Prepared and filed by St Ives Burrups

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
November 14, 2003

Commission File Number: 001-10579

COMPANIA DE TELECOMMUNICACIONES DE CHILE S.A.
(Exact name of registrant as specified in its charter)

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           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  

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  

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  

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.
   
2.

2


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COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES

REPORT ON THE FINANCIAL STATEMENTS
for the nine month periods ended
September 30, 2002 and 2003
(CONSOLIDATED)

(Translation of financial statements originally issued in Spanish)

 


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COMPAÑIA 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

 


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Deloitte & Touche
Sociedad de Auditores y Consultores Ltda.
RUT: 80.276.200-3
Av. Providencia 1760
Pisos 6, 7, 8 y 9
Providencia, Santiago
Chile
Fono: (56-2) 270 3000
Fax: (56-2) 374 9177
e-mail: auditoria@deloitte.cl
www.deloitte.cl
 
INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Chairman and Members of the Board of Directors of Compañía de Telecomunicaciones de Chile S.A.

1.
We have reviewed the accompanying interim consolidated balance sheets of Compañía de Telecomunicaciones de Chile S.A. and subsidiaries as of September 30, 2003 and 2002 and the related interim consolidated statements of income and cash flows for the nine-month periods then ended. These interim consolidated financial statements (including the related notes) are the responsibility of the management of the Company. 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.
   
2.
We conducted our reviews in accordance with auditing standards generally established in Chile for a review of interim financial information. A review of interim financial information consists principally of applying analytical procedures to the financial statements 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 consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.
   
3.
Our report dated October 24, 2003 on the interim consolidated financial statements as of September 30, 2002, was qualified for the put and call option contract on the investment in Sonda S.A., as Compañía de Telecomunicaciones de Chile S.A. and its subsidiary were in process of evaluating whether the projected earnings of Sonda S.A. would allow the complete recovery of the goodwill which had arisen on this investment. As is discussed in Note 2 d) 7), on July 29, 2003, Inversiones Santa Isabel Limitada communicated its decision to exercise the early call option, an operation which was completed on August 26, 2003, as a result of which our present report on the accompanying 2002 interim financial statements differs from our previously issued report.
   
4.
Based on our review of the interim consolidated financial statements at September 30, 2003 and 2002, we are not aware of any material modifications that should be made to them 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

October 22, 2003

Una firma miembro de
Deloitte Touche Tohmatsu

 


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COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2003
(Restated for general price-level changes and expressed in thousands of constant Chilean Pesos as of September 30, 2003)

    Notes   2002   2003  
        ThCh$   ThCh$  
ASSETS
       
 
 
CURRENT ASSETS
                   
Cash and bank
          15,499,066     11,065,712  
Time deposits
                   
Marketable securities (net)
          52,446,233     268,863  
Trade accounts receivable, net of allowance for doubtful accounts
of ThCh$ 72,491,954 and ThCh$ 89,097,817, respectively
    (4)     89,950,371     47,483,444  
Notes receivable, net of allowance for doubtful notes
    (5)     204,284,331     214,593,001  
of ThCh$ 8,341,742 and ThCh$ 6,933,253, respectively
    (5)     5,610,309     5,960,648  
Miscellaneous accounts receivable
    (5)     25,832,519     11,404,984  
Notes and accounts receivable from related companies
    (6a)     19,628,052     18,201,485  
Inventories (net)
          16,769,648     19,704,226  
Recoverable taxes
          16,668,254     21,604,519  
Prepaid expenses
          9,768,638     8,747,891  
Deferred taxes
    (7b)     26,565,304     21,155,049  
Other current assets
    (8)     79,539,046     35,424,445  
         

 

 
TOTAL CURRENT ASSETS
          562,561,771     415,614,267  
         

 

 
PROPERTY, PLANT AND EQUIPMENT
                   
Land
    (9)     27,539,330     27,694,719  
Constructions and
               
   infrastructure works
          185,582,533     186,799,365  
Machinery and equipment
          3,282,492,915     3,439,859,750  
Other property, plant and equipment
          403,388,080     381,777,356  
Technical revaluation
          9,242,348     9,242,473  
Accumulated depreciation (less)
          1,934,282,559     2,180,120,508  
         

 

 
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET
          1,973,962,647     1,865,253,155  
         

 

 
OTHER NON-CURRENT ASSETS
                   
Investment in related companies
    (10)     39,896,023     10,467,888  
Investment in other companies
          3,862     3,862  
Goodwill
    (11a)     185,456,179     161,320,334  
Long-term debtors
    (5)     52,035,175     30,572,407  
Intangibles
    (12)     30,878,720     36,111,578  
Accumulated amortization (less)
    (12)     2,278,546     4,029,581  
Others
    (13)     17,805,990     9,957,408  
         

 

 
TOTAL OTHER ASSETS
          323,797,403     244,403,896  
         

 

 
TOTAL ASSETS
          2,860,321,821     2,525,271,318  
         

 

 

The accompanying notes 1 to 33 are an integral part of these consolidated financial statements

 


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COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2003
(Restated for general price-level changes and expressed in thousands of constant Chilean Pesos as of September 30, 2003)

    Notes   2002   2003  
        ThCh$   ThCh$  
LIABILITIES
       
 
 
                     
CURRENT LIABILITIES
                   
Short-term obligations with banks
and financial institutions
    (14)     18,361,468     19,179,704  
Short-term portion of long-term obligations
with banks and financial institutions
    (14)     43,101,678     56,278,285  
Obligations with the public (Promissory notes)
    (16a)         9,950,159  
Obligations with the public (Bonds payable)
    (16b)     26,404,718     109,847,734  
Long-term obligations maturing
               
within a year
          485,920     445,284  
Dividends payable
          200,322     167,675  
Trade accounts payable
    (33)     131,299,966     131,225,405  
Notes payable
          87,086     227,226  
Other creditors
          5,581,526     42,837,408  
Notes and accounts payable to related companies
    (6b)     11,636,420     19,698,765  
Accruals
    (17)     25,987,135     9,485,826  
Withholdings taxes
          13,200,152     9,224,829  
Unearned income
          2,391,052     7,705,410  
Other current liabilities
          1,991,074     2,791,897  
         

 

 
TOTAL CURRENT LIABILITIES
          280,728,517     419,065,607  
         

 

 
LONG-TERM LIABILITIES
                   
Obligations with banks and
financial institutions
    (15)     616,329,289     371,255,246  
Bonds payable
    (16b)     565,808,796     338,429,064  
Notes and accounts payable to related companies
    (6b)     25,763,829     22,687,508  
Miscellaneous accounts payable
          5,686,346     9,021,941  
Accruals
    (17)     22,810,785     19,106,007  
Deferred taxes
    (7b)     28,831,336     46,786,562  
Other liabilities
          10,270,971     4,674,289  
         

 

 
TOTAL LONG-TERM LIABILITIES
          1,275,501,352     811,960,617  
         

 

 
MINORITY INTEREST
    (19)     1,216,445     1,261,258  
         

 

 
SHAREHOLDERS’ EQUITY
    (20)              
Paid-in capital
          735,741,104     850,980,476  
Reserve — equity indexation
          9,564,638     10,211,766  
Share premium
          115,886,504     0  
Other reserves
          744,278     59,027  
Retained earnings
          440,938,983     431,732,567  
Accumulated earnings
          456,881,572     422,223,259  
Net income for the period
          (15,942,589 )   9,509,308  
         

 

 
TOTAL SHAREHOLDERS’ EQUITY
          1,302,875,507     1,292,983,836  
         

 

 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
          2,860,321,821     2,525,271,318  
         

 

 

The accompanying notes 1 to 33 are an integral part of these consolidated financial statements

 


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COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2003
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of September 30, 2003)

        2002   2003  
        ThCh$   ThCh$  
       
 
 
OPERATING RESULTS:
                   
Operating revenues
          655,236,368     605,313,097  
Operating costs (less)
          453,673,387     411,715,396  
         
 
 
Gross profit
    (21a)     201,562,981     193,597,701  
Administrative and selling expenses (less)
          99,460,444     105,437,172  
         
 
 
