UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
o REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF
1934
OR
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31,
2008
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from _________
to
_________
OR
o SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
Commission File
Number: 001-10579
Compañía de Telecomunicaciones de
Chile S.A.
(Exact name of Registrant as specified in its charter)
Telecommunications Company of
Chile
(Translation of Registrant’s name into English)
Republic of Chile
(Jurisdiction of incorporation or
organization)
Avenida Providencia
111
Santiago, Chile
(Address of principal executive
offices)
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Securities registered or to be registered pursuant to
Section 12(b) of the Act
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||
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Title of each
class
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Name of each exchange on which
registered
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American Depositary
Shares
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New York Stock
Exchange
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Series A Common
Stock
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New York Stock
Exchange*
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*
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Listed not for trading,
but only in
connection with the registration of American Depositary Shares, pursuant
to the requirements of the Securities and Exchange
Commission.
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Securities registered or to be
registered pursuant to Section 12(g) of the Act:
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None
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Securities for which
there is a reporting
obligation pursuant to Section 15(d) of the Act:
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None
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Indicate the number of outstanding
shares of each of the issuer’s classes of capital or common stock as
of the close of the period covered by the annual report:
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Series A Common
Stock
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873,995,447
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Series B Common
Stock
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83,161,638
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Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No x
If this report is an annual or
transition report, indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes o No x
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days:
Yes x No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated
filer x Accelerated
filer o Non-accelerated filer o
Indicate by check mark which basis of
accounting the registrant has used to prepare the financial
statements included in this filing:
U.S. GAAP
o International Financial Reporting
Standards as issued by the International Accounting Standards
Board x Other o
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 o Item 18 o
If this is an annual report, indicate by
check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes o No x
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CERTAIN TERMS AND
CONVENTIONS
All references to “Chile” or the “Republic” are references to the Republic of Chile. All references to the “Government” are
references to the Government of
Chile. Unless otherwise specified, all references to “Telefónica Chile” or the “Company” are references to Compañía de Telecomunicaciones de Chile S.A., a
publicly held stock corporation (sociedad
anónima
abierta) organized under
the laws of Chile, and its subsidiaries. All references
to “Telefónica” are references to Telefónica S.A., a publicly held stock corporation
organized under the laws of the Kingdom of Spain that owned, directly and indirectly,
97.89% of the Company’s ordinary shares at January 31, 2009. All references to “Telefónica Group” are references to Telefónica and its subsidiaries, including
Telefónica Chile.
Unless otherwise specified, all
references to “$,” “US$,” “U.S. dollars” and “dollars” are to United States dollars,
references to “Chilean
pesos,” “pesos” or “Ch$” are to Chilean pesos, references to
“UF” are to Unidades de Fomento, a
daily-indexed Chilean peso-denominated monetary unit that takes into account the
effect of the Chilean inflation rate of the previous month,
and references to “UTM” are to Unidad Tributaria Mensual, a
monthly-indexed Chilean peso-denominated monetary unit that takes into account
the effect of the Chilean inflation rate of the month before the previous
month. All references to “euros” are to the common currency of the
European Union. Unless otherwise specified, all references to “IFRS” are to international financial
reporting standards as
issued by the
International Accounting Standards Board (the “IASB”), all references to “Chilean GAAP” are to generally accepted accounting
principles in Chile and all
references to “U.S. GAAP” are to generally accepted accounting
principles in the United States. All references to the “SVS” or “Chilean Securities and
Exchange
Commission” are to the Superintendencia de
Valores y Seguros de Chile.
PRESENTATION OF FINANCIAL
INFORMATION
This Annual Report contains the audited
consolidated balance sheets of Compañía de Telecomunicaciones de Chile S.A.
and its Subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements
of income, shareholders’ equity and cash flows for each of the
two years in the period ended December 31,
2008 (collectively, the “Audited Consolidated Financial
Statements” or
“Financial Statements”), which were audited by Ernst &
Young Ltda.
Since January 1, 2008, the Company’s consolidated financial statements are
and will be prepared in accordance with the International Financial Reporting
Standards as published by the IASB.
The Company’s consolidated financial information as of
and for the year ended December 31, 2007 included in the Company’s annual consolidated financial statements
was restated in accordance
with IFRS. See Note 3 to
the Audited Consolidated Financial Statements of the Company as of and for the year ended December
31, 2008, included
elsewhere in this Annual Report.
As permitted by IFRS, the Company
maintained the restatement of adjustments since January 1, 2004, the same date
used as the transition date to IFRS by Telefónica, the Company’s parent company.
IFRS differs in certain significant
respects from Chilean GAAP. As a result, the Company’s financial information presented under
IFRS is not directly comparable to its financial information presented under
Chilean GAAP, and readers
should avoid such a comparison. Merely for the convenience of the
reader, translations of certain amounts into dollars at a specified rate have
been included. Unless otherwise specified, or unless the context otherwise
requires, the U.S. dollar
equivalent for information in Chilean pesos is based on the exchange rate (the
“Observed Exchange
Rate”) reported by Banco
Central de Chile (the “Central Bank”) that is computed, for any date, by
averaging the exchange rates of the previous business day’s transactions in Chile’s Mercado Cambiario Formal (the
“Formal Exchange
Market”). On January 2,
2009, the Central Bank reported that the
Observed Exchange Rate with reference to December 31, 2008, the last business day in 2008 for which an exchange rate was reported, was Ch$636.45 per US$1.00. Telefónica Chile does not represent that the
Chilean peso or U.S. dollar amounts in this Annual Report actually represent, or
could have been or could be converted into, U.S. dollars or Chilean pesos, as
the case may be, at the
rates indicated, or at any particular rate or at all. See “Item 3. Key Information—Exchange Rates” for information regarding historical
rates of exchange in Chile from January 1, 2004. Unless otherwise specified,
references to the depreciation or the appreciation of the Chilean peso
against the U.S. dollar are in nominal terms (without adjusting for inflation),
based on the Observed Exchange Rates for the relevant
period.
FORWARD-LOOKING STATEMENTS AND
ASSOCIATED RISKS
This Annual Report contains certain “forward-looking statements” within the meaning of Section 21E of
the Exchange Act. Some of these forward-looking statements include
forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,”
“may,” “should” or “will continue,” or similar expressions or the negatives
thereof or other variations on these expressions, or similar terminology, or
discussions of strategy, plans or intentions. These statements also include
descriptions in connection with, among other
things:
|
|
·
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the Company’s business development plans and
strategies, including its asset growth, cost-saving and financing
plans;
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·
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new offerings of services and
acquisitions of licenses, and anticipated demand related to such new
services and
licenses;
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·
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the future impact of
competition;
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·
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economic and political
developments in Chile;
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·
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the effects of inflation and
currency volatility on the Company’s financial condition and results
of operations;
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·
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the outcome of regulatory
proceedings in which the Company is involved, including
its litigation with the State of
Chile;
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·
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the Company’s unionized
employees;
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·
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trends affecting the
Company’s financial condition or results
of operations; and
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·
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regulations affecting the
Company’s business, including tariff
decrees, new rulings,
concession and licenses.
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Such statements reflect the
Company’s current views regarding future events
and are subject to certain risks, uncertainties and assumptions. Many factors
could cause actual results, performance or achievements to be materially different from any future
results, performance or achievements that forward-looking statements may express
or imply, such as, for example:
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·
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changes in regulations and
laws;
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·
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the Company’s ability to implement its cost
and expenses control plans and its investment program,
including its ability to arrange financing where
required;
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·
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the nature and extent of future
competition and technological
development;
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·
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political, economic and
demographic developments in Chile;
and
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·
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other risks and
uncertainties, some
of which are described in more detail in “Item 3. Key
Information—Risk Factors,” “Item 4. Information on the
Company” and
“Item 5. Operating
and Financial Review and
Prospects.”
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If one or more of these risks or
uncertainties affects future events and circumstances, or if underlying
assumptions do not materialize, actual results may vary materially from those
described in this Annual Report as anticipated, believed, estimated or expected.
The Company has no plans to update any industry information or forward-looking statements set out in
this Annual Report and have no obligation to update any such
statements.
Not applicable.
Not applicable.
A. Selected Financial
Data
The following table presents selected
financial data as of December 31, 2008 and the previous year. The selected financial data should be
read in conjunction with the Audited Consolidated Financial Statements and notes thereto, “Item 5. Operating and Financial Review
and Prospects” and other
financial information included herein.
Since January 1, 2008, the Company’s consolidated financial statements are
and will be prepared in accordance with the International Financial Reporting Standards as
published by the International Accounting Standards Board
(IASB).
The Company’s consolidated financial information as of
and for the year ended December 31, 2007 included in the Company’s annual consolidated financial statements was restated in accordance with IFRS. See Note 3 to the Audited Consolidated Financial
Statements of the Company.
As permitted by IFRS, the Company
maintained the restatement of adjustments since January 1, 2004, the same date
used as the transition date
to IFRS by Telefónica, the Company’s parent company.
IFRS differs in certain significant
respects from Chilean GAAP. As a result, the Company’s financial information presented under
IFRS is not directly comparable to its financial information presented under Chilean GAAP, and
readers should avoid such a comparison.
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For the year ended December
31,
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||||||||||||
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2007
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2008
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2008
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||||||||||
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(in millions of Chilean
pesos
for the years ended December
31)
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(in millions
of
U.S.
dollars)
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|||||||||||
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Income
Statement:
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||||||||||||
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Revenues
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696,300 | 738,731 | 1,160.7 | |||||||||
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Other operating
income
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9,059 | 28,131 | 44.2 | |||||||||
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Employee expenses
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(86,268 | ) | (101,029 | ) | (158.7 | ) | ||||||
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Depreciation and
amortization
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(181,591 | ) | (167,573 | ) | (263.3 | ) | ||||||
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Other miscellaneous operating
expenses
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(357,908 | ) | (411,078 | ) | (647.6 | ) | ||||||
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Financial expenses (net)
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(11,044 | ) | (27,009 | ) | (42.4 | ) | ||||||
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Participation in profit of associates accounted for using equity
method
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1,783 | 1,607 | 2.5 | |||||||||
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Foreign currency exchange
differences
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(29,793 | ) | (7,504 | ) | (11.8 | ) | ||||||
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Profit Before
Taxes
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40,536 | 54,276 | 85.3 | |||||||||
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Income Taxes
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(8,980 | ) | (6,369 | ) | (10.0 | ) | ||||||
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Profit for the
Year
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31,556 | 47,907 | 75.2 | |||||||||
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Minority
Interest
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(91 | ) | (69 | ) | (0.1 | ) | ||||||
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Profit attributable to
equity holders of instruments of the
parent
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31,647 | 47,975 | 75.4 | |||||||||
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Earnings per ADS (US$)(1)(3)
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0.21 | 0.31 | – | |||||||||
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Earnings per Share (Ch$)(1)
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33.0 | 50.1 | – | |||||||||
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Dividend per Share(2)
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19.4 | 11.3 | 0.02 | |||||||||
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For the year ended December
31,
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||||||||||||
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2007
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2008
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2008
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||||||||||
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(in millions of Chilean
pesos
for the years ended December
31)
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(in millions
of
U.S.
dollars)
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|||||||||||
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Dividends per ADS
(US$)(3)
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0.12 | 0.07 | – | |||||||||
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Weighted Average
Number of Shares
Outstanding
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957,157,085 | 957,157,085 | – | |||||||||
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Consolidated Balance
Sheet
Data:
|
||||||||||||
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Cash and cash and
equivalents
|
73,084 | 71,555 | 112.4 | |||||||||
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Property, plant and
equipment
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1,028,281 | 1,011,577 | 1,589.4 | |||||||||
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Total
Assets
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1,463,544 | 1,485,456 | 2,333.9 | |||||||||
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Current
liabilities
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339,000 | 398,659 | 626.4 | |||||||||
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Non-current
liabilities
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503,395 | 482,058 | 757.4 | |||||||||
| Net cash flows used in financing activities | 68,770 | 51,499 | 80.9 | |||||||||
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Total equity attributable to
Shareholders of parent
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621,149 | 604,739 | 950.2 | |||||||||
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Consolidated Cash Flow
Data:
|
||||||||||||
|
Net cash flows from operating
activities
|
228,958 | 178,137 | 279.9 | |||||||||
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Net cash flows used in investing
activities
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128,237 | 128,167 | 201.4 | |||||||||
| Capital Stock | 737,179 | 697,936 | 1,096.6 | |||||||||
|
Capital Expenditures (4)
|
141,304 | 147,989 | 232.5 | |||||||||
|
(1)
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Basic earnings (loss) per share
have been computed using the weighted average number of shares
outstanding during
each period presented.
|
|
(2)
|
Dividends paid represents the
amount of dividends paid in the periods
indicated.
|
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(3)
|
Calculated on the basis that each ADS
represents four shares of Series A Common Stock. Dividends
represent an amount equal to the interim dividends declared for each
year and the final dividend for the preceding year declared in April of
each year. See “Item
8. Financial Information—Dividend Policy and
Dividends.”
|
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(4)
|
Represents the amount disbursed in
each year, irrespective of the year in which the investment was
made.
|
The following table presents selected
financial data expressed in Chilean pesos as of December 31, 2007 for the three
previous years, in accordance with the Consolidated Financial Statements
presented to the SEC in the
form 20-F for the year 2007, which were prepared in accordance with Chilean
GAAP, which differs in certain significant respects from U.S. GAAP. The following selected consolidated
financial data was affected by certain changes in the Company’s corporate structure during the years
presented. In particular,
the data for 2004 reflects the divestiture and deconsolidation of the
Company’s mobile subsidiary Telefónica Móvil pursuant to its sale in July
2004.
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2004 (1)
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2005
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2006
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||||||||||
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(in millions of Chilean
pesos
for the year ended December 31,
2007)
|
||||||||||||
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Statement of Operations
Data:
|
||||||||||||
|
Chilean
GAAP
|
||||||||||||
|
Operating
Revenues
|
798,488 | 636,779 | 619,917 | |||||||||
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Operating Costs and
Expenses
|
(504,908 | ) | (409,073 | ) | (400,629 | ) | ||||||
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Administrative and Selling
Costs
|
(180,959 | ) | (132,200 | ) | (130,550 | ) | ||||||
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Operating
Results
|
112,619 | 95,505 | 88,738 | |||||||||
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Interest
Income
|
10,549 | 8,755 | 4,765 | |||||||||
|
Interest Expense, Net of
Capitalized Interest
|
(61,406 | ) | (32,350 | ) | (20,922 | ) | ||||||
|
Price Level Restatement and
Exchange Differences(1)
|
10,204 | 3,181 | 715 | |||||||||
|
Other non-operating income,
net(7)
|
353,258 | (10,828 | ) | (16,469 | ) | |||||||
|
Income before Income
Taxes
|
425,223 | 64,264 | 56,826 | |||||||||
|
Income
Taxes
|
(70,883 | ) | (36,616 | ) | (31,790 | ) | ||||||
|
Net Income
(loss)
|
354,019 | 27,615 | 25,081 | |||||||||
|
Dividends Paid(2)
|
720,073 | 126,916 | 25,800 | |||||||||
|
Chilean GAAP earnings (loss) per
Share(3)
|
369.87 | 28.85 | 26.20 | |||||||||
|
Earnings per ADS(4)
|
1,479.48 | 115.40 | 104.80 | |||||||||
|
Dividends per Share(5)
|
752.3 | 13.60 | 26.95 | |||||||||
|
Dividends per ADS(4)
|
3,009.22 | 530.39 | 107.82 | |||||||||
|
Weighted Average Number of Shares
Outstanding
|
957,157,085 | 957,157,085 | 957,157,085 | |||||||||
|
2004 (1)
|
2005
|
2006
|
||||||||||
|
(in millions of Chilean
pesos
for the year ended December 31,
2007)
|
||||||||||||
|
Statement of
Operations Data:
|
||||||||||||
|
U.S. GAAP
|
||||||||||||
|
Net Income (loss) in accordance
with U.S. GAAP
|
22,788.1 | 50,042.0 | 43,705.9 | |||||||||
|
Net income (loss) from continuing
operations*
|
24,209.0 | 50,042.0 | 43,705.9 | |||||||||
|
Net income (loss) from
discontinuing operations*
|
(1,420.9 | ) | - | - | ||||||||
|
Number of
Shares
|
957,157,085 | 957,157,085 | 957,157,085 | |||||||||
|
Net Income (loss) in
accordance with U.S.
GAAP per Share
|
23.81 | 52.28 | 45.66 | |||||||||
|
Net Income (loss) from continuing
operations per
Share
|
25.29 | 52.28 | 45.66 | |||||||||
|
Net Income (loss) from
discontinuing operations per Share
|
(1.48212 | ) | - | - | ||||||||
|
Balance Sheet
Data:
|
||||||||||||
|
Chilean
GAAP
|
||||||||||||
|
Current Assets
|
479,776 | 349,041 | 315,448 | |||||||||
|
Property, Plant and Equipment,
net
|
1,570,989 | 1,426,066 | 1,330,430 | |||||||||
|
Other
Assets
|
101,580 | 101,229 | 87,771 | |||||||||
|
Total
Assets
|
2,152,345 | 1,876,336 | 1,733,648 | |||||||||
|
Total Long-Term Debt (including
Current Maturities)(8)
|
636,492 | 550,875 | 431,308 | |||||||||
|
Total Shareholders’ Equity
|
1,118,843 | 1,014,943 | 967,417 | |||||||||
|
U.S. GAAP
|
||||||||||||
|
Total
Assets
|
2,157,075 | 1,876,029 | 1,744,700 | |||||||||
|
Shareholders’ Equity
|
981,161 | 882,845 | 855,992 | |||||||||
|
Paid in
Capital
|
1,000,817 | 1,000,817 | 956,821 | |||||||||
|
Other Data:
|
||||||||||||
|
Capital Expenditures(6)
|
92,404 | 79,024 | 117,629 | |||||||||
*
The Company has revised its amounts previously presented under U.S. GAAP to
reclassify its discontinued operations for the sale of Telefónica Móvil de Chile
S.A. in 2004. These revised numbers are unaudited. Under Chilean GAAP, the
Company is not required to restate or reclassify financial information presented
in previous years to reflect significant divestures. For purposes of U.S. GAAP,
the Company is required to eliminate the results of operations of certain
divested operations from those of its continuing operations in presenting its
U.S. GAAP results. See Note 37 to the Audited Consolidated Financial
Statements.
|
(1)
|
The Company has revised its
amounts previously presented under U.S. GAAP to reclassify its
discontinued operations for the sale of Telefónica Móvil de Chile S.A. in 2004. These
revised numbers are unaudited. Under Chilean GAAP, the Company is not required to
restate or reclassify financial information presented in previous years to
reflect significant divestures. For purposes of U.S. GAAP, the Company is
required to eliminate the results of operations of certain divested
operations from those of its continuing
operations in presenting its U.S. GAAP
results.
|
|
(2)
|
Dividends paid represents the
amount of dividends paid in the periods
indicated.
|
|
(3)
|
Basic earnings (loss) per share
have been computed using the weighted average number of shares outstanding during
each period presented.
|
|
(4)
|
Calculated on the basis that each
ADS represents four shares of Series A Common
Stock.
|
|
(5)
|
Represents an amount equal to the
interim dividends declared for each year and the final dividend for the
preceding year
declared in April of each year. See “Item 8. Financial
Information—Dividend Policy and
Dividends.”
|
|
(6)
|
Represents the amount disbursed in
each year, irrespective of the year in which the investment was
made.
|
|
(7)
|
The Company recorded a
non-operating gain
associated with the sale of its subsidiary Telefónica Móvil de Chile S.A. to
Telefónica
Móviles (TEM) in July
2004.
|
|
(8)
|
Total Long-Term Debt (including
Current Maturities) includes notes and accounts payable to related
companies and capital lease
obligations.
|
Exchange Rates
Chile’s Ley Orgánica Constitucional
del Banco Central de
Chile No. 18,840 (the
“Central Bank Act”), enacted in 1989, liberalized the
rules that govern the purchase and sale of foreign exchange in Chile. Prior to 1989, Chilean law authorized
the purchase and sale of foreign exchange only in those cases explicitly
authorized by the Central Bank.
The Central Bank Act empowers the
Central Bank to determine whether certain purchases and sales of foreign
exchange must be carried out in the Formal Exchange Market, a market formed by
banks and other institutions authorized by the Central Bank for that purpose. The Central Bank has ruled
that certain foreign exchange transactions (including those attendant to foreign
investments) may be effected only in the Formal Exchange Market. Banks and other
institutions may purchase and sell foreign exchange in the Formal Exchange Market at such
rates as they freely determine from time to time. The Central Bank reports an
Observed Exchange Rate that is computed, for any date, by averaging the exchange
rates of the previous business day’s transactions in the Formal Exchange Market.
