites 5,198 0.057% 6,8165 35,432 252,603 Foreign Intelsat 288,065 0.057% - - 429,250 ---------------------------------------------------------------------------- ------------------- --------------------- Value of investment portfolios 12,680,901 24,862,691 Adjustment to market value provision (11,752,540) Book value of investment portfolio 13,110,151 ---------------------------------------------------------------------------- ------------------- ---------------------
Publicly offered promissory notes (Fixed Income)
--------------- ----------------------------- ------------ ------------------------- --------------- -------------- Date Par Book Value Market Instrument Purchase Maturity Value Amount Rate Value Provision ThCh$ ThCh$ ThCh$ ThCh$ Zero 26-Dec-2002 01-Jul-2004 6,911,910 7,102,708 5.40 7,102,708 - Zero 26-Dec-2002 01-Oct-2005 4,042,340 4,167,562 5.07 4,167,562 - Zero 26-Dec-2002 01-Nov-2005 1,935,629 2,024,160 5.85 2,024,160 - Zero 26-Dec-2002 01-Dec-2005 15,204,025 15,903,417 5.85 15,903,417 - --------------------------------------------- ------------ ------------- ----------- --------------- -------------- Total 28,093,904 29,197,847 - 29,197,847 - --------------------------------------------- ------------ ------------- ----------- --------------- --------------
------------------------------------------------------------------ 18 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 5. Current and long-term receivables: The detail of current and long-term receivables is as follows:
---------------------------------------------------------------------------------------------------- Current --------------------------------------------------------------------- Description Up to 90 days Over 90 up to 1 year Subtotal --------------------------------------------------------------------- 2002 2003 2002 2003 2003 ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ------------------------------- ---------------------------------------------------------------- Trade accounts receivable 307,158,826 291,725,075 16,156,616 9,246,520 300,971,595 Standard telephony service 147,790,596 175,893,354 8,302,306 8,596,677 184,490,031 Long distance 76,429,944 45,108,129 - - 45,108,129 Mobile 49,593,064 43,481,701 - - 43,481,071 Communications companies 20,687,438 23,330,986 4,990,886 649,843 23,980,829 Information service 1,888,058 - 281,950 - - Others 10,769,726 3,910,905 2,581,474 - 3,910,905 Allowance for doubtful accounts (72,390,674) (91,193,943) (3,204,091) (4,298,339) (95,492,282) Notes receivable 15,865,950 12,812,673 857,748 367,180 13,179,853 Allowance for doubtful notes (8,315,220) (7,995,974) (381,661) - (7,995,974) Miscellaneous accounts receivable 20,239,888 8,180,597 10,231,141 4,036,507 12,217,104 Allowance for doubtful accounts - - - - - ---------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- Current Long-term --------------------------------------- Description Total Current (net) -------------------------------------------------------------------- 2002 2003 2002 2003 ThCh$ % ThCh$ % ThCh$ ThCh$ --------------------------------------------------------------------------------------------------- Trade accounts receivable 247,720,677 100.0 205,479,313 100.0 5,919,191 4,054,565 Standard telephony service 107,131,924 43.25 111,973,274 54.49 5,919,191 4,054,565 Long distance 70,384,801 28.41 41,655,711 20.27 - - Mobile 31,633,306 12.77 27,834,053 13.55 - - Communications companies 24,106,479 9.73 20,254,018 9.86 - - Information service 2,116,707 0.85 - 0.00 - - Others 12,347,460 4.99 3,762,257 1.83 - - Allowance for doubtful accounts - - - - Notes receivable 8,026,817 5,183,879 - - Allowance for doubtful notes - - - - Miscellaneous accounts receivable 30,471,029 12,217,104 38,672,723 36,621,985 Allowance for doubtful accounts - - - - --------------------------------------------------------------------------------------------------- Total long-term receivables 44,591,914 40,676,550 --------------------------------------------------------------------
------------------------------------------------------------------ 19 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENS, continued (Translation of financial statements originally issued in Spanish) 6. Balances and transactions with related companies: a) Notes and Accounts Receivable VOLVER
------------------------------------------------------------------------------------------------------------------------------------ Tax No. Company Short-term Long-term ------------------------------------------------------------------ 2002 2003 2002 2003 ThCh$ ThCh$ ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------------------------ Foreign Telefonica Mobile Solutions Chile S.A. 5,111 8,732 - - 83.628.100-4 Telefonica Espana 745,822 1,006,139 - - Foreign Telefonica Internacional de Espana S.A. 6,881 6,648 - - 93.541.000-2 Impresora y Comercial Publiguias S.A. 1,601,450 2,150,668 - - Foreign Terra Networks Chile S.A. 2,659,351 1,047,822 - - 96.895.220-k Atento Chile S.A 852,986 571,142 - - 96.910.730-9 Emergia Chile S.A. 971,177 35,363 - - 96.894.490-8 Puerto Norte 15,527 - - - Foreign SBS Ltda. 539,817 - - - Foreign Sonda Mexico 22,166 - - - Foreign Sonda Beanscope Chile S.A. 790 - - - Foreign Datadec 52,068 - - - 94.071.000-6 Orden S.A. 78,106 - - - Foreign Telefonica Data Espana 255,384 191,927 - - Foreign Servibanca 7,114 - - - Foreign Unisel Argentina 1,424 - - - 79.688.080-5 Unisel Chile 49,688 - - - Foreign Westham Trade Co Ltda. 32,683 - - - 96.539.380-3 Ediciones Financieras 3,519 - - - 77.077.040-8 Inversiones Nicocam Ltda. 4,416 - - - 78.707.040-k Bac Servicios Computacionales Ltda. 6,467 - - - 96.703.200-k Orden Gestion 79,972 - - - 78.214.420-0 Orden Integracion 4,897 - - - Foreign Telefonica procesos Tec. de Informacion 11,674,562 11,459,928 - - 91.408.000-2 Telefonica Ing. Seguridad - 3,603 - - Foreign Telefonica WholeSale International Services - 179,064 - - Foreign Bismark Telecomunicaciones 108,021 - - - 96.967.100-k Novis S.A. 46,161 - - - 78.868.200-k Atento Recursos Ltda. 712 - - - 83.628.100-4 Sonda S.A. - 1,990,360 - - ------------------------------------------------------------------------------------------------------------------------------- TOTAL 19,826,272 18,651,396 - - -------------------------------------------------------------------------------------------------------------------------------
There have been charges and credits to current accounts with these companies due to billing for sales of material, equipment and services. b) Notes and Accounts Payable
------------------------------------------------------------------------------------------------------------------------------------ Tax No. Company Short-term Long-term ---------------------------------------------------------------- 2002 2003 2002 2003 ThCh$ ThCh$ ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------------------------ 59.083.900-0 Telefonica Mobile Solutions Chile S.A. - 1,481,840 - - 96.527.390-5 Telefonica Internacional Chile S.A. 264,101 264,571 23,635,437 23,870,901 93.541.000-2 Impresora y Comercial Publiguias S.A. 9,024,618 3,375,992 - - 96.834.230-4 Terra Networks Chile S.A. 1,851,076 2,638,622 - - 96.895.220-k Atento Chile S.A 5,007,455 5,066,616 - - 96.910.730-9 Emergia Chile S.A. - 25,400 - - 94.071.000-6 Orden S.A. 2,381 - - - 96.768.410-4 Payroll 3,792 - - - Foreign Unisel Argentina 47,452 - - - 79.688.080-5 Unisel Chile 344,394 - - - Foreign Westham Trade Co Ltda. 342,639 - - - 96.539.380-3 Ediciones Financieras 507 - - - Foreign Telefonica procesos Tec. de Informacion - 7,076,254 - - 96.539.380-3 Telefonica Ing. Seguridad - 6,555 - - Foreign Telefonica WholeSale International Services - 909,951 - - 78.868.200-k Atento Recursos Ltda. 92,086 39,615 - - 78.214.420-0 Orden Integracion 19,458 - - - 96.725.400-2 Solex 56,770 - - - 83.628.100-4 Sonda S.A. - 1,096,026 - - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL 17,056,729 21,981,442 23,635,437 23,870,901 ----------------------------------------------------------------------------------------------------------------------------------
In accordance with Article 89 of the Chilean Companies Act, all these transactions have been carried out under conditions similar to those prevailing in the market. The balance in long-term accounts with related entities corresponds to a mercantile current account that Telefonica CTC Chile has signed with Telefonica Internacional Chile S.A. This mercantile current account is included in a contract denominated in US dollars with undefined maturity dates and which accrues interest at a fixed annual rate of 2.07%. 20 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 6. Balances and transactions with related companies: c) Transactions:
----------------------------------------------------------------------------------------------------------------------------------- Nature Description of of Company Tax No. Relationship transaction ----------------------------------------------------------------------------------------------------------------------------------- Telefonica Espana Foreign Parent Co. Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Telefonica Internacional Chile S.A. 96.527.390-5 Parent Co. Purchases and Services Rendered Associate Financial Expenses ----------------------------------------------------------------------------------------------------------------------------------- Impresora y Comercial Publiguias S.A. 93.541.000-2 Associate Sales and Services Associate Purchases and Services Rendered Associate Financial Income Associate Other Non-operating Income ----------------------------------------------------------------------------------------------------------------------------------- Terra Networks Chile S.A. 96.834.230-4 Associate Sales and Services Associate Purchases and Services Rendered ----------------------------------------------------------------------------------------------------------------------------------- Atento Chile S.A 96.895.220-k Associate Sales and Services Associate Purchases and Services Rendered Associate Other Non-operating Income ----------------------------------------------------------------------------------------------------------------------------------- Emergia Chile S.A. 96.910.730-9 Associate Sales and Services Associate Purchases and Services Rendered ----------------------------------------------------------------------------------------------------------------------------------- Orden S.A. 94.071.000-6 Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Terra Networks Espana Foreign Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Unisel Argentina Foreign Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Unisel Chile 79.688.080-5 Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Ediciones Financieras 96.539.380-3 Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Orden Salud 96.703.020-1 Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Atento Recursos Ltda. 78.868.200-k Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Telefonica. Procesos y Tecnologia de Informacion S.A. Foreign Parent Co. Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Orden Gestion 96.703.200-k Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Orden Integracion 78.214.420-0 Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Solex 96.725.400-2 Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- SBS Ltda. Foreign Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Sonda Mexico Foreign Associate Sales and Services ----------------------------------------------------------------------------------------------------------------------------------- Telefonica Data Espana Foreign Associate Sales and Services Purchases and Services Rendered ----------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- 2002 2003 ThCh$ ThCh$ -------------------------------------------------------------- Company Effect on Effect on Amount income Amount income --------------------------------------------------------------------------------------------------------------------------- Telefonica Espana 5,369 5,369 - - --------------------------------------------------------------------------------------------------------------------------- Telefonica Internacional Chile S.A. 262,761 262,761 265,860 265,860 474,010 474,010 319,936 319,936 --------------------------------------------------------------------------------------------------------------------------- Impresora y Comercial Publiguias S.A. 1,116,933 1,116,933 1,322,003 1,322,003 1,421,047 1,421,047 2,535,958 2,535,958 - - 343,967 343,967 - - 1,570,690 1,570,690 --------------------------------------------------------------------------------------------------------------------------- Terra Networks Chile S.A. 378,386 378,386 2,206,488 2,206,488 - - 309,520 309,520 --------------------------------------------------------------------------------------------------------------------------- Atento Chile S.A - - 413,000 413,000 7,927,101 7,927,101 6,106,209 6,106,209 - - 9,782 9,782 --------------------------------------------------------------------------------------------------------------------------- Emergia Chile S.A. - - 579,902 579,902 340,328 340,328 12,025 12,025 --------------------------------------------------------------------------------------------------------------------------- Orden S.A. 1,690 1,690 - - --------------------------------------------------------------------------------------------------------------------------- Terra Networks Espana 33,007 33,007 - - --------------------------------------------------------------------------------------------------------------------------- Unisel Argentina 4,073 4,073 - - --------------------------------------------------------------------------------------------------------------------------- Unisel Chile 6,190 6,190 - - --------------------------------------------------------------------------------------------------------------------------- Ediciones Financieras 4,451 4,451 - - --------------------------------------------------------------------------------------------------------------------------- Orden Salud 7,598 7,598 - - --------------------------------------------------------------------------------------------------------------------------- Atento Recursos Ltda. 138,374 138,374 - - --------------------------------------------------------------------------------------------------------------------------- Telefonica. Procesos y Tecnologia de Informacion S.A. 417,379 417,379 - - --------------------------------------------------------------------------------------------------------------------------- Orden Gestion 2,749 2,749 - - --------------------------------------------------------------------------------------------------------------------------- Orden Integracion 26,400 26,400 - - --------------------------------------------------------------------------------------------------------------------------- Solex 134 134 - - --------------------------------------------------------------------------------------------------------------------------- SBS Ltda. 539,817 539,817 - - --------------------------------------------------------------------------------------------------------------------------- Sonda Mexico 22,166 22,166 - - --------------------------------------------------------------------------------------------------------------------------- Telefonica Data Espana 255,384 255,384 151,244 151,244 - - 739,449 739,449 ---------------------------------------------------------------------------------------------------------------------------
The conditions of the Mandate and Mercantile Current Account are short and long-term respectively. In the case of Telefonica Internacional Chile S.A. it is denominated in US dollars, accruing interest at a variable rate which adjusts to market conditions (US$ + 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 based on the transaction that produces them. 21 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 7. Income tax and deferred taxes: a) General information: As of June 30, 2002 and 2003 the Parent Company has not made a provision for first category income as it has accumulated tax losses of ThCh$ 196,496,063 and ThCh$ 28,486,551 respectively. Likewise, as of June 30, 2002 and 2003 certain subsidiaries have accumulated tax losses of ThCh $ 127,192,962 and ThCh$ 131,710,102, respectively. As of June 30, 2002 and 2003, a first category income tax provision was established at subsidiaries with positive taxable income of ThCh$ 36,260,969 and ThCh$ 26,104,585, respectively. As of June 30, 2003 the subsidiaries with a positive balance in Taxed Retained Earnings and the related credits are detailed in the following table:
-------------------------------------------- ------------- ------------- ------------- ----------- --------- Subsidiaries Taxed Taxed Taxed Taxed Amount of Retained Retained Retained Retained credit Earnings Earnings Earnings Earnings w/15% credit w/16% credit w/16.5% credit W/o credit ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ -------------------------------------------- ------------- ------------- ------------- ----------- --------- CTC Equipos y Servicios de Telecomunicaciones S.A. - 1,179,040 6,329,748 16,094 1,268,992 CTC Transmisiones Regionales S.A. - 15,779,713 12,095,611 55,264 5,001,496 Globus 120 S.A. 2,092,814 792,904 451,630 240,983 594,870 Telefonica Empresas CTC Chile S.A. 605,733 7,080,202 6,820,706 2,445,981 2,580,947 Comunicaciones Mundiales S.A. 245,642 66,855 75,186 5,189 68,489 Total 2,944,189 24,898,714 25,772,881 2,763,511 9,514,794 -------------------------------------------- ------------- ------------- ------------- ----------- ---------
22 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 7. Income tax and deferred taxes, continued: b) Deferred taxes: As of June 30, 2002 and 2003, net deferred tax assets (liabilities) arising on temporary differences of ThCh$ (2,795,570) and ThCh$ (21,885,276), respectively are analyzed as follows:
----------------------------------------------------------------- Description 2002 ----------------------------------------------------------------- Deferred tax assets Deferred tax liabilities ----------------------------------------------------------------- Short-term Long-term Short-term Long-term ----------------------------------------------------------------- Temporary differences Allowance for doubtful accounts 12,621,415 - - - Vacation provision 633,637 - - - Tax benefits for tax losses 37,362,991 14,427,253 - - Staff severance indemnities - 1,298,999 - 7,057,871 Leased assets and liabilities - 205,328 - 41,618 Depreciation of property, plant and equipment - 4,971,649 - 206,916,492 Deferred charge on sale of assets - - - 716,573 Software - - - 6,478,789 Deferred charges for capitalized disbursements - - - 1,310,590 Tax value difference for temporary investments (Terra) 2,641,344 - - - Other events 729,807 530,703 5,641 6,917,432 ---------------------------------------------------------------------------------------------------------------- Subtotal 53,989,194 21,433,932 5,641 229,439,365 ---------------------------------------------------------------------------------------------------------------- Complementary accounts net of accumulated (757,096) (4,889,298) - (162,463,845) amortization Subtotal 53,232,098 16,544,634 5,641 66,975,520 ---------------------------------------------------------------------------------------------------------------- Tax reclassification (5,641) (16,544,634) (5,641) (16,544,634) ---------------------------------------------------------------------------------------------------------------- Total 53,226,457 - - 50,430,886 ---------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- Description 2003 -------------------------------------------------------------- Deferred tax assets Deferred tax liabilities -------------------------------------------------------------- Short-term Long-term Short-term Long-term -------------------------------------------------------------- Temporary differences Allowance for doubtful accounts 18,587,305 - - - Vacation provision 538,136 - - - Tax benefits for tax losses 4,908,991 21,523,456 - - Staff severance indemnities - 970,807 - 6,458,719 Leased assets and liabilities - 73,587 - 128,431 Depreciation of property, plant and equipment 55,277 4,039,669 - 201,921,037 Deferred charge on sale of assets - - 13,056 Software - - - 5,028,340 Deferred charges for capitalized disbursements - - - 3,268,906 Tax value difference for temporary investments (Terra) 2,604,286 - - Other events 1,929,853 1,207,815 14,607 2,095,582 ------------------------------------------------------------------------------------------------------------------- Subtotal 28,623,848 27,815,334 14,607 218,914,071 ------------------------------------------------------------------------------------------------------------------- Complementary accounts net of accumulated (41,923) (11,618,325) - (152,264,468) amortization Subtotal 28,581,925 16,197,009 14,607 66,649,603 ------------------------------------------------------------------------------------------------------------------- Tax reclassification (14,607) (16,197,009) (14,607) (16,197,009) ------------------------------------------------------------------------------------------------------------------- Total 28,567,318 - - 50,452,594 -------------------------------------------------------------------------------------------------------------------
As stated in Note 2d, as of June 30, 2002 included are balances of deferred tax assets and liabilities for ThCh$ 313,478 arising in Sonda S.A. (former subsidiary of Telefonica Empresas CTC de Chile S.A.) which was consolidated line by line in the statement of income until August 31, 2002. 23 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 7. Income taxes and deferred income taxes, continued: c) Breakdown of income taxes: The current tax expense presented in the following table is based on the determination of taxable income, net of credits for donations, training expenses and other credits.