OPERATING RESULTS
          102,102,537     88,160,529  
NON-OPERATING RESULTS:                    
Financial income
          10,661,996     5,946,609  
Net income from investments in related companies
    (10)     943,088     1,055,334  
Other non-operating income
    (21b)     12,418,413     11,368,316  
Loss from investments in related companies (less)
    (10)     473,957     416,366  
Amortization of goodwill (less)
    (11a)     21,070,577     20,228,782  
Financial expenses (less)
          64,022,445     49,381,590  
Other non-operating expenses (less)
    (21c)     30,085,010     7,114,740  
Price-level restatement
    (22)     (3,399,290 )   (408,208 )
Exchange differences
    (23)     (3,725,219 )   1,356,986  
         
 
 
NON-OPERATING LOSS, NET
          (98,753,001 )   (57,822,441 )
         
 
 
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
          3,349,536     30,338,088  
Income taxes
    (7c)     (18,544,776 )   (20,725,018 )
CONSOLIDATED INCOME
          (15,195,240 )   9,613,070  
Minority interest
    (19)     (747,349 )   (103,762 )
Amortization of negative goodwill
    (11b)          
         
 
 
NET INCOME FOR THE PERIOD
          (15,942,589 )   9,509,308  
         
 
 

The accompanying notes 1 to 33 are an integral part of these consolidated financial statements

 


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COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2003
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of September 30, 2003)

    2002   2003  
    ThCh$   ThCh$  
   

 

 
NET CASH FLOWS FROM OPERATING ACTIVITIES
    235,881,867     199,754,626  
Net income for the period
    (15,942,589 )   9,509,308  
Result on sales of assets:
    (7,658,655 )   (3,851,627 )
Loss on sales of property, plant and equipment
    313,857     (328,218 )
Gain on sales of investments
    (7,972,512 )   (3,590,114 )
Loss on sales of investments
        66,705  
Debits (credits) to income that do not represent cash flows:
    290,464,257     243,670,417  
Depreciation for the period
    200,232,537     200,524,628  
Amortization of intangibles
    667,314     1,368,919  
Provisions and write offs
    18,247,456     24,755,771  
Net income from investments in related companies
    (943,088 )   (1,055,334 )
Loss from investments in related companies
    473,957     416,366  
Amortization of goodwill
    21,070,577     20,228,782  
Price-level restatement
    3,399,290     408,208  
Exchange differences
    3,725,219     (1,356,986 )
Other credits to income that do not represent cash flows
    (18,459,853 )   (6,119,090 )
Other debits to income that do not represent cash flows
    62,050,848     4,499,153  
Changes in operating assets
Decrease
    10,094,176     (12,417,073 )
Trade accounts receivable
    (13,049,127 )   (16,961,895 )
Inventories
    9,232,526     (5,124,358 )
Other assets
    13,910,777     9,669,180  
Changes in operating liabilities Increase (decrease)
    (41,822,671 )   (37,260,161 )
Accounts payable related to operating activities
    (61,661,320 )   (35,522,004 )
Interest payable
    (5,975,435 )   (9,746,958 )
Income taxes payable (net)
    19,544,702     14,615,026  
Other accounts payable related to non-operating activities
    6,012,265     (3,860,557 )
V.A.T. and other similar taxes payable
    257,117     (2,745,668 )
Minority interest
    747,349     103,762  

The accompanying notes 1 to 33 are an integral part of these consolidated financial statements

 


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COMPAÑIA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2003
(Restated for general price-level changes and expressed in thousands of constant Chilean pesos as of September 30, 2003)

    2002   2003  
    ThCh$   ThCh$  
   
 
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    (149,067,975 )   (159,519,635 )
Proceeds from loans
    13,987,836      
Obligations with the public
        19,791,533  
Other sources of financing
    1,009,775      
Dividends paid (less)
    (1,279,288 )   (16,761,793 )
Loans paid (less)
    (76,751,112 )   (92,986,502 )
Obligations with the public paid (less)
    (75,840,669 )   (69,562,873 )
Payment of other loans from related companies (less)
    (10,194,517 )    
NET CASH PROVIDED BY (USED IN) INVESTMENT ACTIVITIES
    (85,206,602 )   (40,305,259 )
Sales of property, plant and equipment
    542,999     635,197  
Sales of permanent investments
    28,729,933     33,388,363  
Sales of other investments
        62,392,169  
Other investment income
        206  
Acquisition of property, plant and equipment (less)
    (50,124,948 )   (100,195,617 )
Payment of capitalized interest (less)
    (3,731,211 )    
Permanent investments (less)
    (121,386 )    
Investments in financial instruments (less)
    (30,643,331 )   (33,362,313 )
Other investment activities (less)
    (29,858,658 )   (3,163,264 )
   

 

 
NET CASH FLOWS FOR THE PERIOD
    1,607,290     (70,268 )
               
EFFECT OF INFLATION ON CASH AND CASH EQUIVALENTS
    (1,226,629 )   (595,929 )
   

 

 
NET INCREASE (DECREASE) OF CASH AND CASH EQUIVALENTS
    380,661     (666,197 )
   

 

 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    87,927,504     21,285,592  
   

 

 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
    88,308,165     20,619,395  
   

 

 

The accompanying notes 1 to 33 are an integral part of these consolidated financial statements

 


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COMPAÑÍA 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)
Compañía de Telecomunicaciones de Chile S.A. (Telefónica 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 September 30, 2003 the following subsidiaries of the consolidated group are registered with the Securities Registry:
   
            Participation
   TAXPAYER    Registration   (direct & indirect)
 
  SUBSIDIARIES
  NO.   Number   %  
            2002   2003  
   
 
 
 
 
CTC Transmisiones Regionales S.A.(188 Mundo Telefónica)
    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 nine-month periods ended as of September 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 the event 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 2.9% 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

 


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COMPAÑÍA 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 September 30, 2003 the consolidated group (The Company) is composed of Compañía de Telecomunicaciones de Chile S.A. and the following subsidiaries:
   
                Participation Percentage  
         
 
            2002   2003  
         
 
 
TAXPAYER
NO.
    Company Name     Total     Direct     Indirect     Total  
     
 
 
 
 
79.727.230-2
    CTC Isapre S.A. (6)     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 Telefónica)     99.16     99.16         99.16  
96.961.230-5
    Telefonica Gestión de Servicios Compartidos Chile S.A.     99.99     99.90     0.09     99.99  
Foreign
    CTC International S.A. (1)     100.00              
96.786.140-5
    Telefónica Móvil S.A.     99.99     99.99         99.99  
74.944.200-k
    Fundación Telefónica 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
    Telefónica 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
              Tecnonáutica S.A. (2)     99.99         99.99     99.99  
96.934.950-7
                   Portal de Pagos e Información S.A. (3)     99.99         99.99     99.99  
96.893.540-2
                        Infochile S.A.     99.99         99.99     99.99  
96.700.900-8
         Telefónica Data Chile S.A. (4)     99.99              
96.833.930-3
              Comunicaciones Empresariales S.A. (5)     99.99              
                                 

 
1)
The board of directors’ meeting of CTC International S.A., held in December 2002, approved the liquidation of this company.
   
2)
On May 2, 2003, Telefónica Empresas S.A. sold its holding in Tecnonáutica S.A. to Infoera S.A., which became owner of 99.99% of the shares of that company.
   
3)
On May 2, 2003, Tecnonáutica S.A. sold its holding in Infochile S.A. to Portal de Pagos e Información S.A., which became owner of 99.98% of the shares of that company.
   
4)
The Extraordinary Shareholders’ Meeting of Telefónica Empresas CTC Chile S.A., held on January 28, 2003, approved the merger by incorporation of the subsidiary Telefónica Data Chile S.A., increasing the capital of Telefónica Empresas CTC Chile S.A. by ThCh$ 414 equivalent to the issuance of 2,878 shares.
   
5)
The Extraordinary Shareholders’ Meeting of Telefónica Data Chile S.A., held in November 2002, approved the incorporation by absorption of the subsidiary Comunicaciones Empresariales S.A.
   
6)
On September 1, 2003 Telefónica CTC Chile S.A., sold 100% of its participation in this subsidiary for UF 9,175, which resulted Telefónica CTC Chile to recognizing a loss on the sale of the subsidiary of ThCh 66,705.
   
 
 

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COMPAÑÍA 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
   
7)
During September 2002, Telefónica CTC Chile sold and transferred 25% ownership of Sonda S.A. to Inversiones Pacífico Limitada and Inversiones Santa Isabel Limitada, companies associated with Mr. Andrés Navarro H. Once this transaction had taken place, Telefónica CTC Chile through its subsidiary Telefónica Empresas CTC Chile S.A., continues to hold 35% ownership in that company.
   