Since 1989, the Central Bank has also
set a reference exchange rate known as the dólar
acuerdo (“Reference Exchange Rate”) that is reset monthly, taking internal
and external inflation into account, and is adjusted daily to reflect
variations in the parities
between the Chilean peso and each of the U.S. dollar, the euro and the Japanese
yen.
The Central Bank Act authorized the
Central Bank to carry out its transactions at rates within a specified band set
around the Reference Exchange Rate. While the band was in place, the
Central Bank generally carried out its transactions at the spot rate. When banks
needed to buy or sell U.S. dollars from or to the Central Bank, the Central Bank
made such sales at rates as high as the upper limit of the band, and such purchases at rates as
low as the lower limit of the band. Banks generally carried out authorized
transactions on the Formal Exchange Market at the spot rate, which usually
fluctuated within the range of the band.
In order to keep fluctuations in the average exchange rate within
the range of the band, the Central Bank of Chile in the past intervened by
buying or selling foreign currency on the formal exchange market. On
September 2,
1999, in order to allow for
increased exchange rate flexibility, the Central Bank suspended its
formal commitment to maintain the exchange rate within a specified band. The
Central Bank may, however, still intervene in certain exceptional cases of
exchange rate fluctuations to keep the average exchange rate within certain limits, and must inform the
market of the reason for its intervention in each such event. Nonetheless, the
Central Bank will continue to publish the Reference Exchange Rate as a reference
for the market. Purchases and sales of foreign exchange that may be effected outside the Formal
Exchange Market can be carried out in the Mercado Cambiario
Informal (the “Informal Exchange Market”), a recognized currency market in
Chile.
The following table sets forth the high,
low, average and year-end Observed Exchange Rates for U.S. dollars for each
year beginning with 2004
and for each of the past
six months, as reported by the Central Bank. On March 31, 2009, the Observed Exchange Rate was
Ch$583.26 per US$1.00.
|
Observed Exchange
Rates(1)
(Ch$ per
US$)
|
||||||||||||||||
|
Low(2)
|
High(2)
|
Average(3)
|
Period-End
|
|||||||||||||
|
Year ended December 31,
2004
|
557.40 | 649.45 | 609.51 | 557.40 | ||||||||||||
|
Year ended December 31,
2005
|
509.70 | 592.75 | 559.77 | 512.50 | ||||||||||||
|
Year ended December 31,
2006
|
511.44 | 549.63 | 530.28 | 532.39 | ||||||||||||
|
Year ended December 31,
2007
|
493.14 | 548.67 | 522.42 | 496.89 | ||||||||||||
|
Year ended December 31,
2008
|
431.22 | 676.75 | 522.35 | 636.45 | ||||||||||||
|
Month ended October 31,
2008
|
555.56 | 676.75 | 623.79 | 669.94 | ||||||||||||
|
Month ended November 30,
2008
|
629.19 | 675.57 | 651.24 | 664.57 | ||||||||||||
|
Month ended December 31,
2008
|
625.59 | 674.83 | 647.91 | 636.45 | ||||||||||||
|
Month ended January 31,
2009
|
610.09 | 643.87 | 622.09 | 617.10 | ||||||||||||
|
Month ended February 28, 2009
|
583.32 | 623.87 | 605.10 | 599.04 | ||||||||||||
|
Month ended March 31,
2009
|
572.39 | 643.87 | 606.73 | 583.26 | ||||||||||||
|
Source:
|
Central Bank and Reuters Data
Base
|
|
(1)
|
Reflects nominal pesos at
historical
values.
|
|
(2)
|
Exchange rates are the actual high
and low for each period.
|
|
(3)
|
Corresponds to daily average rates
during the period.
|
Telefónica Chile does not represent that the Chilean
peso or U.S. dollar amounts referred to herein actually represent the amounts that were, could have been
or could be converted into U.S. dollars or Chilean pesos, as the case may be, at
the rates indicated, at any particular rate or at all.
The Central Bank regulates the
international issuance by Chilean companies of non-peso-denominated debt, including, among
other things, the repatriation and exchange for pesos of the foreign currency
proceeds from such offerings. See “Item 10. Additional
Information—Exchange Controls and Other Limitations
Affecting Security Holders.”
B. Capitalization and
Indebtedness
Not applicable.
C. Reasons for the Offer and Use of
Proceeds
Not applicable.
D. Risk Factors
The following discussion should be read
together with this Form 20-F, including the Audited Consolidated Financial
Statements, and the notes
thereto.
Risks Relating to the
Company’s Business
Regulation may adversely affect revenues
in certain of Telefónica
Chile’s businesses.
Tariff regulation
The Chilean Government has historically
regulated local telephony services in Chile. The Comisión Resolutiva
Antimonopolios (the
“Antitrust
Authority”, now known as
the “Tribunal de Libre
Competencia”), a Chilean government agency
responsible for making certain determinations relating to competitive conditions
in the telecommunications
industry, determined that Telefónica Chile is a dominant operator of
local telephony in many geographical areas of Chile. As a result, the Company is
subject to tariff decrees that regulate certain rates and fees that the Company
can charge for such local telephony services in most of the
country. In accordance with the
telecommunications law, all telecommunications operators are subject to
regulation of their access charges (the charge to telecommunications operators
for accessing another operator’s network) which have been set at different levels
depending on the operator. Consequently, costs of accessing different
operators’ networks differ. Regulatory changes in
approved access charge rates may affect the revenues for local telephony and
costs of interconnections to other local operators. Similarly,
interconnections to local operators represent costs for the long distance and
mobile businesses. Despite
the above, in January 2009, the Antitrust Authority issued an opinion recognizing that current market conditions do not justify tariff regulation
regarding local telephone service (fixed and variable charge), public telephones
and line
connections. The Chilean telecommunications
authority, the Subsecretaría de
Telecomunicaciones
(“Subtel”), may confirm, modify or reject that opinion and, in any case, the Company can give
no assurance that the eventual ruling, if any, will not have a material adverse
effect on the results of operations or financial position of the
Company.
Tariff regulation may have a significant
impact on Company revenues
and its ability to compete in the marketplace, as the Company is required to
charge the same tariff to all clients in a designated tariff area. See
“Item 4. Information on the
Company—Business Overview—Licenses and Tariffs.” In 2008, approximately 27% of Company revenues (including the
regulated items in fixed charge, variable charge, access charges and public
telephony) were from regulated business activities. The application of the local
service tariffs, defined by Tariff Decree
No. 169 for the period from
2004 to 2009, resulted in a minor impact in the 2004 and 2005 financial
statements of Telefónica
Chile. In contrast, the introduction of
Tariff Decree No. 187 in May 1999 resulted in a reduction of approximately 25%
in regulated revenues per line in the first year. Since
1999, the Company has sought administrative relief to correct what it believes
are certain errors and illegalities in Tariff Decree No. 187. Upon denial of
such relief, and having exhausted the administrative recourses available to it, in March 2002,
Telefónica Chile filed a civil lawsuit for damages
against the State of Chile, which is currently
pending.
The Company can give no assurance that
future tariff decrees for fixed telephony will not have a material
adverse effect on the
results of operations or financial position, as such future tariff decrees could
cause alterations in demand or traffic volume, or changes in the timing of
traffic distribution from more expensive to less expensive time
slots.
Other regulations
New regulations or changes in the
existing regulatory model may adversely affect the Company’s businesses. No assurance can be given that future
regulations, if any, will not have a material adverse effect on the
Company’s results of operations of
financial
position.
Law No. 18,168 (as amended, and together
with the regulations promulgated thereunder, the “Telecommunications Law”) also specifies certain causes for which
an operator can be sanctioned through penalties or even the termination of its
public or intermediate
service license, if the operator is in violation of the law or does not comply
with the terms and conditions to which the license is subject. If the holder
believes that its license has been terminated unlawfully, the holder may appeal
the termination in Chilean courts. If a
license is terminated, the holder is barred from applying for any license for a
period of five years. Any such sanctions could have a material adverse effect on
the Company’s results of operations or financial
position.
Telefónica Chile faces intense
competition.
Telefónica Chile faces intense competition in every
aspect of its business, ranging from existing operators to new entrants. In
addition, consolidation is leading to greater levels of
competition.
In 2004, two leading cable operators merged. The
combined company,
VTR GlobalCom, currently leads the paid television market and is also
a relevant player in broadband and fixed telephony. In the mobile telephony
business, Telefónica
Móviles (“TEM”) acquired Bellsouth in Chile and the mobile subsidiary of
Telefónica Chile in 2004. In the same year, competition
increased with the entry of new operators, primarily in the long distance and
data transmission businesses. The Mexican operator Telmex, a data transmission
operator, and América Móvil, a Telmex affiliate, entered the
local mobile telephony market by acquiring Smartcom in August 2005. In 2007,
Telmex also acquired ZAP, a local satellite television operator. Similarly, in
September 2005, the local data transmission operator, GTD, acquired the local fixed
operator Manquehue. In
2008, Telmex started building a hybrid fiber coaxial network with voice,
broadband and pay television services. Telmex had already entered
the residential segment through a bundled offer of telephony, broadband and satellite
television. Its telephony and broadband services are provided over
WiMax. See “Item 4. Information on the Company—Business Overview Areas—Market and
Competition.”
In the fixed local telephony market,
Telefónica Chile competes with both mobile telephony and other
fixed and cable telephony operators, which are not subject to the same tariff
regulations as the Company and therefore may compete with different
conditions. Partly as a result, the
Company’s market share has declined. In the corporate communications and data
transmission services market, there are eight major operators in the main cities
of Chile, three of which have nationwide
infrastructure coverage. In
the long distance services market, Telefónica Chile competes with numerous other long distance operators and with
mobile telephone operators in the domestic long distance market. As a result,
the Company has faced intense pricing pressure and a decreasing trend in
traffic. Telefónica
Chile also faces increasing competition in broadband
services and in pay television services as well.
The development of new technologies, such as wireless accesses like WiMax or
3G networks, deployed by mobile
operators to provide
wireless broadband has increased competition in the market. See “Item 4. Information on the Company—Business Overview—Market and Competition.” Increased competition or the entrance
of new competitors could adversely affect the Company’s results of operations, financial
condition or prospects.
Changes in technology could affect Telefónica Chile in ways it cannot
predict.
The telecommunications industry as a
whole has traditionally been, and is likely to continue to be, subject to rapid
and significant changes in technology and the related introduction of new
products and services.
Although the Company believes that for the foreseeable future, existing and
developing technologies will not materially adversely affect the viability or
competitiveness of its telecommunications business, there can be no assurance as
to the effect of such technological
changes on the Company or that the Company will not be required to expend
substantial financial resources on the development or implementation of new
competitive technologies.
New services and technological advances
may offer additional
opportunities to compete against the Company on the basis of cost, quality or
functionality. It may not be practicable or cost-effective for the Company to
replace or upgrade its installed technologies in response to
competitors’ actions. Responding to such change may require the
Company to devote substantial financial resources to the development,
procurement or implementation of new technologies and to write off obsolete
assets relating to its existing technology. If the Company chooses
to purchase or invest in the development of
new telecommunications technology, there can be no assurance that such new
products or services will not serve as a substitute to existing products and
services offered by the Company. In the past, the Company has experienced such substitution with the
introduction of mobile communications service, which has contributed to the
declines in number of fixed lines, volume of traffic and in domestic long
distance traffic.
Recent trends seen outside of
Chile have shown an increased use of IP technology as a
substitute for traditional voice services, which are often provided at lower
prices. The Telecommunications Law requires a regulation to be defined for these
services to be offered to the public. Additionally, in 2006, Subtel initiated a process of public
inquiry for new regulations relating to IP telephony over broadband. After receiving comments from thirty actors during the inquiry process,
on June 14, 2008, Rule No.
484 regarding voice over IP
services was published in
the Official Gazette. Even though, such rule favors the application of
regulations similar to those of public telephone
services to voice over IP, use of this technology may serve as a
substitute for the Company’s local and long distance traffic and
increase pricing
pressure.
As a result, if the Company chooses to
introduce any such new telephony products or services, it can give no assurance
that the benefits of such new products and services will not be materially
offset by declines in existing products and services offered by the Company or
that it will be permitted to participate in that business.
Labor relations may negatively impact
Telefónica Chile.
As of December 31, 2008, approximately 60% of the
Company’s employees were union members. As of
December 31, 2008, the Company had collective bargaining
agreements in place with 22 unions.
The Company has taken steps to maintain
stable labor relations, such as the contracts for periods from three to four
years that were signed after a successful collective bargaining process, as well as the
agreement between the Company and its employees in order to implement a new
model of labor relations, which was designed to encourage a greater degree of
participation and to address the interests of workers and management alike. In 2008, a collective labor agreement
was signed with the Chilean telecommunications union, SINTELFI, the largest union in terms
of representation of Company
employees, representing
1,605 employees. The agreement was negotiated in advance of
its expiration,
and modified the parameters for annual
compensation and incentive adjustments, basing them on performance, productivity
and alignment with business objectives. As of December 31, 2008, 92.8% of
unionized employees have signed three to four year contracts.
However, the Company can provide no
assurance that in the future it will be able to successfully negotiate new
contracts on favorable terms, or that the unions involved in the negotiations
will not choose to implement a labor strike or invoke Article 369 at such time. Article 369
of the Chilean Labor Code allows unions that are renewing labor agreements to
freeze the conditions of the previous agreement for a period of 18
months. In addition,
new regulations or changes
in the existing labor laws may adversely affect the
Company’s businesses.
Telefónica is the controlling shareholder of
Telefónica Chile, and thus may determine the outcome of
actions requiring shareholder approval.
As a result of the tender offers
launched by Inversiones Telefónica International Holding Limitada in
September and December 2008, Telefónica Internacional Chile S.A.
increased its ownership of
Telefónica Chile’s common stock from 44.9% to 97.89%. Telefónica Internacional Chile is a 99.9% owned subsidiary of
Telefónica Chile Holding B.V., which in turn is indirectly
wholly-owned by
Telefónica. Consequently,
Telefónica has the ability to determine the outcome of
any actions requiring shareholder approval. See “Item 10. Additional
Information—Memorandum and Articles of
Association—Shareholders’ Meetings and Voting
Rights.” In addition,
Telefónica’s equity stake in Telefónica Chile allows Telefónica to control the Company’s Board of Directors. At the General
Annual Shareholders’ Meeting held on April 13, 2007,
Telefónica elected five of seven members of the Board
of Directors.
The Company could be adversely affected
if major suppliers fail to provide needed equipment and services on a timely
basis.
The Company depends on suppliers for
network infrastructure, equipment and services to satisfy its operating needs.
Many suppliers rely heavily on labor; therefore, any work stoppage or labor
relations problems affecting the Company’s suppliers could adversely affect its
operations. Suppliers may, among other things, extend delivery times, raise prices and limit supply
due to their own shortages and business requirements. If these suppliers fail to
deliver products and services on a timely basis that satisfies its
customers’ demands, the Company could be
negatively affected. Similarly, interruptions in the supply of
telecommunications equipment for networks could impede network development and
expansion.
The Company’s historical consolidated financial and
operating results may not be indicative of future
performance.
The Company has divested subsidiaries in the past years.
See “Item 4. Information on
the Company—History and Development of the
Company—Divestures.” In October 2008, the Company sold the assets and customer portfolio of
a subsidiary, Telefónica Asistencia y Seguridad S.A., to Prosegur for a total of Ch$15,563 million. In
July 2004, the Company sold its mobile
subsidiary, which provided 29.2% of operating revenues in the year ended
December 31, 2003, and generated Ch$13,467 million (historic value) in operating
income during the same
period. The sale of businesses resulted in the loss of their contributions to
the Company’s operating results. No assurances can
be given that the Company will or will not divest of additional businesses in
the future or that such divestitures will or will not affect the
Company’s results and access to financing. As a
result, the Company’s historical consolidated financial
results for and as of the end of periods ending on or prior to these
transactions may not be indicative of its future operating and financial
performance.
The Company may not be successful in the
development of new businesses or product innovation.
The Company cannot ensure the success of
any new services, products or the development of new businesses in the
telecommunications market
or other markets, or their impact on the Company’s results.
Certain considerations related to
platforms located in other countries.
The Company operates in Chile and most of its systems and platforms
are located within Chile. Nevertheless, the Company also relies on shared platforms within
the Telefónica
Group, such as SAP
accounting support, and
other equipment outside Chile in order to provide the pay television
service. As a result, the Company cannot assure that volatility or unfavorable
economic, political and
social conditions outside Chile will not materially affect its ability
to provide services.
The Company may not be able to refinance
its outstanding indebtedness.
The Company’s total financial debt as of December
31, 2008 amounted to Ch$436,388 million, (US$685.7 million), including current maturities,
outstanding derivatives and fair value adjustments, with an average maturity of 2.4 years. Although in the past
Telefónica Chile has relied substantially on public debt
issuances and bank loans to
meet its financing requirements, in recent years its main sources of liquidity
have been cash flow generated from operations and cash flow resulting from
savings associated with the refinancing of certain loans and sale of assets.
In 2008, the Company continued with the renegotiation of
loans and extending
of maturities. As a result, the Company has
similar amounts of debt maturing in each of the next five years, the repayments of which are expected to be funded through
cash flow generated from operations and refinancings.
Due to
recent turmoil in global credit markets and the continued decline in the global
economy, the Company may not be able to refinance its debt at terms that are as
favorable as those from which the Company previously benefited, at terms that
are acceptable to the Company or at all. Refinancing of debt or increased levels
of debt could have negative effects that include: difficulties in obtaining
future financing; reductions in credit ratings issued by rating agencies;
restrictions on cash flows
or operations imposed by lenders; higher rates; and reduced flexibility to take
advantage of or pursue other business opportunities. For these reasons,
among others, if current economic conditions persist or decline, the Company’s
operating results and financial condition, as well as its ability to service
debt and pay other obligations, could be adversely affected.
A system failure could cause delays or
interruptions of service, which could cause us to lose
customers.
To provide effective service, the Company will need to continue
to provide its customers with reliable service over its network. Some of the
risks to the Company’s network and infrastructure
include:
|
|
·
|
physical damage to access lines
and networks;
|
|
|
·
|
power surges or
outages;
|
|
|
·
|
software defects;
|
|
|
·
|
disruptions beyond the
Company’s control;
and
|
|
|
·
|
disruptions due to changes in
obsolete equipment.
|
The Company’s operations also rely on a stable
supply of utilities. Given recent instability of those supplies, including the
supply of gas from Argentina and electricity rationing in
Chile, the Company can not ensure that future
supply instability or interruptions will
not impair its ability to procure required utility services in the future, which
could adversely impact its operations.
Prolonged service interruptions could affect the
Company’s business. The Company relies heavily
on its network equipment, telecommunications providers, data and software to
support all of its functions. The Company relies on its networks and the
networks of others for substantially all of its revenues. The
Company is able to deliver services only to the extent that it can protect its
network systems against damage from power or telecommunications failures,
computer viruses, natural disasters, unauthorized access, theft of copper wires from external networks and
other disruptions. While the Company endeavors to provide for failures in the
network by providing backup systems and procedures, it cannot guarantee that
these backup systems and procedures will operate satisfactorily in an emergency. Should the Company
experience a prolonged failure, it could seriously jeopardize its ability to
continue operations. In particular, should a significant service interruption
occur, its customers may choose a different provider and its reputation may be damaged, reducing its
attractiveness to new customers.
The Company may not be successful in
currently pending legal proceedings.
The Company is a party to lawsuits and
other legal proceedings in the ordinary course of its businesses, some
of which have been pending
for several years. An adverse outcome in, or any settlement of, these or other
lawsuits could result in significant costs and negatively impact the Company’s financial results. See “Item 8. Financial
Information—Consolidated Statements and Other Financial
Information—Legal Proceedings.”
Risks Relating to Chile
A downturn in the Chilean economy may
adversely affect Telefónica
Chile.
Nearly all of Telefónica Chile’s customers are Chilean companies or
individuals, and substantially all of Telefónica Chile’s operations are located in Chile. For these reasons, the results of the
Company’s operations and its financial condition
are sensitive to, and dependent upon, the level of economic activity in
Chile. Historically, growth in the
Chilean telecommunications industry has been
tied to the state of Chile’s economy, particularly levels
of consumer spending and
demand.
Unfavorable
general economic conditions, such as a recession or economic slowdown in Chile,
could negatively affect the affordability of and demand for some of the
Company’s products and services. In difficult economic conditions, consumers may
seek to reduce discretionary spending by forgoing purchases of the Company’s
products, electing to use fewer higher-margin services or obtaining products and
services under lower-cost programs offered by other companies. Similarly, under
these conditions the business customers that the Company serves may delay
purchasing decisions, delay full implementation of service offerings or reduce
their use of services. Furthermore, adverse economic conditions may lead to an
increased number of the Company’s consumer and business customers that are
unable to pay for services. If any of these events were to occur, it could have
a negative effect on the Company’s results of operations.