---------------------------------------------------------------------------------------------------------------------- Description 2002 2003 ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------------------- Current tax expense (income tax) (5,801,755) (4,307,256) Current tax expense (Single Article No. 21 - 35%) (47,857) (50,543) Adjustment of tax expense (prior year) 89,996 329,016 ---------------------------------------------------------------------------------------------------------------------- Income tax subtotal (5,759,616) (4,028,783) ---------------------------------------------------------------------------------------------------------------------- - Effect of deferred tax assets or liabilities for the period (2,830,358) (7,313,442) - Effect of amortization of deferred tax assets and liabilities complementary accounts (2,660,800) (5,357,739) ---------------------------------------------------------------------------------------------------------------------- Deferred tax subtotal (5,491,158) (12,671,181) ---------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------- Total income tax expense (11,250,774) (16,699,964) ----------------------------------------------------------------------------------------------------------------------
24 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 8. Other Current Assets: The detail of other current assets is as follows:
---------------------------------------------------------------------------- ------------------- ------------------ 2002 2003 ThCh$ ThCh$ ---------------------------------------------------------------------------- ------------------- ------------------ Fixed income securities purchased with resale agreement 84,972,362 10,202,973 Fixed income securities sold with repurchase agreements 9,970,993 - Collective negotiation bonus to be amortized (a) - 1,181,003 Adjustment to market value for cellular equipment to be commercialized (c) 3,263,333 3,194,183 Exchange insurance premiums to be amortized 4,260,922 1,407,372 Telephone directories for connection program 8,206,764 7,759,256 Higher discount rate of bonds to be amortized (note 24) 1,217,626 540,302 Disbursements for placement of bonds to be amortized (note 24) 1,875,982 1,689,029 Disbursement of negotiable instruments (note 24) - 105,860 Disbursements for foreign financing proceeds to be amortized (b) 1,656,187 616,308 Exchange difference insurance debtors (net of partial liquidations) 15,635,558 5,171,577 Deferred charges for modification of staff severance indemnities discount rate (net) 114,306 253,373 Others 9,216,839 1,068,540 ---------------------------------------------------------------------------- ------------------- ------------------ Total 140,390,872 33,189,776 ---------------------------------------------------------------------------- ------------------- ------------------
(a) During June 2002, the Company signed a 2-year collective contract with a part of its employees (3 years for Telefonica Movil employees) granting them, among other benefits, a special negotiation bonus. This bonus was paid between June and July of 2002 (for Telefonica Movil employees, a second installment of ThCh$ 440,000 (historical) will be paid in May 2004). The total benefit which amounts to Ch$ 2,494,544 (historical), is being deferred using the straight-line method during the term of the respective collective contracts. The long-term portion is shown under "Other" long-term (see note 13). (b) This amount corresponds to the cost (net of amortization) of the reserve paid to the Banco Central de Chile and disbursements incurred for foreign loans obtained by the Company to finance its investment plan. (c) Corresponds to adjustment to market value for cellular equipment held in inventory at period-end, which is charged to results in accordance with the method of negotiation, contract or prepayment. 25 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 9. Property, plant and equipment: The detail of property, plant and equipment is as follows:
--------------------------------------------------------------------------------------------------------------------- Description 2002 2003 --------------------------------------------------------------------- Accumulated Gross prop., Accumulated Gross prop., depreciation plant and depreciation plant and ThCh$ equipment ThCh$ equipment ThCh$ ThCh$ --------------------------------------------------------------------------------------------------------------------- Land - 29,808,243 - 27,667,278 Construction and Infrastructure Works 72,885,107 199,963,526 72,392,554 186,258,179 Machinery and equipment 1,691,084,021 3,289,001,067 1,849,589,750 3,410,794,925 Central office telephone equipment 731,496,546 1,462,959,661 941,743,424 1,603,356,562 External plant 586,300,232 1,370,886,421 631,291,636 1,384,324,690 Subscribers' equipment 206,064,719 350,481,453 243,690,801 386,787,401 General equipment 167,222,524 104,673,532 32,863,889 36,326,272 Other Property, Plant and Equipment 141,918,240 441,968,496 180,117,140 378,476,278 Office furniture and equipment 101,513,760 125,417,498 85,715,792 130,558,913 Projects, work in progress and their materials - 186,782,347 - 114,346,063 Leased assets (1) 4,096,587 12,056,628 4,612,555 11,376,729 Property, plant and equipment temporarily out - 15,039,544 13,411,298 23,242,508 of service Software and others 36,307,893 102,672,479 76,377,495 98,952,065 Technical revaluation-Circular 550 10,004,489 9,230,699 10,425,577 9,230,850 --------------------------------------------------------------------------------------------------------------------- Total 1,915,891,857 3,969,972,031 2,112,525,021 4,012,427,510 ---------------------------------------------------------------------------------------------------------------------
(1) As of June 2003 this caption mainly considers: ThCh$ 5,518,866 gross value for purchase of administrative offices with accumulated depreciation of ThCh$ 598,515 with contract terms of 15 years from 1996, ThCh$ 3,242,129 gross value for electronic and computer equipment with accumulated depreciation of ThCh$ 2,896,475 with 12-year contract terms from 1994. In addition there is ThCh$ 983,305 gross value of long distance transmission equipment with accumulated depreciation of ThCh$ 208,952 with 18-year contract terms from 1996. The balance of gross property, plant and equipment includes capitalized interest of ThCh$ 209,268,747 and ThCh$ 211,261,434 in 2002 and 2003, respectively. Accumulated depreciation of this interest amounts to ThCh$ 72,995,897 and ThCh$ 92,158,887 in 2002 and 2003, respectively. Depreciation for the periods was charged to operating costs for ThCh$ 132,791,579 and ThCh$ 131,022,817, for 2002 and 2003, respectively and to administration and selling expense for ThCh$ 291,376 for 2003. Property, plant and equipment temporarily out of service, made up mainly of the cable TV networks of La Serena and Concepcion not transferred in the sale of assets to Cordillera Comunicaciones, resulted in a depreciation charge of ThCh$ 713,140 in 2002 and ThCh$ 1,476,669 in 2003, which is classified in Other Non-operating Expenses. The detail by caption of the technical revaluation is as follows:
------------------------------------------------------------------------------------------------------------------------ Net Accumulated Property, plant Property, plant Balance depreciation and equipment and equipment Description 2002 2003 ThCh$ ThCh$ ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------------ Land (454,707) - (477,844) (454,707) Construction and infrastructure works (994,531) (3,553,441) (4,584,504) (4,547,971) Machinery and equipment 254,510 13,979,018 14,293,047 14,233,528 ------------------------------------------------------------------------------------------------------------------------ Total (1,194,728) 10,425,577 9,230,699 9,230,850 ------------------------------------------------------------------------------------------------------------------------
Depreciation for higher value of technical revaluation for the period amounts to ThCh$ (16,340) in 2002 and ThCh$ (26,826) in 2003. Gross property, plant and equipment includes assets that have been totally depreciated amounting to ThCh$ 467,929,189 in 2002 and ThCh$ 609,567,645 in 2003, which include ThCh$ 12,042,022 and ThCh$ 12,002,421, respectively, for technical revaluation. 26 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 10. Investments in Related Companies: The breakdown of investments in related companies is as follows:
---------------------------------------------------------------------------------------------------------------- Currency Country of controlling the No. of Taxp. No. Company origin investment shares ---------------------------------------------------------------------------------------------------------------- Foreign TBS Celular participacion S.A. (1) Brasil Dolar 48,950,000 93.541.000-2 Impresora y Comercial Publiguias S.A. (1) Chile Pesos 45,648 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. (1) Chile Pesos 271,615 96.895.220-K Atento Chile S.A. (1) Chile Pesos 3,209,374 96.725.400-2 Sonda S.A. (1) (2) Chile Pesos 35,000 In development Bolsa de Oportunidades de Negocios S.A. Chile Pesos - In development Time Interating Chile Pesos - 96.725.400-2 Solexe S.A. Chile Pesos - 96.571.690-4 Servibanca S.A. Chile Pesos - 96.768.410-4 Payroll S.A. Chile Pesos - 96.539.380-3 Ediciones Financieras S.A. Chile Pesos - 96.831.860-8 Inversiones Valparaiso S.A. Chile Pesos - 94.071.000-6 Orden S.A. Chile Pesos - Foreign SBS Ltda. Guatemala Dolar - Foreign AGROSYS Guatemala Dolar - Foreign Sonda El Salvador El Salvador Dolar - Foreign Chiptech Guatemala Dolar - 96.894.490-8 Puerto Norte S.A. Chile Pesos - Foreign Bac Servicio Ecuador Dolar - Foreign Bismark Telecomunicaciones Mexico Pesos - Foreign Westham Trade Co. Ltda. Usa Dolar - Foreign Data Dec S.A. Costa Rica Dolar - ---------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Holding Shareholders' equity percentage of the companies --------------------------------------------------------- Taxp. No. Company 2002 2003 2002 2003 --------------------------------------------------------------------------------------------------------------------------------- % % ThCh$ ThCh$ Foreign TBS Celular participacion S.A. (1) 2.61 2.61 159,598,697 192,648,697 93.541.000-2 Impresora y Comercial Publiguias S.A. (1) 9.00 9.00 14,538,889 18,831,344 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. (1) 20.00 20.00 812,035 544,070 96.895.220-K Atento Chile S.A. (1) 28.84 28.84 9,187,850 9,364,525 96.725.400-2 Sonda S.A. (1) (2) - 35.00 - 91,127,731 In development Bolsa de Oportunidades de Negocios S.A. 19.00 - 2,086,200 - In development Time Interating 10.25 - 742,449 - 96.725.400-2 Solexe S.A. 40.00 - 100,995 - 96.571.690-4 Servibanca S.A. 43.33 - 4,752,042 - 96.768.410-4 Payroll S.A. 41.56 - 366,867 - 96.539.380-3 Ediciones Financieras S.A. 7.18 - 127,563 - 96.831.860-8 Inversiones Valparaiso S.A. 33.33 - 5,275,590 - 94.071.000-6 Orden S.A. 33.33 - 2,126,865 - Foreign SBS Ltda. 49.00 - 165,700 - Foreign AGROSYS 50.00 - 7,122 - Foreign Sonda El Salvador 49.00 - 30,522 - Foreign Chiptech 50.00 - 15,670 - 96.894.490-8 Puerto Norte S.A. 50.00 - 168,588 - Foreign Bac Servicio 49.00 - 3,563 - Foreign Bismark Telecomunicaciones 49.90 - 100,379 - Foreign Westham Trade Co. Ltda. 20.00 - 487,865 - Foreign Data Dec S.A. 40.00 - 879,585 - --------------------------------------------------------------------------------------------------------------------------------- Total ==================================================
----------------------------------------------------------------------------------------------------------------------------------- Income for the year Accrued income Equity Value --------------------------------------------------------------------- Taxp. No. Company 2002 2003 2002 2003 2002 2003 ----------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ Foreign TBS Celular participacion S.A. (1) 1,307,088 1,960,638 34,115 51,173 4,165,526 5,028,131 93.541.000-2 Impresora y Comercial Publiguias S.A. (1) -3,777,100 -2,941,206 -339,939 -264,709 1,308,500 1,694,821 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. (1) -326,210 -44,629 -65,242 -8,927 162,407 108,814 96.895.220-K Atento Chile S.A. (1) 24,140 162,085 6,962 46,746 2,649,776 2,700,729 96.725.400-2 Sonda S.A. (1) - 1,104,413 - 386,548 - 31,894,706 In development Bolsa de Oportunidades de Negocios S.A. - - - - 396,378 - In development Time Interating - - - - 76,101 - 96.725.400-2 Solexe S.A. - - - - 40,398 - 96.571.690-4 Servibanca S.A. 140,632 - 60,936 - 2,059,060 - 96.768.410-4 Payroll S.A. 36,121 - 15,012 - 152,470 - 96.539.380-3 Ediciones Financieras S.A. -28,705 - -2,061 - 9,159 - 96.831.860-8 Inversiones Valparaiso S.A. - - - - 1,758,354 - 94.071.000-6 Orden S.A. - - - - 708,884 - Foreign SBS Ltda. - - - - 81,193 - Foreign AGROSYS - - - - 3,561 - Foreign Sonda El Salvador - - - - 14,956 - Foreign Chiptech - - - - 7,835 - 96.894.490-8 Puerto Norte S.A. - - - - 84,294 - Foreign Bac Servicio - - - - 1,746 - Foreign Bismark Telecomunicaciones - - - - 50,089 - Foreign Westham Trade Co. Ltda. - - - - 97,573 - Foreign Data Dec S.A. - - - - 351,834 - ----------------------------------------------------------------------------------------------------------------------------------- Total 14,180,094 41,427,201 ======================================== ------------------------ ------------------------------------------------------------------------------------------------------------ Unearned Investment Income book value --------------------------------------------- Taxp. No. Company 2002 2003 2002 2003 ------------------------------------------------------------------------------------------------------------ ThCh$ ThCh$ ThCh$ ThCh$ Foreign TBS Celular participacion S.A. (1) - - 4,165,526 5,028,131 93.541.000-2 Impresora y Comercial Publiguias S.A. (1) - - 1,308,500 1,694,821 96.922.950-1 Empresa de Tarjetas Inteligentes S.A. (1) - - 162,407 108,814 96.895.220-K Atento Chile S.A. (1) - - 2,649,776 2,700,729 96.725.400-2 Sonda S.A. (1) - - - 31,894,706 In development Bolsa de Oportunidades de Negocios S.A. - - 396,378 - In development Time Interating - - 76,101 - 96.725.400-2 Solexe S.A. - - 40,398 - 96.571.690-4 Servibanca S.A. - - 2,059,060 - 96.768.410-4 Payroll S.A. - - 152,470 - 96.539.380-3 Ediciones Financieras S.A. - - 9,159 - 96.831.860-8 Inversiones Valparaiso S.A. - - 1,758,354 - 94.071.000-6 Orden S.A. - - 708,884 - Foreign SBS Ltda. - - 81,193 - Foreign AGROSYS - - 3,561 - Foreign Sonda El Salvador - - 14,956 - Foreign Chiptech - - 7,835 - 96.894.490-8 Puerto Norte S.A. - - 84,294 - Foreign Bac Servicio - - 1,746 - Foreign Bismark Telecomunicaciones - - 50,089 - Foreign Westham Trade Co. Ltda. - - 97,573 - Foreign Data Dec S.A. - - 351,834 - ----------------------------------------------------------------------- Total 14,180,094 41,427,201 =========================================---------------------------------------------
(1) Recognition of income for this company is that accrued for May 2002 and 2003. (2) "As indicated in Note 2d, as of September 2002 the Company no longer has a majority or controlling interest in Sonda S.A. It now recognizes 35% equity in the Company." As of the date of these financial statements there are no liabilities for hedge instruments assigned to foreign investments. The Company has the intention of reinvesting net income from foreign investments on a permanent basis, therefore there is no net income that is potentially remittable. 27 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 11. Goodwill and negative goodwill: (a) Goodwill: The detail of goodwill is as follows:
----------------------------------------------------------------------------------------------------------------------- Taxpayer No. Company Year 2002 2003 Amount Amount amortized Balance of amortized Balance of in the period Goodwill in the period Goodwill ThCh$ ThCh$ ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------------- Foreign Consorcio Telefonica do Brasil 2001 87,203 2,960,085 87,203 2,784,234 90.430.000-4 CTC Globus S.A. 1998 538,012 17,693,117 538,012 16,608,177 78.703.410-1 Tecnonautica S.A. 1999 32,991 1,182,279 71,466 1,078,725 96.786.140-5 Telefonica Movil 1997 4,895,692 152,713,134 4,895,692 142,840,605 83.628.100-4 Sonda S.A. 1999 1,721,224 22,594,643 1,881,941 9,808,256 96.834.320-3 Infoera 1999 20,771 730,653 43,982 665,557 96.811.570-7 Telepeajes S.A. 2001 9,745 85,627 19,264 58,430 Foreign Sonda Uruguay 1999 78,119 945,499 - - Foreign Setco S.A. (Uruguay) 1999 76,816 927,681 - - Foreign Sonda del Ecuador 1997 19,483 204,562 - - 96.571.690-4 Servibanca 2000 18,685 283,392 - - 96.768.410-4 Payroll 1999 948 12,544 - - 96.894.490-8 Puerto Norte 2000 662 10,384 - - Foreign Bac Ecuador 2001 - 103,023 - - Foreign Bac Peru 2001 - 15,020 - - 96.895.220-K Atento Chile S.A. 2001 178,296 176,230 - - Foreign Sonda Bancos 2001 5,029 93,027 - - Foreign Sonda Peru 2001 2,492 47,330 - - Foreign Bismark (Mexico) 2001 2,406 44,496 - - Foreign Tecnoglobal S.A. 2001 27,670 525,716 - - Foreign Bac Financiero 2001 46,655 754,258 - - 96.833.930-3 Telef. Comun. Empresariales 2001 17,188 130,723 - - 96.590.960-5 Tecnopolis 2001 1,008 19,122 - - Foreign Track S.A. 2002 1,214 23,060 - - Foreign Condec Brasil 1998 141,302 1,460,118 - - Foreign Data Dec 1995 15,668 - - - ---------------------------------------------------------------------------------------------------------------------- Total 7,939,279 203,735,723 7,537,560 173,843,984 ----------------------------------------------------------------------------------------------------------------------