 
Additionally on September 26, 2002, Telefónica Empresas signed an agreement with Inversiones Santa Isabel Limitada, which granted it an option to sell 35% of Sonda, which it could exercise between July 16 and 25, 2005, at the book value of the investment as of June 30, 2005, plus a premium of UF 142,021, with a minimum value of UF 2,048,885. on the other hand, in the event Telefónica Empresas does not exercise that option to sell, between July 26 and August 5, 2005 Inversiones Santa Isabel Limitada had an option to purchase the same 35% of Sonda, under the same previously described conditions. Likewise, Inversiones Santa Isabel Ltda. could exercise the option to purchase in advance between July 26 and 31, 2003 or of 2004.
   
 
On July 29, 2003, Telefónica Empresas became aware of the decision of Inversiones Santa Isabel Limitada, to exercise the option early to purchase the remaining 35 % of Sonda S.A. . This transaction involved a disbursement by the purchasing company of ThCh$ 33,388,363 (historical) on August 26, 2003, resulting in a charge to income of ThCh$ 6,999,276 before taxes (ThCh$ 5,683,065 net of the tax effect).
 
(e) 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 September 30, 2003 and 2002, for beginning balances was 1.2% and 1.3%, respectively.
 
(f) Basis of conversion:
   
 
Assets and liabilities in US$ (United States dollars), Euros, UF (Unidad de Fomento) and Pound Sterling, have been translated into Chilean pesos at the exchange rates at each period closing date:
   
 
YEAR
  US$   EURO   UF  
     
 
 
 
 
2002
    748.73     738.392     16,455.03  
 
2003
    660.97     770.811     16,946.03  
   
 
The exchange differences are charged or credited to income for the period.
 
(g) Time deposits:
   
 
Time deposits are presented at the value of the invested capital plus readjustments, if applicable, and accrued interest as of period end.
 
 
 

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COMPAÑÍA 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:
   
(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 period’s 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.
 
(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 24 month period 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 until 100% is reached for debts over 120 days and 180 days for large customers (corporations).
 
 

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COMPAÑÍA 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:
   
(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 $ 6,818,537 in 2002.
   
 
As described in Note 3a, starting 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 8.24%.
 
     
(n) Leased assets:
   
 
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.
 
 

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COMPAÑÍA 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:
   
(ñ) 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 in the “Diario Oficial”) of the decrees covering the respective licenses.
 
(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.
 
 

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COMPAÑÍA 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:
     
 
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).
     
 
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 September 30 of each year, the accumulated balances of temporary differences reflect 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 approved by the customers and which consider the degree of completion of the respective projects.
 
 

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COMPAÑÍA 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.
 
 

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COMPAÑÍA 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.
 
 

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COMPAÑÍA 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:
   
 
Starting 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:
     
  i)
Since the Company no longer owns part of Sonda S.A., the financial statements of Telefónica CTC Chile as of September 30, 2003, have only recognized their 35% equity in the net income of Sonda S.A. earned until June 30, 2003, maintaining the consolidation with that company until August 31, 2002.
   
 
For a comparative analysis of the figures, a consolidated statement of income is presented, assuming that for the eight month period ended August 31, 2002, the investment in Sonda S.A. was recorded using only the equity method.
   
    Jan-Sep
2003
  Jan-Sep
2002
  Variation
 
    ThCh$   ThCh$   ThCh$   %  
   

 

 

 

 
Operating revenues
    605,313,097     594,686,447     10,626,650     1.8  
Operating costs
    517,152,568     494,797,982     22,354,586     4.5  
Salaries and employee benefits
    42,117,931     48,788,997     (6,671,066 )   (13.7 )
Depreciation
    198,249,390     192,870,602     5,378,788     2.8  
Goods and services
    171,348,075     160,698,315     10,649,760     6.6  
Administrative and selling expenses
    105,437,172     92,440,068     12,997,104     14.1  
   

 

 

 

 
Operating Income
    88,160,529     99,888,465     (11,727,936 )   (11.7 )
                           
Financial income
    5,946,609     9,354,629     (3,408,020 )   (36.4 )
Income from investments in related companies
    638,968     1,023,677     (384,709 )   (37.6 )
Amortization of goodwill
    20,228,782     20,515,972     (287,190 )   (1.4 )
Financial expenses
    49,381,590     63,257,360     (13,875,770 )   (21.9 )
Other income and expenses
    (4,253,576 )   19,889,720     (24,143,296)     C.S.  
Price-level restatement
    948,778     (4,914,228 )   5,863,006     C.S.  
   

 

 

 

 
Non-operating income (loss)
    (57,822,441 )   (98,198,974 )   40,376,533     (41.1 )
Income before taxes and minority interest
    30,338,088     1,689,491     28,648,597     N.A.  
Income tax
    (20,725,018 )   (17,510,014 )   (3,215,004 )   18.4  
Minority interest
    (103,762 )   (122,066 )   18,304     (15.0 )
   

 

 

 

 
Net income (loss) for the period
    9,509,308     (15,942,589 )   25,451,897     C.S.  
   

 

 

 

 
      
  ii)
The sale of the subsidiary Compañía de Teléfonos Isapre S.A. was completed on September 2; its net effect meant a loss of ThCh$ 66,705 with regard to the book value of that investment.
 
c) Change in estimate:
   
 
As of September 30, 2003, the Company accelerated the amortization of goodwill in the subsidiaries Tecnonáutica S.A. and Infoera S.A. recognizing a higher charge to income for the period of ThCh $ 92,982, reducing the remaining amortization period for such goodwill from 17 to 8 years.
 
 

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COMPAÑÍA 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
    9,955,727     451,869  
Publicly offered promissory notes
    74,534,419     46,942,157  
Mutual fund units
    5,449,582     80,590  
Others
    10,643     8,828  
   
 
 
Total Marketable Securities
    89,950,371     47,483,444  
   
 
 
 
Shares
 
Taxpayer
No.
  Company
Name
  Number of
Shares
  Interest   Market Quote
per share
  Market
Value
  Restated
Cost
 
            %   ThCh$   ThCh$   ThCh$  
   
 
 
 
 
 
 
Foreign
    New Skies Satellites     5.198     0.057 %   4.2699     22,195     252.853  
Foreign
    Intelsat     288.065     0.057 %           429.674  
         
 
 
 
 
 
Value of investment portfolios
    22,195      682,527  
Adjustment to market value provision
        (230,658 )
Book value of investment portfolio
        451,869  
                           
 
 
     
a)
The Board Meeting held on July 10, 2003, approved the sale of the 2,984,986 shares of Terra Networks S.A., that the Company had through the OPA launched by Telefónica S.A. The price of the OPA was 5.25 Euros per share, which at the exchange rate as of the date in which the sale materialized, resulted in a total selling price of ThCh$ 12,643,411.
 
Publicly offered promissory notes (Fixed Income)
 
    Date       Book Value              
   
  Par  
  Market        
Instrument
  Purchase   Maturity   Value   Amount   Rate   Value   Provision  
            ThCh$   ThCh$       ThCh$   ThCh$  
   
 
 
 
 
 
 
 
Zero
    Dec-2002     Jul-2004     5,922,291     6,750,512     5.40     6,750,512      
Zero
    Dec-2002     Dic-2005     13,217,688     15,161,750     5.85     15,161,750      
Zero
    Dec-2002     Nov-2005     1,682,700     1,929,509     5.85     1,929,509      
Zero
    Dec-2002     Oct-2005     3,526,840     3,971,996     5.07     3,971,996      
               
 
 
 
 
 
      Sub-Total    24,349,519      27,813,767            27,813,767        
               
 
 
 
 
 
PRD
    Sep-2003     Jul-2004     3,965,820     4,236,287     6.00     4,236,287      
BCD
    Sep-2003     Sep-2004     14,541,340     14,892,103     5.00     14,892,103      
               
 
 
 
 
 
      Total    42,856,679      46,942,157            46,942,157        
               
 
 
 
 
 
 
 

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COMPAÑÍA 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              
   
             
    Up to 90 days   Over 90 up to 1 year   Subtotal   Total Current (net)   Long-term  
   
 
 
 
 