The Company can give no assurance that
Chile’s economy will continue to grow in the
future, nor can it give assurances that future developments in or affecting the
Chilean economy will not impair its ability to proceed with its business plan or materially
adversely affect its business, financial condition or results of
operations.
Developments in other emerging markets
or in the global telecommunications market may adversely affect
Telefónica Chile.
Developments in the global telecommunications market and in
other emerging markets, particularly in Latin America, may adversely affect the
market for Telefónica
Chile’s securities and the availability of
foreign capital in Chile. The Company cannot predict whether
events in other markets will adversely affect the
price of, or market for, its securities.
Unfavorable
general economic conditions, including the current recession in the United
States and the recent financial crisis affecting the global banking system and
financial markets, have caused a decrease in the amount of foreign capital
invested in emerging markets, including Chile and Latin America. In turn, this
has caused securities markets in many emerging markets, including Chile and
Latin America, to decrease in value and has led to depreciation of emerging
market currencies compared to the U.S. dollar. The Company cannot give any assurance
that negative developments in
Latin America or other emerging markets will not
occur or that such negative developments would
not adversely affect the
securities markets in which the Company’s securities trade or affect the
Company’s access to sources of
financing.
An increase in inflation may adversely
affect Telefónica
Chile.
Chile has experienced high levels of
inflation in the past. High
levels of inflation in Chile could adversely affect the Chilean
economy and Telefónica
Chile’s financial condition and results of
operations. The rate of inflation as measured by changes in the Chilean consumer
price index in the years 2004, 2005, 2006, 2007 and 2008 was 2.4%, 3.7%, 2.6%, 7.8% and 7.1% respectively. Over the past two years, inflation
has exceeded the Central Bank’s target range. Generally, high levels of inflation will
adversely affect the Company’s financial condition to the extent
that, during any given
period:
|
|
·
|
the Company’s average domestic
inflation-indexed liabilities exceed its average domestic
inflation-indexed assets;
|
|
|
·
|
the Company’s average monetary assets exceed
its average monetary liabilities;
or
|
|
|
·
|
the Company is unable to
transfer increased
inflation-indexed costs such as labor and supplies to
customers.
|
Any significant increase in the level of
inflation in the future may adversely affect the performance of the Chilean
economy and the operating results of the Company.
Currency devaluations and foreign exchange
fluctuations may adversely affect Telefónica Chile.
Volatility of the value of the Chilean
peso against the U.S. dollar could adversely affect the Company’s financial condition and results of
operations. In 2004, 2005
and 2007, the peso recorded a nominal
appreciation against the U.S. dollar of 6.1%, 8.1% and 6.7%, versus the prior year. However, in 2006 and 2008 the peso experienced a nominal
depreciation of 3.9% and 28.1%, respectively.
The main driver of exchange rate volatility in the past years was the significant devaluations in
other Latin American countries, mainly Brazil, as well as general uncertainty and trade imbalances
in global markets. In 2007, Chilean peso
appreciation was driven by improvement in Chilean economic indicators and record commodities prices, together with weakness in the U.S.
dollar. More recently, the
primary driver of exchange rate volatility has been the substantial appreciation
of the U.S. dollar relative to emerging markets currencies, including the Chilean peso. The value of the Chilean peso against
the U.S. dollar may continue to fluctuate significantly in the future. See
“Item 3. Key
Information—Selected Financial Data—Exchange Rates.”
Historically,
a significant portion of the Company’s indebtedness has been denominated in U.S.
dollars, while a substantial part of its revenues and operating expenses has
been denominated in pesos. If the peso’s value declines against the dollar,
Telefónica Chile will need more pesos to repay the same amount of
dollar-denominated debt. As a result, fluctuations in the Chilean peso to U.S.
dollar exchange rate may affect the Company’s financial condition and results of
operations. As of December 31, 2008, 67.8% of the Company’s interest-bearing
debt was denominated in U.S. dollars and was fully hedged against exchange rate
variations between the peso and the U.S. dollar through financial instruments
such as forward exchange agreements and cross-currency swaps. The remainder of
the Company’s interest-bearing debt is UF- or peso-denominated and therefore not
subject to exchange rate risk. The Company’s hedging policy against foreign
exchange fluctuations is disclosed in “Item 11. Quantitative and Qualitative
Disclosures About Market Risk—Risk of Variations in Foreign Currency Exchange
Rates.”
Risks
Relating to the Company’s ADSs
The
relative illiquidity and volatility of Chilean securities markets and the
decreased liquidity of the Company’s common stock could adversely affect the
price of the Company’s ADSs and common stock.
Chilean securities markets are
substantially smaller and less liquid than the major securities markets in the
United States. In addition, Chilean securities
markets may be affected materially by developments in other emerging markets,
particularly in other
countries in South
America. Since the
completion of the tender offers launched by
Telefónica Internacional Holding Limitada, the liquidity of the
Company’s common stock in the Chilean market has
markedly decreased. The relatively low liquidity of the Chilean market and the low
liquidity of the Company’s common stock may impair the ability of
holders of ADSs to sell shares of the Company’s common stock withdrawn from the ADS
program into the Chilean market in the amount and at the price and
time they wish to do
so.
The termination of the deposit agreement
relating to the Company’s ADSs may impair ADS
holders’ ability to transfer their
ADSs, delay ADS
holders’ receipt of any dividends and result in the cancellation of the ADSs
and the subsequent sale of
the securities underlying
the ADSs.
The
Company has directed Citibank, N.A., as depositary, (the “Depositary”) to
terminate the deposit agreement relating to the Company’s ADSs. Upon
effectiveness of the termination, which the Company expects to occur on or about
May 7, 2009 (the “Termination Date”), the Depositary will cease to provide
certain services, including the registration of transfer of Telefónica Chile’s
ADSs, and it will suspend the distribution of dividends to the holders of the
ADSs. Existing ADS holders may exchange their ADSs for the underlying Series A
Common Stock of the Company at any time until the expiration of a 60-day period
commencing on the Termination Date. In addition, after the expiration of such
60-day period, the Depositary may, and intends to, sell the securities
underlying the ADSs and may thereafter hold the net proceeds of any such sale,
together with any other cash then held by it under the deposit agreement, in an
unsegregated account, without liability for interest, for the pro rata benefit
of the holders of the ADSs. The Company cannot guarantee that such termination
will not impair ADS holders’ ability to transfer their ADSs when and if they
choose to do so, will not delay the receipt of any dividends or that the sale of
any securities underlying the ADSs will occur in a manner that maximizes the
price obtained for such securities. See “Item 9. The Offer and Listing—Offer and
Listing Details—Common Stock Prices and Related Matters” for more
information.
The delisting of the Company’s ADS’ from the NYSE and the
Company’s expected deregistration with the SEC
may reduce the liquidity of the market for the Company’s ADSs.
Effective
February 19, 2009, the Company’s ADSs have been delisted from the New York Stock
Exchange. Following the delisting and the termination of the deposit agreement,
the Company will deregister with the U.S. Securities and Exchange Commission
(the “SEC”) if it becomes eligible to do so under the SEC’s rules. The company
hopes to do so in or around October 2009. If it is able to deregister with the
SEC, the Company will no longer be required to file annual or periodic reports
with the SEC, and investors will have to rely on its filings with the SVS and
the Chilean Stock Exchanges, which are made in the Spanish language, for
information. As a result, there can be no assurance that a liquid market for the
Company’s ADSs exists now or will exist in the future. See See “Item 9. The
Offer and Listing—Offer and Listing Details—Common Stock Prices and Related
Matters” for more information.
Controls on foreign investment and
repatriation of investments in Chile may adversely impact the
Company’s ADS holders’ ability to obtain and dispose of the
shares of the Company’s common stock underlying its
ADRs.
Equity investments in Chile by persons who are not Chilean
residents are generally subject to exchange control regulations that restrict
the repatriation of investments and earnings from Chile. The Company’s ADSs are subject to an ADR foreign
investment contract among us, the Depositary and the Central Bank of Chile which is intended to grant holders of
the Company’s ADSs and the Depositary access to Chile’s formal exchange market. See
“Item 3. Key
Information—Exchange Rates.” Pursuant to current Chilean law, the
Company’s ADR foreign investment contract may
not be amended unilaterally by the Central Bank of Chile. However, the Company cannot make any
assurances that additional Chilean restrictions applicable to holders of its
ADSs, the disposition of underlying shares of its common stock or the
repatriation of the proceeds from the disposition of the underlying common stock
could not be imposed in the future, nor can the Company assess the duration or
impact of the restrictions if imposed. If for any reason, including changes to the Company’s ADR foreign investment contract or
Chilean law, the Depositary is unable to convert Chilean pesos to
U.S. dollars, investors would receive dividends or other distributions in
Chilean pesos. Transferees of shares of the Company’s common stock withdrawn from the ADR
facility will not be entitled to access to the formal exchange market unless the
withdrawn shares are redeposited with the Depositary.
Holders of ADSs may be unable to
exercise preemptive rights.
The Ley de Sociedades
Anónimas (Law No. 18,046), the Reglamento de
Sociedades Anónimas (the “Chilean Corporations Law”) and applicable regulations require
that whenever the Company issues new common stock for
cash, the Company grants preemptive
rights to all of its shareholders (including holders of ADSs), giving them
the right to purchase a sufficient number of shares to maintain their existing
ownership percentage. Such an offering would not be possible unless a
registration statement under the U.S. Securities Act of 1933, as amended, were effective with respect to
such rights and common stock or an exemption from the registration requirements
thereunder were available.
Since the Company is not obligated to
elect to make a registration statement available with respect to such
rights and the common
stock, holders of ADSs may not be able to exercise their preemptive rights. If a
registration statement is not filed or an applicable exemption is not available,
the Depositary will sell holders’ preemptive rights and distribute the
proceeds thereof if a
premium can be recognized over the cost of any such sale.
Holders of ADSs may have fewer and less
well-defined shareholders’ rights than with shares of a company in
the United
States.
The Company’s corporate affairs are governed by its
estatutos, or bylaws, and the laws of
Chile. Under such laws, the
Company’s shareholders may have fewer or less
well-defined rights than
they might have as shareholders of a corporation incorporated in a U.S. jurisdiction.
Foreign Exchange risks may
adversely affect the U.S.
dollar amount of dividends payable to holders of the Company’s ADSs.
Chilean trading in the shares of the
common stock underlying ADSs is conducted in pesos. The Depositary will receive cash
distributions that the Company makes with respect to the shares underlying the ADSs in
pesos. The Depositary will then convert such pesos to U.S.
dollars at the then prevailing exchange rate to make dividend and other
distribution payments in respect to ADSs. If the Chilean peso depreciates
against the U.S. dollar,
the value of the ADSs and the distributions ADS holders receive from the
Depositary may decrease.
A. History and Development of the
Company
Telefónica Chile is a corporation organized under the
Chilean Corporations Law.
Telefónica Chile was incorporated on November 18, 1930 and has a duration through August 10, 2068. The address and telephone numbers of
the Company’s registered office and the
Company’s agent in the United States are as follows:
|
Compañía de Telecomunicaciones de Chile
S.A.
Avenida Providencia
111
Santiago, Chile
Telephone: (562)
691-2020
|
CT Corporation
System
111 Eighth Avenue
New York, New York 10011
Telephone: (800)
624-0909
|
Telephone service in Chile commenced in 1880 with the
formation of
Compañía de
Teléfonos Edison in Valparaíso. In 1927, the International Telephone
and Telegraph Corporation (“ITT”) acquired the Chile Telephone Company,
which had 26,205 telephones in operation at the time. In 1930, the Company was
formed as a stock company named Compañía de Teléfonos de Chile S.A. In 1971, the Chilean
Government intervened to take management control of the Company and, in 1974,
the Chilean Government’s Corporación de Fomento de la
Producción (“Corfo”) acquired 80% of the total
shares issued by the
Company, then held by ITT.
In August of 1987, Corfo announced that
it would reduce its shareholdings and privatize the Company by selling
approximately 30% of Corfo’s shares in the Company. In January of
1988, 151 million shares of Series A Common Stock of the Company were
transferred to Bond Chile. After giving effect to a capital increase in an April
1988 offering and other additional purchases of Series A Common Stock and Series
B Common Stock of the Company, Bond Chile owned approximately 50% of the then issued and
outstanding capital stock of the Company.
In April of 1990, TISA, a subsidiary of Telefónica, indirectly acquired the stock of
Bond Chile—and thus all of Bond Chile’s interest in the Company. Bond Chile
then changed its name to
Telefónica Internacional
Chile S.A. (“TIC”).
The Company’s July 1990 international offering of
American Depositary Shares (“ADSs”) reduced TIC’s ownership to 44.5% of the Company’s issued and outstanding capital stock.
Subsequently, payments made by third parties for subscribed but unpaid
shares further reduced TIC ownership to 43.6% by 2003. In July 2004, TIC purchased an additional 1.3%,
increasing its ownership stake in the Company up to 44.9%.
An Extraordinary
Shareholders’ Meeting held on April 20, 2006 approved the modification of the
Company’s brand name to “Telefónica Chile.” The legal name of the Company has not
changed.
On September 17, 2008,
Telefónica, acting through
its subsidiary, Inversiones
Telefónica Internacional Holding Limitada (“Inversiones Telefónica”), itself a subsidiary of TIC, launched
a tender offer in Chile and the U.S. for the 55.1% of the shares of
Telefónica Chile that it did not control. The tender
offer was for any and all Telefónica Chile shares, including its ADSs,
trading on the Santiago and
New York exchanges, at a price per share of Ch$1000 for Series A shares
(Ch$4000 per ADS) and
Ch$900 for Series B shares. Among other conditions, the tender offer was subject
to the approval at an Extraordinary Shareholders’ Meeting of an amendment to the
Company’s bylaws that, among other things, would
permit a shareholder to own more than 45% of the Company’s common stock. Although 55% of the
shares voted in favor, the 75% majority required for approval was not achieved
and the amendment was not approved. On October 28,
2008, an Extraordinary Shareholders’ Meeting was held to submit the
aforementioned bylaw amendment to a vote after certain terms of the offer were
modified, including an increase in the offer price to Ch$1100 per Series A share (Ch$4400 per ADS) and Ch$990 per Series B
share.
With the approval of 85.9% of all
outstanding shares eligible to vote, the Company’s shareholders approved the elimination
of the following articles of the Company’s estatutos (“bylaws”): Article 1 bis (subject to Decree Law 3500);
Article 5 bis (maximum permitted shareholding concentration of 45% of the
outstanding shares, minimum minority shareholding requirement of 10% of the
outstanding shares, minimum number of unrelated shareholders and
minimum shareholdings of such shareholders
requirement of 15% of the outstanding shares held by 100 or more shareholders,
and restrictions pertaining to registration in the shareholders’ registry); Article 17 bis (minimum
quorum required for certain actions by the board of directors); Article 24 bis
(board faculty limits); Article 28 (selection of account inspectors); Article 32
bis (requirement of approval of investment and financing policy at the ordinary
shareholders’ meeting); Article 33 bis (approval of
the disposition of any assets essential to
the Company’s operations, establishment of
guarantees regarding such assets and early modification of the investment and
financing policy at the extraordinary shareholders’ meeting); Article 40 bis (limitations
on voting rights); Article 45 bis (minimum
quorum requirement for modification of certain bylaw articles); Article 47 bis
(Pension Funds Administrators’ right of withdrawal); and Article 51
bis (requirement to send certain information to shareholders). All
the above relate to Title XII of Decree Law
3500.
On November 2, 2008, Inversiones
Telefónica announced the success of the tender
offer launched on September
17, 2008, having thus acquired a 96.75% equity interest. Pursuant to Chilean regulatory
requirements, on December
2, 2008, Inversiones
Telefónica launched a subsequent tender offer
in Chile and the U.S. for all remaining shares at the same
offer price as the previous
tender offer. As a result
of the tender offers, Inversiones Telefónica purchased 53.0% of the Company’s outstanding capital
stock.
Currently, Telefónica Chile is controlled by TIC, which, directly and through Inversiones
Telefónica, holds a combined 97.89% interest in the Company. TIC is
indirectly wholly-owned by
Telefónica S.A., a Spanish communications company whose shares are
listed on various European, American and Asian stock exchanges.
Telefónica’s capital stock is widely held and
Telefónica does not have a
controlling shareholder.
On January 29, 2009, Telefónica Chile’s Board of Directors resolved to terminate its ADR
program, delist its ADSs from the New York Stock
Exchange, deregister with the SEC and terminate the Foreign Investment Contract among Telefónica Chile, the Central Bank of Chile
and Citibank, N.A., as
depositary, under Chapter XXVI of the Compendium of
International Foreign Exchange Regulation.
The Company’s website address is www.telefonicachile.cl.
Mergers, Acquisitions and New
Subsidiaries
During the last three years,
Telefónica Chile has not participated in any merger or
acquisition activities material to the business. However, during 2006, 2007 and
2008, the Company reorganized its subsidiaries in the following
manner:
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·
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In January 2006, 100% ownership of
Tecnonaútica was
transferred from
Telefónica Internet
Empresas S.A. (“TIE”) to Telefónica Chile. Following this
transfer, the subsidiary changed its name to Telefónica Multimedia and expanded its
line of business to pay television
services.
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·
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Also in January 2006, ownership of
TIE was transferred
from Telefónica
Empresas to Telefónica
Chile.
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·
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In March 2006, CTC Equipos was
absorbed by Telefónica
Chile.
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·
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Also in March 2006,
Telefónica
Chile’s long distance subsidiaries,
Telefónica Mundo and
Globus, merged to form a new subsidiary called Telefónica Larga Distancia. In June
2006, as part of this merger process, a payment of Ch$674 million
(historical) was made to 2,375 shareholders of Telefónica Mundo who exercised their
right of withdrawal.
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·
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In September 2007,
Telefónica Chile
acquired the
remaining outstanding stock of TIE, equivalent to 0.0005%, at book
value. In
December 2007, the
Board of Directors agreed to the dissolution of TIE, transferring all its
assets and liabilities to the Company, which is its legal
continuer.
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·
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In November 2007, TIE sold its participation in
Telepeajes de Chile S.A. to Telefónica Gestión de Servicios Compartidos de
Chile, S.A. (“t-gestiona”), a Telefónica Chile
subsidiary.
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·
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In November 2007, t-gestiona purchased a third
party’s participation, achieving
99.99% ownership of
Telepeajes de Chile S.A. Finally, Telepeajes de Chile S.A. changed its
name to Instituto Telefónica Chile and a new and unique
line of business in training was
adopted.
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·
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In December 2008, after the Company purchased from
t-gestiona its .001% interest in Telemergencia, thus
gathering 100% of its capital stock, the Board of Directors agreed to the
dissolution of Telemergencia, transferring all of its assets and liabilities to the
Company, which is its legal
continuer.
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Divestitures
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·
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In
October 2008, the Company executed agreements for the sale of the assets
and customer portfolio of its subsidiary Telefónica Asistencia y Seguridad
S.A. (“Telemergencia”) to Prosegur for a total of Ch$15,563 million
(US$24.4 million).
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Capital Expenditures
Capital expenditures disbursed by the Company in
2007 and 2008 amounted to, respectively, Ch$141,304 million (US$228.4 million) and
Ch$147,989 million (US$232.5 million). The Company has been steadily
adjusting its capital expenditures in local telephony and using its available installed capacity to expand
service, rather than investing in new lines. During 2008, the Company focused
its investment primarily on consolidating business growth (especially in
broadband), projects for the corporate segment and digital television. Together, these investments
consumed approximately 64% of the year’s capital expenditures. In the fixed
telecommunications business, investments were used for commercializing lines
with minute plans and for maximizing the use of installed capacity, focusing on network deployment in areas
of real estate development. The investment plan for the year also emphasized
initiatives designed to update network infrastructure by replacing old equipment
and introducing new generation technologies, such as IP telephony, with a view to attaining high
service-quality standards with more stable and flexible platforms. Additional
emphasis was placed on simplifying the processes and systems that support tools
for the Company’s business, technical and administrative
management.
Since January 2001, all capital
expenditures made by the Company have been on projects located within
Chile. Capital expenditures have been
financed substantially with cash flow generated from
operations.
B. Business Overview
The Company provides a broad range of telecommunications
and other services throughout Chile, including:
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·
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local telephone
services;
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·
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broadband services;
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·
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pay television
services;
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·
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long distance services;
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·
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data
transmission;
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·
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dedicated lines (direct lines
dedicated to a customer’s exclusive
use);
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·
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terminal equipment sales and
leasing;
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·
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public telephone
service;
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·
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interconnection services
(connecting calls from long distance, mobile and local telephone networks
to Telefónica
Chile’s local telephone
network);
and
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·
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value-added services
(including the sale
of telephone numbers, such as “600,” “700” and “800” numbers for toll calls, to
providers of telephone-based services, and the provision of supplementary
services and direct
dialing).