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. 28 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 11. Goodwill and negative goodwill, continued: (b) Negative goodwill: The detail of negative goodwill is as follows:
-------------------------------------------------------------------------------------------------------------- Taxpayer No. Company Year 2002 2003 Amount Balance of Amount Balance of amortized Negative amortized Negative in the period Goodwill in the period Goodwill ThCh$ ThCh$ ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- Foreign Sonda Inveriones 2002 - 72,893 - - S.A. -------------------------------------------------------------------------------------------------------------- Total - 72,893 - - --------------------------------------------------------------------------------------------------------------
12. Intangibles:
-------------------------------------------------------------------------- ------------------ ------------------ 2002 2003 ThCh$ ThCh$ -------------------------------------------------------------------------- ------------------ ------------------ Underwater cable rights (gross) 19,271,074 22,649,648 Accumulated amortization previous period (1,596,099) (2,371,210) Amortization for the period (349,317) (429,124) Licenses (Software) (gross) 2,100,732 2,190,703 Accumulated amortization previous period - (263,261) Amortization for the period - (279,193) Licenses for use of wireless (gross) - 9,612,076 Accumulated amortization previous period - (27,458) Amortization for the period 0 (159,443) Trade marks and key money 692,012 - -------------------------------------------------------------------------- ------------------ ------------------ Total Net Intangibles 20,118,402 30,922,738 -------------------------------------------------------------------------- ------------------ ------------------
29 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 13. Others (from Other Assets): The detail of Others is as follows:
--------------------------------------------------------------------------------------------------------- 2002 2003 ThCh$ ThCh$ --------------------------------------------------------------------------------------------------------- Disbursements for obtaining external financing to be amortized (see note 8b) 745,903 1,473,078 Collective negotiation bonus (see note 8a) - 553,397 Bond issue expenses to be amortized (see note 24) 5,480,883 3,141,017 Leased vehicles 421,210 255,790 Higher discount rate of bonds to be amortized ( see note 24) 6,855,059 3,690,153 Deferred charge for modification of staff severance indemnities discount rate (net) 745,202 - Commercial projects in development (Lottery, Investment Fund) 3,604,660 - Deferred exchange insurance premiums to be amortized 809,766 202,887 Rental of telephone posts paid in advance 1,979,514 764,942 Guarantee deposits 255,596 281,688 Others 1,874,228 1,003,331 --------------------------------------------------------------------------------------------------------- Total 22,772,021 11,366,283 ---------------------------------------------------------------------------------------------------------
30 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 14 Short-term obligations with banks and financial institutions: The breakdown of short-term obligations with banks and financial institutions is as follows:
--------------------------------------------------------------------- Bank or financial institution U.S.$ U.F. ----------------------------- ------------------------------ ------------------------------------ Taxp. No. Short-term 2002 2003 2002 2003 ----------------- --------------------------------------- -------------- ---------- --------------- --------------- ThCh$ ThCh$ ThCh$ ThCh$ 97.015.000-5 BANCO SANTANDER SANTIAGO 1,481,935 - - - 97.004.000-5 BANCO DE CHILE 833,975 - - - 97.030.000-7 BANCO ESTADO - - 9,319,257 9,299,134 59.004.250-1 BANCO SUDAMERIS 400,976 - - - 97.008.000-7 BANCO CITIBANK - - 8,833,894 - 97.036.000-K BANCO SANTIAGO - - - - 97.023.000-9 BANCO CORPBANCA - - - - Foreign BRADESCO 55,553 - - - 97.080.000-K BANCO BICE - - - - -------------- ---------- --------------- --------------- Total 2,772,439 - 18,153,151 9,299,134 -------------- ---------- --------------- --------------- Capital owed 2,732,250 - 17,863,079 9,199,763 ============================== ================================== Average annual interest rate 3.93% - 3.89% 3.36% Bank or financial institution $ TOTAL ----------------------------- -------------------------------- ------------------------------ Taxp. No. Short-term 2002 2003 2002 2003 ----------------- --------------------------------------- -------------- ---------------- ----------- -------------- ThCh$ ThCh$ ThCh$ ThCh$ 97.015.000-5 BANCO SANTANDER SANTIAGO - - 1,481,935 - 97.004.000-5 BANCO DE CHILE 6,940,123 - 7,774,098 - 97.030.000-7 BANCO ESTADO - - 9,319,257 9,299,134 59.004.250-1 BANCO SUDAMERIS - - 400,976 - 97.008.000-7 BANCO CITIBANK - - 8,833,894 - 97.036.000-K BANCO SANTIAGO 7,435,316 - 7,435,316 - 97.023.000-9 BANCO CORPBANCA 36,968 - 36,968 - Foreign BRADESCO - - 55,553 - 97.080.000-K BANCO BICE 111,165 - 111,165 - -------------- --------------- ----------- -------------- Total 14,523,572 - 35,449,162 9,299,134 -------------- --------------- ----------- -------------- Capital owed 14,515,997 - 35,111,326 9,199,763 =============================== ============================== Average annual interest rate 4.80% - 2.30% 3.36% -------------------------------------------------------------------------------------------------------------- Short-term portion of long-term -------------------------------------------------------------------------------------------------------------- 79.561.240-8 CHASE MANHATTAN BANK 426,212 - - - Foreign BANCO CREDITO INVERSIONES - - 6,571,366 - Foreign BANCO CITIBANK 9,083,857 7,688,140 - - 97.015.000-5 BANCO SANTANDER SANTIAGO - - 199,479 30,604,030 97.036.000-K BANCO SANTIAGO - - 9,860,999 - Foreign ABN AMRO BANK 1,068,321 1,175,250 - - Foreign BANCO EXTERIOR DE ESPANA 17,977,568 - - - Foreign J.P. MORGAN 128,835,473 - - - Foreign BBVA BHIF - 18,344,326 - - ------------------------------ ---------------------------------- Total 157,391,431 27,207,716 16,631,844 30,604,030 -------------- --------------- --------------- --------------- Capital owed 153,653,334 24,986,866 16,371,686 30,145,813 ============================== ================================== Average annual interest rate 3.14 % 1.93% 6.24% 3.60% ------------------------------------------------------------------------------------------------------------- Short-term portion of long-term ------------------------------------------------------------------------------------------------------------- 79.561.240-8 CHASE MANHATTAN BANK - - 426,212 - Foreign BANCO CREDITO INVERSIONES - - 6,571,366 - Foreign BANCO CITIBANK - - 9,083,857 7,688,140 97.015.000-5 BANCO SANTANDER SANTIAGO - 9,834,890 199,479 40,438,920 97.036.000-K BANCO SANTIAGO - - 9,860,999 - Foreign ABN AMRO BANK - - 1,068,321 1,175,250 Foreign BANCO EXTERIOR DE ESPANA - - 17,977,568 - Foreign J.P. MORGAN - - 128,835,473 - Foreign BBVA BHIF - - - 18,344,326 -------------------------------- -------------------------------- Total - 9,834,890 174,023,275 67,646,636 -------------- ---------------- ------------- ---------------- Capital owed - - 170,025,020 55,132,679 ================================ ================================ Average annual interest rate - 3.54% 3.44% 2.40% Percentage of obligations in foreign currency: 76.46% for 2002 and 48.14% for 2003 Percentage of obligations in national currency: 23.54% for 2002 and 51.86% for 2003
31 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 15 Long-term obligations with banks and financial institutions: Long-term obligations with banks and financial institutions:
----------------------------------------------------------------- Years to maturity for long-term portion Currency --------------------------------------------------- or Indexation Bank or Financial Index 1 to 2 2 to 3 3 to 5 Taxp. No. Institution ------------- ----------------------- ----------------------------------------------------------------- ThCh$ ThCh$ ThCh$ LOANS IN DOLLARS 79.561.240-8 CHASE MANHATTAN (1) US$ - - - 97.008.000-7 BANCO CITIBANK US$ 7,508,867 7,508,867 - Foreign ABN AMRO BANK (2) US$ - 73,407,600 136,328,400 Foreign BBVA BHIF US$ 69,912,000 69,912,000 - SUBTOTAL 77,420,867 150,828,467 136,328,400 LOANS IN UNIDADES DE FOMENTO 97.015.000-5 BANCO SANTANDER SANTIAGO UF 30,145,813 - - SUBTOTAL 30,145,813 - - LOANS IN OTHER CURRENCIES - - - Foreign MERCOM BANK $ - - - --------------------------------------------------- TOTAL 107,566,680 150,828,467 136,328,400 =================================================== Percentage of obligations in foreign currency: 92.36% in 2003 and 87.23% in 2002 Percentage of obligations in local currency: 7.64% in 2003 and 12.77% in 2002 ----------------------------------------------------------------- Total Long-term amount portion of principal as of owed Bank or Financial 31/06/2003 31/06/2003 Taxp. No. Institution ------------- ----------------------- ----------------------------------------------------------------- ThCh$ ThCh$ LOANS IN DOLLARS 79.561.240-8 CHASE MANHATTAN (1) - - 85,465,657 97.008.000-7 BANCO CITIBANK 15,017,734 Libor + 0.57% 183,196,612 Foreign ABN AMRO BANK (2) 209,736,000 Libor + 1.00% 142,442,765 Foreign BBVA BHIF 139,824,000 Libor + 1.05% - SUBTOTAL 364,577,734 2.36% 411,105,034 LOANS IN UNIDADES DE FOMENTO 97.015.000-5 BANCO SANTANDER SANTIAGO 30,145,813 Tab 90 + 0.75% 60,184,666 SUBTOTAL 30,145,813 - 60,184,666 LOANS IN OTHER CURRENCIES - - - Foreign MERCOM BANK - - 49,142 ------------------------------------------------------------ TOTAL 394,723,547 2.45% 471,338,842 ============================================================ Percentage of obligations in foreign currency: 92.36% in 2003 and 87.23% in 2002 Percentage of obligations in local currency: 7.64% in 2003 and 12.77% in 2002
(1) In April and June 2003, the Company prepaid loans in the amount of US$ 90,000,000 and US$ 30,000,000 which it had with this bank. (2) In April 2003, the Company renegotiated this loan, which allowed it to extend the expiry date from December 2003 to April 2008, in addition to changing the agent bank which was Citibank N.A.. 32 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 16. Obligations with the Public: a) Promissory Notes: On January 27, 2003, Telefonica CTC Chile registered a line of negotiable instruments in the securities registry, inspection number No. 5. The maximum amount of this line is ThCh$ 35,000,000, where all placements charged to this line may not exceed the mentioned amount. The term of this line shall be 10 years from the date of registration with the Superintendency of Securities and Insurance. The interest rate shall be defined at each issuance of these negotiable instruments. On June 26, 2003, Telefonica CTC Chile, placed ThCh$ 2,000,000 in two series (A and B) of negotiable instruments. In this case, the placing agent was Scotiabank Sud Americano. The details of this transaction are as follows:
-------------------------------------------------------------------------------------------------------------------- Registration Current number or Series nominal Bond Interest Final Book value Placement identification of amount readjustment rate maturity 2002 2003 in Chile the instrument placed unit ThCh$ ThCh$ or abroad -------------------------------------------------------------------------------------------------------------------- Short-term promissory notes 005 A 10,000,000 NON-INDEXED CH$ 0.2700 SEP 24, 2003 - 9,923,222 CHILE 005 B 10,000,000 NON-INDEXED CH$ 0.2974 NOV 20, 2003 - 9,860,266 CHILE -------------------------------------------------------------------------------------------------------------------- Totales - 19,783,488 --------------------------------------------------------------------------------------------------------------------
33 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 16. Obligations with the public, continued: b) Bonds The breakdown of obligations with the public for bond issues, classified as short and long-term is as follows:
--------------------------------------------------------------------------------------------------------------- Registration number Current Bond or identification of nominal amount readjustment Interest Final the instrument Series placed unit rate maturity --------------------------------------------------------------------------------------------------------------- % Short-term portion of long-term bonds 143.27.06.91 E (f) - 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 (d) - 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 Luxembourg Eurobonds (c) - EURO 5.375 Aug.2004 Long-term bonds 143.27.06.91 F 857,143 U.F. 6.000 Apr.2016 177.12.08.94 H (a) - U.F. 5.800 Aug.2006 177.12.08.94 I (d) - 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 Emitidos en New York Yankee Bonds (e) 197,000,000 US$ 7.625 Jul.2006 Emitidos en New York Yankee Bonds 200,000,000 US$ 8.375 Jan.2006 Emitidos en Luxemburgo Eurobonos (c) 139,000,000 EURO 5.375 Aug.2004 ----------------------------------------------------------------------------------------------------------------------------------- Frequency Par value Registration number ------------------------------------------------------------------------ Placement or identification of In Chile the instrument Interest payment Amortizations 2002 2003 or abroad ----------------------------------------------------------------------------------------------------------------------------------- ThCh$ ThCh$ Short-term portion of long-term bonds 143.27.06.91 Semi-annual Semi-annual 5,355,109 - Chile 143.27.06.91 Semi-annual Semi-annual 1,416,022 1,403,736 Chile 177.12.08.94 Semi-annual Semi-annual 8,704,256 - Chile 177.12.08.94 Semi-annual Semi-annual 2,300,932 - Chile 203.23.04.98 Semi-annual Semi-annual 6,086,415 - Chile 203.23.04.98 Semi-annual Semi-annual 1,679,235 1,682,208 Chile Issued in New York Semi-annual Maturity 5,964,791 5,823,047 Abroad Issued in New York Semi-annual Maturity 4,978,080 4,776,106 Abroad Issued in Luxembourg Semi-annual Maturity 6,174,344 5,446,422 Abroad ------------------------------- Total 42,659,184 19,131,519 ============================================= Long-term bonds 143.27.06.91 Semi-annual Semi-annual 15,720,328 14,536,774 Chile 177.12.08.94 Semi-annual Semi-annual 25,394,374 - Chile 177.12.08.94 Semi-annual Semi-annual 25,394,374 - Chile 203.23.04.98 Semi-annual Semi-annual 35,552,124 - Chile 203.23.04.98 Semi-annual Semi-annual 67,718,331 67,838,280 Chile Emitidos en New York Semi-annual Maturity 142,442,764 137,726,640 Abroad Emitidos en New York Semi-annual Maturity 142,442,764 139,824,000 Abroad Emitidos en Luxemburgo Semi-annual Maturity 127,054,847 111,736,540 Abroad ------------------------------- Total 581,719,906 471,662,234 =============================================
34 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 16. Obligations with the Public, continued: b) Bonds, continued: a) During August 2002, Telefonica CTC Chile prepaid this bond placement, paying the full balance of capital (UF) plus interest accrued as of that date. b) During November 2002, Telefonica CTC Chile prepaid this bond placement, paying the full balance of capital (UF) plus interest accumulated as of that date. c) Since June 2002, Telefonica CTC Chile has made partial purchases of its placement denominated in euros; at this period-end the early redemption of this placement amounts to 61.0 million euros. d) During May 2003, Telefonica CTC Chile prepaid this bond placement of, paying the full capital balance (UF) plus interest accumulated as of that date. e) During May 2003, Telefonica CTC Chile made a partial repurchase of 3.0 million dollars of its placement denominated in that same currency; this redemption was made at a price of 111.57% of par value, which meant a payment of 3.34 million dollars, plus interest accrued as of that date on the nominal amount of the repurchase. These transactions have implied recognizing a charge to income for the balances off "Disbursements for bond placements to be amortized", as well as the expenses corresponding to "Higher discount rate of bonds to be amortized". In April 2003, the last installment of this issuance was paid. 35 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 17. Accruals: The detail of accruals shown in liabilities is as follows:
--------------------------------------------------------------------------------------------- 2002 2003 ThCh$ ThCh$ --------------------------------------------------------------------------------------------- Current 10,580,875 6,596,666 Staff severance indemnities 1,144,845 266,633 Vacation 4,319,835 3,189,027 Other employee benefits (a) 8,798,499 6,085,345 Employee benefit advances (3,682,304) (2,944,339) --------------------------------------------------------------------------------------------- Long-term Staff severance indemnities 22,503,166 18,604,264 --------------------------------------------------------------------------------------------- Total 33,084,041 25,200,930 ---------------------------------------------------------------------------------------------
(a) Includes provisions for the following concepts: statutory bonus, annual vacation bonus, scholarships, Christmas bonus, Independence Day bonus and others. During the 2002 and 2003 periods, there were no write-offs for any concept. 18. Staff severance indemnities: The detail of the charge to income for staff severance indemnities is as follows:
----------------------------------------------------------------------------------------------------- 2002 2003 ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------- Operating costs and administration and selling 2,700,342 2,420,410 expenses ----------------------------------------------------------------------------------------------------- Total charge to income 2,700,342 2,420,410 ----------------------------------------------------------------------------------------------------- Payments in the period (165,367) (896,983) -----------------------------------------------------------------------------------------------------
19. Minority interest: Minority interest includes recognition of the portion of equity and income of subsidiaries pertaining to third parties. The detail is as follows:
------------------------------------------------------------------------------------------------------------------ Subsidiaries Percentage Participation Participation Minority in equity in net income (loss) Interest June 30, for the period ended June 30, -------------------------------------------------------------------- 2002 2003 2002 2003 2002 2003 % % ThCh$ ThCh$ ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------ Soc. Nacional de Procesamiento de Datos S.A. 40.01 - 36,890,372 - 574,690 - Administradora de Telepeajes de Chile S.A. 19.99 20.00 (74,380) 23,390 (8,355) (6.288) CTC - Transmisiones Regionales S.A. 0.84 0.84 951,924 1,050,227 79,073 114.378 Infoera S.A. 0.01 0.01 (3) - 1 - Fundacion Telefonica 50.00 50.00 146,192 89,694 (26,933) (95.771) Tecnonautica S.A. 0.01 0.00 (14) - (2) - Comunicaciones Mundiales - 0.34 - 5,444 - 180 ------------------------------------------------------------------------------------------------------------------ Total 37.914.091 1,168,755 618,474 12,499 ------------------------------------------------------------------------------------------------------------------
36 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 20. Shareholders' Equity During the 2002 and 2003 periods, changes in shareholders' equity accounts are as follows:
Price-level Paid-in Restatement Contributed Other Retained capital surplus reserves earnings --------------- ----------- ----------- ---------- ------------ ThCh$ ThCh$ ThCh$ ThCh$ ThCh$ 2002 --------------------------------------------------------- Balances as of December 31, 2001 715,017,592 - 111,177,044 1,536,666 435,806,854 Transfer of 2001 net income to retained earnings - - - - 4,111,658 Absorption of accumulated deficit development period - - - - (371,667) Final dividend 2001 - - - - (1,233,497) Adjustment of foreign investment conversion reserve - - - 23,600 - Price-level restatement - 4,290,106 667,063 9,220 2,636,420 Net income for the period - - - - - --------------- ----------- ----------- ---------- ------------ Balance as of June 30, 2002 715,017,592 4,290,106 111,844,107 1,569,486 440,949,768 --------------- ----------- ----------- ---------- ------------ Restated balances as of June 30, 2003 740,128,498 4,440,771 115,771,992 1,624,605 456,435,603 --------------- ----------- ----------- ---------- ------------ 2003 --------------------------------------------------------- Balances as of December 31, 2002 736,468,120 - 114,512,356 1,924,736 451,465,216 Transfer of 2002 loss to retained earnings - - - - (17,680,376) Adjustment of foreign investment conversion reserve - - - (303,991) - Price-level restatement - 8,101,149 1,259,636 21,172 4,771,634 Net income for the period - - - - - --------------- ----------- ----------- ---------- ------------ Balance as of June 30, 2003 736,468,120 8,101,149 115,771,992 1,641,917 438,556,474 --------------- ----------- ----------- ---------- ------------ Accumulated Net (loss) deficit income development for Total period the period shareholders'equity -------------------- ------------------- ------------------- ThCh$ ThCh$ ThCh$ 2002 ----------------------------------------------------- Balances as of December 31, 2001 (371,667) 4,111,658 1,267,278,147 Transfer of 2001 net income to retained earnings - (4,111,658) - Absorption of accumulated deficit development period 371,667 - - Final dividend 2001 - - (1,233,497) Adjustment of foreign investment conversion reserve - - 23,600 Price-level restatement - 7,602,809 Net income for the period - 1,335,145 1,335,145 -------------- -------------- Balance as of June 30, 2002 - 1,335,145 1,275,006,204 -------------- -------------- Restated balances as of June 30, 2003 - 1,382,035 1,319,783,504 -------------- -------------- 2003 ----------------------------------------------------- Balances as of December 31, 2002 - (17,680,376) 1,286,690,052 Transfer of 2002 loss to retained earnings - 17,680,376 - Adjustment of foreign investment conversion reserve - - (303,991) Price-level restatement - - 14,153,591 Net income for the period - 8,216,694 8,216,694 ---------- -------------- -------------- Balance as of June 30, 2003 - 8,216,694 1,308,756,346 ---------- -------------- --------------
37 ----------------------------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 20. Shareholders' Equity, continued: (a) Paid-in capital: As of June 30, 2003, the Company's paid-in capital is as follows:
Number of shares: ---------------------------------------------------------------------------------------------------------- Series No. of subscribed No. of paid shares No. of shares with shares voting rights ---------------------------------------------------------------------------------------------------------- A 873,995,447 873,995,447 873,995,447 B 83,161,638 83,161,638 83,161,638 ---------------------------------------------------------------------------------------------------------- Paid-in capital: ---------------------------------------------------------------------------------------------------------- Series Subscribed Paid-in Capital Capital ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------- A 672,480,822 672,480,822 B 63,987,298 63,987,298 ----------------------------------------------------------------------------------------------------------
(b) Shareholder distribution: In accordance with Circular No. 792 of the Chilean Superintendency of Securities and Insurance, the distribution of shareholders based on their participation in the Company as of June 30, 2003 is as follows:
--------------------------------------------------------------- ---------------------- -------------------- Percentage of Total Number of holdings shareholders Type of shareholder % --------------------------------------------------------------- ---------------------- -------------------- 10% holding or more 63.24 2 Less than 10% holding: Investment equal to or exceeding UF 200 36.03 2,396 Investment under UF 200 0.73 11,926 --------------------------------------------------------------- ---------------------- -------------------- Total 100.00 14,324 --------------------------------------------------------------- ---------------------- -------------------- Company controller 43.64 1 --------------------------------------------------------------- ---------------------- --------------------
(c) Dividend policy: As established in Law No. 18,046, except otherwise agreed upon at the General Shareholders' Meeting with the unanimous vote of the outstanding shares, when there is net income, at least 30% should be distributed as dividends. On April 5, 2002, the General Shareholders' Meeting agreed to pay a dividend of ThCh$1,233,497 (historical) out of retained earnings and which was paid on May 15, 2002. On April 4, 2003, the General Shareholders' Meeting was informed of the dividend distribution policy proposed by the Board of Directors for 2003. Distribution for 2003, of at least 30% of net income of the same year - percentage equal to that required by law - by means of a final dividend in May 2004, which will be proposed at the corresponding General Shareholders' Meeting. 38 -------------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 20. Shareholders' Equity, continued: (d) Other reserves: In 1994 the Company set up a reserve for the purchase of Invercom S.A. and Instacom S.A., in 1998 for the purchase of Sonda S.A. and its subsidiaries and, since 2001, for the adjustment of Consorcio Telefonica de Brasil Celular Holding.
-------------------------------------------------------------------------------------------------------------- Net Balance as of Movement June 30, 2003 Amount ThCh$ ThCh$ --------------------------------- Company December Price-level 31, 2002 restatement ThCh$ ThCh$ -------------------------------------------------------------------------------------------------------------- 96.720.710-1 Invercom S.A. 41,007 451 - 41,458 84.119.600-7 Instacom S.A. 15,726 173 - 15,899 83.628.100-4 Sonda S.A. 1,401,666 15,418 (103,422)(1) 1,313,662 Foreign TBS Participacion S.A. 466,337 5,130 (200,569)(1) 270,898 -------------------------------------------------------------------------------------------------------------- Total 1,924,736 21,172 (303,991) 1,641,917 --------------------------------------------------------------------------------------------------------------
(1) This movement corresponds to the net effect of the adjustment for conversion differences in accordance with Technical Bulletin No. 64 issued by the Chilean Accountants' Association. (e) Subsidiary development stage deficit: The General Ordinary Shareholders' Meeting held on April 5, 2002 approved absorption of the accumulated deficit in the development period as of December 31, 2001, for the subsidiaries Telefonica Gestion de Servicios Compartidos S.A. and Infoera S.A. 39 ------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 21. Income and Expenses: (a) Operating revenues and expenses: The detail of operating revenue and expenses is as follows:
---------------------------------------------------------- ------------------------- ------------------------- 2002 2003 ThCh$ ThCh$ ---------------------------------------------------------- ------------------------- ------------------------- Operating revenues Revenues from sale of services 401,625,598 365,031,350 Revenues from sale of equipment and projects 33,466,552 35,277,961 Total operating revenues 435,092,150 400,309,311 Depreciation and amortization 132,791,579 131,022,817 Salaries and employee benefits 44,506,448 29,611,435 Cost of long distance services and interconnections 29,902,646 37,498,420 Cost of sales of equipment and projects 18,465,380 21,093,966 Provision for doubtful accounts 10,443,593 14,725,569 Contracts with third parties 22,333,367 18,280,988 Cost of sales of information technology development 11,044,977 - Vehicle, office and equipment rentals 6,493,295 5,137,610 Materials (includes obsolescence provisions) 3,383,892 1,101,018 Pole rentals 2,755,940 2,115,203 Telephone directory printing 2,472,412 2,607,958 Others 15,453,992 13,012,724 ---------------------------------------------------------- ------------------------- ------------------------- Total operating costs 300,047,521 276,207,708 ---------------------------------------------------------- ------------------------- ------------------------- Gross profit 135,044,629 124,101,603 ---------------------------------------------------------- ------------------------- -------------------------
Depreciation includes ThCh$ 8,860,445 and ThCh$ 9,802,721 in 2002 and 2003, respectively, for capitalized interest. (b) Other non-operating income: The breakdown of other non-operating income is as follows:
2002 2003 ThCh$ ThCh$ ------------------------------------------------------------------- ------------------ ------------------ Other Income Provision for adjustment to market value for Terra Network - 3,374,506 Penalties on suppliers and indemnities 22,241 994,116 Net gain on sale of shares 2,079,431 - Final compensatory indemnity for termination of Publiguias contract - 1,570,690 Real estate rental 12,505 - Sale of materials 156,146 - Net revenues from sale of assets 543,337 - Recovery of insurance indemnity - 86,325 Reversal of customs trial case provision - 300,000 Dividends received 174,483 - Others 678,434 430,066 ------------------------------------------------------------------- ------------------ ------------------ Total 3,666,577 6,755,703 ------------------------------------------------------------------- ------------------ ------------------
40 --------------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 21. Income and Expenses continued: (c) Other non-operating expenses: The detail of other non-operating expenses is as follows:
----------------------------------------------------------------- -------------------- -------------------- 2002 2003 ThCh$ ThCh$ ----------------------------------------------------------------- -------------------- -------------------- Other Expenses: Lawsuit indemnities and other provisions 1,804,229 1,053,922 Depreciation and retirement of out of service property, plant and equipment (1) 788,099 2,006,239 Loss on sale of property, plant and equipment 348,989 - Under provided taxes 188,978 - Provision for decrease in market value - Terra Networks S.A. 4,464,603 - Difference in tax recovery 543,429 - Donations - 83,959 Loss due to accident to assets - 81,792 Others 1,597,563 1,270,391 ----------------------------------------------------------------- -------------------- -------------------- Total 9,735,890 4,496,303 ----------------------------------------------------------------- -------------------- --------------------
(1) This account is mainly for depreciation of the Cable TV network in La Serena and Concepcion (assets that are temporarily out of service) which were not transferred in the sale of subsidiary Multimedia to Cordillera Comunicaciones. 41 ----------------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 22. Price-level restatement: The detail of price-level restatement is as follows:
----------------------------------------------------------------------------------------------------------- Assets (Charges) Credits Indexation 2002 2003 ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------- Inventories C.P.I. 283,789 51,119 Prepaid expenses C.P.I. (125,101) 4,785 Prepaid expenses U.F. - 13,903 Other current assets C.P.I. 460,735 419,435 Other current assets U.F. 1,708,137 (6,455,221) Short and long-term deferred taxes C.P.I. 1,082,561 1,618,820 Property, plant and equipment C.P.I. 9,331,944 21,312,777 Investments in related companies C.P.I. 80,470 452,064 Goodwill C.P.I. 1,269,621 1,985,095 Long-term receivables C.P.I. 327 (1,366,431) Long-term receivables U.F. (1,159,603) - Other long-term assets C.P.I. 157,136 381,906 Other long-term assets U.F. 1,194,872 2,443,288 Expense accounts C.P.I. 2,547,495 1,689,674 ----------------------------------------------------------------------------------------------------------- Total Credits 16,832,383 22,551,214 ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------- Liabilities - Shareholders' Equity (Charges) Credits Indexation 2002 2003 ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------- Short-term obligations C.P.I. (166,853) 17,220 Short-term obligations U.F. (5,023,410) (3,287,423) Long-term obligations C.P.I. (276,184) (13,611) Long-term obligations U.F. (3,988,704) (3,774,932) Shareholders' equity C.P.I. (7,869,814) (14,153,591) Revenue accounts C.P.I. (3,193,926) (2,607,339) ----------------------------------------------------------------------------------------------------------- Total Charges (20,518,891) (23,819,676) ----------------------------------------------------------------------------------------------------------- ----------------------------------------------------- -------------------------------------- Loss from price-level restatement, net (3,686,508) (1,268,462) ----------------------------------------------------- --------------------------------------
42 -------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 23. Exchange differences: The detail of exchange differences is as follows:
---------------------------------------------------------------------------------------------------------------- Assets (Charges) Credits Currency 2002 2003 ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------- Inventories US$ 29,106 - Other current assets US$ 23,069,130 (10,616,757) Other current assets EURO (266,177) 234,275 Long-term receivables US$ 11,945,556 3,601,444 Long-term receivables EURO - (5,419,332) Other long-term assets US$ (2,558,672) (63,428) Other long-term assets EURO 106,290 21,395 ---------------------------------------------------------------------------------------------------------------- Total (Charges) Credits 32,325,233 (12,242,403) ----------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------- Liabilities (Charges) Credits Currency 2002 2003 ThCh$ ThCh$ ---------------------------------------------------------------------------------------------------------------- Short-term obligations US$ (825,640) (10,900,096) Short-term obligations EURO 8,785,702 (187,534) Long-term obligations US$ (34,155,650) 19,032,471 Long-term obligations EURO (8,159,086) 5,250,065 ---------------------------------------------------------------------------------------------------------------- Total Credits (Charges) (34,354,674) 13,194,906 ---------------------------------------------------------------------------------------------------------------- ------------------------------------------------------- ----------------------------------------- Income (loss), net, from exchange differences (2,029,441) 952,503 ------------------------------------------------------- -----------------------------------------
43 ------------------------------------------------------------ COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 24. Issuance and placement of shares and debt expense: The detail of this item is as follows:
----------------------------------------------------------------------------------------------------------------- Short-term Long-term -------------------------------------------------------------- 2002 2003 2002 2003 ThCh$ ThCh$ ThCh$ ThCh$ ----------------------------------------------------------------------------------------------------------------- Disbursements made for issuance of bond placement 1,875,982 1,689,029 5,480,883 3,141,017 Higher discount rate of bonds to be amortized 1,217,626 540,302 6,855,059 3,690,153 Disbursements for emission of bonds to be amortized - 105,860 - - ----------------------------------------------------------------------------------------------------------------- Total 3,093,608 2,335,191 12,335,942 6,831,170 -----------------------------------------------------------------------------------------------------------------
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 "Obligation with the public". 25. Cash Flows: Financing and investment activities that did not generate cash flows during the period, but that involve future cash flows are as follows: a) Financing activities: The detail of financing activities that commit future cash flows is as follows: Obligations with banks and financial - see notes 14 and 15 institutions Bonds payable - see note 16 b) Investment Activities: Investment activities that commit future cash flows are as follows:
---------------------------------------------------------- ------------------------- ------------------ Maturity ThCh$ ---------------------------------------------------------- ------------------------- ------------------ Other investment income from maturity of Zeros: 2004 6,911,910 2005 21,181,994 ---------------------------------------------------------- ------------------------- ------------------
44 --------------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES ------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 26. Derivative Contracts: The breakdown of derivative contracts is as follows:
---------------------------------------------------------------------------------------------------------------------------------- TYPE OF TYPE OF DERIVATIVE CONTRACT ---------------------------------------------------------------------------------------------- CONTRACT MATURITY SPECIFIC PURCHASE PROTECTED ITEM VALUE OR ITEM SALE OR TRANSACTION EXPIRY POSITION ---------------------------------- NAME AMOUNT ---------------------------------------------------------------------------------------------------------------------------------- FR CCPE 164,600,000 III Quart. 2003 Exchange rate P Oblig. in US$ 164,600,000 FR CCPE 216,300,000 IV Quart. 2003 Exchange rate P Oblig. in US$ 216,300,000 FR CCPE 213,700,000 I Quart. 2004 Exchange rate P Oblig. in US$ 213,700,000 FR CCPE 164,284,132 II Quart. 2004 Exchange rate P Oblig. in US$ 164,284,132 FR CCPE 118,000,000 III Quart. 2004 Exchange rate P Oblig. in US$ 118,000,000 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 139,000,000 III Quart. 2004 Exchange rate P Oblig. in EURO 139,000,000 FR CCPE 22,000,000 III Quart. 2003 Exchange rate P Oblig. in US$ 22,000,000 FR CCPE 13,000,000 I Quart. 2004 Exchange rate P Oblig. in US$ 13,000,000 FR CCPE 46,000,000 II Quart. 2004 Exchange rate P Oblig. in US$ 46,000,000 Zero Cost Collar CCPE 225,000,000 IV Quart. 2003 Interest rate P Oblig. in US$ 225,000,000 S CCPE 150,000,000 III Quart. 2003 Interest rate P Oblig. in US$ 150,000,000 S CCPE 100,000,000 III Quart. 2004 Interest rate P Oblig. in EURO 100,000,000 ---------------------------------------------------------------------------------------------------------------------------------- Income to be deferred for exchange insurance to be amortized Costs to be deferred for exchange insurance to be amortized Exchange insurance expired during the year ( net ) ---------------------------------------------------------------------------------------------------------------------------------- Total ---------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------ TYPE OF VALUE AFFECTED ACCOUNTS DERIVATIVE OF PROTECTED ------------------------------------------------------------------------------- ITEM ASSET / LIABILITY EFFECT ON INCOME ------------------------------------------------------------------------ ThCh$ NAME AMOUNT REALIZED UNREALIZED ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------------ FR 115,075,152 asset 115,075,152 - (4,677,521) liability (117,423,316) FR 151,219,656 asset 151,219,656 - (6,323,297) liability (155,853,362) FR 149,401,944 asset 149,401,944 - (6,643,393) liability (155,795,842) FR 114,854,322 asset 114,854,322 - (2,611,214) liability (116,900,402) FR 82,496,160 asset 82,496,160 - (2,355,307) liability (87,241,432) FR 27,964,800 asset 27,964,800 - (1,131,744) liability (29,851,001) FR 10,486,800 asset 10,486,800 - (412,947) liability (10,808,392) FR 17,478,000 asset 17,478,000 - (691,471) liability (18,022,077) FR 13,283,280 asset 13,283,280 - (541,719) liability (13,179,884) FR 111,736,540 asset 111,736,540 - 9,959,181 liability (101,409,733) FR 15,380,640 asset 15,380,640 - (428,780) liability (15,801,670) FR 9,088,560 asset 9,088,560 - (177,590) liability (9,454,580) FR 32,159,520 asset 32,159,520 - (792,660) liability (33,568,370) Zero Cost Collar - asset (1,240,212) (2,056,709) (1,240,212) S - asset (85,739) - (85,739) S - asset 3,285,254 (1,530,533) 1,634,026 ------------------------------------------------------------------------------------------------------------------ Income to be deferred for exchange liability (1,527,739) 115,672 1,554,660 insurance to be amortized Costs to be asset 1,610,259 (533,739) (1,073,495) deferred for exchange insurance to be amortizedExchange insurance expired during the year ( net ) (518,123) - ------------------------------------------------------------------------------------------------------------------- Total (4,523,432) (16,039,222) --------------------------------------------------------------------------------------------------------------------
Types of derivatives: Type of Contract: FR: Forward CCPE: Hedge contract for existing items S : Swap 45 ----------------------------------------------------------- COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 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 pesos charged for access charges of Ch$ 2,203 million, based on the differences that would originate when access charge rates were reduced due to the dictation of Tariff Decree No. 187 of Telefonica CTC. The first instance sentence accepted VTR's complaint and compensation alleged by Telefonica CTS. The Company filed a motion to vacate and appeal that is currently underway. (iii) Labor lawsuits: In the normal course of business of the Company there have been labor lawsuits filed against it. To date, among others, there are certain labor lawsuits involving 27 former employees who claim wrongful dismissal. These employees did not sign releases or receive staff severance indemnities. First instance sentences have been handed down in two of these lawsuits, accepting the complaint. They have been appealed by the Company. The Company has obtained favorable sentencing in a third lawsuit, with the Supreme Court ratifying a previous verdict by the Court of Appeals 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 labor union have filed complaints before the Santiago Labor Courts, requesting indemnity for various concepts. 46 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 27. Contingencies and restrictions, continued: In Management's opinion and that of in house legal counsel, the risk of the Company being obliged to pay indemnities in the amounts claimed in the 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 connection with the indemnities claimed. (iv) Complaint against the Chilean Government: Telefonica CTC Chile continued its efforts to have illegalities incurred in drafting Decree 187 which set its rates corrected. The presentation of an administrative replacement recourse is emphasized. Subsequent to the negative response from the Authority, Telefonica CTC Chile filed an indemnity complaint against the Government for illegalities incurred in the process of setting rates The complaint was for US$274 million, plus readjustments and interest, and covers past and future damages until May 2004, due to having to charge lower rates than those that should legally have been set. The Third Civil Court of Santiago accepted the complaint, and notified the Government. Once the answer from the Government had been received, as well as the answer and rejoinder 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, within which Telefonica CTC Chile has rendered abundant testimonial evidence. (v) Manquehue Net: On June 24, 2003, Telefonica CTC Chile filed a petition for forced compliance with contract with damage indemnity before the mixed arbitration court of Mr. Victor Vial del Rio against Manquehue Net, in the amount of Ch $ 3,647,689,175 in addition to those accrued during the substantiation process. Likewise and on the same date, Manquehue Net filed a petition for discount compliance (in the amount of UF 107,000), in addition to a petition of obligation to perform (signing of 700 service contracts). Regarding both petitions, the Arbitrator conceded transfer on June 25, 2003. The parties were subsequently notified. b) Financial covenants: 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 cover and cash flow. The maximum debt ratio for these contracts is 1.60, while the interest coverage ratio cannot be less than 3.00 and, lastly, the cash 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 June 30 2003, the Company meets all financial covenants. 47 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 27. Contingencies and restrictions, continued: c) Contracts with Sonda S.A. In September 2002, Telefonica CTC Chile through its subsidiary Telefonica Empresas, sold and transferred 25% ownership of Sonda S.A. to Inversiones Pacifico Limitada and Inversiones Santa Isabel Limitada, companies related to Mr. Andres Navarro. In addition, the Company signed an agreement with Inversiones Santa Isabel Limitada, which grants various rights and obligations to both parties in the sales option for the remaining 35% of Sonda, which are detailed in note 2d. 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, VTR S.A. shall be solely and exclusively responsible for settling it up to approximately US$10 million, granting guarantees to cover said contingencies. Those guarantees expired on March 27, 2001. On December 26, 2001 the parties renewed the guarantees for US$ 2.5 million, and which expire on December 27, 2003. On June 14, 2002, the parties signed a release which resulted in a payment by VTR S.A. amounting to US$ 2 million. b) Commitment to sell ownership in Sonda S.A. Inversiones Santa Isabel Limitada, signed an agreement with Telefonica Empresas that give it a sales option for 35% of Sonda (as described in note 2d). To guarantee faithful and timely compliance with the obligations derived from the option contract, Inversiones Santa Isabel Limitada issued bank guarantees in favor of Telefonica Empresas for UF 1,983,185. These guarantees will remain in custody until August 26, 2003 and must be renewed within the following 20 days for UF 2,003,260, bearing in mind that they must be sight and renewed with a maturity date of September 26, 2004. Subsequently, during September 2004 they must once again be renewed until Sept 26, 2005 for UF 2,048,885 with an execution procedure similar to the one previously described. 48 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 29. Local and Foreign Currency: A summary of the assets in local and foreign currency is as follows:
------------------------------------------------------------------------------------------------------------------------------ Description Currency 2002 2003 ThCh$ ThCh$ ------------------------------------------------------------------------------------------------------------------------------ Total current assets: 654,271,625 405,688,707 Cash Non-indexed Ch$ 11,869,155 9,087,233 Dollars 2,258,264 1,162,739 Euros 199,673 117,815 Time deposits Indexed Ch$ 264,745 267,769 Non-indexed Ch$ 13,419,472 - Dollars 17,875 - Marketable securities Indexed Ch$ 141,745 137,216 Non-indexed Ch$ 2,233,004 - Dollars 58,787,788 29,197,847 Euros 12,115,171 13,110,151 Other currencies 132,479 - Notes and accounts receivable (a) Indexed Ch$ 5,670,933 1,065,569 Non-indexed Ch$ 276,437,565 221,814,727 Dollars 4,110,025 - Notes and accounts receivable from related companies Indexed Ch$ - 1,078,721 Non-indexed Ch$ 7,955,736 6,112,747 Dollars 11,870,536 11,459,928 Other current assets (b) Indexed Ch$ 75,682,782 61,745,691 Non-indexed Ch$ 97,776,366 40,921,405 Dollars 72,831,162 7,956,932 Euros 497,149 452,217 Total property, plant and equipment : 2,054,080,174 1,899,902,489 Property, plant and equipment and accumulated depreciation Indexed Ch$ 2,054,080,174 1,899,902,489 Total other long-term assets 305,336,242 298,240,614 Investment in related companies Indexed Ch$ 9,403,167 41,427,201 Dollars 4,776,927 - Investment in other companies Indexed Ch$ 3,858 3,858 Dollars 7,123 - Goodwill Indexed Ch$ 203,688,717 173,843,984 Non-indexed Ch$ 47,006 - Other long-term assets (c) Indexed Ch$ 43,305,111 50,567,363 Non-indexed Ch$ 11,588,953 2,816,368 Dollars 31,935,373 29,517,503 Euros 580,007 64,337 ------------------------------------------------------------------------------------------------------------------------------ Total assets 3,013,688,041 2,603,831,810 ------------------------------------------------------------------------------------------------------------------------------ Indexed Ch$ 2,392,241,232 2,230,039,861 Non-indexed Ch$ 421,327,257 280,752,480 Dollars 186,595,073 79,294,949 Euros 13,392,000 13,744,520 Other currencies 132,479 -
(a) Includes the following balance sheet accounts: Trade Accounts Receivable, Notes Receivable and Misellaneous Accounts Receivable. (b) Includes the following balance sheet accounts: Inventories, Recoverable Taxes, Prepaid Expenses, Deferred Taxes and Other Current Assets. (c) Includes the following balance sheet accounts:Long-term Debtors, Notes and Accounts Receivable from Related Companies, Intangibles, Amortization and Others. 49 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 29. Local and foreign currency, continued A summary of the current liabilities in local and foreign currency is as follows:
----------------------------------------------------------------------------------------------------------------------------------- Up to 90 days 90 days up to 1 year ------------------------------------------------------------------------------------ DESCRIPTION Currency 2002 2003 2002 2003 ------------------------------------------------------------------------------------ Average Average Average Average 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$ 9,319,258 2.48 9,299,134 3.36 8,833,895 5.47 - - Non-indexed Ch$ 14,523,570 2.32 - - - - - - Dollars 1,290,504 21.55 - - 1,481,935 7.82 Short-term portion of obligations with banks and financial institutions Indexed Ch$ 16,631,843 2.34 458,216 3.60 - - 30,145,813 3.60 $ no reajustable - - 9,834,890 3.54 - - - - Dollars 153,566,683 3.16 9,729,717 2.00 3,824,749 8.59 17,478,000 1.89 Obligations with the public (Promissory notes) Non-indexed Ch$ - - 19,783,488 3.40 - - Obligations with the public (Bonds payable) Indexed Ch$ 5,226,212 6.75 1,682,208 5.80 20,315,757 5.94 1,403,736 5.80 Dollars 10,942,871 - 10,599,153 - - - Euros 6,174,344 - 5,446,422 - - - - - Long-term obligations maturing within a year Indexed Ch$ 472,615 9.40 417,338 8.95 33,115 8.51 53,218 8.84 Non-indexed Ch$ 20,911 - - - - - Notes and accounts payable to related parties Indexed Ch$ 9,024,621 - - - - - - - Non-indexed Ch$ 7,919,267 - 13,638,297 - - - 8,317,745 Dollars 112,841 - - - - - 25,400 - Other current liabilities (d) Indexed Ch$ 2,240,067 - 24,089,605 - 6,428,685 - 258,713 - Non-indexed Ch$ 198,641,451 - 144,531,038 - 3,178,844 - 200,119 - Dollars 8,004,861 - 10,390,879 - 475,815 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 444,111,919 259,900,385 44,572,795 57,882,744 ------------------------------------------------------------------------------------------------------------------------------------ Subtotal by currency Indexed Ch$ 42,914,616 35,946,501 35,611,452 31,861,480 Non-indexed Ch$ 221,105,199 187,787,713 3,178,844 8,517,864 Dollars 173,917,760 30,719,749 5,782,499 17,503,400 Euros 6,174,344 5,446,422 - -
(d) Includes the following balance sheet accounts: Dividends payable, Trade accounts payable, Notes payable, Miscellaneous accounts payable, Accruals, Withholdings taxes, Unearned Income and Other current liabilities. 50 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATEDD FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) 29. Local and foreign currency, continued A summary of the long-term liabilities in local and foreign currency is as follows:
------------------------------------------------------------------------------------------------------------------------- 1 to 3 years 3 to 5 years ----------------------------- ----------------------------- 2002 2002 ----------------------------- ----------------------------- Average Average annual annual interest interest Amount rate Amount rate ------------ ----------- ---------- ---------- ThCh$ % ThCh$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ 60,184,667 8.00 0 - Non-indexed Ch$ 7,835 11.75 13,532 11.75 Dollars 303,745,597 2.71 107,359,435 2.91 Bonds payable Indexed Ch$ 34,123,002 6.06 27,582,026 6.18 Dollars 142,442,764 8.38 142,442,764 7.63 Euros 127,054,847 5.38 0 - Other long-term liabilities (e) Indexed Ch$ 2,906,378 - 4,843,322 - Non-indexed Ch$ 4,466,400 - 3,341,744 - Dollars 23,727,677 3.00 0 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 698,659,167 285,582,823 ----------------------------------------------------------------------------------------------------------------------- Subtotal by currency Indexed Ch$ 97,214,047 32,425,348 Non-indexed Ch$ 4,474,235 3,355,276 Dollars 469,916,038 249,802,199 Euros 127,054,847 -