 
    2002   2003   2002   2003   2003   2002   2003   2002   2003  
Description
  ThCh$   ThCh$   ThCh$   ThCh$   ThCh$   ThCh$   %   ThCh$   %   ThCh$   ThCh$  
   
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
    269,640,120     288,316,147     11,365,667     10,909,527     299,225,674     204,284,331     100,0     214.593.001     100,0     6.434.140     4.561.896  
   Standard telephony service
    155,140,229     180,019,056     8,967,864     9,167,691     189,186,747     110,160,199     53,93     114.100.404     53,17     6.434.140     4.561.896  
   Long distance
    47,180,698     49,104,593             49,104,593     42,186,985     20,65     45.268.385     21,09          
   Mobile
    44,667,572     33,750,701             33,750,701     28,822,479     14,11     32.140.044     14,98          
   Communications companies
    20,895,176     19,644,744     2,397,803     1,741,836     21,386,580     21,539,534     10,54     18.072.270     8,42          
   Others
    1,756,445     5,797,053             5,797,053     1,575,134     0,77     5.011.898     2,34          
Allowance for doubtful accounts
    (72,230,641 )   (80,048,828 )   (4,490,814 )   (4,583,845 )   (84,632,673 )                            
Notes receivable
    13,437,515     14,036,895     748,157     331,037     14,367,932     5,610,309           5.960.648                
Allowance for doubtful notes
    (8,575,363 )   (8,407,284 )           (8,407,284 )                            
Miscellaneous accounts receivable
    16,771,318     8,001,101     9,061,201     3,403,883     11,404,984     25,832,519           11.404.984           45.601.035     26.010.511  
Allowance for doubtful accounts
                                                 
   

 

 

 

 

 

 

 

 

 

 

 
 
                          Total long-term receivables     52,035,175     30,572,407  
                                                         
 
 
 
 

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COMPAÑÍA 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:
   
 a) Notes and Accounts Receivable
 
          Short-term

  Long-term

 
Tax No.
    Company     2002     2003     2002     2003  
            ThCh$     ThCh$     ThCh$     ThCh$  
       

 

 

 

 
96.942.730-3
    Telefónica Mobile Solutions Chile S.A.     2,103     17,043          
Foreign
    Telefónica España     809,981     1,039,789          
96.527.390-5
    Telefónica Internacional Chile S.A.         6,647          
93.541.000-2
    Impresora y Comercial Publiguías S.A.     1,278,101     3,470,135          
83.628.100-4
    Sonda S.A.     1,805,616              
96.834.230-4
    Terra Networks Chile S.A.     1,011,874     1,002,256          
96.895.220-k
    Atento Chile S.A     417,012     299,990          
96.545.480-2
    CTC Marketing e Inform S.A. (Nexcom S.A.)     368,044     291,819          
96.910.730-9
    Emergia Chile S.A.     909,793     6,438          
Foreign
    Telefónica Data España     386,563     282,105          
Foreign
    Telefónica Data EEUU         675,008          
Foreign
    Terra Networks España     7,604              
78.868.230-1
    Atento Educación Ltda.     2,514              
Foreign
    Telefónica procesos Tec. de Información     12,628,847     10,834,576          
59.083.900-0
    Telefónica Ingenieria Seguridad         4,407          
Foreign
    Telefonica Whole Sale International Services         271,272          
                                 
         
 
 
 
 
           TOTAL     19,628,052     18,201,485          
         
 
 
 
 

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
   
          Short-term

  Long-term

 
Tax No.
    Company     2002     2003     2002     2003  
            ThCh$     ThCh$     ThCh$     ThCh$  
       

 

 

 

 
96.942.730-3
    Telefónica Mobile Solutions Chile S.A.         2,234,802          
96.527.390-5
    Telefónica Internacional Chile S.A.     132,069     396,537     25,763,829     22,687,508  
93.541.000-2
    Impresora y Comercial Publiguías S.A.     1,707,804     360,013          
96.834.230-4
    Terra Networks Chile S.A.     2,182,964     3,670,133          
96.895.220-k
    Atento Chile S.A     5,809,139     5,369,001          
96.910.730-9
    Emergia Chile S.A.     844,008     260,967          
83.628.100-4
    Sonda S.A.     928,122              
Foreign
    Telefónica procesos Tec. de Información         7,076,254          
Foreign
    Telefonica Whole Sale International Services         271,668          
78.868.200-k
    Atento Recursos Ltda.     32,314     59,390          
         
 
 
 
 
TOTAL     11,636,420     19,698,765     25,763,829     22,687,508  
         
 
 
 
 

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 Telefónica CTC Chile has signed with Telefónica 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%.

 


COMPAÑÍA 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
   
                      2002   2003  
                      ThCh$   ThCh$  
            Nature       Description  
 
 
          of     of           Effect on           Effect on  
 Company
     Tax No.      Relationship      transaction     Amount     income     Amount     income  
   

 

 

 

 

 

 

 
Telefónica España
    Foreign     Parent Co.     Sales and Services     15,007     15,007          
Telefónica Internacional Chile S.A.
    96.527.390-5     Parent Co.     Purchases and Services Rendered     264,361     264,361     398,130     398,130  
                  Financial Expenses     474,502     474,502     435,083     435,083  
Impresora y Comercial Publiguías S.A.
    93.541.000-2     Associate     Sales and Services     3,934,656     3,934,656     4,269,213     4,269,213  
                  Purchases and Services Rendered     3,854,155     3,854,155     4,288,469     4,288,469  
                  Financial Income             344,237     344,237  
                  Other Non-operating Income             1,569,287     1,569,287  
Terra Networks Chile S.A.
    96.834.230-4     Associate     Sales and Services     2,355,190     2,355,190     3,194,870     3,194,870  
                  Purchases and Services Rendered     143,043     143,043     420,972     420,972  
Atento Chile S.A
    96.895.220-k     Associate     Sales and Services     1,074,888     1,074,888     614,494      
                  Purchases and Services Rendered     10,020,750     10,020,750     8,974,736     8,974,736  
                  Other Non-operating Income     20,729     20,729     12,587     12,587  
Emergia Chile S.A.
    96.910.730-9     Associate     Sales and Services     914,083     914,083     291,543     291,543  
                  Purchases and Services Rendered     35,009     35,009     30,296     30,296  
                  Other Non-operating Income     12,500     12,500     12,043     12,043  
Telefonica Whole Sale International Services
    Foreign     Associate     Sales and Services             229,570     229,570  
                  Purchases and Services Rendered             1,103,625     1,103,625  
Atento Recursos Ltda.
    78.868.200-k     Associate     Sales and Services     354,359     354,359     13,274     13,274  
Telefonica. Procesos y Tecnología de Información S.A.
    Foreign     Associate     Sales and Services     417,789     417,789          

The conditions of the Mandate and Mercantile Current Account are short and long-term respectively. In the case of Telefónica 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.


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COMPAÑÍA 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 September 30, 2003 the Parent Company recorded a first category tax provision based on current legal regulations since it has positive taxable income of ThCh$ 13,811,623. As of September 30, 2002 it did not record a first category income tax provision since it had accumulated tax losses amounting to approximately ThCh$ 140,000,000. Likewise as of September 30, 2003 and 2002 certain subsidiaries have accumulated tax losses of ThCh$ 272,840,212 and ThCh$ 118,904,847, respectively.

As of September 30, 2003 and 2002, the first category income tax provision in subsidiaries with positive taxable income is ThCh$ 30,391,506 and ThCh$ 15,418,219, respectively.