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The Company provides all of its fixed
telephony services through
its own digital telecommunications network, including local
telephone,
broadband and
interconnection services.
In addition, the Company, through its subsidiaries Telefónica Empresas and Telefónica Larga Distancia S.A. (“Telefónica Larga Distancia”), provides substantially all of its data transmissions and domes
tic and
international long distance services with its own equipment and data and long distance networks,
respectively. The pay
television service, which utilizes satellite technology and was launched in June 2006, is provided by the Telefónica Multimedia Chile S.A.
subsidiary.
Chilean law currently requires companies
to obtain licenses from the government before providing many telecommunications
services. Telefónica
Chile holds licenses to provide local telephone service and data
transmission services throughout Chile. The Company also holds licenses to
provide long distance service throughout Chile and internationally through its
subsidiary Telefónica Larga
Distancia. In addition, Telefónica Chile, through Telefónica Empresas, holds nationwide public
service data transmission licenses for an indefinite term.
Moreover, the Chilean Government sets
the maximum prices, fees and charges that Telefónica Chile may charge for certain
services, including local
telephone service, public telephones, interconnection services and related
administrative services, unbundled network services, and line connections. The
regulation applies to the Company’s fixed monthly charge, variable charge,
connections and other installations, access charges for
rural companies, the number for information services through an operator, access
charges and interconnection, and public telephones. In 2008, approximately
27% of Telefónica Chile’s total operating revenues were
generated through the
provision of services subject to tariff regulation. The Chilean Government does
not currently regulate the prices that Telefónica Chile charges for its other
products and services, including, among others, long distance, data
transmission, broadband, pay television, value-added
services, directory advertising, and sales and leasing of terminal
equipment.
Despite the above, in 2008, the Ministry of Transportation
and Telecommunications asked the Competition Tribunal to review the telephony services currently subject to regulation in
light of changes in market conditions. In January 2009, the Competition Tribunal
issued its opinion,
recognizing that market conditions did not currently justify tariff regulation
regarding local telephone service (fixed and variable charge), public
telephones and interconnection services. Subtel must still make a ruling based on this
opinion.
Telecommunications Products and
Services
The
Company’s primary business focus in 2008 was on marketing its “Dúo” and “Trío”
voice, broadband and television bundles, whose main feature is the flexibility
given to customers to choose the services they desire according to their
specific interests. In other words, customers may build their own service
bundles with the amount of voice minutes, the broadband speed and the television
plan that suits their personal preferences. The Company
developed
a page on its website displaying valuation and comparison mechanisms that
include all possible bundles. The main products and services offered by the
Company are described below:
Fixed Telecommunications Services
The Company provides basic telephone
services to its customers over the public telephone network in two
forms:
Regulated Plans
Regulated plans include telephone line
service (fixed monthly
charge) and variable charges that includes local traffic defined as measured
local service (“MLS”) and traffic from local lines to
Internet and mobile telephones (“local tranche”).
Minute Plans (Tariff Flexibility
Plans)
In order to mitigate the
adverse impact of
regulation and the decrease in traffic and other negative factors affecting
fixed-line revenues, Telefónica Chile has focused on offering
various non-regulated services over its local
network infrastructure, thus adding value to existing fixed lines and mitigating the decrease in
revenues per line. Starting in 2004, as an alternative to the regulated plan,
the Company began to market Flexible Plans (see “—Regulatory Framework” below) such as: (i) Planes de
Minutos (“Minute Plans”), consisting of telephone service with a certain
number of minutes for a monthly charge; (ii) Línea
Económica (“Economy Line”), consisting of a monthly amount from
which customer calls are deducted, allowing for additional calls to be placed
using prepaid cards; (iii) Línea Súper
Económica (“Super Economy Line”), which enables customers to make calls
for a certain number of minutes through prepaid cards charged on a monthly
basis; and (iv) bundled services, such as broadband plus minute plans.
Marketed individually or bundled with broadband and pay television plans, the Minute Plans have slowed the rate
of decline in fixed lines.
During 2008, 389,566 new fixed lines
were connected, a 11.3% decrease and 1.4% increase in new line connections as
compared to 2007 and 2006, respectively, and 447,797 lines were
disconnected, a 5.9% and a 26.5% decrease compared with 2007 and 2006,
respectively. As a result, lines in service under fixed telephony as of
December 31,
2008 totaled 2,120,974,
representing a decrease of 2.7% and 4.3% as compared to December 31, 2007 and December 31, 2006, respectively.
The following table sets forth certain
fixed-line performance and line connection information for the periods
indicated.
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For the year ended December
31,
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||||||||||||||||||||
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2004
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2005
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2006
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2007
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2008
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||||||||||||||||
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Lines
installed
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3,043,379 | 3,007,432 | 3,021,487 | 3,032,522 | 3,058,238 | |||||||||||||||
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Fixed lines in
service
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2,427,364 | 2,440,827 | 2,215,629 | 2,179,205 | 2,120,974 | |||||||||||||||
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Average fixed lines in
service
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2,406,266 | 2,451,356 | 2,332,634 | 2,185,823 | 2,147,544 | |||||||||||||||
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Lines per 100
inhabitants(1)
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15.0 | 15.1 | 13.4 | 13.1 | 12.6 | |||||||||||||||
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Number of new lines
connected
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343,318 | 358,088 | 384,003 | 439,224 | 389,566 | |||||||||||||||
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Number of lines
disconnected
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332,733 | 344,625 | 609,201 | 475,648 | 447,797 | |||||||||||||||
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Defects per line (annual
average)(2)
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0.40 | 0.44 | 0.54 | 0.52 | 0.45 | |||||||||||||||
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Local traffic (in
millions of
minutes)(3)
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13,759 | 12,012 | 9,643 | 8,395 | 7,313 | |||||||||||||||
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(1)
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Telefónica Chile fixed lines per 100
inhabitants. Population figures are based on National Institute of
Statistics reports, which estimated Chile’s population to be 16.8 million as
of December 2008.
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(2)
|
Defects refer to any technical
problems occurring in telephone lines, ADSL and equipment as well as in
the Company’s external plant and central
switches.
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(3)
|
As of February 1, 2000, per-second billing was
implemented.
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Over the past four years,
Telefónica Chile’s fixed-line traffic has decreased, mainly due
to customers’ greater use of mobile services and
electronic communications.
As of December 31, 2008, 1,661,452
lines, a 3% increase compared with 2007, have been signed up for flexible tariff
plans in accordance with
Decree No. 742, which provides regulations governing the terms on which dominant
local public telephony service operators may provide alternative plans and joint
offers, representing 78.3% of the Company’s total lines in service and thus
significantly contributing to the
growth of the fixed-line
market.
Although the effective rates charged for
flexible tariff plans are less than those charged in traditional plans, these
types of products allow the Company to use the available capacity of
the network to be more
competitive.
Broadband Services
Telefónica Chile offers broadband ADSL technology to
residential customers,
small and medium enterprise customers and corporate clients, as well
as to Internet Service Providers (“ISPs”) as resellers.
Although broadband service is currently
primarily used for high-speed Internet access, it also allows the Company to
offer customers other services, such as virtual private networks (“VPNs”), security systems with remote
monitoring from anywhere in the world, e-learning, wireless connections,
intranet IP telephony (voice over IP) for corporate customers and multimedia
applications. The broadband service also allows the provision of value-added
services, including online antivirus and firewall protection, parental controls for Internet and computer
technical support, both remote and in-home.
Telefónica Chile’s broadband service continued to expand,
supported by bundling with voice and pay television plans, as evidenced by a 10%
increase in the number of connections. In addition, fixed telephony
operators continued to develop capacity, boosting speeds (tripling and doubling
them in April and December, respectively) and increasing the average installed
access speed by 75%. In 2008, the broadband market was highly dynamic as a result of the sector’s strong growth. In addition, the entrance of new competitors, such as
the mexican operator Telmex, and increased 3.5G broadband sales by existing mobile telephony
operators led to increased
competition. Nevertheless,
as of December 31, 2008, ADSL connections totaled 710,797,
representing an increase of 10.3% and 43.4% with respect to 2007 and 2006,
respectively. The following table sets forth the number of ADSL connections in
service as of the dates indicated:
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As of December
31,
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2004
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2005
|
2006
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2007
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2008
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ADSL connections in
service
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200,794 | 314,177 | 495,479 | 644,522 | 710,797 | |||||||||||||||
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ADSL/Lines in
service
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8.3 | % | 12.9 | % | 22.4 | % | 29.6 | % | 33.5 | % | ||||||||||
Other Fixed Telephony Services
Prepaid Services
Prepaid services have supported the
development of flexible
plans. The prepaid service known as Tarjeta
Línea
Propia (“TLP”) allows customers to make calls from
any fixed telephone, public phone or enabled mobile phone, and surf the web on a
broadband connection using Wireless Fidelity (“Wi-Fi”) or through dial-up access. TLP allows customers to
refill the Super Economy Line and the bundled Prepaid Broadband
through prepaid or postpaid lines. In addition to the physical TLP, the
Company also sells an electronic version. As of December 31, 2008, 15.7 million TLPs were sold at Ch$1,000 each,
representing a decrease of 1.2% over 2006 and an increase of 5.3% over 2005. The
total number of prepaid lines reached 336,973 in 2008, which represents
decreases of 5.5% with respect to 2007 and 5.6% with respect to 2006.
Public Telephones
(Payphones)
Telefónica Chile offers public telephony services and is
responsible for the installation and operation of its own public telephones on
public roadways and in indoor areas, the marketing of public telephone equipment
to private third parties
and fixed telephony installation. Currently, the public telephony market in
Chile is made up of seven operators and
numerous private parties. The revenues in this business area are generated by
traffic on public phones owned by the Company, the management of its own call
centers, maintenance agreements for indoor installations,
and post-sales maintenance and business
support services provided to third parties such as owners of public telephones
purchased from the Company.
Alarm Monitoring and Security
Services
Telefónica Chile, through its subsidiary
Telemergencia, offered alarm monitoring services to residential customers and
SMEs until October 14, 2008 when Telemergencia’s assets and client portfolio
were sold to Prosegur,
an international company operating in the alarm monitoring
market, for Ch$15,563 million (US$24.4
million).
Value-Added Services
Telefónica Chile markets value-added services to its
fixed telephone service customers. Such services include caller ID (incoming and
call waiting), voice mail,
call waiting, call forwarding, control of outbound traffic to mobile phones,
information and entertainment services (“600” and “700” numbers), itemized local call
lists and guaranteed
in-home maintenance.
In 2008, revenues from fixed
telecommunications were Ch$553,530 million
(US$869.7 million),
representing 74.9% of total ordinary
income, increased 3.8% from
2007, mainly as a result of 0.8% and 22.1% increases in revenues from voice and broadband, respectively, as compared with
2007.
Multimedia (Television Services)
On June 14, 2006, Telefónica Chile launched its pay satellite television
service with a flexible marketing format unique to the local
market.
Telefónica Chile was the first company to provide
flexible pay television. Customers pay for what they watch, which means
that the services are tailored to the interests and budget of each home. The
plan is known as the Telefónica digital television offering, and it
offers an entry-level plan for Ch$9,900, including a selection of the
channels in greatest demand such as
Disney Channel, Discovery Kids, Discovery Channel, Cartoon Network, TNT, Sony,
Warner, ESPN football channel and Fox. For a variety of prices, the customer has the opportunity to add an
assortment of thematic or premium movie plans, family, sports and premiere
film channels under this format.
The service provides national coverage
and offers additional services to customers, which include, among others,
parental control, an on-screen programming guide, program reminders,
access to pay-per-view
service and a thematic search feature. In order to provide this service,
the Company invested in information technology systems and software as well as
equipment for installation in customers’ homes, such as satellite receivers and
set-top boxes. In addition, the Company incurred costs associated with satellite
transmission services and content acquisition. After one year of offering this
service, the Company launched broadband television service (“IPTV”), starting a gradual
deployment of this project
by initially providing service only to a limited number of clients as a trial.
The service is offered in areas of Santiago where the Company’s network meets the technological
requirements. This service constitutes part of the digital television flexible contents offer, and
includes interactive functions such as video on demand (“VoD”), by which clients have available a
wide and diverse range of films, series and audio-visual content from a digital
library with more than 200 hours of content. Telefónica Chile was the first Latin American company to
provide this technology. Moreover, in September 2007, the personal video
recorder (“PVR”) service was launched, which allows
users to record programs and pause, forward and rewind live
programming.
The pay television service is provided
by the Telefónica
Multimedia Chile S.A. subsidiary, and is marketed in bundles: “Dúo,” combining television and fixed
telephony and “Trío,” combining television, fixed telephony
and broadband service. About 17% of the Company’s total clients have subscribed to the
television service.
Growth is achieved by providing
flexibility to customers, who can purchase a convenient service tailored to
their interests and budgets. As of December 31, 2008, the Company had 262,957 pay television customers, making it the
second-largest pay television operator in the country.
In 2008, revenues from digital
television services were Ch$39,235 million
(US$61.6 million), which
represented 5.3% of total
ordinary income.
Corporate
Customer Communications and Data
The corporate communications business,
operated through the Telefónica Empresas subsidiary, has the
mission of providing a comprehensive response to the communications needs of the
larger and more complex organizations established in Chile. Clients of Telefónica Empresas include government
ministries, public institutions, associations, and large corporations, both
national and international, that are involved in a broad range of economic
activities.
“Communications” play an essential role in the mission-critical processes
of these clients. For this reason, the services provided by Telefónica Empresas are subject to continuous
challenges, which include increasing capacity, availability and quality
standards, and the need for progressive convergence and integration of
different technologies. By integrating technologies, this subsidiary delivers solutions that add value to its
clients’ businesses, meeting their requirements
more efficiently.
One of
the primary services provided by Telefónica Empresas is data transmission,
mainly through IP-based services. In some cases, circuit-based solutions and
value-added services are delivered through data links such as Frame Relay and
ATM. Telefónica Empresas also provides corporate clients with basic and advanced
telephony solutions, private IP telephony and IP Centrex solutions based on the
Next Generation Network infrastructure. In addition to providing a range of
solutions such as PABX, videoconferencing and point-to-point data circuits,
Telefónica Empresas offers advanced telecommunications solutions in the form of
consulting projects, professional services and outsourcing. Telefónica Empresas
supplements these offerings with international services tailored to each
customer’s needs. These services take advantage of Grupo Telefónica’s
international presence and network, delivering relevant added value for global
customers. In recent years, Telefónica Empresas has begun offering networked IT
services that ensure the availability, protection and operational continuity of
a company’s IT systems and involve managing the infrastructure at both the
customer’s facilities and the Telefónica Chile datacenter. Telefónica Empreses
also provides and manages the IT equipment and voice terminals, as well as
integrated corporate connectivity and Internet access for the customer's
employees, with features tailored to each position.
The following table sets forth
information regarding some of the Company’s data services as of the dates
indicated.
|
As of December
31,
|
||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||
|
Dedicated IP
connections
|
10,377 | 10,869 | 12,634 | 15,581 | 19,122 | |||||||||||||||
|
Datared
(circuits)
|
9,770 | 5,821 | 5,353 | 4,808 | 4,742 | |||||||||||||||
|
Frame Relay
(points)
|
3,892 | 2,621 | 1,930 | 1,865 | 1,388 | |||||||||||||||
|
ATM
(points)
|
1,660 | 1,085 | 1,101 | 1,101 | 1,090 | |||||||||||||||
In 2008, revenues from the corporate customer
communications and data business segment, which include revenues from equipment
sales and rental, data transmission services and complementary services,
amounted to Ch$88,480 million (US$139.0 million), representing 12.0% of total ordinary income. Revenues from this
segment increased 11.4% compared to 2007.
Long
Distance
The Company provides a broad offering of
domestic and international long distance services, including public and private
voice, data and video services, through its subsidiary Telefónica Larga Distancia. The long distance (“LD”) business segment also includes the
rental of Telefónica Larga
Distancia’s LD network to other telecom operators,
such as other LD carriers with and without their own networks, as well
as mobile companies,
including Telefónica
Móvil, which was sold by
Telefónica Chile in July 2004, and ISPs.
Telefónica Larga Distancia,
like many other LD operators, has a business area dedicated to international
businesses. This area is involved in negotiating settlement rates and volumes for
incoming and outgoing international traffic with different international
operators, as well as establishing agreements for the intermediation of
international traffic among LD carriers.
During 2008, the Company recorded an increase of 5.3% in domestic
LD traffic compared to 2007
and 5.5% compared to 2006 due to the growing use of mobile telephones, e-mail
and Internet, and the increase in lines blocked for LD calls. On the other hand,
in terms of international
LD business, traffic increased 5.4% compared to
2007 and increased 14.7% compared to
2006, primarily owing to the increased competition in prices for international LD destinations.
The following table sets forth traffic
information for domestic and international LD telephone traffic carried by
Telefónica Larga Distancia
for the periods indicated.
|
2004
|
2005
|
2006
|
2007
|
2008
|
||||||||||||||||
|
Domestic LD traffic (in millions of
minutes)
|
664 | 602 | 542 | 543 | 572 | |||||||||||||||
|
Outgoing international LD traffic (in millions of
minutes)
|
67 | 66 | 68 | 74 | 78 | |||||||||||||||
The business continues to face major
challenges as a result of increased penetration by the mobile industry, which is
replacing long distance telephone service. In addition, there has been a
significant shift in the way Chileans communicate towards e-mail and the Internet. As a result, the
Company’s strategy has been to maximize
installed capacity and to create innovative product plans that generate traffic,
ensure customer loyalty and allow it to lead the industry. In 2008, Telefónica Larga Distancia
installed the Puerto
Natales-Cerro Castillo fiber-optic network, having received the contract through a public tender held by the
Telecommunications Development Fund to provide telecommunications infrastructure
for residents of rural areas in the region. This helped Telefónica Larga Distancia overcome the negative industry trend in 2008
and position itself as
the market leader.
The main sales channels through which
the Company offers its long distance products and services are direct
telemarketing sales campaigns conducted by third parties. The Company
also uses third-party call centers to sell domestic and international LD traffic plans and other products, such
as prepaid cards.
In 2008, revenues from LD were
Ch$55,697 million (US$87.5 million), which represented
7.5% of total consolidated revenues.
Revenues from LD decreased by 8.8% and 15.8% compared to 2007 and 2006,
respectively.
Other Businesses
t-gestiona
Telefónica
Gestión de Servicios Compartidos Chile S.A. (“t-gestiona”), a subsidiary of
Telefónica Chile, provides support services to all Company subsidiaries and other Telefónica
Group companies. Its
services include, without limitation, logistics, e-learning, accounting,
insurance, collections, payroll, real estate management and general
services.
Fundación Telefónica
Fundación Telefónica is a non-profit organization whose
mission is to develop and channel the community and cultural activities of the
Grupo Telefónica companies
in Chile.
In 2008, Fundación Telefónica continued to promote the Educational
Internet project, which has
provided free Internet connections to more than 5,500 educational establishments
throughout Chile and has trained more than 30,000 teachers in
educational uses of the Internet. In 2008, the Fundación Telefónica media portal (www.educared.cl) developed educational
content in the sciences,
technology and mathematics, and received almost one and a half million visits
during the year.
Another important program sponsored by
Fundación Telefónica is “Pro-niño,” a community initiative
providing support for
children and youth at social risk by offering full scholarships that allow them
to continue their education. In addition, the “Volunteer Army” – made up of some 1,500 individuals and
led by Fundación
Telefónica – organized various support activities and fundraisers in 2008 that
directly benefited more than 7,000 underprivileged people.
In addition, in 2008, the
Fundación
Telefónica Hall of the Arts
presented the highly successful exhibit “Cubism and its Surroundings” with works from the Telefónica España art collection, notably by Juan Gris
and other world-renowned artists. This was followed by “Territories and Existences,
Gobi-Southern Atacama,” an
exhibit by Magdalena Correa, and “Tesla, a Digital Culture
Encounter,” a collective
exhibit of the work of major Chilean artists. As a
form of national cultural
outreach, Fundación
Telefónica also continued its traveling photo
exhibit “One Day in
Chile,” which visited the cities of
Temuco, Talca and Curicó.
Market and
Competition
The telecommunications industry in Chile, including the pay television business,
achieved sales of US$5.0 billion in 2008, an increase of
14% from 2007. This
increase was largely driven by mobile growth and broadband
development.
In 2008, the industry advanced with an
important growth in
Internet access speeds for residential and business users and a great momentum
toward full market availability of integrated services. In the residential
segment, there was significant growth in the area of bundled voice, broadband
and television. A similar situation is developing
in the small and medium enterprises (“SME”) segment, where voice and broadband
plans are becoming available. The corporate communications segment is witnessing
a consolidation of IP networks, making it possible to offer voice and data services and facilitating integration toward
IT-based business processes.