----------------------------------------------------------------------------------------------------------------------- 5 to 10 years over 10 years -------------------------------- -------------------------- 2002 2002 -------------------------------- -------------------------- Average Tasa annual interes interest promedio Amount rate Monto anual -------------- ----------- ------------ ---------- ThCh$ % M$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ 0 - 0 - Non-indexed Ch$ 27,776 11.75 0 - Dollars 0 - 0 - Bonds payable Indexed Ch$ 44,308,136 6.32 63,766,367 6.55 Dollars 0 - 0 - Euros 0 - 0 - Other long-term liabilities (e) Indexed Ch$ 37,013,366 - 8,934,187 - Non-indexed Ch$ 6,510,744 - 22,503,166 - Dollars 0 - 0 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 87,860,022 95,203,720 ----------------------------------------------------------------------------------------------------------------------- Subtotal by currency Indexed Ch$ 81,321,502 72,700,554 Non-indexed Ch$ 6,538,520 22,503,166 Dollars - - Euros - -
---------------------------------------------------------------------------------------------------------------------- 1 to 3 years 3 to 5 years ----------------------------- -------------------------- 2002 2002 ----------------------------- -------------------------- Average Average annual annual interest interest Amount rate Amount rate ------------ ----------- ---------- --------- ThCh$ % ThCh$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ 30,145,813 3.60 - - Dollars 154,841,733 2.33 167,788,800 2.39 Bonds payable Indexed Ch$ 3,707,612 6.72 5,763,317 6.72 Dollars 139,824,000 8.38 137,726,640 7.63 Euros 111,736,540 5.38 - - Other long-term liabilities (e) Indexed Ch$ 13,787,481 - 7,286,636 - Non-indexed Ch$ 1,880,159 - 457,573 - Dollars 23,870,902 2.70 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 479,794,240 319,022,966 ---------------------------------------------------------------------------------------------------------------------- Subtotal by currency Indexed Ch$ 47,640,906 13,049,953 Non-indexed Ch$ 1,880,159 457,573 Dollars 318,536,635 305,515,440 Euros 111,736,540 -
---------------------------------------------------------------------------------------------------------------------- 5 to 10 years over 10 years ----------------------------- -------------------------- 2002 2002 ----------------------------- -------------------------- Average Tasa annual interes interest promedio Amount rate Monto anual -------------- ------------ ------------ ---------- ThCh$ % M$ % LONG-TERM LIABILITIES Obligations with banks and financial institutions Indexed Ch$ - - - - Dollars 41,947,201 2.40 - - Bonds payable Indexed Ch$ 7,819,023 6.72 65,085,102 6.72 Dollars - - - - Euros - - - - Other long-term liabilities (e) Indexed Ch$ 4,384,001 - 40,092,001 - Non-indexed Ch$ 1,049,618 - 16,929,428 - Dollars - - - - --------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM LIABILITIES 55,199,843 122,106,531 --------------------------------------------------------------------------------------------------------------------- 12,203,024 105,177,103 1,049,618 16,929,428 41,947,201 - - -
(e) Includes the following balance sheet accounts: Notes and accounts payable to related companies, Miscellaneous accounts payable, Accruals, Deferred Taxes, Other Liabilities. 51 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 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 the 2003 period. 31. Subsequent Events: a) Offer from Telefonica S.A. to purchase shares of Terra Networks On May 28, 2003 Telefonica S.A. announced an offer to purchase 100% of the shares of Terra Lycos. On July 10, 2003 the Board of Directors of CTC Transmisiones Regionales S.A. agreed to participate in the offer (OPA) and sell the 2,984,986 shares of Terra Networks S.A. it owns at a price of 5.25 euros per share. b) Payment of eventual dividend and capitalization of Share Premium. The Extraordinary Shareholders' Meeting of Telefonica CTC Chile S.A. held on July 11, 2003, approved payment of an eventual dividend of Ch$17.5 per share to be charged to retained earnings at December 31, 2002. The dividend will be paid on July 30, 2003. Additionally, the Extraordinary Shareholders' Meeting approved modification of the bylaws to reflect the company's capital increase resulting from the capitalization of the "Share Premium" account. c) Promise of Sale Contract with Isapre Consalud S.A. On July 23, 2003, Compania de Telecomunicaciones de Chile S.A. signed a Promise of Sale Contract with the Isapre Consalud S.A. group for 100% of the shares of Compania de Telecomunicaciones de Chile Isapre S.A. (Istel) for the equivalent in pesos of 9,175 Unidades de Fomento, which is subject to the results of a "due diligence" to be performed by the interested buyer. The final contract will be signed on September 1 of this year. d) In the period from July 1 to July 24, 2003, there have been no other significant subsequent events that affect these consolidated financial statements. 52 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES -------------------------------------------------------------------------------- NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued (Translation of financial statements originally issued in Spanish) ---------- 32. Environment: In management's opinion and in the opinion of in-house legal counsel, the nature of the Company's operations do not directly or indirectly affect the environment; therefore, as of the closing date of these consolidated financial statements, no resources have been committed or payments made for non-compliance of municipal ordinances or of those of other supervisory bodies. 33. Accounts payable: The detail of the accounts payable balance is as follows: --------------------------------------------------------------------------- 2002 2003 ThCh$ ThCh$ --------------------------------------------------------------------------- Suppliers Local 117,469,817 96,557,976 Foreign 7,579,002 10,784,473 Carrier service Local 9,870,607 6,026,759 Foreign 1,096,734 1,163,523 Accrual of completion percentage 27,072,286 13,785,496 --------------------------------------------------------------------------- Total 163,088,446 128,318,227 --------------------------------------------------------------------------- Alejandro Espinoza Querol Claudio Munoz Zuniga General Accountant General Manager 53 COMPANIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2003 Management's Discussion and Analysis of the Consolidated Financial Statements 2 TABLE OF CONTENTS 1. Highlights............................................................. 3 2 Volume statistics, property, plant & equipment and statements of income .................................................. 6 3. ANALYSIS OF RESULTS FOR THE PERIOD 3.1 Operating Income................................................. 8 3.2 Non-operating Result............................................. 9 3.3 Net Income for the Period....................................... 10 4. Results by business area.............................................. 10 5. Statement of cash flows............................................... 12 6. Financial indicators.................................................. 13 7. Explanation of the main differences between market or economic value and the book value of the Company's assets............................ 14 8. Regulatory issues..................................................... 14 9. Analysis of markets, competition and relative participation........... 17 10. Analysis of market risk............................................... 21 Management's Discussion and Analysis of the Consolidated Financial Statements 3 1. HIGHLIGHTS Results for the Period and Business Statistics for the Company As of June 30, 2003, Telefonica CTC Chile recorded consolidated net income of Ch$ 8,217 million, figure which compares positively with net income of Ch$ 1,382 million obtained as of June 30 of the previous year. At an operating level, the income of Telefonica CTC Chile reached Ch$ 60,327 million. It should be noted that for comparison purposes, the first half of 2002 includes the contribution of the subsidiary Sonda to the Company's consolidated income. For comparative purpose in the table below, the following financial statement line items are presented as described in Note 3 to the financial statements: Certain financial statement information presented as described and quantified in Note 3 (*) For the six month period Ended June 30, VARIATION 2002 2003 % Revenues 390,785 400,309 2.4% Costs (197,492) (208,959) 5.8% EBITDA 193,293 191,350 -1.0% Depreciation (128,163) (131,023) 2.2% Operating Income 65,130 60,327 -7.4% (*) For comparison purposes, 2002 excludes consolidated results of SONDA S.A.. SONDA S.A. has been presented in the financial statements of the Company since September 1, 2002 as an equity-method investee. Including the effects of Sonda, consolidated operating income decreased by 9.2% in relation to the first half of the previous year. Non-operating income at June 30,2003, shows a loss of Ch$ 35,398 million, a 33.5% drop in relation to the same period in the previous year, derived mainly from a decrease in price-level restatement, together with a decrease in the financial expenses associated to a lower level of debt and better financing conditions together with a drop in other non-operating revenues. Regarding business operating statistics, as of June 30, 2003, fixed telephone lines in service of Telefonica CTC Chile reached 2,566,384, a decrease of 7.0% in relation to June 30, 2002. ADSL customers in service increased to 84,202 a growth of 178.2 % in relation to the previous year. Mobile service customers reached 1,944,393, a growth of 13.7% compared to 2002. The long distance business experienced a drop in traffic of 12.5% in domestic long distance (DLD) and a growth of 2.3% in outgoing international long distance (ILD), of 322 million of minutes and 32 million of minutes, respectively, as of June 30, 2003. ATM links for corporate customers decreased by 8.1% whereas IP links grew by 256.0%. As of June 30, 2003, the corporation's payroll was 4,807 persons, representing a decrease of 39.0% in comparison to June 2002 (13.5% upon excluding the Sonda payroll in 2002). Management's Discussion and Analysis of the Consolidated Financial Statements 4 Tariff Setting Process for Telefonica CTC (Local Telephone Service) As an issue prior to the process of setting the rates for the services provided by Telefonica CTC, on January 13 of this year, Telefonica CTC Chile S.A. requested the pronouncement of the Antitrust Commission wish respect to decreeing freedom of rates in specific geographic areas, to define the telephone services which will be subject to rate regulation in areas where the market conditions are not sufficient to guarantee a freedom of rates regime and to determine that Telefonica CTC Chile S.A. has the right to offer alternative rate plans without prior authorization. On April 30, 2003, Telefonica CTC submitted to the Undersecretary of Telecommunications (Subtel) its proposal for the Technical Economic Basis for the Tariff Setting Study for services rendered by Telefonica CTC Chile to other public telephone service suppliers, to concessionaires of intermediate services, which provide long distance telephone services and to suppliers of complementary services. On May 20, 2003, the Atitrust Commission dictated Resolution No. 686 which defines the services subject to tariff setting by the Ministries of Economy and of Transportation and Telecommunications, which are similar to those established for the 1999 - 2004 period. The mentioned Resolution No. 686 rejects the petition for tariff freedom for specific primary zones requested by Telefonica CTC Chile, and in relation to the request for rate flexibility, informed favorably by the Regulator, the Antitrust Commission did not issue a specific pronouncement in spite of the fact that most of its members were for making a pronouncement on the same, whereas the rest of the members considered that such matter did not correspond to that Commission. On May 30, 2003, Subtel sent Telefonica CTC Chile the Preliminary Technical Economic Basis. In this respect, Telefonica CTC Chile formulated 84 controversies to the Preliminary Technical Economic Basis of Subtel and requested that an Expert Commission would set up in conformity with what is established in the law and Regulation that Regulates the Procedure, Advertising and Participation of the Tariff Setting Process. The Expert Commission was officially established on June 17, 2003, integrated by the experts designated by Telefonica CTC Chile and Subtel. On July 17, the mentioned Commission issued its report on the controversies formulated by Telefonica CTC. Management's Discussion and Analysis of the Consolidated Financial Statements 5 Process for Setting Interconnection Rates for Telefonica Movil On January 10, 2003, Telefonica Movil presented its proposal for Technical Economic Basis to the Undersecretary of Telecommunications, to govern the process for setting interconnection rates. By means of Resolution dated February 22, 2003, Subtel approved the Final Technical Economic Basis that will govern the interconnection rate setting process for the concessionaires mobile telephone service to the public for the 2004 - 2009 period. 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 the global decrease in market rates. As of June 30, 2003, interest-bearing debt reached US$ 1,413 million, reflecting a decrease of 22.8% compared to the nominal interest-bearing debt of US$ 1,831 million recorded as of June 30, 2002. The decrease in debt levels together with improved financing conditions in turn had the effect of lowering financial expenses for 2003. Telefonica S.A.'s Offer to Purchase Shares of Terra Networks On May 28, 2003, Telefonica S.A. announced an offer to purchase 100 % of the shares of Terra Lycos. On July 10, 2003, the Board of Directors of CTC Transmisiones Regionales S.A. agreed to participate in the offer (OPA) and sell 2,984,986 shares of Terra Networks S.A. owned by it at an unit price of 5.25 Euros. Recovery in the price of the shares of Terra Networks in the international market during this year, had a positive impact on the investment valuation of the shares that CTC Transmisiones Regionales S.A. holds in that company. This resulted in recognition of Ch$ 3,375 million in non-operating incomes in the first half of 2003. Placement of Negotiable Instruments On January 27, 2003, Telefonica CTC Chile S.A. registered a line of negotiable instruments in the Securities Registry with a maximum amount of Ch$ 35,000 million, for a 10-year term. On June 26, Telefonica CTC Chile, placed Ch$ 20,000 million, through a placing agent, in two series of equal par value, with final maturity deadline in September and November 2003. Management's Discussion and Analysis of the Consolidated Financial Statements 6 2. VOLUME STATISTICS, PROPERTY, PLANT & EQUIPMENT AND STATEMENTS OF INCOME
TABLE No. 1 VOLUME STATISTICS =================================================================================================== DESCRIPTION JUNE JUNE VARIATION 2002 2003 Q % --------------------------------------------------------------------------------------------------- Lines in Service at (end of period) 2,760,252 2,566,384 (193,868) -7.0% Total Average Lines in Service 2,752,417 2,625,176 (127,241) -4.6% Local calls (millions) (1) 2,514 2,376 (138) -5.5% Inter-primary DLD Minute(2) (thousands) 1,531,596 1,309,939 (221,657) -14.5% Total ILD Minutes(3) (thousands) 1,024,469 798,771 (225,698) -22.0% ILD Minute Outgoing (incl. Internet) 875,274 621,916 (253,358) -28.9% ILD Minutes Incoming 149,195 176,854 27,659 18.5% Line Connections 165,515 124,423 (41,092) -24.8% Mobile Telephone Customers 1,710,326 1,944,393 234,067 13.7% ADSL Connections in Service 30,262 84,202 53,940 178.2% Permanent Personnel Telefonica CTC Chile 3,231 2,631 (600) -18.6% Permanent Personnel Subsidiaries 4,654 2,176 (2,478) -53.2% Total Corporate Personnel 7,785 4,807 (3,078) -39.0% =======================================================================================================
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 June 30, 2003) ==================================================================================================== DESCRIPTION JUNE JUNE VARIATION 2002 2003 MCh$ % ---------------------------------------------------------------------------------------------------- Land, Infrastructure, Machinery and Equipment 3,783,190 3,898,081 114,891 3.0% Projects and Works in Progress 186,782 114,346 (72,436) -38.8% Accumulated Depreciation (1,915,892) (2,112,525) (196,633) 10.3% NET PROPERTY, PLANT & EQUIPMENT 2,054,080 1,899,902 (154,178) -7.5% ====================================================================================================
Management's Discussion and Analysis of the Consolidated Financial Statements 7 TABLE No. 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED AS OF JUNE 30, 2003 AND 2002 (Figures in millions of pesos as of 06.30.03)