As of September 30, 2003 the subsidiaries with a positive balance in Taxed Retained Earnings and the related credits are detailed in the following table:

Subsidiaries
  Taxed
Retained
Earnings
w/15% credit
  Taxed
Retained
Earnings
w/16% credit
  Taxed
Retained
Earnings
w/16.5% credit
  Taxed
Retained
Earnings
W/o credit
  Amount of
credit
 
    ThCh$   ThCh$   ThCh$   ThCh$   ThCh$  
   
 
 
 
 
 
CTC Equipos y Servicios de Telecomunicaciones S.A.
    18     2,801,638     9,358,101     1,865,307     2,077,746  
CTC Transmisiones Regionales S.A.
        15,383,464     2,184,140     486,861     3,290,625  
Globus 120 S.A.
    2,092,814     792,904     606,672     240,983     620,452  
Telefónica Empresas CTC Chile S.A.
    605,733     7,080,202     183,573     8,080     1,485,820  
Comunicaciones Mundiales S.A.
    245,885     66,921     47,128     22,048     63,915  
   

 

 

 

 

 
Total
    2,944,450     26,125,129     12,379,614     2,623,279     7,538,558  
   

 

 

 

 

 

 


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COMPAÑÍA 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 September 30, 2002 and 2003, net deferred tax assets (liabilities) arising on temporary differences of ThCh$ (2,266,033) and ThCh$ (25,632,513), respectively are analyzed as follows:
   
Description
  2002

  2003

 
    Deferred tax assets

  Deferred tax liabilities

  Deferred tax assets

  Deferred tax liabilities

 
    Short-term   Long-term   Short-term   Long-term   Short-term   Long-term   Short-term   Long-term  
   

 

 

 

 

 

 

 

 
Temporary differences
                                                 
Allowance for doubtful accounts
    18,414,767                 18,268,900              
Vacation provision
    789,369                 670,517              
Tax benefits for tax losses
    1,799,375     45,529,359             164,941     20,048,883          
Staff severance indemnities
        1,346,858         8,226,021         922,783         6,551,640  
Leased assets and liabilities
        685,449         11,920     67,692     70,380         126,109  
Property, plant and equipment
        4,635,345         212,235,133     100,648     5,292,474         200,483,830  
Software
                6,612,396                 561,946  
Deferred charge on sale of assets
                3,963,998                 2,727,210  
Unearned income
        188,457             487,115              
Tax value difference for temporary investments (Terra)
    3,461,110                              
Other events
    2,800,766     528,512     10,313     839,221     1,404,491     106,112     9,255     1,338,052  
   

 

 

 

 

 

 

 

 
Subtotal
    27,265,387     52,913,980     10,313     231,888,689     21,164,304     26,440,632     9,255     211,788,787  
   

 

 

 

 

 

 

 

 
Complementary accounts net of accumulated amortization
    (689,769 )   (15,300,623 )       (165,443,996 )       (10,077,857 )       (148,639,450 )
   

 

 

 

 

 

 

 

 
Subtotal
    26,575,618     37,613,357     10,313     66,444,693     21,164,304     16,362,775     9,255     63,149,337  
   

 

 

 

 

 

 

 

 
Tax reclassification
    (10,314 )   (37,613,357 )   (10,313 )   (37,613,357 )   (9,255 )   (16,362,775 )   (9,255 )   (16,362,775 )
   

 

 

 

 

 

 

 

 
Total
    26,565,304             28,831,336     21,155,049             46,786,562  
   

 

 

 

 

 

 

 

 

 


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COMPAÑÍA 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$  
   
 
 
Tax expense before tax benefits (income tax)
    4,862,641     18,769,680  
Current tax expense (Flat Article No. 21 — 35%)
    216,452     70,611  
Adjustment of tax expense (prior year)
        (96,268 )
   

 

 
          Income tax subtotal
    5,079,093     18,744,023  
   

 

 
— Effect of deferred tax assets or liabilities for the period
    2,681,596     9,017,052  
— Tax benefit for tax losses (1)
        (13,946,756 )
— Effect of amortization of deferred tax assets and liabilities complementary accounts
    10,784,087     6,910,699  
   

 

 
          Deferred tax subtotal
    13,465,683     1,980,995  
   

 

 
          Total income tax expense
    18,544,776     20,725,018  
   

 

 

 
 (1)
Income tax for the 2003 period amounts to ThCh$ 4,797,267 after applying the tax benefit for tax losses.

 


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COMPAÑÍA 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
    8,027,355     9,204,230  
Collective negotiation bonus to be amortized (a)
    1,003,872     1,076,681  
Adjustment to market value for cellular equipment to be commercialized (c)
    4,114,086     3,122,435  
Exchange insurance premiums to be amortized
    2,844,853     981,024  
Telephone directories for connection program
    8,044,328     6,002,894  
Higher discount rate of bonds to be amortized (note 24)
    882,450     502,461  
Disbursements for placement of bonds to be amortized (note 24)
    1,904,454     1,549,543  
Disbursement of negotiable instruments (note 24)
        25,782  
Disbursements for foreign financing proceeds to be amortized (b)
    832,449     659,270  
Exchange difference insurance debtors (net of partial liquidations)
    50,580,817     10,915,357  
Deferred charges for modification of staff severance indemnities discount rate (net)
    114,419     126,687  
Others
    1,189,963     1,258,081  
   

 

 
          Total
    79,539,046     35,424,445  
   

 

 


 
(a)
In June 2002, the Company signed a 2-year collective contract with a part of its employees (3 years for Telefónica Móvil employees) granting them, among other benefits, a special negotiation bonus. This bonus was paid between June and July of 2002 (for Telefónica Móvil 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.

 


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COMPAÑÍA 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:

    2002   2003  
   
 
 
Description
  Accumulated
depreciation
  Gross prop., plant
and equipment
  Accumulated
depreciation
  Gross prop., plant
and equipment
 
    ThCh$   ThCh$   ThCh$   ThCh$  
   
 
 
 
 
Land
        27,539,330         27,694,719  
Construction and Infrastructure Works
    70,083,287     185,582,533     72,932,710     186,799,365  
Machinery and equipment
    1,728,233,694     3,282,492,915     1,902,916,784     3,439,859,750  
Central office telephone equipment
    882,811,084     1,519,731,145     974,175,624     1,620,012,394  
External plant
    599,432,273     1,372,741,058     644,884,222     1,391,928,430  
Subscribers’ equipment
    211,743,956     353,940,970     252,796,652     392,340,708  
General equipment
    34,246,381     36,079,742     31,060,286     35,578,218  
Other Property, Plant and Equipment
    125,506,768     403,388,080     193,839,920     381,777,356  
Office furniture and equipment
    76,807,387     141,177,924     91,807,638     132,959,817  
Projects, work in progress and their materials
        141,173,719         112,082,247  
Leased assets (1)
    4,102,614     11,383,817     4,198,958     10,707,695  
Property, plant and equipment temporarily out of service
    7,783,831     15,504,168     13,705,305     20,665,161  
Software and others
    36,812,936     94,148,452     84,128,019     105,362,436  
Technical revaluation-Circular 550
    10,458,810     9,242,348     10,431,094     9,242,473  
   

 

 

 

 
Total
    1,934,282,559     3,908,245,206     2,180,120,508     4,045,373,663  
   

 

 

 

 
                           

 
(1)
As of September 2003 this caption mainly considers: ThCh$ 5,524,373 gross value for purchase of administrative offices with accumulated depreciation of ThCh$ 626,135 with contract terms of 15 years from 1996, ThCh$ 3,245,316 gross value for electronic and computer equipment with accumulated depreciation of ThCh$ 2,980,657 with 12-year contract terms from 1994. In addition there is ThCh$ 984,277 gross value of long distance transmission equipment with accumulated depreciation of ThCh$ 215,311 with 18-year contract terms from 1996.

The balance of gross property, plant and equipment includes capitalized interest until December 2002, of ThCh$ 210,521,236 and ThCh$ 211,261,397 in 2002 and 2003, respectively. Accumulated depreciation of this interest amounts to ThCh$ 77,678,175 and ThCh$ 97,150,381 in 2002 and 2003, respectively.

Depreciation for the periods was charged to operating costs for ThCh$ 199,048,570 and ThCh$ 198,249,390, for 2002 and 2003, respectively. Property, plant and equipment temporarily out of service, made up mainly of the cable TV networks of La Serena not transferred in the sale of assets to Cordillera Comunicaciones, resulted in a depreciation charge of ThCh$ 1,183,967 in 2002 and ThCh$ 2,498,506 in 2003, which is classified in Other Non-operating Expenses.

The detail by caption of the technical revaluation is as follows:

Description
  Property, plant and
equipment
2002
  Net
Balance
  Accumulated
Depreciation
  Property, plant and
equipment
2003
 
    ThCh$   ThCh$   ThCh$   ThCh$  
   
 
 
 
 
Land
    (476,687 )   (478,317 )       (478,317 )
Construction and infrastructure works
    (4,588,149 )   (1,005,994 )   (3,580,524 )   (4,586,518 )
Machinery and equipment
    14,307,184     295,690     14,011,618     14,307,308  
   

 

 

 

 
Total
    9,242,348     (1,188,621 )   10,431,094     9,242,473  
   

 

 

 

 

Depreciation of the technical revaluation surplus for the period amounts to ThCh$ (24,245) in 2002 and ThCh$ (21,945) in 2003.