Additionally, there has been massive,
across-the-board growth in mobile communications in all of Chile’s social and business strata. Mobile
broadband services have
similarly spread throughout Chilean society and represented more than 50% of
total broadband market net gains.
At the country level, there has been a
clear consolidation of a competitive model based on “overlapping” networks that primarily employ the
following access
technologies:
|
|
·
|
Four operators utilize copper pair and ADSL broadband
technology for
telephony, data and
ADSL broadband, with
estimated potential coverage of 65% of the country’s 4.5 million households and a
majority of businesses.
|
|
|
·
|
Coaxial network concentrated in one cable
television company with potential coverage of almost 53% of all
households. In 2008, the development of a second cable network commenced
with an estimated additional coverage of 15%. Additionally, several operators,
including the
Company, offer television services through satellite
transmission.
|
|
|
·
|
Fiber-optic networks for corporations
with an approximate length of 25,000 kilometers, operated primarily by
four operators.
|
|
|
·
|
Mobile coverage using the GSM
standard in approximately 95% of the country’s inhabited territory; mobile
service provided by three
companies.
|
Nationwide, a competitive model based on
network infrastructure that mainly uses copper pair (“ADSL”), coaxial, fiber optic and wireless technologies
(“3G”, “WiMax” and “PHS”) remains in place. During 2008, the
consolidation of bundled services continued generating a competitive focus among
diverse sectors’ operators, which create their own
services or alliances with third parties. As a result, almost all fixed
operators in the residential segment offer bundled
services of voice, broadband and pay television. A similar situation exists in
the small and medium
enterprise segment with
offers of voice plans and broadband. In the corporate segment, operators offer
bundled solutions that
allow corporations to consolidate their IP networks for transmitting voice and
data, simplifying the integration of business processes based on IT. Similarly,
mobile communications have grown in the country, becoming a mass service and
penetrating all segments of the
population.
In the context of solutions of wireless
last mile, Telmex maintains its WiMax service for voice and broadband, VTR
maintains its intention of expanding its current coverage under the same
technology and Telsur continues to implement its wireless telephony services
with its own and rented
infrastructure.
In 2008, Telmex started building a
hybrid fiber coaxial (“HFC”) network with voice, broadband and pay
television services. Telmex had already entered
the residential segment through a bundled offer of telephony,
broadband and satellite television. The telephony and broadband services are
provided over WiMax, while its acquisition of ZAP TV allowed it to bundle these
services with satellite television.
In mobile business, 3G technology was included in the
operators’ sale offers and utilizes the UMTS and
HSDPA standards. As a result, mobile broadband was the business with highest
growth in the industry in 2008.
The following chart shows the business
segments in which the main Chilean telecommunications companies
operate:
|
Company
|
Fixed
Telephony
|
Broadband (1)
|
Long
Distance
|
Mobile
Communications
|
Data
Transmission
|
ISP
|
Pay
Television (9)
|
|||||||
|
Telefónica Chile(2)
|
ü
|
ü
|
ü
|
ü
|
ü
|
ü
|
||||||||
|
Movistar(3)
|
ü
|
ü
|
ü
|
|||||||||||
|
ENTEL(4)
|
ü
|
ü
|
ü
|
ü
|
ü
|
ü
|
||||||||
|
VTR(5)
|
ü
|
ü
|
ü
|
ü
|
ü
|
ü
|
||||||||
|
Claro(6)
|
ü
|
ü
|
||||||||||||
|
Telmex Chile(7)
|
ü
|
ü
|
ü
|
ü
|
ü
|
ü
|
||||||||
|
Telefónica del
Sur
|
ü
|
ü
|
ü
|
ü
|
ü
|
ü
|
||||||||
|
Terra
Networks
|
ü
|
|||||||||||||
|
CMET
|
ü
|
ü
|
ü
|
ü
|
ü
|
ü
|
||||||||
|
Direct TV
|
ü
|
ü
|
||||||||||||
|
GTD - Manquehue(8)
|
ü
|
ü
|
ü
|
ü
|
ü
|
|
(1)
|
Broadband with last mile access.
Does not include resellers or ISPs and does not consider
dedicated accesses to
corporations.
|
|
(2)
|
In July 2004, the extraordinary
shareholders’ meeting of Telefónica Chile approved the offer made by TEM to
acquire 100% of the Company’s subsidiary, Telefónica Móvil de Chile S.A. (“Movistar”). See “Item 4. Information on the
Company—History and Development of the
Company—Divestitures.”
|
|
(3)
|
Includes operations from Bellsouth
Chile acquired by TEM in 2004. The
Antitrust Commission approved the merger of both companies in January
2005.
|
|
(4)
|
Telecom Italia sold its stake in
Entel Chile (55%) to Chilean investors in
2005.
|
|
(5)
|
Includes Metrópolis Intercom merged in July
2005.
|
|
(6)
|
Until July 2006, it was named
Smartcom. It was acquired by América Móvil in August
2005.
|
|
(7)
|
In 2008, Telmex Chile began to offer voice, broadband
and pay television
services over its HFC
network.
|
|
(8)
|
Includes Manquehue Net, which was
acquired by GTD in September
2005.
|
|
(9)
|
Only those companies that own the
infrastructure to provide the
service.
|
Telefónica Chile faces intense competition in every aspect of
its business activities. Unless otherwise indicated, all statements regarding
the competitive position of Telefónica Chile are based on the Company’s internal
estimates.
Fixed
Telecommunications
The fixed telephony market in Chile reached approximately 3.4 million lines
as of December 2008, the same as year-end 2007. The rate of penetration of fixed
lines, as of December
2008, was 20.2 lines per 100
inhabitants.
Although Telefónica Chile operates approximately 63% of
the local fixed lines in
service in Chile, its market share has been declining
for the past seven years because of intense competition in key niches of the
market due to the aggressive offers of competitors.
Currently, there are ten operators that
provide fixed telephony
service and, in the aggregate, operate the total number of fixed lines in
service in Chile as of December 31, 2008. In certain areas of the Santiago
Metropolitan Region, Complejo Manufacturero de Equipos Telefónicos S.A.C.I. (“CMET”), GTD S.A. (“Grupo Teleductos”), which includes operations from Manquehue Net
and Telesat S.A., VTR Telefónica S.A. (“VTR”), which is an 80% subsidiary of Liberty
Media, Entel Telefonía
Local S.A. (“Entelphone”), which is a local telephony subsidiary
of Empresa Nacional de
Telecomunicaciones S.A. (“Entel”), and Compañía Nacional de Teléfonos (“Telefónica del Sur” or “Telsur”), hold licenses to provide local
service. Furthermore, two companies, Telsur and its subsidiary
Compañía Telefónica de Coyhaique S.A. (“Telcoy”), have licenses to provide local
service in southern Chile—Telsur in Regions X and XI and Telcoy in
Regions XI and XII. Additionally, Telmex operates in the corporate segment of
the main cities in the country and recently entered the residential segment
with an offer of bundled services which
is enhanced by its development of its HFC network. Apart from Telefónica Chile, three other companies provide local
telephone service in rural areas. Telefónica Chile also competes with providers of private
communications systems, particularly in areas of
significant business activity.
Broadband
Broadband connections (ADSL, cable
modem, W:Max and Wireless Local Loop (“WLL”)) in Chile currently represent 99% of all Internet
connections (broadband, narrowband and dedicated). Broadband penetration of total
homes in Chile (calculated as “total accesses”/“total homes”) has increased from 29% in 2007 to
32% at the end of 2008. Moreover,
broadband through fixed
lines (“fixed
broadband”) connections grew to 1,450,000 by
year-end 2008, a 13%
increase. As of December 2008, ADSL broadband connections represented 57% of the
country’s total broadband
use.
There are nine operators in the Chilean
broadband market (broadband being defined as connections of 128 kbps or more)
using the different
technologies. One of the nine operators provides broadband service utilizing
cable modems (VTR). Four use only ADSL technology (Telefónica Chile, Telefónica del Sur, GTD and CMET).
Additionally, Entel utilizes ADSL and WLL technology and Telmex utilizes ADSL and WiMax. Claro and
Telefónica Chile offer mobile broadband access. The
Company estimates that, as of December 31, 2008, its ADSL service (including
direct sales and as a wholesale provider) accounted for approximately 49% of all
fixed broadband access offered in Chile.
Long Distance
The LD telephony market in Chile maintains its trend toward decreased
traffic, observed since 1999. Thus, annual domestic LD traffic decreased by 11%
in 2008 compared to the previous year, while international LD traffic fell by 4% in the same period.
These results are primarily due to the substitution by mobile telephony and
Internet communications.
In 2008, Telefónica Larga Distancia’s market share represented approximately
47% of domestic
LD voice traffic and 43%
of outgoing international LD voice traffic, maintaining market
leadership in domestic and
international LD, according
to Telefónica Chile estimates.
Corporate Customer Communications and
Data
Strong competition remains in the
corporate communications and data transmission market in Chile because of the ongoing aggressiveness
exhibited by operators. Operators are continuing to migrate their traditional
services (ATM, Frame Relay and Datared) to IP networks and are expanding their
services into outsourcing of IT services. As of December 2008, there
are eight operators in the country’s major cities and only three have
national infrastructure coverage. Telefónica Chile estimates that as of December 31, 2008, its share of the total revenues
generated by the market for these services was approximately
44%. In this market, the Company competes mainly with Entel, Telmex Chile, Teleductos and
Telsur.
Security
Telefónica Chile, through its subsidiary Telemergencia,
participated in the security business until October 2008, when the client portfolio and related
assets were sold to a third party.
Corporate Goals and Business
Strategy
Telefónica Chile’s goal is to lead the growth and innovative
development of the information society in Chile by building relationships of
deep-seated trust and mutual benefit with customers, employees, shareholders, the
government and the country at-large.
The Company harnesses its corporate
values, communications solutions and Telefónica Group’s technological innovations in the
service of this goal, striving to improve the lives of its customers and contribute to the
country’s welfare.
Accordingly, in 2008, despite the
turbulent global and local economies, Telefónica Chile invested over US$150 million in the deployment
of broadband technologies, high-speed networks, data services and information
technologies.
This has led to significant advances,
the most noteworthy being:
|
|
·
|
Quadrupling broadband connection
speed from an average
of 600 kpbs in late
2007 to 2.4 Mpbs in late 2008.
|
|
|
·
|
Ensuring broadband network
coverage and quality in almost 99% of its current infrastructure
through upgrades in the external copper network, new
nodes and fiber-optic
links.
|
|
|
·
|
Making IP service convergence a reality in
the corporate markets (VoIP, VPN IP and
Centrex).
|
Corporate
and Business Strategy
The internal action plan for the Company’s strategy is based on “Plan
Ahora,” launched in early 2007, defining
specific goals for each of the company’s four strategic pillars: customers,
employees, society and shareholders.
In 2008, the Company made significant
progress in meeting the
plan’s components, the most noteworthy being:
a customer-oriented organizational culture; implementation of several
initiatives designed to improve service and customer care quality; reducing revenue
growth’s dependence on traditional businesses; motivating employees to achieve common targets; the
“Pro-niño” project; and the “Public-Private Agreement for Digital
Connectivity in Chile.”
The specific goals of the plan’s four pillars are:
Customers: “The best customer
experience”
The goal is to lead the industry in customer
satisfaction. To achieve this, the Company promotes an organizational culture
based on excellence, innovation and customer focus in all areas, emphasizing
service delivery and customer care quality with a view to consolidating its competitive and market leadership
position.
Employees: “The best company to work for in the
telecommunications industry”
With a view to attracting the best
talent and assembling a team that is not only the best but is also motivated and
keen to accomplish its
goals, the Company has implemented an internal workplace management model that
focuses on five areas of action: leadership, communications, compensation,
development and recognition.
Society: “Social commitment”
The Company’s goal is to be recognized as a socially responsible company
in light of its efforts to shrink the digital-social gap by providing broadband
access to the low-income population and by contributing to education through
digital literacy and connectivity programs at schools and through social programs.
Shareholders: “The best combination of growth and
profitability”
The Company maintains particular emphasis on
constant innovation and on productivity gains, with the aim of growing
profitably and in line with shareholders’ demands. Thus, the Company invests in businesses
with the greatest potential impact, ensuring efficient operations and process
management.
Licenses and Tariffs
Licenses
Under Law No. 18,168 (as amended, and
together with the regulations promulgated thereunder, the “Telecommunications Law”), companies must obtain licenses in
order to provide the following telecommunications services:
|
|
·
|
public telecommunications services
(services provided to the public, such as local and mobile telephony, data
transmission, paging and trunking);
|
|
|
·
|
intermediate telecommunications
services (services provided to companies that are holders of
telecommunications licenses, as well as domestic and international LD
services provided under the Multicarrier System);
and
|
|
|
·
|
broadcasting services, such
as those provided by
radio and television
stations.
|
Only corporate entities may obtain
licenses. Licenses specify the conditions that the license holder must fulfill
in order to install, operate and develop the service and business that are the
subject of the license.
Licenses granted since 1994 for public and intermediate services generally have
30-year terms and may be renewed indefinitely for 30-year periods at the request
of the operator (although certain licenses held by Telefónica Chile have longer terms).
Holders of local telephone service
licenses are required to provide service to all parties located in the license
area that have requested such service within two years of such request. In
addition, license holders must provide service to all parties situated outside the license area who
are willing to pay for the line extensions required to reach their location from
the license holder’s facilities.
The Telecommunications Law requires that
holders of public telecommunications service licenses interconnect their networks to other networks
providing the same type of service. This requirement is intended to ensure that
subscribers and users of public services are able to communicate with each
other, both inside the country and abroad. The same requirement applies to holders of intermediate
service licenses for LD services, who are required to interconnect their
networks to the local telephone network. Subtel sets the tariffs applicable to services
provided through the interconnection of networks, in accordance with the procedures established in
the Telecommunications Law. The structure, level and indexing of these
interconnection rates are fixed by a tariff decree.
More than one service license may be
granted for the same geographic area. Moreover, in instances where the number of licenses to be
granted is limited by technical or other concerns, such licenses are awarded
through a public bidding process.
The Telecommunications Law specifies
certain causes for which an operator can be sanctioned through the termination of its public or intermediate
service license. A license may be terminated, after notice of noncompliance with
the applicable technical regulations, by executive decree, if the operator is in
violation of the law or does not comply with the terms and conditions to which the license is
subject. If the holder believes that its license has been terminated unlawfully,
the holder may appeal the termination in Chilean courts. If a license is
terminated, the holder is barred from applying for any license for a period of five
years.
The following table provides the
breakdown of those products and services offered by Telefónica Chile that are regulated under the 2004 to
2009 tariff decree (“Tariff
Decree No. 169”) or are
unregulated and that require or do not require
licenses.
|
Services Subject to Tariff
Regulation
|
Activities Not Subject to Tariff
Regulation
|
|||
|
License Required(1)
|
License
Required
|
License Not
Required
|
||
|
Local telephone
service
|
Domestic long distance
service
|
Sale of advertising in telephone
directories
|
||
|
Access charges and
interconnection
|
International long distance
service
|
Direct
marketing
|
||
|
Public telephones(1)
|
Mobile communications(2)
|
Sales and leasing of telephone and
facsimile equipment and private exchanges (“PABX”)
|
||
|
Line
connections
|
Public data
transmission
|
Supplementary
services
|
||
|
Unbundled network
services(3)
|
Other unbundled network
services(3)
|
Broadband
|
||
|
Pay
television
|
||||
|
(1)
|
All services subject to tariff
regulation require licenses, except the public telephony. However,
Telefónica
Chile’s public telephony services are
regulated.
|
|
(2)
|
The interconnection fee for calls
to the mobile networks is regulated under the CPP structure. See
“—Licenses and
Tariffs—Calling Party Pays
Structure” below. The
mobile business was sold in July
2004.
|
|
(3)
|
Only the unbundling of the local
network, as defined by the Antitrust Commission, is
regulated.
|
Licenses Held by Telefónica Chile
Telefónica Chile holds the following licenses for the
provision of telecommunications services:
|
|
·
|
Local
Telephony Public Service Licenses. Telefónica Chile holds a license for
local telephone service in all regions of Chile for a 50-year renewable
period beginning as of December 1982, except Regions X and XI, which were
incorporated to said license in 1995. In addition, the Company
holds licenses for
local telephone service in the Santiago Metropolitan Region and in certain
cities in Regions V and VIII for an indefinite term. Telefónica Chile also holds a nationwide
public service renewable license for data transmission for a
30-year period beginning as of July
1995.
|
|
|
·
|
Multicarrier
Long Distance Licenses. Under the Multicarrier System,
Telefónica
Chile’s long distance subsidiary,
Telefónica Larga
Distancia S.A. (formerly, Telefónica Mundo), held 30-year
renewable licenses beginning as of April 1993 to install and operate
a nationwide fiber-optic network, a network of base stations and other
transmission equipment, and to provide domestic and international LD
services, including voice, data and image transmission, throughout Chile.
The Company’s other LD subsidiary, Globus,
also held licenses for an indefinite term to provide domestic and
international LD services through central switches and cable and
fiber-optic networks nationwide. Since the merger of Globus and
Telefónica Mundo in
2006, all the aforementioned licenses
are owned by Telefónica Larga
Distancia.
|
|
|
·
|
Public Service
Data Transmission. In
addition to the 30-year data transmission license previously mentioned,
Telefónica Chile,
through Telefónica
Empresas, holds, as of March 1987, nationwide public service data
transmission licenses for an indefinite
term.
|
|
|
·
|
Limited
Television
License. The
Company’s subsidiary, Telefónica Multimedia, formerly known as
Tecnonaútica S.A.
(see “Item 4. History
and Development of the Company—Divestitures”), has a license to establish,
operate and use a
portion of the spectrum of the 2.6 GHz
bandwidth in Santiago, Chile, for an indefinite period. The license was
modified to be an intermediate telecommunications service concession,
authorizing the frequencies used to communicate voice, data
and images for a 30-year period. This period started on February 29, 2008.
Since December 2005, Telefónica Chile, through
Telefónica
Multimedia, has held a nationwide 10-year renewable license to provide
limited satellite television service. Additionally,
in January 2006, Telefónica Chile, through
Telefónica
Multimedia, was assigned a limited television service license to provide
the service nationwide in the main municipalities, except Region III and
Region Metropolitana, through the Company’s xDSL broadband network for an
indefinite period. Moreover, in March 2007, a limited television service
license was granted in order to provide this service through the xDSL
broadband network in the Metropolitan Region for an indefinite
period.
|
|
|
·
|
Wireless Local
Telephony
Licenses. Telefónica Chile also holds licenses
for wireless local
telephony (3400 to 3700 MHz) in Regions XI and
XII, which enable the transmission of
voice, data and images. This frequency may be used for Wi-Fi and Wi-Max
developments, among others.
|
The Tariff System
Pursuant to the Telecommunications Law,
prices for public telecommunications services and intermediary
telecommunications services in Chile are not regulated unless the Antitrust
Authority (“Competition
Tribunal”) specifically
rules that the conditions
existing in the market are insufficient to ensure a free pricing system, in
which case maximum tariffs for certain telecommunications services must be
subject to tariff regulation. The Competition Tribunal may subject public local
telephony services and domestic and
international long distance services, except for mobile telephone services to
the public, which are expressly exempted under the Telecommunications Law, and
the switching services and signals provided as intermediate
telecommunications service or as private circuits,
to price regulation. In addition, maximum prices for interconnection services
(mainly inter-company access fees for network usage) are, as a matter of law,
subject to tariff regulation and are set in accordance with procedures established by the
Telecommunications Law.
Also pursuant to the Telecommunications
Law, once the Competition Tribunal has determined that tariff regulation is
necessary, the structure, level and indexing of the maximum tariffs that may be
charged for
tariff-regulated services are fixed by a joint decree issued by the Ministry of
Transport and Telecommunications and the
Ministry of the Economy (together, the
“Ministries”). The Ministries determine such maximum
tariffs by applying to each regulated company an economic model based on the
costs, efficiency and growth rates of a hypothetical company that provides only
regulated services, and calculating a rate of return on such services in line
with the hypothetical company’s market cost of capital. Telefónica Chile’s actual rate of return, however, may
vary from the predictions of the model. Each maximum tariff takes into account
the relevant cost components associated with providing the regulated service,
and is adjusted monthly in accordance with the tariff index (the “Tariff Index”), as contemplated in the tariff
structure and described below. A distinct Tariff Index exists for each
individual regulated service that reflects the different theoretical cost
components associated with each such service.
As part of the tariff-setting process,
license holders prepare studies of each regulated service that they provide in
each license area, calculating the incremental development costs and the total
long-term cost with respect to each such service for a five-year period. The purpose of these
studies is to propose to the Ministries a structure for and level of
future tariffs for each regulated service in each license
area.