=================================================================================================================================== DESCRIPTION Jan - Jun Jan - Dec Jan - Jun VARIATION (2003/2002) ----------------------- 2002 2002 2003 MCh$ % ------------------------------------------------------------------------------------------------------------------------------------ Local Telephone Service 188,076 385,420 186,651 (1,425) -0.8% Basic Telephone Service 159,720 325,684 153,916 (5,804) -3.6% Fixed Charges 79,837 160,479 78,560 (1,277) -1.6% Variable Income 76,140 158,168 72,360 (3,780) -5.0% Connections and Other Installations 3,743 7,037 2,996 (747) -20.0% Access Charges and Interconnections (1) 11,837 23,521 11,115 (722) -6.1% National Long Distance 4,617 9,540 4,492 (125) -2.7% International Long Distance 1,789 3,552 1,449 (340) -19.0% Other Charges and Interconnection Services 5,431 10,429 5,174 (257) -4.7% Advertisements in Telephone Directories 1,150 4,897 1,322 172 15.0% Other Local Telephone Services 15,369 31,319 20,298 4,929 32.1% Value Added Service 8,302 17,352 9,274 972 11.7% Commercialization of Equipment 2,809 5,022 4,538 1,729 61.5% Other Services 4,258 8,945 6,486 2,228 52.3% Long Distance 37,434 75,553 33,586 (3,848) -10.3% National Long Distance 16,705 33,298 14,548 (2,157) -12.9% International Service 14,382 28,357 13,386 (996) -6.9% Media and circuit rentals 6,347 13,898 5,652 (695) -11.0% Mobile Communications 99,875 209,208 112,077 12,202 12.2% Mobile Communications 57,963 122,224 67,765 9,802 16.9% CPP Interconnection (2) 41,912 86,984 44,312 2,400 5.7% Corporate Communications 40,656 87,154 42,202 1,546 3.8% Equipment Sales and Rental, Network Sales 10,795 24,771 12,469 1,674 15.5% Private Services 29,861 62,384 29,733 (128) -0.4% Other Businesses 69,051 115,308 25,793 (43,258) -62.6% Information Services (3) 44,016 63,008 -- (44,016) -100.0% Public Telephones 6,535 12,211 5,444 (1,091) -16.7% ITI Maintenance and Equipment Sales 14,245 28,554 14,833 588 4.1% Other Income (4) 4,255 11,536 5,516 1,261 29.6% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME 435,092 872,644 400,309 (34,783) -8.0% ------------------------------------------------------------------------------------------------------------------------------------ OPERATING COSTS (300,047) (608,861) (276,207) 23,840 -7.9% Payroll (44,506) (80,441) (29,611) 14,895 -33.5% Depreciation (132,791) (263,906) (131,023) 1,768 -1.3% Other Operating Costs (122,750) (264,513) (115,573) 7,177 -5.8% ADMINISTRATION AND SELLING COSTS (68,600) (131,850) (63,775) 4,825 -7.0% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING COSTS (368,647) (740,710) (339,982) 28,665 -7.8% ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME 66,445 131,933 60,327 (6,118) -9.2% ------------------------------------------------------------------------------------------------------------------------------------ Financial Income 6,923 16,875 4,587 (2,336) -33.7% Other Non-operating Income 3,667 13,367 6,756 3,089 84.2% Income from Investment in Related Companies (5) (290) 2,381 211 501 CS Financial Expenses (40,102) (82,368) (34,602) 5,500 -13.7% Amortization of Goodwill (7,939) (24,933) (7,538) 401 -5.1% Other Non-operating Expenses (9,736) (38,297) (4,496) 5,240 -53.8% Price-level Restatement (5,716) (9,051) (316) 5,400 -94.5% ------------------------------------------------------------------------------------------------------------------------------------ NON-OPERATING INCOME (53,193) (122,027) (35,398) 17,795 -33.5% ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAX 13,252 9,907 24,929 11,677 88.1% ------------------------------------------------------------------------------------------------------------------------------------ Taxes (11,251) (27,011) (16,700) (5,449) 48.4% Minority Interest (619) (770) (12) 607 -98.1% ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME (6) 1,382 (17,874) 8,217 6,835 494.6% ====================================================================================================================================
(1) Due to accounting consolidation does not include access charges of188 Mundo Telefonica and Globus. (2) Corresponds to income recorded in Telefonica Movil. (3) Revenues from Sonda S.A. are included only in 2002 due to deconsolidation as of September of that year. (4) Includes revenues from Istel, Telemergencia and Tgestiona (5) For the purposes of a comparative analysis, participation in income from investments in related companies is shown net (net income/losses). (6) For comparative purposes certain reclassifications have been made for 2002 statements of income. Management's Discussion and Analysis of the Consolidated Financial Statements 8 3. ANALYSIS OF RESULTS FOR THE PERIOD 3.1 OPERATING INCOME As of June 30, 2003, operating income reached Ch$ 60,327 million, which represents a decrease of 9.2% in comparison to the previous year. Operating Revenues Operating revenues for the period reached CH$400,309 million showing a decrease of 8.0% in relation to 2002. This decrease incorporates the effects of the deconsolidation of Sonda as of September 2002. Isolating this effect, operating revenues increased by 2.4% over the previous year. This variation was mainly originated by a 12.2% increase in mobile services, together with a 3.8% increase in revenues from corporate communications. The above was partly offset by a 10.3% decrease in long-distance revenues and a drop of 0.8% in local telephone revenues. The latter is mainly due to the generation of greater revenues equivalent to 32.1% for added value services and other services such as ADSL, partly compensating the decreased revenues derived from the Corporation's decrease in traffic and lines in service. Revenues from Local Telephone Service: Revenues from Basic Telephone Service decreased by 3.6% in respect of the previous year. The variation experienced by this revenue is mainly derived from: (i) the 1.6% decrease in the level of fixed charge, corresponding to the fixed monthly charge for network connections, mainly due to the decrease in the number of lines in service and compensated in part by the indexation of rates applicable to these services; (ii) the 5.0% drop in revenues from variable charge, mainly due to the decrease in lines in service, to the downward trend in the behavior of traffic per line and compensated in part by the indexation applicable to these services. Consolidated revenues from access charges and interconnections decreased by 6.1%, mainly due to the 2.7% decrease in revenues from domestic long distance access charges and a 19.0% decrease in revenues from international long distance access charges, due to the 22.0% drop in international interconnection traffic, and to a 4.7% decrease in revenues from other charges and interconnection services. Other Local Telephone Services increased by 32.1% due to an 11.7% increase in value added services, higher revenues equivalent to 61.5% for commercialization of equipment and a 52.3% increase in other services and, lastly, to a 52.3% increase in other services, mainly due to contributions from broad band services for the concept of ADSL, which show a sustained growth during the last few periods. Long Distance: Revenues from these services decreased by 10.3% in comparison to 2002, due to a decrease of 12.9% and 6.9% in revenues from DLD and ILD, respectively, the latter influenced by an average decrease of 13.6% in the price of these services, in spite of a 2.3% growth in outgoing ILD traffic. Media and circuit rentals show decreased revenues equivalent to 11.0% in relation to the first quarter of 2002. Management's Discussion and Analysis of the Consolidated Financial Statements 9 Mobile Communications: Total revenues from this business increased by 12.2% in relation to 2002, mainly due to the 14.6% 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: Business revenues shows an increase of 3.8% in comparison to the previous year, corresponding to a 15.5% increase in the sale and rental of equipment and networks, compensated by a 0.4% decrease in private services. The above is explained by the increase in corporate services, a 256.0% increase in dedicated IP links and the growth in Broad Band and ISP services, all offset in part by the 8.1% decrease in the number of ATM services and the 49.3% decrease in Datared services. Other Operating Revenues: This income, excluding the effect of Sonda in 2002, shows a 3.0% increase mainly due to higher revenues from alarm monitoring services and increased revenues from maintenance of interior telephone lines and public telephony equipment. Operating Costs Operating costs of Ch$339,982 million for the period decreased by 7.8% compared to 2002. This decrease is mainly explained by a 33.5% decrease in salaries which translates into a 12.0% decrease excluding Sonda in 2002, reflecting the savings in the workforce reduction carried out by the Company in October 2002. Depreciation decreased by 1.3% (increase of 2.2% when excluding Sonda in 2002) due mainly to the Corporation's new assets becoming operational. Other operating costs dropped by 5.8%, (however, when excluding Sonda in 2002, they increased by 11.7%) mainly due to an increase in the interconnection service costs and an increase in the Corporation's allowance for doubtful accounts. Administration and selling costs in comparison to the first half of 2002, show a decrease of 7.0%, however, upon excluding Sonda in 2002, they increased by 5.6% due mainly to the increase in expenses from advertising expenses, sales commissions and outsourcing services, partly offset by remuneration savings due to the reduction in the Corporation's payroll. 3.2 NON-OPERATING RESULT Non-operating result in the first half of 2003 shows a loss of Ch$35,398 million, figure that is less than the non-operating result for the same period in 2002. The variation in non-operating result is broken down as follows: Interest income shows a drop of 33.7%, mainly due to lower domestic and international interest rates and less available funds, which have been assigned to diminish the Corporation's financial debt. Other non-operating income There is a 84.2% increase mainly a rise in the price of Terra Networks shares in the market during 2003 and the final adjustment of the compensatory indemnity due to early termination of the contract with Publiguias S.A., partly offset by the sale of shares booked in the first half of 2002. Interest expenses decreased by 13.7% in 2003, mainly due to a reduced debt and better financing conditions. Management's Discussion and Analysis of the Consolidated Financial Statements 10 Other non-operating expenses decreased by 53.8%, derived mainly from higher expenses incurred in 2002 due to staff severance indemnities and expenses related to lawsuits. Additionally, 2002 includes the effect of the lower market value of the Terra Networks shares. Price-level restatement shows a deficit of $316 million, 94.5% lower than the loss of Ch$5,716 million recorded in the first half of 2002. This last figure partly picks up the effect of the devaluation of Sonda's investments in Argentina and Brazil. It should be noted, that there has been a 100% level of coverage on exchange rate variations and 84% coverage of interest rate variations. The Company's coverage policy for the peso-dollar exchange has allowed it to neutralize the effects of the exchange rate variations in 2002 and 2003. 3.3 NET INCOME FOR THE PERIOD Net income was Ch$ 8,217 million in comparison with net income of Ch$ 1,382 million earned in 2002. Net income obtained during the period derives from a 33.5% drop in non-operating result and a 9.2% decrease in operating income, together with a 48.4% increase in income tax in relation to the previous year. This increase in tax expense is fundamentally due to a 130.8% increase in deferred tax expense derived from a 101.4% increase in amortization of complementary accounts plus an increase in deferred tax expense of 158.4% for the period, a situation that is partially compensated by a 25.8% drop in income taxes payable. 4. RESULTS BY BUSINESS AREA Local Telephone Business: Showed a net loss of CH $15,469 million in the period, which represents a decrease of CH$ 3,442 million in the loss with respect to the previous year, explained mainly by a 24.4% decrease in non-operating deficit. Long Distance Business: showed a profit of Ch$13,458 million, a 35.7% increase over the previous year. This variation is composed of a 22.5% drop in the operating income, and a non-operating gain of Ch$2,571 million which compares positively with the non-operating deficit of Ch$5,739 million in the first half of 2002. Corporate Communications Business: This business contributed income of Ch$4,963 million, compared to income in 2002 of Ch$9,596 million. This variation is mainly due to a 30.58% drop in operating income as a result of drop in revenue due to the transfer of PYMES customers to local business. The above was partly offset by a decrease in goods and services and salary expenses. In addition there was a non-operating deficit of Ch$ 1,012 million as of June 2003, while the previous year showed non-operating income of Ch$214 million for the same period. Mobile Business: The Mobile Communications business contributed income of Ch $4,200 million to the consolidated net income during the period, whereas in 2002 it had income of Ch$2,140 million. This positive contribution is derived from higher results at an operating and non-operating level. Other Businesses: These businesses as a whole showed income of Ch$1,064 million as a result operating income of Ch $ 4,208 million and a non-operating deficit of Ch$2,969 million, whereas during the same period in the previous year, there was a loss of Ch$1,357 million. In 2003 these businesses include mainly public telephone services, maintenance and installations of basic telephone equipment, "Isapre Istel" (employee health insurance) and shared services. In 2002 they also include the results of SONDA. Management's Discussion and Analysis of the Consolidated Financial Statements 11 INCOME AND COSTS BY BUSINESS AS OF JUNE 30, 2002 AND 2003 (Figures in millions of pesos as of 06.30.03)
------------------------------------------------------------------------------------------------------------------------------------ Local Corporate Communications Long Distance Jan-Jun Jan-Dec Jan-Jun Jan-Jun Jan-Dec Jan-Jun Jan-Jun Jan-Dec Jan-Jun 2002 2002 2003 2002 2002 2003 2002 2002 2003 ----------------------------------------------------------------------------------------------------------------------------------- Operating Income 212,575 435,002 214,108 59,072 115,487 53,095 50,745 100,953 48,057 Income 188,076 385,420 186,651 40,656 87,154 42,202 37,434 75,553 33,586 Intercompany Transfers 24,499 49,582 27,457 18,416 28,333 10,893 13,311 25,400 14,471 Operating Expenses (187,282) (384,387) (188,831) (48,710) (94,777) (45,902) (32,913) (65,739) (34,232) Payroll (27,521) (55,504) (24,303) (7,731) (14,679) (6,236) (3,194) (6,498) (2,686) Depreciation (88,269) (174,468) (83,746) (5,327) (11,176) (6,272) (4,793) (9,904) (5,469) Goods and Services (42,486) (94,231) (56,104) (15,426) (36,726) (13,305) (18,203) (36,373) (18,678) Intercompany Transfers (29,006) (60,184) (24,679) (20,225) (32,197) (20,089) (6,723) (12,965) (7,398) Operating Income 25,293 50,615 25,276 10,362 20,710 7,193 17,831 35,214 13,826 Non-operating Income and Expenses Financial Expenses (39,924) (82,848) (34,205) (235) (461) 0 (166) (223) 0 Other Income and Expenses (8,388) (24,794) (1,006) 489 (1,122) (480) (4,397) (8,231) 3,388 Intercompany Transfers 12,476 23,355 8,112 (39) 276 (532) (1,176) (2,556) (816) Non-operating Income (35,835) (84,287) (27,100) 214 (1,307) (1,012) (5,739) (11,010) 2,571 ---------------------------------------------------------------------------------------------------------------------------------- R.A.I.I.D.A.I.E (*) 117,651 223,645 116,128 16,138 31,040 12,453 17,051 34,332 21,866 ---------------------------------------------------------------------------------------------------------------------------------- Taxes and Others (8,369) (17,287) (13,646) (980) (2,425) (1,218) (2,178) (4,595) (2,938) Income After Taxes (18,911) (50,959) (15,469) 9,596 16,977 4,963 9,915 19,609 13,458 ----------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------- Mobile Telephones Others Jan-Jun Jan-Dec Jan-Jun Jan-Jun Jan-Dec Jan-Jun 2002 2002 2003 2002 2002 2003 ---------------------------------------------------------------------------------------------------------------- Operating Income 103,692 217,854 114,691 79,610 137,891 37,568 Income 99,875 209,208 112,077 69,051 115,308 25,793 Intercompany Transfers 3,818 8,646 2,614 10,558 22,583 11,775 Operating Expenses (96,256) (201,115) (107,154) (76,493) (134,098) (33,360) Payroll (6,819) (13,747) (7,032) (18,189) (25,813) (2,901) Depreciation (24,432) (51,557) (30,253) (9,971) (17,133) (5,659) Goods and Services (59,630) (125,908) (64,655) (36,656) (66,994) (12,683) Intercompany Transfers (5,374) (9,904) (5,213) (11,677) (24,158) (12,117) Operating Income 7,436 16,739 7,537 3,116 3,793 4,208 Non-operating Income and Expenses Financial Expenses 2,129 2,229 (467) (948) (1,066) (76) Other Income and Expenses 475 (1,856) (163) 2 (3,656) (2,389) Intercompany Transfers (7,392) (12,505) (3,972) (1,464) (3,706) (504) Non-operating Income (4,787) (12,132) (4,602) (2,410) (8,428) (2,969) -------------------------------------------------------------------------------------------------------------- R.A.I.I.D.A.I.E (*) 24,952 53,935 33,655 11,626 13,564 6,974 -------------------------------------------------------------------------------------------------------------- Taxes and Others (509) (665) 1,265 (2,064) (2,809) (175) Income After Taxes 2,140 3,942 4,200 (1,357) (7,444) 1,064 --------------------------------------------------------------------------------------------------------------