Gross property, plant and equipment includes assets that have been totally depreciated amounting to ThCh$ 512,029,604 in 2002 and ThCh$ 661,289,617 in 2003, which include ThCh$ 12,113,554 and ThCh$ 12,015,474, respectively, for technical revaluation.


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COMPAÑÍA 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   Holding Shareholders’ equity Income for                 Unearned   Investment  
    Country controlling
percentage of the companies the year   Accrued income   Equity Value Income   book value  
    of the No. of




















 
Taxp. No. Company origin investment shares 2002 2003 2002 2003 2002   2003   2002   2003   2002   2003 2002 2003   2002   2003  
          % % ThCh$ ThCh$ ThCh$   ThCh$   ThCh$   ThCh$   ThCh$   ThCh$ ThCh$ ThCh$   ThCh$   ThCh$  


























 
Foreign
TBS Celular participación S.A. (1) Brasil Dólar 400,999,739 2.61 2.61 146,360,958 182,477,471 3,704,215   2,194,998   96,680   57,289   3,820,021   4,762,662   3,820,021   4,762,662  
93.541.00- 0-2
Impresora y Comercial Publiguías S.A. Chile Pesos 45,648 9.00 9.00 26,135,744 31,530,056 7,801,622   9,759,690   702,146   878,372   2,352,217   2,837,705   2,352,217   2,837,705  
96.922.95- 0-1
Empresa de Tarjetas Inteligentes S.A. (1) Chile Pesos 271,615 20.00 20.00 602,535 456,195 (534,005 ) (133,083 ) (106,801 ) (26,617 ) 120,507   91,239   120,507   91,239  
96.895.22- 0-K
Atento Chile S.A. (1) Chile Pesos 3,209,374 28.84 28.84 9,244,380 9,626,501 71,608   414,956   20,651   119,673   2,666,079   2,776,282   2,666,079   2,776,282  
96.725.40- 0-2
Sonda S.A. (1) (2) Chile Pesos 35.00 87,040,726 (1,043,143 )   (365,100 ) (389,749 ) 30,464,254     30,464,254    
In develop ment
Bolsa de Oportunidades de Negocios S.A. Chile Pesos 19.00 2,088,263         396,770     396,770    
In development
Time Interating Chile Pesos 10.25 743,171         76,175     76,175    
96.571.69- 0-4
Servibanca S.A. Chile Pesos 43.33 220,902     95,717            
96.768.41- 0-4
Payroll S.A. Chile Pesos 33.33 83,690     27,894            
96.539.38- 0-3
Ediciones Financieras S.A. Chile Pesos 6.66 (30,871 )   (2,056 )          
Total
                                 39,896,023    10,467,888        39,896,023    10,467,888  

 
(1)
Recognition of income for this company is that accrued for Agost 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.”
 
During September 2002, Telefónica Empresas sold and transferred 25% ownership in Sonda S.A., to Inversiones Pacífico Limitada and Inversiones Santa Isabel Limitada, companies linked to Mr. Andrés Navarro. This operation meant disbursements on the part of the purchasing companies amounting to ThCh$ 27,920,701 (historical), implying for Telefónica Empresas a net effect on income (loss), amounting to ThCh$ 1,889,316, product of proportional extraordinary amortization of goodwill in relation to the percentage sold and to the difference between the book value of the investment and the amount received. Once this transaction was carried out, Telefónica Empresas had a 35% holding in that company.
 
Additionally, on September 26, Telefónica Empresas signed an agreement with Inversiones Santa Isabel Limitada, which granted it an option to sell 35% of Sonda, which it could exercise between July 16 and 25, 2005, at the book value of the investment as of June 30, 2005, plus a bonus of UF 142,021, with a minimum value of UF 2,048,885. In case Telefónica Empresas does not exercise such option to sell, between July 26 and August 5, 2005, Inversiones Santa Isabel Limitada has an option to purchase the same 35% of Sonda, under the same conditions as above.
 
Likewise, Inversiones Santa Isabel Limitada can exercise the option to purchase in advance between July 26 and 31, 2003, at the book value on June 30, 2003, plus a bonus of UF 96,000, with a minimum price of UF 1,983,185, or between July 26 and 31, 2004, at the book value of June 30, 2004, plus a bonus of UF 119,000 with a minimum price of UF 2,003,260.
 
On July 29, 2003, Telefónica Empresas became aware of the decision of Inversiones Santa Isabel Limitada, to anticipate and exercise the purchase option for the remaining 35% of Sonda S.A. This transaction meant a disbursement on the part of the purchasing company of ThCh$ 33,388,363 (historical), implying an effect on income, before taxes amounting to ThCh$ 6,999,276, (ThCh$ 5,683,065 net of tax effect).
 
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.

 


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COMPAÑÍA 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:
     
            2002   2003  
           
 
 
 Taxpayer No.
Company    Year    Amount
amortized
in the period
   Balance of
Goodwill
   Amount
amortized
in the period
   Balance of
Goodwill
 
             ThCh$    ThCh$    ThCh$    ThCh$  
       
 

 

 

 

 
Foreign
Consorcio Telefónica do Brasil     2001     131,657     2,918,645     131,657     2,742,620  
90.430.000-4
CTC Globus S.A.     1998     812,279     17,436,883     812,279     16,350,868  
78.703.410-1
Tecnonáutica S.A.     1999     49,809     1,166,663     107,747     1,043,309  
96.786.140-5
Telefónica Móvil     1997     7,391,414     150,373,307     7,391,414     140,491,013  
96.834.320-3
Infoera     1999     31,359     720,808     66,403     643,838  
96.811.570-7
Telepeajes S.A.     2001     35,901     80,413     29,084     48,686  
83.628.100-4
Sonda S.A. (a)     1999     11,752,768     12,547,989     11,690,198      
Foreign
Sonda Uruguay     1999     97,101              
Foreign
Setco S.A. (Uruguay)     1999     95,318              
Foreign
Sonda del Ecuador     1997     26,659              
96.571.690-4
Servibanca     2000     24,840              
96.768.410-4
Payroll     1999     1,261              
96.894.490-8
Puerto Norte     2000     881              
96.895.220-K
Atento Chile S.A.     2001     269,188     86,771          
Foreign
Sonda Bancos     2001     6,684              
Foreign
Sonda Perú     2001     3,409              
Foreign
Bismark (México)     2001     3,292              
Foreign
Tecnoglobal S.A.     2001     36,783              
Foreign
Bac Financiero     2001     62,022              
96.833.930-3
Telef. Comun. Empresariales     2001     41,597     124,700          
96.590.960-5
Tecnópolis     2001     1,367              
Foreign
Track S.A.     2002     1,613              
Foreign
Sonda Do Brasil     2002     193,375              
           
 
 
 
 
  Total           21,070,577     185,456,179     20,228,782     161,320,334  
           
 
 
 
 

The goodwill amortization period has been determined considering aspects such as; nature and characteristics of the business and estimated period of return of the investment.


 
 a)
For 2002, amortization of goodwill includes ThCh$ 9,141,600, as extraordinary amortization of the sale of 25% of the holdings of Telefónica Empresas in Sonda S.A. Product of the sale of the 35% holding had in this company in July 2003, the balance of goodwill maintained as of that date, in the amount of ThCh$ 9,808,257 was amortized.

 


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COMPAÑÍA DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
(Translation of financial statements originally issued in Spanish)

12.
Intangibles:
           
    2002
ThCh$
  2003
ThCh$
 
   

 

 
Underwater cable rights (gross)
    19,155,852     24,134,071  
Accumulated amortization previous period
    (584,774 )   (2,370,053 )
Amortization for the period
    (1,562,341 )   (664,450 )
Licenses (Software) (gross)
    2,355,838     2,355,838  
Accumulated amortization previous period
        (263,907 )
Amortization for the period
    (131,431 )   (463,902 )
Licenses for use of wireless (gross)
    9,367,030     9,621,669  
Accumulated amortization previous period
        (26,702 )
Amortization for the period
        (240,567 )
   

 

 
Total Net Intangibles
    28,600,174     32,081,997  
   

 

 
               


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COMPAÑÍA 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)
    2,293,560     1,401,281  
Collective negotiation bonus (see note 8a)
    1,353,751     422,249  
Bond issue expenses to be amortized (see note 24)
    4,930,834     2,654,504  
Leased vehicles
    405,279     246,784  
Higher discount rate of bonds to be amortized (see note 24)
    5,113,150     3,553,587  
Deferred charge for modification of staff severance indemnities discount rate (net)
    566,926      
Deferred exchange insurance premiums to be amortized
    594,452     141,334  
Rental of telephone posts paid in advance
    1,672,613     478,089  
Guarantee deposits
    258,746     297,305  
Others
    616,679     762,275  
   

 

 
Total
    17,805,990     9,957,408  
   

 

 
               


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COMPAÑÍA 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   US$

  U.F.