Regulatory Framework
The first five-year tariff period
commenced in 1989, at which time the Competition Tribunal determined
that the conditions prevailing in the local and domestic and international
LD markets did not
guarantee free competition and therefore would be subject to regulation.
However, according to Resolution No. 515, in April 1998, the Antitrust Commission
determined that only local services, public telephone services and line
connections offered by dominant companies would be subject to tariff regulation.
In addition, Resolution No. 515 included the unbundled network
services among the services subject to tariff
regulation.
On January 18, 2001, the Company estimated that market
conditions had changed and consequently asked the Antitrust Commission to
deregulate local telephone rates charged to the public, stating, in its
opinion, that the
then-existing market conditions warranted deregulation throughout the
country. However, on July
11, 2001, by Resolution No.
611, the Antitrust Commission rejected the Company’s petition, although the Antitrust
Commission asked the National Economic Attorney
General’s Office to monitor the evolution of the
market in order to detect changes as they occur that could lead to the
deregulation of certain services in certain geographic areas. The Antitrust
Commission also decided that Telefónica Chile could request authorization to
offer alternative tariff plans and request the authority to issue complementary
resolutions to Tariff Decree No. 187, which would allow for differentiated rates
within each tariff area. In accordance with this decision, in the second half of 2001, the
Company submitted a proposal to Subtel for alternative tariff plans for
different customer categories. In this regard, on May 24, 2002, Subtel approved the
Company’s proposal to offer prepaid service for
fixed line customers. Moreover, on August 24, 2002, the Ministries issued Decree No. 455,
which approved a high usage plan oriented toward residential customers and a
very high usage plan oriented toward corporate customers, which were based on a
flat monthly fee.
Tariff Setting Process for Telefónica Chile’s Services for 2004 to 2009: Tariff
Decree No. 169
On January 13, 2003, Telefónica Chile requested that the Antitrust
Commission, on the basis that market conditions were sufficient to guarantee
healthy competition, rule
in favor of fully deregulating tariffs in specific geographical areas. The
Company also requested that, in cases where conditions are not sufficient to
guarantee competition, the Antitrust Commission define the services that will be
subject to tariff regulation by the corresponding ministries,
nonetheless affording the Company the flexibility to offer alternative tariff
plans to the regulated rates without previous authorization.
On May 22, 2003, the Antitrust Commission issued
Resolution No. 686. This Resolution ruled against deregulation of
rates charged by Telefónica
Chile for services to the public. The
Antitrust Commission did not issue a specific pronouncement regarding the
request for tariff flexibility. In view of this, on September 1, 2003, the Company submitted to the Antitrust
Commission a request for an explanation and expansion of Resolution No. 686
regarding tariff flexibility.
Thus, on October 13, 2003, the Antitrust Commission issued
Resolution No. 709, unanimously approving the Company’s September 1, 2003 request for local telephony services
tariff flexibility and making it possible to offer alternative plans within a
framework of conditions to be subsequently specified by the
regulator.
On February 26, 2004, a rule of procedures regarding
how the Company may offer
alternative tariff plans was published in the Official Gazette. A relevant
aspect is that no previous authorization is required to offer these plans. Plans
are not subject to maximum tariffs or predetermined structures, and may
include joint offers with other
telecommunications and non-telecommunications services.
By Exent Resolution No.
1,418, dated November
25, 2008, Subtel affirmed 2007’s level of average monthly consumption of
“heavy use” plans of 5,000 minutes per customer for
2009.
Resolution No. 686 of May 2003, also
defined the services subject to tariff regulation by the Ministries for the
2004 to 2009 tariff decree, which were
substantially similar to the services regulated in Tariff Decree No.
187.
In February 2005, Tariff Decree No. 169 was approved and
published in the Official Gazette. Starting in May 2004, the Company began
charging customers with the published rates retroactively from May 6, 2004, as required by the Telecommunications
Law. In addition to the new tariffs, Tariff Decree No. 169 also provides
for seven tariff areas compared to four in the previous decree, three time slots
(normal from 08:00 to 19:59 hrs.; reduced from 20:00
to 24:00 hrs.; and night from 0:00 to 8:00 hrs. on weekdays) versus two in
Tariff Decree No. 187,
adjustments in the composition of the tariff indicator and a new prepaid tariff.
The average variation in tariffs between Tariff Decree No. 169 and the existing
Tariff Decree, based on 2003 traffic, is as follows:
|
Average Tariff Variation
Between
Decree No. 169 and
Decree
No. 187(1)
|
|
|
Fixed
Charge
|
+7.7%
|
|
Variable Charge—Measured Local Service
(MLS)
|
-18.3%
|
|
Local Tranche (to mobile and rural
operators)
|
+48.2%
|
|
Local Tranche (to Internet and 10X
numbers)
|
+28.3%
|
|
Access
Charge
|
+49.1%
|
|
(1)
|
Traffic is weighted according to
2003 Company traffic in the different time slots. 2003 was used as the
reference year, because 2004 traffic was influenced by the impact of two
different tariffs (under Tariff Decrees No. 187 and No. 169). Tariff
Decree No. 169 also introduced a regulated
prepaid tariff which amounted to Ch$150.48 in Chilean pesos as of Dec.
2002 (excluding VAT).
|
A Tariff Index has also been defined to
adjust monthly maximum regulated tariffs, which is different for the fixed
monthly charge and the
variable charges (including the variable charge per minute, the local
interconnection charge and access charges), taking into account: (i) the monthly
variation of the wholesaler price index (“WPI”) for domestic goods, (ii) the monthly
variation of the WPI for
imported goods, (iii) consumer price index, (iv) wholesaler price index, (v)
access charge index (for variable charge only) and (vi) the prevailing corporate
income tax rate. The use of the Tariff Index permits the Company to
significantly minimize the impact of inflation on its
revenues from tariff-regulated services.
The following is the Tariff Index for Tariff Decree No.
169:
|
Index
|
WDGPI(1)
|
WIGPI(2)
|
Index of Wages and Salaries
|
CPI(3)
|
WPI(4)
|
Access Charge Index(5)
|
||||||||||||||||||
|
Fixed
Charge
|
36 | % | 21.3 | % | – | 12.4 | % | 30.3 | % | – | ||||||||||||||
|
Variable Charge
(MLS)
|
9.5 | % | 34.0 | % | – | 19.4 | % | 26.3 | % | 10.8 | % | |||||||||||||
|
(1)
|
WDGPI: Wholesaler
domestic goods price index.
|
|
(2)
|
WIGPI: Wholesaler
imported goods price index (U.S. dollar component).
|
|
(3)
|
CPI: Consumer price
index.
|
|
(4)
|
WPI: Wholesaler price
index.
|
|
(5)
|
Access charge index: A
composite of access charges for non-Telefónica Chile operators.
|
Tariff Setting Process for
Telefónica Chile’s Services for
2009-2014
In
January 2008, through a petition by the Ministry of Telecommunications to the
Competition Tribunal to determine if prevailing market conditions warranted a
free pricing regime in local telephony services, the process for setting tariffs
for the period from 2009 to 2014 commenced. After a discussion process and
presentation of antecedents by almost all industry actors, the Competition
Tribunal, through Report No. 2/2009 of January 30, 2009, liberalized tariffs for
the following services: telephony line service, variable charge, line connection
and public telephony.
Additionally,
price regulation for “local tranche” and value-added services, including
disconnection and replacement of the service, access entitled for domestic and
international LD and complementary services, among others, was expanded to apply
to all companies, not just dominant companies. Also, tariff regulation for
unbundled network services for all fixed-line companies remains in
effect.
Moreover,
the Competition Tribunal upheld the classification of Telefónica del Sur (and
its related company, Telcoy) in Regions X, XI and XIV, ENTEL in Isla de Pascua
and Telefónica Chile in the rest of the country as dominant
companies.
Furthermore,
the Competition Tribunal made several recommendations for increasing
competition, including:
|
|
·
|
requiring
service providers to offer “effectively” bundled services separately and
to identify the unit price by service and discount associated with the
bundling;
|
|
|
·
|
measures
to prevent the offering of fixed-mobile bundling
services;
|
|
|
·
|
maintaining
close oversight of contracts and agreements between related fixed and
mobile companies;
|
|
|
·
|
maintaining
regulations, such as “Flexibility Ruling (No. 742),” for commercializing
plans and increasing transparency in price information and plan
conditions;
|
|
|
·
|
reassigning
the responsibility for defining “unbundling” and “resale of services” from
the Competition Tribunal to Subtel;
|
|
|
·
|
requiring
Subtel to assure an effective resale offer from fixed telephony companies
with installed networks;
|
|
|
·
|
suggesting
eliminating call price differences among same company telephones (“on
net”) and towards different ones (“off net”);
and
|
|
|
·
|
the
rapid implementation of number portability for fixed and mobile
telephony.
|
In conjunction with the above, in April
2008, Telefónica
Chile presented its technical and economic
basis proposal for a new Tariff Setting Process for the Company’s regulated services for the period from
2009 to 2014. Subtel issued definitive technical and economic bases in
June 9, 2008, through Exent Resolution No. 562. On
November 7, 2008, the Company presented its tariff proposal for the
different regulated services and
on March 7, 2009, the
Ministry of Transportation and Telecommunications issued the objections and
counterproposals report. Telefonica Chile requested the constitution of an expert
panel, whose recomendation will be
included in Telefonica Chile’s reply. Finally, a new Tariff Decree
regulating services that remain subject to tariff regulation under Report No.
2/2009 of the Competition Tribunal, for the period from 2009 to 2014, will be in
place on May 7,
2009.
Multicarrier System
On March 10, 1994, Law No. 19,302 amended the
Telecommunications Law to introduce the Multicarrier System for LD services.
Among other things, the Multicarrier System permits local telephone service
providers to obtain licenses to supply domestic and international LD services through a
subsidiary or affiliate using their own equipment. Under this system, users are
able to select LD carriers on a dialed or pre-subscribed
basis.
Calling Party Pays
Structure
Calling Party Pays (“CPP”) was implemented on February 23, 1999. Under this tariff structure, local
telephone companies pay mobile telephone companies an interconnection charge for
calls placed from fixed networks to mobile networks.
On April 12, 2004, the Chilean General Comptroller
approved the tariff decrees
for mobile interconnection tariffs and interconnection facilities of the mobile
telephony networks, applicable to the operators in this market for the 2004 to
2009 period, which were published in the Official Gazette on April 14, 2004. These decrees were applied retroactively to January 23,
2004 for mobile operators, except for Telefónica Móvil de Chile S.A., for which it is applied retroactively
to February 12,
2004. The tariff decrees
stipulate three time slots defined as “peak,” “reduced” and “night” and new per-minute tariffs for the
period. The tariffs implied a decline of 26.5% in the first year, compared to the average tariff in
Chilean pesos as of December 2002, with a subsequent 0.5% decrease per
year thereafter. The new tariffs imply an average decrease of 27.4% for the period of
2004 to 2009 in comparison with the average tariff in Chilean pesos as of
December 2002.
In July 2004, the Company sold its
mobile subsidiary and therefore is no longer regulated in this business. See
“—History and
Development of the
Company—Divestitures” above.
The tariff-setting process for
interconnection rates of the mobile companies, corresponding to the period from
2009 to 2014, finished with the issuance of tariff decrees in January 2009,
establishing an average
decrease of 44.6% from
outstanding tariffs as of December 2008. Although these decrees were
published in the Official Gazette on April 13, 2009, they will
apply retroactively to January 24, 2009.
Lawsuit
Against the State of Chile
On October 31, 2001, Telefónica Chile filed an administrative
motion for reconsideration with the Ministries, to correct the following errors
in the issuance of Tariff Decree No. 187: a mathematical error in determining the
fixed monthly charge for telephone line service; unlawful application of the
depreciation method; failure to consider the costs of telephone directories;
incorrectly assuming lower investments related to the location of switching centers; erroneous
application of the same
local telephone service non-payment rate to the CPP service; and
failure to scale access charges and local tranche charges. On January 29, 2002, the Ministries issued a joint response
rejecting the administrative motion filed by
Telefónica Chile.
Upon exhausting the administrative
recourses available to correct what the Company believes are illegal actions
taken in the tariff-setting process discussed above, in March 2002,
Telefónica Chile filed a lawsuit for damages against the State of
Chile. This legal action seeks damages in the amount of Ch$181,038 million
(US$274 million, historical value as of the date of the lawsuit), plus
adjustments and interests, covering past and prospective losses
through May 2004 arising from errors incurred in
Tariff Decree No. 187. Experts’ reports have been presented on various
aspects of the case supporting the position held by Telefónica Chile’s position. On March 29, 2005, the judge called the period of
discussion and proof provision from the interested
parties to a close, in order to issue a sentence in first instance. In March
2008, the trial court rejected the Company’s claims. The Company is appealing this
decision.
For further information, see
“Item 8. Financial Information—Legal Proceedings.”
Voissnet
Lawsuit
Voissnet has filed two complaints before the
Antitrust Commission against Telefónica Chile alleging improper business practices
related to the commercialization of its broadband and telephony offerings.
Telefónica Chile has requested that both complaints be
rejected. The
Competition Tribunal stated
it would issue a combined ruling on both claims.
For further information, see
“Item 8. Financial
Information—Legal Proceedings.”
Key Proposed Changes to the Regulatory Framework
Public Inquiries on Regulations for IP
Telephony Services
In July and August 2004, Subtel
initiated a process of public inquiries addressed to the main participants in
the telecommunications industry in connection with their proposals
regarding network
unbundling and IP telephony.
The proposal for IP telephony defined a
special type of telephony over broadband, which is provided over existing
infrastructure and with lower regulatory requirements than traditional
telephony. This discriminates against traditional local operators,
which are subject to different conditions for the same service. The Company,
along with other operators, presented its comments on, and legal objections to,
the proposal, calling it, among other things, discriminatory and likely to inhibit investment in new
infrastructure and broadband.
On December 20, 2006, Subtel made a public inquiry on the
proposed rules governing public voice over IP. As was required,
Telefónica Chile provided its comments and proposals on
January 26, 2007.
From the new regulation presented by
Subtel, the most relevant proposals were:
|
|
·
|
The concessionaires of public
telephone services and LD intermediate telecommunication services will be
able to obtain concessions for the new service, without
restrictions or
limitations of any sort. This means that the regulation does not exclude
or limit the participation of Telefónica Chile and Telefónica Larga
Distancia.
|
|
|
·
|
To provide public services of
voice over IP, a concession obtained by supreme decree will be
required.
|
|
|
·
|
The concessionaires of the new
services must establish and accept the interconnection with telephony
public services networks. Costs of interconnections must be charged to the
new operators.
|
|
|
·
|
The coverage of the concession
will be nationwide.
|
|
|
·
|
The concessionaires of the new services
must provide access to emergency services and will not be obligated to
distribute phone
directories.
|
|
|
·
|
The concessionaires will be able
to use the telephone service
numbering.
|
|
|
·
|
The regulation will come into
effect 6 months from
the date of the publication in the Official
Gazette.
|
Thirty companies provided comments. In
general, the telephone companies approved of the regulation and favored the
application of regulations similar to those of public telephone service to voice
over IP. Companies from the
computer sector, however, supported having less regulation over this
service.
The resulting regulation, Rule No. 484,
regarding voice over IP
services was published in the Official Gazette on June 14, 2008. Rule No. 484 was
generally similar to the
proposed regulations described above.
Public Inquiry on “Bill Amending Law No. 18,168 (the
General Telecommunications Act) to Create a Panel of Experts to
Resolve Disputes Arising in the Telecommunications Industry”
On September 6, 2006, Subtel announced a public inquiry on a
bill to create an expert committee, made up of seven professionals, to resolve
disputes in the telecommunications industry. The document proposes, among other
things, a list of matters to be resolved by the panel, the panel’s powers and duties, its composition
(five engineers and two attorneys named by the Antitrust Commission), and the
areas where it lacks jurisdiction. The costs of the panel would be borne by the
concessionaires on a prorated basis, which may take into account the value of their assets
and/or the estimated number of disputes affecting them as well as the nature and
complexity of these disputes.
Telefónica Chile duly submitted its proposal and
comments, along with Movistar, Telmex, Telefónica del Sur and Telcoy, GTD, VTR, Entel, SOFOFA,
Colegio de Ingenieros, and Instituto Libertad y Desarrollo.
On April 29, 2008, the Government presented a bill before the
National Congress in order to create the expert committee.
Public Inquiry on “Creation of an Office of Superintendent of
Telecommunications”
This bill aims at modifying the
Telecommunications Law in order to create a jurisdictional separation between
the setting of telecommunications policy and the monitoring and punitive
preventive control of market operations. As of January 31, 2009, no bill had been presented before the
National Congress on this matter.
Public Inquiry on “Amendment of License
Regime”
This bill aims to give network operators
and service providers a set of rules to eliminate bureaucratic procedures when initiating services.
In view of technological advances leading to a convergence of networks and
services, the proposed system is designed, among other issues, to replace the
license and permit granting procedures currently required prior to initiating service. The new
registration-based system would make it necessary to register before
telecommunications service can be provided, but would eliminate the need for
prior approval from regulatory authorities unless the service involves
exclusive use of the radio
spectrum.
In addition, this
bill:
|
|
·
|
establishes differences between
network operators and service
operators;
|
|
|
·
|
eliminates local and domestic long
distance separation and domestic LD multicarrier, keeping it only for
international
LD;
|
|
|
·
|
amends the freedom to determine service
areas by providing that service areas originally listed upon registration
may not be reduced;
|
|
|
·
|
defines broadband as a
“telecommunications
service”;
|
|
|
·
|
provides for higher penalties by
increasing fines; and
|
|
|
·
|
shortens the period for addressing service supply
requests from two years to six
months.
|
As of January 31, 2009, no bill had been presented before the
National Congress on this matter.
Network Neutrality
Bill
Aimed at ISPs and telecommunications
access providers, the Network Neutrality Bill, among other
provisions, contains the prohibition against blocking, interfering with,
discriminating against or hindering the ability of users to access, utilize,
send, receive or offer any legitimate content, application or service
through the Internet; requires access
providers and ISPs to take action designed to ensure user privacy, virus
protection and network security; and sets a 90-day period for Subtel to issue
regulatory provisions for operating issues and identify practices
restricting the free use of content or
services. This bill is now at its second constitutional stage.
Telefónica Chile has submitted a report, including
comments and proposals, to the Senate Public Works, Transportation and
Telecommunications Committee, including comments and
proposals.
Digital Connectivity
In 2007, Telefónica Chile jointly executed a Digital Connectivity
Agreement with Subtel, Fundación País Digital, fixed and mobile telephony
licensees, LD carriers, the Mobile Telephony Association and the
Association of Internet
Providers. By setting goals aimed at improving telecommunications service
coverage, the agreement seeks to enhance collaborative efforts toward
significantly reducing the digital gap. Goals include facilitating
communications for the general public, attaining two million
broadband access points, connecting 100% of rural schools, providing access to
telecommunications services to 95% of the country’s rural population, and driving the
country’s productive development through
information and communication
technologies.
Telefónica Chile will participate in various work areas
described in the Digital Connectivity Agreement. These include: digital
connectivity regulations, competition and new technology, the Telecommunications
Development Fund and
corporate social responsibility, and indicators and
tracking.
Bill to Amend the Free Competition
Act
In June, 2006, the Government announced a legal initiative seeking to
amend the law on free competition to eliminate the implicit
risk of market concentration. This initiative is aimed at
taking preventive action and increasing the maximum penalty that the Antitrust
Commission may impose from 20,000 to 30,000 Annual Tax Units (from US$15 to
US$22 million). This bill is now at its second constitutional stage in the Congress.
Law Project that Modifies the
Telecommunications Development Fund
Currently, companies with public and
intermediate telecommunications service concessions that offer LD services and
companies with limited television service permits may participate in public auctions for the
right to develop telecommunications projects financed by the Telecommunications
Development Fund, which is financed by the Government. In order to participate
in the auctions of this fund, these companies were required to create separate corporations, which
are subject to the laws and standards governing publicly traded companies and to
the regulation of the Superintendency of Securities and Insurance. On
July 12, 2007, Law No. 20,196 was passed, modifying
Article 28F of the Ley General de
Telecomunicaciones,
eliminating the obligation for concessionaires and permit holders of
telecommunications services to create separate corporations when participating
in public bidding processes of the Telecommunications Development Fund.
C. Organizational
Structure
As a result of the tender offers
described above, Telefónica Chile is now controlled by TIC, which holds a 97.89% interest. The shareholders of
TIC are Telefónica Chile Holding B.V. (99.99%) and
Telefónica Internacional Holding B.V. (0.01%), both of which are 100% controlled by Telefónica, a Spanish communications company whose
shares are listed on various European, American and Asian stock exchanges.