(*) R.A.I.I.D.A.I.E. : Income before taxes, interest, depreciation, amortization and extraordinary items. GRAPH OF NET INCOME (LOSS) BY BUSINESS (Six month period ended June, 30) (Figures in millions of pesos as of 06.30.03) (BAR GRAPH) Corporate Long Mobile Local Communications Distance Telephones Others Jun 2002 (18,911) 9,596 9,915 2,140 (1,357) Jun 2003 (15,469) 4,963 13,458 4,200 1,064 Management's Discussion and Analysis of the Consolidated Financial Statements 12 5. STATEMENT OF CASH FLOWS TABLE No. 4 CONSOLIDATED CASH FLOWS (Figures in millions of pesos as of June 30, 2003)
========================================================================================================== DESCRIPTION JAN-JUN JAN-JUN VARIATION 2002 2003 MCh$ % ---------------------------------------------------------------------------------------------------------- Cash flows from operating activities 123,754 154,603 32,849 26.5% Cash flows from financing activities (69,635) (116,858) (47,223) 67.8% Cash flows from investment activities (25,783) (39,508) (13,725) 53.2% Effect of inflation on cash and cash (642) (533) 109 -17.0% equivalents Net change in cash and cash equivalents for 27,694 (296) (27,990) -101.1% the period ==========================================================================================================
The decrease of CH$ 296 million in cash and cash equivalents for 2003 to the increase of CH$ 27,694 million in 2002, comes from higher cash flows destined to investment and, mainly to greater amortization and prepayment cash flows to decrease the debt of Telefonica CTC Chile, a situation that was partly offset by increased cash flows from operating activities during the first half of 2003, as compared to the same period of the previous year. Management's Discussion and Analysis of the Consolidated Financial Statements 13 6. FINANCIAL INDICATORS TABLE No. 5 CONSOLIDATED FINANCIAL INDICATORS
----------------------------------------------------------------------------------------------------------------------- DESCRIPTION JAN - JUN JAN - DEC JAN - JUN 2002 2002 2003 ----------------------------------------------------------------------------------------------------------------------- LIQUIDITY RATIO Current Ratio 1.34 1.18 1.28 (Current Assets / Current Liabilities) Acid Ratio 0.21 0.25 0.17 (Most liquid assets / Current Liabilities) ----------------------------------------------------------------------------------------------------------------------- DEBT RATIOS Debt Ratio (Total Liabilities / Shareholders' Equity) 1.22 1.09 0.99 Long-term Debt Ratio (Long-term Liabilities / Total Liabilities) 0.70 0.73 0.75 Financial Expenses Coverage (Income Before Taxes and Interest / Interest Expenses) 1.22 0.92 1.59 ----------------------------------------------------------------------------------------------------------------------- RETURN AND NET INCOME PER SHARE RATIO Operating Margin 15.3% 15.1% 15.1% (Operating Income / Operating Revenues) 3.1% 6.1% 3.1% Operational Income Return (Operating Income / Net Property, Plant and Equipment (1)) $ 1.4 -$18.6 $8.6 Net Income per Share 0.1% -1.4% 0.2% (Net Income / Average number of paid shares each year) Return on Equity 0.05% -0.61% 0.08% (Net income / Average shareholders' equity) Return Shareholders' on Assets 0.07% -0.87% 0.1% (Net income / Average assets) Operating Assets Yield 0.06% 0.1% N.A. (Net income / Average operating assets (2)) Return on Dividends (Paid dividends / Market Price per Share) ------------------------------------------------------------------------------------------------------------------------- ACTIVITY INDICATORS Total Assets MCh$ 3,013,688 MCh$ 2,701,815 MCh$ 2,603,832 Sale of Assets MCh$ 14,758 MCh$ 21,684 MCh$ 112,602 Investments in other companies and property, plant and equipment MCh$ 48,614 MCh$ 147,108 MCh$ 69,905 Inventory Turnover (Cost of Sales / Average Inventory) 0.65 2.6 0.63 Days in Inventory 278 140 284 (Average Inventory / Cost of sales times 360 days) ========================================================================================================================
(1) Figures at the beginning of the year, restated. (2) Property, plant and equipment are considered operating assets Management's Discussion and Analysis of the Consolidated Financial Statements 14 In the previous table, the following is highlighted: The current ratio shows a decrease because the levels of current assets and liabilities decreased by 37.9% and 35.0%, respectively. The debt ratio decreased due to lower levels of financial liabilities compared to January - June 2002. 7. EXPLANATION OF THE MAIN DIFFERENCES BETWEEN MARKET OR ECONOMIC VALUE AND THE BOOK VALUE OF THE COMPANY'S ASSETS Due to am imperfect market for 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 lower than the book value. 8. REGULATORY ISSUES Fixed Telephony Tariff Decree Decree No. 187 is in effect as of May 5, 1999. It establishes maximum rates for Telefonica CTC Chile for local telephone services and interconnection services for a period of five years, which expires on May 4, 2004. The main services subject to tariff regulation are: Telephone Line Service (formerly Fixed Charge), Local Measured Service, Local Tranche, Access Charges, Communications Service from Public Telephones and Network Unbundling Services. In relation to the procedure to be followed for setting rates for services subject to tariff regulation, on January 13 of this year, Telefonica CTC Chile S.A. requested that the Antitrust Commission decree freedom of rates in specific geographic areas, that they define telephone services which will be subject to rate regulation in areas where the market conditions are not sufficient to guarantee a freedom of rates regime and that they determine that Telefonica CTC Chile S.A. has the right to offer alternative rate plans without prior authorization. Subtel, together with the process of rate setting for Telefonica CTC Chile, initiated the process of rate setting for public services provided by Entelphone in Easter Island and access charge rates provided by Entelphone, CMET, Telesat and Manquehue Net. On April 30, 2003, Telefonica CTC submitted to Subtel its proposal for the Technical Economic Basis for the Tariff Setting Study for services provided to the public and for the Tariff Setting Study for services provided by Telefonica CTC Chile to other concessionaires of Public Telephone services, to intermediate services concessionaires that provide long distance telephone services and to suppliers of complementary services. Management's Discussion and Analysis of the Consolidated Financial Statements 15 On its side, on May 20, 2003, the Antitrust Commission dictated Resolution No. 686 which defines the services subject to rate setting by the Ministries of Economy and of Transportation and Telecommunications, which are similar to those established for the 1999 - 2004 period. The mentioned resolution No. 686 rejects the petition for tariff deregulation for specific primary zones requested by Telefonica CTC Chile, and in relation to the request for rate flexibility, informed favorably by the Regulator, the Antitrust Commission did not issue a specific pronouncement in spite of the fact that most of its members were in favor of making a pronouncement on the same, whereas the rest of the members considered that such matter did not correspond to that Commission. On May 30, 2003, Subtel sent Telefonica CTC Chile the Preliminary Technical Economic Basis. In this respect, Telefonica CTC Chile formulated 84 controversies to the Preliminary Technical Economic Basis of Subtel and requested the formation off a panel of experts in conformity with what is established in the law and Regulations that regulates the Procedure, Advertising and Participation in the Rate Setting Process. The Expert Commission was officially constituted on June 17, integrated by the experts designated by Telefonica CTC Chile and Subtel. On July 17, the mentioned panel issued its report on the controversies informed by Telefonica CTC Chile. Once the pronouncement has been sent, which is not binding upon nature Subtel, it has 10 days to dictate the Final Technical Economic Basis. Entelphone, CMET, Manquehue Net and Telesat did not formulate controversies to the Preliminary Technical Economic Basis. Consequently with the above, Subtel dictated the Final Technical Economic Basis for the respective companies. Management's Discussion and Analysis of the Consolidated Financial Statements 16 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 expiry 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. In Exempt Resolution dated February 22, 2003, the Undersecretary of Telecommunications approved the Final Technical Economic Basis that will apply to the process of setting the Access Charges Rates for the mobile telephone public service for the 2004 - 2009 period. Lawsuit Against the State of Chile Upon extinguishing the administrative instances to correct the illegalities involved in the Tariff Setting Process, Telefonica CTC Chile S.A. filed a lawsuit for damages against the State of Chile. The lawsuit for US$274 million, plus readjustments and interests, 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. Upon conclusion of the testimonial and partial testing, the expert investigation stage requested by the parties begins. Management's Discussion and Analysis of the Consolidated Financial Statements 17 9. ANALYSIS OF MARKETS, COMPETITION AND RELATIVE PARTICIPATION Continued growth is observed in the mobile and broad band Internet market during the first quarter of 2003, in contrast with the stagnation in the fixed-network voice communication, long distance and narrow band Internet business. In the competitive environment, there were no relevant changes in the relative participation of the operators in the various businesses, with exception of an increase in the participation of Telefonica CTC Chile in the broad band market. Among the relevant competitive events, in mid-April 2003, the highlight is the announcement of the owner of AT&T Chile (AT&T Latin America) that it had requested protection under Chapter 11 of the Bankruptcy Law in the United States of America for reorganizing its operations. At the same time AT&T Corp had an agreement of intent to sell its participation in AT&T Latin America to Southern Cross, which finally did not prosper. 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 into 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 MAY 2003 was in the order OF 23.7 lines per 100 inhabitants (considering the population figures of the April 2002 census) Telefonica CTC Chile has approximately 75.5% of fixed telephone lines as of May 2003. 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 Commission established the possibility for Telefonica CTC Chile to offer alternative tariff plans to Decree No. 187, oriented toward volume discounts, and to request tariff deregulation in certain geographic areas. In this regard, on September 4, 2001, Telefonica CTC Chile presented a proposal for alternative tariff plans (for high traffic consumption), which was 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 or Wireless Local Loop (WLL), only Entel (licenses: one national and 13 regional) is currently developing its projects. Telefonica del Sur (which was awarded licenses from the VIII to X Regions) informed Subtel of the interruption of its project, due to extenuating circumstances, this being the reason that Subtel annulled the concession for local wireless public service in the VIII and IX regions. Management's Discussion and Analysis of the Consolidated Financial Statements 18 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 calls. This law allows local telephone operators to participate in the long distance market through an independent subsidiary subject to some 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 the first half of 2003 with respect to the first half of 2002 estimated at 11% and 6% respectively. Telefonica CTC Chile, through its subsidiaries 188 Telefonica Mundo and GLOBUS 120, reached an estimated market share of 38.7% in domestic long distance and 31.4% in outgoing international long distance, in the second quarter of 2003. 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 corporate clients and Internet service providers (ISPs). Likewise, it includes the commercialization of advanced equipment (multiple lines and PABx, among others). In October 2002, Telefonica Empresas refocused toward the company and corporate segments. 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, with a market share of approximately 47% considered during the first half of 2003, including sale of advanced equipment to companies. Mobile Communications Provides mobile communication services (cellular telephony, paging, 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% of a total of 6.6 million of customers estimated as of June 2003. Regarding the tender offer 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. Management's Discussion and Analysis of the Consolidated Financial Statements 19 On July 18, 2002, 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 of UF 544,521, equivalent to US$12.8 million. On the other hand, Telefonica CTC enabled the specialized radio-communications interconnection requested by a mobile service operator, which is available as of the beginning of April 2003. Pay TV The pay television market is composed of two main cable TV competitors with approximately 80% of the pay TV market. (roughly 710,000 customers), two satellite TV operators and approximately 20 cable TV operators in specific areas, jointly have the remaining 20% of the market. 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 Antitrust Commission. 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 of both companies ended by way of a legal settlement. In January 2002, a merger agreement was reached between Liberty Media and United Global Com (UCG), companies that participate in the Chilean operators Metropolis Intercom and VTR, respectively. Internet Access In this market there are currently approximately 34 ISP's operating effectively, in which three of them concentrate 83% of the traffic. IP traffic (switched) for the second quarter of 2003 in the network of Telefonica CTC Chile, reached approximately 1,671 million of minutes, a 2% drop in respect to the second quarter of 2002 mainly due to the migration of intensive users to broad band access. Telefonica CTC Chile focuses on Internet access for corporate clients through its ISP TIE, segment in which it holds a market share near to 30%, and has commercial agreements with ISP Terra. Telefonica CTC Chile continues with an intensive deployment of internet access through ADSL broad band, directly to the final customer and through a wholesale model in the ISP industry. At the end of June 2003, Telefonica CTC Chile's broadband connections in service reached 84,202, representing a growth of 178.2% when compared to June 2002, thus achieving a market share of 33%. Management's Discussion and Analysis of the Consolidated Financial Statements 20 Other Businesses Comprises the Public Telephone market, in which Telefonica CTC Chile participates through its subsidiary CTC Equipos. There are seven nationwide companies of, which CTC Equipos, as of June 2003, has approximately 23% market share as of June 2003considering its own public telephones. Additionally, Telefonica CTC Chile has another 21,588 community telephones installed. 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 has completed 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 in 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's control is transferred to Andres Navarro, while Telefonica CTC Chile keeps the remaining 35% ownership through its subsidiary Telefonica Empresas. On November 20, 2001 a new subsidiary was formed to commercialize and install alarm systems and video cameras for residential and corporate customers, providing monitoring and surveillance services and any other service relating to the above. As of May 2003, it is estimated that Telefonica CTC Chile has a market share of 29% in this service. Management's Discussion and Analysis of the Consolidated Financial Statements 21 10. ANALYSIS OF MARKET RISK Financial Risk Coverage With the attractive foreign interest rates in certain periods, the Company 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 financial 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 forward agreements. As of June 30, 2003, the interest-bearing debt in original currency expressed in dollars was US$1,413 million, including US$991 million of financial liabilities in dollars, US$220 million in debt expressed in "unidades de fomento" (inflation indexed Chilean currency unit), and US$160 million of debt in euros. In this manner, US$1,211 million corresponded to debt exposed to foreign currencies, and therefore directly or indirectly exposed to variations of the dollar. Simultaneously, the Company had dollar/UF and dollar/peso exchange insurance and assets in dollars that resulted, as of June 30, 2003, in Zero exposure to foreign exchange. 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 June 30, 2003, the Company had debts at variable interest rates, Libor, Euro Libor and TAB, mainly for syndicated loans. To protect the Company from increases in the variable (floating) interest rates, derivative financial instruments have been used, particularly "collars" and "Forward Rate Agreements" (which protect the Libor rate), to limit the future fluctuations of interest rates. As of June 30, 2003, this has allowed the Company to end with an exposure of 16% of the total interest-bearing debt in original currency. 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, thereto duly authorized. Date: August 29, 2003 TELECOMMUNICATIONS COMPANY OF CHILE By /s/ Julio Covarrubias F. ------------------------------- Name: Julio Covarrubias F. Title: Chief Financial Officer