  $

  TOTAL

 
Taxp. No.
    Short-term   2002   2003   2002   2003   2002   2003   2002   2003  
        ThCh$   ThCh$   ThCh$   ThCh$   ThCh$   ThCh$   ThCh$   ThCh$  

 

 

 

 

 

 

 

 

 

 
97.015.000-5
    BANCO SANTANDER SANTIAGO                         9,876,369         9,876,369  
97.030.000-7
    BANCO ESTADO             9,378,507             9,303,335     9,378,507     9,303,335  
97.008.000-7
    BANCO CITIBANK             8,952,091                 8,952,091      
97.004.000-5
    BANCO DE CHILE             30,870                 30,870      
         

 

 

 

 

 

 

 

 
      Total             18,361,468             19,179,704     18,361,468     19,179,704  
         

 

 

 

 

 

 

 

 
      Capital owed             17,896,447             19,099,879     17,896,447     19,099,879  
         

 

 

 

 

 

 

 

 
      Average annual interest rate             1.37 %           3.89 %   1.37 %   3.89 %
                                                         
     
 
      Short-term portion of long-term                                                  
     
 
Foreign
    ABN AMRO BANK     1,988,995     1,067,095                     1,988,995     1,067,095  
Foreign
    BANCO BILBAO VIZCAYA ARGENTARIA     19,344,704     17,274,736                     19,344,704     17,274,736  
97.008.000-7
    BANCO CITIBANK     9,585,030     7,150,504                     9,585,030     7,150,504  
97.015.000-5
    BANCO SANTANDER SANTIAGO             10,342,453     30,785,950             10,342,453     30,785,950  
79.561.240-8
    CHASE MANHATTAN BANK     459,022                         459,022      
97.006.000-6
    BANCO CREDITO INVERSIONES             1,381,474                 1,381,474      
         

 

 

 

 

 

 

 

 
      Total     31,377,751     25,492,335     11,723,927     30,785,950             43,101,678     56,278,285  
         

 

 

 

 

 

 

 

 
      Capital owed     27,535,540     23,623,368     11,195,862     30,121,568             38,731,402     53,744,936  
         

 

 

   
 

 

 

 

 
      Average annual interest rate     2.50 %   1.69 %   2.59 %   5.09 %           2.52 %   3.55 %
                                                         
      Percentage of obligations in foreign currency:    
51.05
%  
for 2002
and
 
33.78
%  
for 2003
                         
      Percentage of obligations in national currency:    
48.95
%  
for 2002
and
 
66.22
%  
for 2003
                         


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COMPAÑÍA 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

 
                         Total                 
        Currency   Long-term   amount Long-term
        or   portion   of principal portion
    Bank or Financial   Indexation   as of   owed as of
Taxp. No.
  Institution   Index   1 to 2   2 to 3   3 to 5 30-09-2003   30-09-2003 31-03-2003
            ThCh$   ThCh$   ThCh$ ThCh$   ThCh$ ThCh$

 
 
 
 
 
 
     
 
 
     LOANS IN DOLLARS                                                  
Foreign
   ABN AMRO BANK (2)     US$         69,401,850     128,889,150     198,291,000     Libor + 1,063%     198,291,000     269,650,712  
Foreign
   BANCO BILBAO VIZCAYA ARGENTARIA     US$     132,194,000             132,194,000     Libor + 1,056%     132,194,000      
97.008.000-7
   BANCO CITIBANK     US$     7,099,118     3,549,560         10,648,678     Libor + 0,57%     10,648,678     194,033,822  
79.561.240-8
   CHASE MANHATTAN BANK (1)     US$                             92,451,673  
                                                         
     
SUBTOTAL
          139,293,118     72,951,410     128,889,150     341,133,678     2.29%     341,133,678     556,136,207  
                                                         
     LOANS IN UNIDADES DE FOMENTO                                                  
97.015.000-5
   BANCO SANTANDER SANTIAGO     UF     30,121,568             30,121,568     Tab 90 + 0,95%     30,121,568     60,193,082  
                                                         
     
SUBTOTAL
          30,121,568             30,121,568         30,121,568     60,193,082  
               
 
 
 
 
 
 
 
     
TOTAL
          169,414,686     72,951,410     128,889,150     371,255,246     2.51%     371,255,246     616,329,289  
               
 
 
 
 
 
 
 
                                                         
     Percentage of obligations in foreign currency:     91.89%     in 2003
  and
  90.23%     in 2002                          
     Percentage of obligations in local currency:     8.11%     in 2003
 and
  9.77%     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.
   

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COMPAÑÍA 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, Telefónica CTC Chile registered a line of negotiable instruments in the securities registry, inscription 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, Telefónica CTC Chile, placed ThCh$ 20,000,000 in two series (A and B) of negotiable instruments. In this case, the placing agent was Scotiabank Sud Americano. The detail of the current amount of this transaction is described below:
                                           
Registration
number or
identification of the
instrument
          Current
nominal

amount
placed
                    Book value        
               Bond
readjustment
unit
   
 Interest
rate
 
 
 Final
maturity
 
    Placement
in Chile or
abroad
 
                 
 
 
    2002
ThCh$
    2003
ThCh$
     
    Series            
 
 
             

 

 

 

 

 

 

 

 

 
Short-term promissory notes
005
    B     10,000,000     Non-indexed Ch$     0.2974     Nov 20, 2003         9,950,159     Chile  
                               
 
       
                        Totales               9,950,159        
                               
 
       
 
On September 24, 2003 Series A of this placement was paid at its maturity date for the nominal amount of ThCh$ 10,000,000.
   

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COMPAÑÍA 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
   
The breakdown of obligations with the public for bond issues, classified as short and long-term is as follows:
Registration number
or identification of
the instrument
          Current
nominal
amount
placed
                                 
              Bond
readjustment
unit
     Interest
rate
   
 Final
maturity
  Frequency

  Par value

    Placement in Chile or abroad  
                                                   
    Series                     Interest payment     Amortizations     2002     2003      
                        %                       ThCh$     ThCh$        

 

 

 

 

 

 

 

 

 

 

 
Short-term portion of long-term bonds        
143.27.06.91
    E (e)         U.F.     6.000     Apr.2003     Semi-annual     Semi-annual     5,434,449         Chile  
143.27.06.91
    F     71,429     U.F.     6.000     Apr.2016     Semi-annual     Semi-annual     1,667,711     1,636,337     Chile  
177.12.08.94
    H (b)         U.F.     5.800     Aug.2006     Semi-annual     Semi-annual     9,189,562         Chile  
177.12.08.94
    I (c)         U.F.     5.500     Aug.2015     Semi-annual     Semi-annual     2,674,507         Chile  
203.23.04.98
    K     7,576     U.F.     6.750     Feb.2020     Semi-annual     Semi-annual     555,258     684,099     Chile  
Issued in New York
    Yankee Bonds         US$     7.625     Jul.2006     Semi-annual     Maturity     3,297,871     2,760,229     Abroad  
Issued in New York
    Yankee Bonds         US$     8.375     Jan.2006     Semi-annual     Maturity     2,516,847     1,995,487     Abroad  
Issued in Luxembourg
    Eurobonds (a)         EURO     5.375     Aug.2004     Semi-annual     Maturity     1,068,513     102,771,582     Abroad  
                                             
 
       
                                          Total     26,404,718     109,847,734        
                                         
 
 
       
Long-term bonds
                                                             
143.27.06.91
    F     857,143     U.F.     6.000     Apr.2016     Semi-annual     Semi-annual     15,722,525     14,525,169     Chile  
177.12.08.94
    H (b)         U.F.     5.800     Aug.2006     Semi-annual     Semi-annual     25,397,925         Chile  
177.12.08.94
    I (c)         U.F.     5.500     Aug.2015     Semi-annual     Semi-annual     25,397,925         Chile  
203.23.04.98
    K     3,992,424     U.F.     6.750     Feb.2020     Semi-annual     Semi-annual     67,727,799     67,655,741     Chile  
   