Telefónica’s capital stock is widely held and Telefónica does not have a controlling shareholder. Telefónica S.A. also has direct or indirect
ownership interests in the following companies that operate in the Chilean
market: Atento Chile S.A., Terra Networks Chile S.A., Telefónica International Wholesale Services
Chile S.A., Telefónica Móviles Soluciones y Aplicaciones S.A. and
Telefónica Móviles Chile S.A.
Subsidiaries and Certain Affiliates of
Telefónica Chile
The following chart sets forth the
organization of Telefónica
Chile’s subsidiaries and affiliates, all of
which are Chilean
corporations, except for TBS Celular Participações S.A., which is a Brazilian
corporation. Percentage ownership information is as of December 31, 2008.
Telefónica Chile’s business activities are managed
through the following operating subsidiaries:
On October 2008, Telefónica Chile sold the assets and client portfolio of Telemergencia to Prosegur for Ch$15,563 million (US$24.4 million).
Subsequently, the Company
purchased from t-gestiona its .001% interest in Telemergencia, thus gathering 100% of its capital stock, and then dissolved
the company as of December 31, 2008.
Subsidiaries and Related
Companies
Telefónica Larga Distancia
Telefónica Larga Distancia S.A. (“Telefónica Larga Distancia”), formerly Telefónica Mundo S.A., a subsidiary formed in 1989, is the
Company’s domestic and international long
distance subsidiary carrier. See “—Business Overview—Licenses and Tariffs—The Tariff System—Multicarrier System” and “—Business Overview—Licenses and Tariffs—Licenses.” The Government granted Telefónica Larga Distancia licenses to provide
domestic and international long distance services with its own equipment
effective August 27,
1994.
On October 14, 1998, Telefónica Chile completed its acquisition of 99.9% of
the equity securities of
VTR Larga Distancia, a telecommunications company offering data transmission and
domestic and international long distance services throughout Chile. The LD business of VTR Larga Distancia
was transferred to a newly created subsidiary, Globus, and the data transmission business of VTR
Larga Distancia was later absorbed by Telefónica Empresas, the subsidiary which
largely forms the Company’s corporate customers communications and
data business area. In 2006, Telefónica Larga Distancia was formed
out of the merger of Globus and Telefónica Mundo.
Telefónica Larga Distancia currently operates
the most extensive fiber-optic network in the country, stretching from Region I
(the Peruvian border) to Region XII (Punta Arenas), including connections to
Peru and Argentina. In
2006, a new tranche of the network was inaugurated from Region X (Osorno) to
Region XII, passing through Argentina between Aduana Pajaritos (Region X) and
reaching Cerro Redondo and Punta Arenas in Region XII. In 2007, this connection was
complemented with a new
fiber optic link between Aduana Pajaritos and
Puerto Natales (XII Region). Telefónica Larga Distancia also operates
digital satellite and microwave links. In addition, Telefónica Larga Distancia participates
actively in the development
and use of submarine fiber-optic networks such as Unisur, Americas II, Atlantis
II, Panamericano, Maya I, TPC-5, Pencan 5, Taino Caribe, Sea Me We-3 and SAM-1
(TIWS), and in the Hispasat, Intelsat and Telesat (formerly Loral Skynet)
satellite systems.
Telefónica Empresas
In 1992, Telefónica Empresas Chile S.A. (“Telefónica Empresas”) began operating Telefónica Chile’s private telecommunications services
(including data transmission, and the sale and rental of networks and equipment)
and managing the Company’s large business and institutional
customer accounts.
Telefónica Multimedia
In
February 2006, the Tecnonaútica subsidiary changed its name to Telefónica
Multimedia, extending its corporate purpose to television services. This
subsidiary is responsible for developing, installing, maintaining, marketing,
and operating cable, satellite and regular or broadband television services
using any physical or technical media, including basic, special or paid
individual or multi-channel services, video on demand, and interactive or
multimedia television services.
t-gestiona
On August 1, 2001, Telefónica Gestión de Servicios Compartidos Chile S.A.
(“t-gestiona”) began operations. This subsidiary is responsible for the
provision of support services to other business areas of the Company, including logistics
delivery, e-learning, fund management, insurance, collection, personnel, tax,
real estate administration and general services.
Instituto Telefónica
In November 2006, a former
Telefónica Chile subsidiary, Telepeajes, changed its name to Instituto
Telefónica Chile and also changed its corporate purpose
to training under the terms set forth in Law No. 19,518, including training in
private security matters.
Atento Chile
Atento Chile S.A. (“Atento Chile”) was created on May 5, 1999. Currently Telefónica Chile holds 28.84% (27.41% directly and 1.43%
indirectly) of this affiliate, which operates an integrated global call-center
business platform among its members. Atento Chile offers Telefónica Chile directory assistance, technical assistance and customer
complaint management, as well as general commercial and sales
information.
Telemergencia
Telefónica Asistencia y Seguridad S.A. was created in 2001 to offer security
services through alarm monitoring systems connected to the phone line, as well as home assistance
services. This subsidiary was dissolved as of December 31, 2008.
Fundación Telefónica
Fundación Telefónica Chile (“Fundación Telefónica”) has existed since 1999 when it was
created to contribute to the improvement of living conditions for the most
vulnerable social groups, encouraging the development of education and equal
opportunity by applying new information technologies to the learning process.
The equity interest of Telefónica Chile in this subsidiary amounts
to 50.0%.
TBS Celular
The primary purpose and activity of TBS
Celular Participações S.A.
(“TBS Celular”) is to hold the shares of
Compañía Riograndense de
Telecomunicaciones (“CRT”) acquired through an international
bidding process conducted pursuant to Edital COD 04/96 or any other shares that
may be offered in the future. In addition, TBS Celular performs any and all
activities pertaining to the management of CRT, as well as to acquire an
interest as a partner or shareholder in other companies in connection with its primary activities. The
ownership interest of Telefónica Chile in TBS Celular is
2.61%.
In February 2006, CRT merged with Vivo
Participações S.A. (formerly Telesp Celular
Participações S.A.);
therefore, Telefónica
Chile indirectly holds 0.124% of Vivo Participações S.A. through TBS
Celular.
D. Property, Plant and
Equipment
The principal plant and equipment of the
Company consists of outside plant and switching equipment and operating units
that are located throughout the country. Furthermore, there is an extensive network consisting of
707 central switches linked by 58,500 kilometers of copper cabling and
7,500 kilometers of local fiber optic cabling. This represents 3.0
million lines, of which 2.1 million are in service. Within the xDSL
broadband network, the
Company has deployed 1,800 broadband nodes (DSLAM) with capacity
to serve roughly 900,000 clients. In addition, in June 2006,
Telefónica Chile launched a new satellite digital
television service which by the end of 2008 had 262,957 clients with an average of 2.1 set-top boxes per home. Additionally,
Telefónica Chile’s LD subsidiary currently owns the
longest LD fiber-optic network in the country (4,450 kilometers), which includes
connections to Peru and Argentina.
The Company’s land and buildings principally consist of its telephone
exchanges and other technical, administrative and commercial properties. As of
December 31, 2008, the Company’s telephone plants and equipment
represented 71.7% of its gross fixed assets (including
depreciation), construction
in progress represented 2.0%, land and buildings represented
20.2%, and furniture, office equipment and
other assets represented 6.2%.
Substantially all of Telefónica Chile’s telephone exchanges are situated
within buildings owned by the Company. Telefónica Chile also owns its corporate headquarters
located at Avenida Providencia 111 in Santiago. This building, which houses the
Company’s principal offices, was completed in
October 1996 and currently provides office space for the majority of the
administrative and technical staff of
Telefónica Chile and its subsidiaries. The assets of
Telefónica Chile and its subsidiaries are insured,
subject to standard deductibles and other terms and conditions, for all events
of physical damage and loss of revenue resulting from service outages. As of
December 31, 2008, the value of the assets and operating
revenue insured totaled approximately Ch$1,679,095 million (US$2,638.2 million), which consisted of
Ch$1,100,943 million (US$1,729.8 million) in insured assets and Ch$578,152 million (US$908.4 million) in insured
revenues.
None.
The information in this Item 5 should be
read in conjunction with the Company’s Audited Consolidated Financial Statements and the notes
thereto included elsewhere in this Annual Report.
Since January 1, 2008, the Company’s consolidated financial statements are
and will be prepared in accordance with the International Financial Reporting
Standards as published by
the International Accounting Standards Board (IASB).
The Company’s consolidated financial information as of
and for the year ended December 31, 2007 included in the Company’s annual consolidated financial statements
was restated in accordance with IFRS. See Note 3 to the Audited Consolidated Financial Statements of the Company.
As permitted by IFRS, the Company
maintained the restatement of adjustments since January 1, 2004, the same date
used as the transition date to IFRS by Telefónica, the Company’s parent company.
IFRS differs in certain significant
respects from Chilean GAAP. As a result, the Company’s financial information presented under
IFRS is not directly comparable to its financial information presented under Chilean GAAP,
and readers should avoid such a
comparison.
IFRS No. 1 provides for certain exemptions from
full retrospective application of IFRS in the opening balance sheet. See Note
3 to the Audited Consolidated Financial Statements of the Company for a discussion of the
exceptions elected by
the Company.
Overview
Telefónica
Chile is the largest local telephony operator in Chile. The Company provides a
broad range of telecommunications services throughout Chile, including local
telephone service, domestic and international long distance service, data
transmission, broadband access and services, dedicated lines, terminal equipment
sales and leasing, public telephone service, interconnection services, certain
value-added services and pay television service.
To
strengthen the Company’s leadership in broadband growth, in 2008 Telefónica
Chile reinforced
its commitment to putting Chile on the path to communications levels similar to
those of developed countries, investing over US$150 million in the deployment of
broadband technologies, high-speed networks, data services and information
technologies. Additionally, the Company strengthened its bundled offers, which
include the “Dúo”, combining broadband services and fixed telephone service, and
“Trío,” combining broadband services, fixed telephone service and pay television
service. This strategy has strengthened client loyalty and new service adds,
increasing the revenue per customer.
Several factors that influence the
Company’s financial results are described in
“—Trend
Information”
below.
Critical Accounting
Policies
Significant accounting principles, as
well as significant estimates, judgments and assumptions in applying those
principles, are described in detail in the notes to the consolidated financial statements. See
Note 2 to the Audited
Consolidated Financial Statements of the Company.
A. Operating
Results
Figures in the following discussion are expressed in
millions of Chilean pesos of their corresponding period.
|
For the years ended December
31,
|
||||||||||||
|
2007
|
2008
|
2008
|
||||||||||
|
(in millions of Chilean
pesos
for the years ended December
31)
|
(in millions of U.S.
dollars)
|
|||||||||||
|
Revenues
|
696,300 | 738,731 | 1,161 | |||||||||
|
Fixed
Telephony
|
533,271 | 553,530 | 869.7 | |||||||||
|
Telephony
(Voice)
|
330,210 | 332,891 | 523.0 | |||||||||
|
Broadband
|
94,335 | 115,139 | 180.9 | |||||||||
|
Access
Charges
|
54,275 | 58,599 | 92.1 | |||||||||
|
Complementary
Services
|
54,451 | 46,901 | 73.7 | |||||||||
|
Television
Services
|
25,274 | 39,235 | 61.6 | |||||||||
|
Corporate
Customers Communications and Data
|
79,390 | 88,480 | 130.0 | |||||||||
|
Long
Distance
|
56,045 | 55,697 | 87.5 | |||||||||
|
Others
|
2,320 | 1,789 | 2.8 | |||||||||
|
Other Operating
Income
|
9,059 | 28,131 | 44.1 | |||||||||
|
Personnel
expenses
|
(86,268 | ) | (101,028 | ) | (158.7 | ) | ||||||
|
Depreciation
and amortization
|
(181,590 | ) | (167,573 | ) | (263.3 | ) | ||||||
|
Other miscellaneous operating
expenses
|
(357,908 | ) | (411,078 | ) | (645.9 | ) | ||||||
|
Financial expenses
(net)
|
(11,044 | ) | (27,009 | ) | (42.4 | ) | ||||||
|
Participation in profits of
associates accounted
for
using the equity method
|
1,783 | 1,607 | 2.5 | |||||||||
|
Foreign currency exchange
differences
|
(29,793 | ) | (7,504 | ) | (11.8 | ) | ||||||
|
Profit before
taxes
|
40,536 | 54,276 | 85.3 | |||||||||
|
(Income)
on tax on profits
|
(8,980 | ) | (6,369 | ) | (10.0 | ) | ||||||
|
NET PROFIT
|
31,556 | 47,907 | 75.2 | |||||||||
Results of Operations for the Year
Ended December 31, 2008
Compared to the Year Ended December 31, 2007
Operating Revenues
Operating revenues increased
by 6.1% to Ch$738,731 million (US$1,160.7
million) in 2008 from Ch$696,300 million in 2007. This growth
resulted mainly from increased revenues from broadband, pay
television and corporate
communications which grew 22.1%, 55.2%, and 11.4%, respectively, compared to 2007. This increase was offset by decreased
revenues from complementary services and LD which declined 13.9% and 0.6%,
respectively, compared to 2007.
Other Operating
Income
Other operating income increased
210.5% to Ch$28,131 million (US$44.2 million) in 2008 from Ch$9,050 million in 2007, mainly explained by
the sale of the security services subsidiary, Telemergencia S.A., that generated a gain of Ch$15,500 million
(US$24.4 million) in the period.
Expenses
Total expenses includes personnel
expenses and other miscellaneous operating expenses. Total expenses increased by
15.3% to Ch$512,106 million (US$804.6 million) in 2008 as compared to Ch$444,176 million in 2007.
Personnel Expenses
Personnel expenses, which accounted for
19.7% of total expenses in 2008, increased by 17.1% to Ch$101,029 million
(US$158.7 million) in 2008, as compared to Ch$86,268 in 2007, primarily due to
adjustments to salary into
real terms (2008 inflation was 8.9%) and a 5.2% increase in the number of
employees.
Other Miscellaneous Operating Expenses
Other operating expenses accounted for 80.3% of total expenses
in 2008. This item includes, among others, television and broadband content,
commercial expenses, maintenance costs, utilities cost and uncollectible
accounts cost. Other
operating expenses
increased by 14.9% to Ch$411,078 million (US$645.9 million) in 2008, as compared
to Ch$357,908 million in 2007, mainly because of: (i) higher television content expenses associated with an increase in number of subscribers, as well as higher capacity rental
costs due to the higher download/upload speed offered to clients;
(ii) an increase in
maintenance costs due
to increased accesses; and (iii) an increase in the provision for uncollectible
accounts, to reflect current expectations about collections.
Depreciation and
Amortization
Depreciation expenses decreased by 7.7%
to Ch$167,573 million (US$263.3 million) in
2008 from
Ch$181,590 million in 2007, mainly because the
useful lives of certain assets expired and lower investment levels as compared
with previous years.
Financial Expenses
Net
Financial expenses net increased by 144.6% to Ch$27,009 million
(US$42.4 million) in 2008
from Ch$11,044 million in 2007, due to hedging activities related to the
Company’s debt, that were swapped from
UF-denominated debt to nominal Chilean peso-denominated debt, increasing the
nominal interest rate.
Participation in Profit (Loss)
of
Associates
Share of profit of associates decreased
by 9.9% to Ch$1,607 million (US$2.5 million) in 2008 from Ch$1,783 million in
2007, accounted for using the equity
method.
Foreign Currency
Exchange
Differences
Foreign currency exchange differences recorded a net loss in the amount of
Ch$7,504 million (US$11.8 million) in 2008, as compared to a loss of Ch$29,793
million in 2007. To the extent that, during any given period, the Company has
net liabilities denominated in a foreign currency (such as the U.S. dollar or euros) and the Chilean
peso depreciates or appreciates in nominal terms against that currency, the
Company may recognize for that period a foreign exchange loss or gain.
Nevertheless the conservative hedging policy of the Company for
foreign currency-denominated interest-bearing
debt and operating expenses allows the Company to offset exposure to
unfavorable exchange rate fluctuations. During 2008, the peso experienced a
nominal depreciation of 28.1% against the U.S. dollar.
Income Taxes
The Company recorded an income tax charge in the
amount of Ch$6,369 million (US$10.0 million) in 2008 corresponding to an
effective consolidated tax rate for the Company of 11.7%, compared to an income
tax charge of Ch$8,980 million in 2007 corresponding to an effective consolidated tax rate for the Company
of 22.2%. The Company’s effective income tax rate differs from
the Chilean tax rate of 17% due to the credit associated to price restatement
for equity.
Net Income (Loss)
As a
result of the above, Telefónica Chile’s net results amounted to a net income of
Ch$47,907 million (US$75.2 million) in 2008, as compared to a net income of
Ch$31,556 million recorded in 2007.
Results of Operations by
Business Segments for the
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
The
tables below sets forth the contribution to the Company’s net income by business
segments for 2008 and 2007. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
regularly used by the chief operating decisionmaker in deciding how to allocate
resources and in assessing performance. See Note 5 to the Audited Consolidated Financial Statements of the Company to find a description
of each of the following segments.
Relevant
information regarding the Company and its main subsidiaries, which represent
different segments, together with information regarding other subsidiaries is as
follows for 2008:
|
For
the year ended as of December 31, 2008
|
Fixed
Telecomm.
|
Long
Distance
|
Corporate
Comm. and Data
|
Television
|
Other
|
Eliminations
|
Total
|
|||||||||||||||||||||
|
(in
millions of Chilean pesos)
|
||||||||||||||||||||||||||||
|
Revenue
from external customers
|
553,530 | 55,697 | 88,480 | 39,235 | 1,789 | - | 738,731 | |||||||||||||||||||||
|
Revenue
between segments
|
68,838 | 46,127 | 11,985 | 11 | 12,775 | (139,736 | ) | - | ||||||||||||||||||||
|
Other
operating income
|
26,619 | 26 | 1,888 | 9 | - | (411 | ) | 28,200 | ||||||||||||||||||||
|
Employee
expenses
|
(85,718 | ) | (941 | ) | (9,044 | ) | (308 | ) | (5,016 | ) | - | (101,029 | ) | |||||||||||||||
|
Depreciation
and amortization
|
(130,152 | ) | (10,456 | ) | (16,177 | ) | (10,784 | ) | (4 | ) | - | (167,573 | ) | |||||||||||||||
|
Other
operating expenses
|
(379,694 | ) | (60,304 | ) | (66,707 | ) | (33,733 | ) | (10,787 | ) | 140,147 | (411,078 | ) | |||||||||||||||
|
Interest
income
|
10,111 | 5,784 | 447 | 26 | 10 | (11,048 | ) | 5,330 | ||||||||||||||||||||
|
Interest
expenses
|
(38,401 | ) | - | (822 | ) | (4,067 | ) | (98 | ) | 11,048 | (32,339 | ) | ||||||||||||||||
|
Financial
expenses, net
|
(28,290 | ) | 5,784 | (375 | ) | (4,041 | ) | (88 | ) | - | (27,009 | ) | ||||||||||||||||
|
Participation
in profit of associated companies accounted for using the equity
method
|
33,893 | 25 | 52 | - | - | (32,363 | ) | 1,607 | ||||||||||||||||||||
|
Foreign
currency exchange differences
|
(7,594 | ) | 1,359 | (278 | ) | (1,090 | ) | 100 | - | (7,504 | ) | |||||||||||||||||
|
Profit
before taxes
|
51,432 | 37,318 | 9,822 | (10,701 | ) | (1,231 | ) | (32,364 | ) | 54,276 | ||||||||||||||||||
|
Income
tax expense
|
(3,648 | ) | (4,515 | ) | (310 | ) | 2,149 | (46 | ) | - | (6,369 | ) | ||||||||||||||||
|
Profit
for the year
|
47,784 | 32,803 | 9,512 | (8,552 | ) | (1,276 | ) | (32,364 | ) | 47,907 | ||||||||||||||||||
|
Segment
assets
|
1,573,220 | 233,730 | 110,425 | 89,099 | 8,014 | (529,032 | ) | 1,485,456 | ||||||||||||||||||||
|
Investment
in associated companies accounted for using the equity
method
|
266,473 | 79 | 205 | - | - | (257,342 | ) | 9,415 | ||||||||||||||||||||
|
Capital
expenditures
|
100,214 | 9,257 | 18,303 | 20,216 | - | - | 147,989 | |||||||||||||||||||||
|
Segment
liabilities
|
939,896 | 52,415 | 43,215 | 86,147 | 7,180 | (248,136 | ) | 880,716 | ||||||||||||||||||||
Relevant
information regarding the Company and its main subsidiaries, which represent
different segments, together with information regarding other subsidiaries is as
follows for 2007:
|
For
the year ended as of December 31, 2007
|
Fixed
Telecomm.