Emitidos en New York
    Yankee Bonds (d)     187,685,000     US$     7.625     Jul.2006     Semi-annual     Maturity     154,086,121     124,054,154     Abroad  
Emitidos en New York
    Yankee Bonds     200,000,000     US$     8.375     Jan.2006     Semi-annual     Maturity     154,086,121     132,194,000     Abroad  
Emitidos en Luxemburgo
    Eurobonos (a)     132,200,000     EURO     5.375     Aug.2004     Semi-annual     Maturity     123,390,380         Abroad  
                                             
 
       
                                          Total     565,808,796     338,429,064        
                                         
 
 
       
                                                           

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COMPAÑÍA 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)
Since June 2002, Telefónica CTC Chile has made partial purchases of its placement denominated in euros; at this period-end the early redemption of this placement amounts to 67.8 million euros.
     
  b)
During November 2002, Telefónica CTC Chile prepaid this bond placement, paying the full balance of capital (UF) plus interest accumulated as of that date.
     
  c)
During May 2003, Telefónica CTC Chile prepaid this bond placement of, paying the full capital balance (UF) plus interest accumulated as of that date.
     
  d)
During May 2003, Telefónica CTC Chile made a partial repurchase of 12.3 million dollars of its placement denominated in that same currency; this repurchase was made at a price of 111.05% of par value, which meant a payment of 13.68 million dollars, plus interest accrued as of that date on the nominal amount of the repurchase.
     
  e)
In April 2003, the last installment of this issuance was paid.
   
 
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”.


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COMPAÑÍA 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
    95,823     226,128  
Staff severance indemnities
    4,904,158     3,944,216  
Vacation
    25,859,555     8,789,362  
Other employee benefits (a)
    (4,872,401 )   (3,473,880)  
Employee benefit advances
    25,987,135     9,485,826  
   

 

 
Long-term
             
Staff severance indemnities
    22,810,785     19,106,007  
   

 

 
Total
    48,797,920     28,591,833  
   

 

 
               

 
(a)
Includes provisions for the following concepts: statutory bonus, annual vacation bonus, scholarships, Christmas 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 expenses
    2,943,240     3,356,222  
   

 

 
Total charge to income     2,943,240     3,356,222  
   

 

 
Payments in the period     (503,345 )   (1,371,557 )
   

 

 
   
19.
Minority interest:

Minority interest includes recognition of the portion of equity and income of subsidiaries pertaining to third parties. The detail is as follows:


  Percentage
Minority
Interest
  Participation
in equity
September 30,
  Participation
in net income (loss)
for the period ended
September 30,
 
Subsidiaries  
 
 
 
    2002   2003   2002   2003   2002   2003  
    %   %   ThCh$   ThCh$   ThCh$   ThCh$  
   

 

 

 

 

 

 
Soc. Nacional de Procesamiento de Datos S.A.
    40.01                 625,365      
Administradora de Telepeajes de Chile S.A.
    19.99     19.99     32,089     17,694     (9,245 )   (11.932 )
CTC — Transmisiones Regionales S.A.
    0.84     0.84     982,040     1,083,633     108,325     146.739  
Fundación Telefónica
    50.00     50.00     196,149     154,504     22,855     (31.145 )
Comunicaciones Mundiales
    0.34     0.34     6,167     5,397     49     94  
CTC Equipos y Servicios S.A.
        0.00         30         6  
   

 

 

 

 

 

 
                  Total
                1.216.445     1,261,258     747,349     103,762  
               
 
 
 
 
   
(a)
Corresponds to the participation of third parties in the income of this subsidiary which was consolidated until August 2002.


35


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COMPAÑÍA 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:

                                                Accumulated     Net (loss)        
                              Reserva                 deficit     income     Total  
      Paid-in     Price-level     Contributed     Other     futuros     Retained     Dividendos     development     for     shareholders’  
      capital     Restatement     surplus     reserves     Dividendos     earnings     provisorios     period     the period     equity  
     
ThCh$
    ThCh$     ThCh$     ThCh$     M$     ThCh$     M$     ThCh$     ThCh$     ThCh$  
2002  

 

 

 

 

 

 

 

 

 

 
Balances as of December 31, 2001
    715,017,592         111,177,044     1,536,666         435,806,854         (371,667 )   4,111,658     1,267,278,147  
Transfer of 2001 net income to retained earnings
                        4,111,658             (4,111,658 )    
Absorption of accumulated deficit development period
                        (371,667 )       371,667          
Final dividend 2001
                        (1,233,497 )               (1,233,497 )
Adjustment of foreign investment conversion reserve
                (833,329 )                       (833,329 )
Price-level restatement
        9,295,229     1,445,302     19,977         5,699,308                 16,459,816  
Net income for the period
                                    (15,493,536 )   (15,493,536 )
   

 

 

 

 

 

 

 

 

 

 
Balance as of September 30, 2002
    715,017,592     9,295,229     112,622,346     723,314         444,012,656             (15,493,536 )   1,266,177,601  
   

 

 

 

 

 

 

 

 

 

 
Restated balances as of September 30, 2003
    735,741,104     9,564,638     115,886,504     744,278         456,881,572             (15,942,589 )   1,302,875,507  
   

 

 

 

 

 

 

 

 

 

 
                                                               
2003
                                                             
Balances as of December 31, 2002
    736,468,120         114,512,356     1,924,736         451,465,216             (17,680,376 )   1,286,690,052  
Transfer of 2002 loss to retained earnings
                        (17,680,376 )           17,680,376      
Increase for capitalization of share premium
    114,512,356         (114,512,356 )                            
Final dividend 2002
                        (16,750,249 )               (16,750,249 )
Adjustment of foreign investment conversion reserve
                (1,887,404 )               —      —      (1,887,404 )
Price-level restatement
        10,211,766         21,695         5,188,668                 15,422,129  
Net income for the period
                                    9,509,308     9,509,308  
   

 

 

 

 

 

 

 

 

 

 
Balance as of September 30, 2003
    850,980,476     10,211,766         59,027         422,223,259             9,509,308     1,292,983,836  
   

 

 

 

 

 

 

 

 

 

 
                                                               

36


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COMPAÑÍA 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 September 30, 2003, the Company’s paid-in capital is as follows:
   
Number of shares:

Series
  No. of subscribed
shares
 
No. of paid shares
  No. of shares with
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
Capital
  Paid-in
Capital
 
   
ThCh$
 
ThCh$
 
   

 

 
A
    672,480,822     672,480,822  
B
    63,987,298     63,987,298  

On July 11, 2003, the Extraordinary Shareholders’ Meeting agreed to increase capital stock for, the capitalization of share premium of ThCh$ 114,512,356.

(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 September 30, 2003 is as follows:
           
Type of shareholder
  Percentage of Total
holdings
%
  Number of
shareholders
 
   

 

 
10% holding or more
    61.51     2  
Less than 10% holding:
             
Investment equal to or exceeding UF 200
    37.77     2,349  
Investment under UF 200
    0.72     11,784  
   

 

 
Total
    100.00     14,135  
   

 

 
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.


37


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COMPAÑÍA 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:
   
(c)
Dividend policy, continued:
   
  Distribute for 2003 at least 30% of net income generated in the same period — percentage that is 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.
   
  On July 11, 2003, the Extraordinary Shareholders’ Meeting agreed to pay a dividend of ThCh$ 16,750,249 (historical), charged to retained earnings as of December 31, 2002, which was paid on July 31, 2003.
   
(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 Telefónica de Brasil Celular Holding.
   
        Amount              
       
             
  Company
  December 31,
2002
  Price-level
restatement
  Net
Movement
  Balance as of
September 30,
2003
 
        ThCh$   ThCh$   ThCh$   ThCh$  
         

 

 

 

 
96.720.710-1
    Invercom S.A.     41,007     492         41,458  
84.119.600-7
    Instacom S.A.     15,726     189         15,899  
83.628.100-4
    Sonda S.A.     1,401,666     15,418     (1,417,084 )    
Foreign
    TBS Participacion S.A.     466,337     5,596     470,320     1,613  
         
 
 
 
 
    Total     1,924,736     21,695     1,887,404     59,027