|
Long
Distance
|
Corporate
Comm. and Data
|
Television
|
Other
|
Eliminations
|
Total
|
|||||||||||||||||||||
|
(in
millions of Chilean pesos)
|
||||||||||||||||||||||||||||
|
Revenue
from external customers
|
533,271 | 56,045 | 79,390 | 25,274 | 2,320 | - | 696,300 | |||||||||||||||||||||
|
Revenue
between segments
|
55,241 | 35,227 | 11,547 | 78 | 11,064 | (113,157 | ) | - | ||||||||||||||||||||
|
Other
operating income
|
10,660 | 117 | 432 | 281 | 7 | (2,440 | ) | 9,058 | ||||||||||||||||||||
|
Employee
expenses
|
(69,235 | ) | (1,056 | ) | (10,947 | ) | (306 | ) | (4,724 | ) | - | (86,268 | ) | |||||||||||||||
|
Depreciation
and amortization
|
(145,562 | ) | (10,838 | ) | (17,916 | ) | (7,272 | ) | (3 | ) | - | (181,591 | ) | |||||||||||||||
|
Other
operating expenses
|
(335,308 | ) | (52,638 | ) | (54,426 | ) | (22,636 | ) | (8,498 | ) | 115,597 | (357,908 | ) | |||||||||||||||
|
Interest
income
|
8,785 | 3,346 | 1,073 | 137 | 31 | (6,368 | ) | 7,004 | ||||||||||||||||||||
|
Interest
expenses
|
(22,274 | ) | - | (2 | ) | (1,805 | ) | (334 | ) | 6,368 | (18,049 | ) | ||||||||||||||||
|
Financial
expenses, net
|
(13,490 | ) | 3,346 | 1,071 | (1,669 | ) | (304 | ) | - | (11,045 | ) | |||||||||||||||||
|
Participation
in profit of associated companies accounted for using the equity
method
|
30,416 | 30 | 62 | - | - | (28,727 | ) | 1,783 | ||||||||||||||||||||
|
Foreign
currency exchange differences
|
(30,204 | ) | (128 | ) | 190 | 324 | 26 | - | (29,793 | ) | ||||||||||||||||||
|
Profit
before taxes
|
35,791 | 30,104 | 9,403 | (5,926 | ) | (110 | ) | (28,727 | ) | 40,536 | ||||||||||||||||||
|
Income
tax expense
|
(5,514 | ) | (3,970 | ) | (940 | ) | 1,254 | 189 | - | (8,980 | ) | |||||||||||||||||
|
Profit
for the year
|
30,277 | 26,134 | 8,464 | (4,671 | ) | 79 | (28,727 | ) | 31,556 | |||||||||||||||||||
|
Segment
assets
|
1,553,067 | 201,165 | 111,248 | 57,795 | 7,236 | (466,968 | ) | 1,463,544 | ||||||||||||||||||||
|
Investment
in associated companies accounted for using the equity
method
|
260,778 | 73 | 148 | - | - | (253,379 | ) | 7,621 | ||||||||||||||||||||
|
Capital
expenditures
|
94,309 | 4,057 | 9,510 | 33,389 | 39 | - | 141,304 | |||||||||||||||||||||
|
Segment
liabilities
|
904,591 | 46,439 | 37,476 | 46,362 | 6,006 | (198,479 | ) | 842,395 | ||||||||||||||||||||
Fixed Telephony Revenues
Fixed telephony revenues, which accounted for 74.9% of
the Company’s operating revenues in 2008, increased
by 3.8% to Ch$553,530 million (US$869.7 million), as compared to Ch$533,271 in
2007. Voice, fixed network and complementary services includes
revenues from: (i) telephony (voice) that consists of traditional telephone
service (fixed and variable charge) and minute plans; (ii) broadband; (iii)
access charges and interconnection; and (iv) complementary services,
which includes other revenues associated with fixed telephony, such as:
interior installations, equipment marketing, connections and other
installations, directory advertising and public telephones, among
others.
Telephony (Voice).
Revenues from basic telephony, which includes telephone line
service fees (fixed monthly charges), variable charges and minute plans
associated with tariff flexibility, among others, increased by 0.8% in 2008 to
Ch$332,891 million (US$523.0 million) from Ch$330,210 million in 2007 mainly due to an 11.2% increase in
revenues in minutes plans, which generated Ch$138,344 million (US$217.4 million)
in 2008 as compared with Ch$124,377 million in 2007. As of December 31, 2008,
these plans represented 78.3% of the total lines in
service. In addition, there
was a 10.1% increase in revenues from value-added services that offset the
decrease in revenues associated with traditional telephony services (fixed
charge and variable charge), which decreased 20.1% and 1.4% to Ch$40,056 million
(US$62.9 million) and Ch$47,156 million
(US$74.1 million) in 2007, respectively. This
decrease was primarily due to a decrease
in the number of lines that are charged fixed monthly and variable charges as customers with
traditional lines have migrated to flexible plans such as “minute plans” and “prepaid plans,” which do not charge a monthly telephone
line service fee.
Broadband. Broadband revenues represented 15.6% of all
operating revenues in 2008 and include revenues from broadband Internet access
provided by the Company
through ADSL to residential customers, small- and medium-sized companies, and
corporate customers. Broadband revenues grew by 22.1% to Ch$115,139 million
(US$180.9 million) in 2008 as compared to Ch$94,335 million in 2007, based on a
10.3% increase in ADSL
connections in the year, driven by a commercial focus on bundled plans of
broadband plus minutes of voice and digital television (for residential
customers). As of December 31, 2008, the number of broadband connections totaled
710,797.
Access Charges and
Interconnection. Revenues
from access charges and interconnection include revenues from interconnection
charges generated by LD carriers, as well as those paid by other
telecommunications operators that use Telefónica Chile’s network and data-processing services offered to LD operators, such as
metering, rating, billing and collections. Access charges and interconnection
revenues increased by 8.0% to Ch$58,599 million (US$92.1 million) in 2008 from
Ch$54,275 million in 2007. This increase was mainly due to higher interconnection
services that increased 11.7% on a year-over-year basis. This was
partially offset by a decrease of 13.0% and 3.3% in access charge revenues from
domestic and international
LD, respectively. Long
distance access charge
traffic decreased 8.5% in 2008 as compared with 2007.
Complementary
Services. Complementary
Services revenues include interior installations, equipment marketing,
connections and other installations, directory advertising, Telemergencia (security services including alarm monitoring),
public telephones, operator
services and equipment marketing, among others. These revenues decreased 13.9% in 2008
to Ch$46,901 million (US$73.7 million) from Ch$54.5 million in 2007, impacted
by: (i) a 11.6% decrease in
revenues from interior
installations due to lower number of lines subject to maintenance
charges; (ii) a decrease in revenues from Telemergencia home security
services mainly due to the sale of this business during this period;
(iii) an 18.3% decrease in
public telephone
revenue due to lower
traffic and lines as a result of mobile substitution; and (iv) a 75.5% decrease in
ISP-switched and dedicated
lines. The above were
partly offset by a 15.1% increase in equipment marketing.
Television Services Revenues
Multimedia revenues accounted for 5.3% of the
Company’s operating revenues in 2008 and increased by 55.2% to Ch$39,235 million
(US$61.6 million), as compared to Ch$25,274 in 2007. This increase was based on
a 19.6% increase in television connections in the year. As of December 31, 2008, the
Company had 262,957 pay television customers.
Long
Distance Revenues
Revenues from the long distance business
segment, which accounted for 7.5% of total revenues in 2008, decreased by 0.6%
to Ch$55,697 million (US$87.5 million) compared to Ch$56,045 million in
2007. LD revenues include revenues from domestic and international long distance
traffic carried by the Company, as well as revenues from the rental of the
Company’s LD network to other telecom operators.
The decrease in LD revenues was mainly attributable to
a 7.0% decrease in domestic
LD revenues. However, this
was partly compensated for by a 3.3% increase in revenues from international LD and a 2.2% increase in rental capacity
compared to 2007.
Corporate
Customers Communications Revenues
Revenues from the corporate customers
communications business segment, which accounted for 12.0% of the
Company’s revenues in 2008, increased by 11.4%
to Ch$88,480 million (US$139.0 million) compared to Ch$79,390 million in 2007.
Corporate customers
communications includes revenues from: (i) the sale and rental of
telecommunications equipment to large corporate customers; (ii) complementary
telephone services, such as “800” numbers and digital communication
services; (iii) data services, including ATM, Frame Relay, data
equipment and services related to the IP network; and (iv) dedicated links and other
services, including videoconference, Datared, E1 Links and VSAT, housing and
hosting, and consulting services to large corporate customers.
The increase in revenues was mainly due
to a 19.3% increase in data services revenues to Ch$33,536 million (US$52.7
million) from Ch$28,107 million in 2007, a 14.9% increase in revenues from
circuits and others and an increase of 2.2% in complementary services. Revenues from terminal
equipment marketing
partially offset these
increases with a 5.8% decrease during 2008.
Other
Businesses Revenues
Revenues
from other businesses, which accounted for 0.2% of the Company’s revenues in
2008, decreased by 22.9% to Ch$1,789 million (US$2.8 million) as compared to
Ch$2,320 million in 2007. Revenues from other businesses include revenues from
t-gestiona.
B. Liquidity and Capital
Resources
Sources of Liquidity
The Company’s main historical sources of liquidity
have been its cash flows
from operations, proceeds from borrowings and the issuance of equity. Although
in the past Telefónica
Chile has relied substantially on public debt
issues and bank loans to meet its financing requirements, since 2001 its main
sources of liquidity have been cash flow
generated from operations and free cash resulting from savings associated with
the refinancing of certain loans. The current working capital level is
sufficient to meet present requirements. If any additional working
capital is needed in the future, the Company
will evaluate additional financing.
During 2008, Telefónica Chile continued to pursue its strategy of
improving its financial structure by focusing capital expenditures on Company
businesses with the highest expected returns and reducing capital
expenses.
During 2008, the Company generated net
cash from operating activities totaling Ch$178,137 million (US$279.9 million), compared to Ch$228,958 million in 2007, as a result of a net income of
Ch$47,907 million
(US$75.2 million) in 2008
as compared to net income of Ch$31,556 million in 2007, adjusted for
activities that affect net income but do not affect cash, principally
depreciation and amortization charges of Ch$167,573 million (US$263.3 million) in 2008 as compared
to Ch$181,590 million in 2007.
Net cash used in investing
activities reached Ch$128,167 million (US$201.4 million) in 2008, compared to
Ch$128,237 million in 2007. The cash used in investing activities in 2008 was
principally associated with the acquisition of property, plant and
equipment.
Net cash used in financing activities
reached Ch$51,499 million (US$80.9 million) in 2008 as compared with
Ch$68,769 million in 2007. Cash in 2008 was
mainly used for dividend payments and a capital reduction of Ch$50,036
million (US$78.6 million) and repayments of
debt.
The Company’s equity as of December 31, 2008 and 2007
was Ch$604,739 million
(US$950.2 million) and Ch$621,149 million, respectively. The decrease
in equity as of
December 31, 2008 was
primarily attributable to the payment, during 2008, of dividends totaling
Ch$10,792 million (US$17.0 million), as well as a capital reduction of Ch$39,243
million (US$61.7 million), in order to distribute additional cash to
shareholders of the parent.
Outstanding Indebtedness
Following its privatization in 1988, the
Company pursued an aggressive development plan to expand its fixed-line network
and develop other telecommunications services, such as LD service, mobile
telephony and data transmission services. To fund the capital expenditures associated with
this expansion, the Company has raised capital by issuing debt through domestic
and international offerings, including the issuance of Yankee and Euro Bonds,
and has borrowed funds from commercial banks in the form of syndicated and bilateral loans. The
Company has also accessed the local Chilean capital markets through the issuance
of medium- and long-term bonds, primarily sold to
pension funds, insurance companies and other institutional investors,
and commercial paper, and through borrowing from
commercial banks.
At December 31, 2008, the
Company’s financial debt totaled
Ch$436,388 million (US$685.7 million) including
current maturities, outstanding derivatives and fair value adjustments, which
decreased as compared with
2007, due
to the amortization of US$150 million of
credit derivatives in August 2008 and the amortization of Series F bonds in
April and October 2008. The repayment of Series F bonds amounted to US$2.3
million.
During 2008, the sources of financing
were mainly operating
funds, which allowed the Company to make Ch$147,989 million (US$232.5 million) in investments. In addition, a
total of Ch$10,793 million (US$17.0 million) was distributed to shareholders as
dividends and Ch$39,243 million (US$61.7 million) was distributed to shareholders
through a capital decrease.
The following table sets forth the
Company’s outstanding debt as of December 31,
2008:
|
As of December 31,
2008
|
||||||||||||||||
|
Total
Debt Outstanding
|
Short
Term Portion
|
Long
Term Portion
|
Type
of Debt
|
Date
Incurred
|
Original
Principal
Amounts
Borrowed(1)
|
Interest
Rate
|
Maturity
|
|||||||||
|
(In
millions of constant Chilean pesos as of December 31, 2008, except as
indicated)
|
||||||||||||||||
|
Long
Term Obligations with Banks:
|
||||||||||||||||
|
CALYON, New York and
Others
|
127,229
|
127,229
|
–
|
Syndicated
loan
|
2004
|
US$200
mm
|
Libor
+ 0.35
|
2009
|
||||||||
|
BBVA Bancomer and
Others
|
95,904
|
476
|
95,429
|
Syndicated
loan
|
2005
|
US$150
mm
|
Libor
+ 0.334
|
2011
|
||||||||
|
BBVA Bancomer and
Others
|
95,338
|
261
|
95,077
|
Syndicated
loan
|
2008
|
US$150
mm
|
Libor
+ 0.60
|
2013
|
||||||||
|
Banco
Santander
|
76,643
|
392
|
76,251
|
Bilateral
loan
|
2005
|
UF
3,555,000
|
TAB360
+ 0.325
|
2010
|
||||||||
|
Total Long Term Obligations with
Banks
|
395,114
|
128,358
|
266,757
|
|||||||||||||
|
Bonds and
Debentures:
|
||||||||||||||||
|
Series F
|
11,475
|
1,641
|
9,834
|
Local
bond
|
1991
|
UF
500,000
|
6.00%
|
2016
|
||||||||
|
Series L
|
63,118
|
40
|
63,147
|
Local
bond
|
2006
|
UF
3,000,000
|
3.75%
|
2012
|
||||||||
|
Total Bonds and
Debentures
|
74,663
|
1,682
|
72,981
|
|||||||||||||
|
Notes
and Accounts Payables to Related Companies and Capital Lease
Obligations:
|
||||||||||||||||
|
Leasing
Obligations
|
225
|
19
|
206
|
Leasing
|
-
|
-
|
8.10%
|
2016
|
||||||||
|
Total Long Term Debt (including
current maturities)
|
470,003
|
|||||||||||||||
|
Total Debt
Outstanding
|
470,003
|
|||||||||||||||
|
Fair Value Total
Debt
|
469,993
|
|||||||||||||||
|
Outstanding
Derivatives
|
33,605
|
|||||||||||||||
|
Total Debt
|
436,388
|
|||||||||||||||
|
(1)
|
In original currency of debt as
incurred.
|
In addition to available cash as of
December 31, 2008, the Company has the ability to draw up to approximately
Ch$1,700 million (US$2.7 million) from unused lines of credit granted by
Chilean banks.
The Company has the equivalent of US$200 million of debt that will mature in
2009. The Company intends to refinance this debt. In connection with this refinancing,
the Company issued Series N bonds in the Chilean market
or the equivalent of Ch$106,000 million
(US$181 million) in April
2009. The bonds will mature in 2014 and carry an interest rate of UF plus 3.23%.
Some of the Company’s indebtedness is governed by
instruments and agreements that contain restrictive covenants with which the
Company is obligated to comply. During the recent years, the Company has been
renegotiating its outstanding debt in order to improve its rates and maturities,
but also to establish less restrictive covenants.
In December 2008, the
Company’s creditors agreed to modify
the leverage covenants
in response to the Company’s adoption of IFRS. Under the terms of
the Company’s syndicated loan agreements, as amended
by the above mentioned modification, the Company must maintain a leverage ratio
(as defined in each respective agreement) equal to or lower than 2.5. Additionally, the covenants
for the local bonds require that the Company maintain a leverage ratio (as
defined in the local bond agreement) equal to or lower than 2.5. In addition, the
Company’s Board of Directors agreed to propose
at the 2009 General Annual
Shareholders’ Meeting to eliminate the inclusion of any
covenant in the Investment
and Financing Policy for 2009. As of December 31, 2008, the Company was in
compliance with all financial covenants set forth under the agreements governing
its debt obligations and
with all other covenants in these agreements. As of December 31, 2008, the
Company had a leverage ratio of 1.38, defined as total liabilities minus
hedging assets divided by equity. As of December 31, 2008, the
Company had an
interest coverage ratio of
6.47, defined as EBITDA
divided by net financial expenses plus debt exchange differences.
During 2008, Fitch Ratings reaffirmed
the Company’s rating of BBB+ with a stable
outlook.
Capital Expenditures and Other Liquidity
Requirements
Debt Prepayment and
Repayment
In 2008, the Company continued its
strategy of strengthening its financial structure. During the last six years,
the Company achieved a significant decrease in its total financial debt through
increased cash flow, which enabled the Company to reduce its debt
through several debt repayments.
During 2008, the Company’s main source of financing was operating
cash flow. These resources allowed investments of Ch$147,989 million (US$232.5
million) for capital expenditures and the payment of dividends and return of
capital equivalent to Ch$50,036 million (US$78.6 million).
Debt Refinance
On June 12, 2008, the Company renegotiated an
international loan in the amount of US$150 million. The international bank loan has been structured as a “club deal,” with the participation of the following
banks: Banco Santander, Banesto, Bank of Tokyo, BBVA, Caja Madrid, EDC and Rabobank. The funds were used to refinance a
syndicated loan that was to
mature in December
2008.
Capital
Expenditures
Capital expenditures have been designated
primarily for those business areas presenting the greatest potential
return.
In 2008, Telefónica Chile’s capital expenditures totaled
Ch$147,989 million (US$232.5 million). These investments were
focused on consolidating
business growth, mostly in broadband, projects of the corporate customer segment and digital television. In the
fixed telecommunications business, investment funds were used for for
commercializing lines with minute plans and for maximizing the use
of installed capacity,
focusing on network deployment in areas of real estate development. The investment plan emphasized
initiatives aimed at
updating network infrastructure by replacing old equipment and introducing new
generation technologies (IP), with a view to attaining high service quality
standards with more stable and flexible platforms.
Additional emphasis was placed on
simplifying the processes and systems that support Company operations, thus
improving the support tools for the Company’s business, technical and administrative
management.
The Company’s management expects to maintain a
similar level of capital expenditures in future years in addition to the capital
expenditures required for the provision of pay television services to its
different client segments.
The Company’s management reviews the capital
expenditures program periodically and adjustments are made as appropriate in
light of any changes in market conditions, general economic conditions in the
country, competition and other factors.
Foreign Exchange and Interest Rate Risk
Management
The Company obtains financing abroad
mainly in U.S. dollars and, in certain cases, with floating interest rates. As a
result, Telefónica
Chile is exposed to financial risks related
to foreign exchange and/or
interest rate fluctuations. For this reason, Telefónica Chile periodically reviews its exposure to
foreign exchange and interest rate risk to determine the levels of coverage
required for each period. See “Item 3. Key Information—Risk Factors.” Currency devaluations and foreign exchange
fluctuations may adversely affect Telefónica Chile.
In 2008, the Company continued its
policy of hedging 100% of its financial debt against foreign exchange fluctuations.
Of the Company’s total long-term debt (including
current maturities) of
Ch$436,288 million (US$685.7 million) as of December 31, 2008,
32.9% was denominated in Chilean pesos and
67.1% was denominated in foreign currencies,
mainly the U.S. dollar. In
addition, the Company has hedged some of its dollar-denominated operating
expenses.
As of December 31, 2008, 62.4% of the
Company’s long-term interest-bearing debt,
including current portion and foreign currency- and Chilean peso-denominated debt, was
exposed to interest rate fluctuations. The remaining 37.6% of the Company’s interest-bearing debt was insulated
from interest rate fluctuations: 21.7% was hedged and 15.9% was fixed-rate debt.
As of December 31, 2008, the Company had outstanding cross-currency swaps of
Ch$101,833 million (US$160.0 million), which serve to hedge against dollar-peso
exchange rate fluctuations and, at the same time, effectively change its
floating rate to a fixed rate. See “Item 11. Quantitative and Qualitative
Disclosures About Market Risk.”
Impact
of Foreign Exchange
Monetary assets and liabilities in foreign currencies are
restated at period-end exchange rates. In the Company’s case, the amount of monetary
correction for any period will depend primarily on the amount of foreign
currency-denominated monetary assets and
liabilities.
Significant Changes in Accounting
Policies
The
following published IFRS and interpretations of the IFRIC have been issued and
still not effective.
|
Standard
and Standard Amendments
|
Date
of mandatory application
|
|
|
Amendment
of IFRS 1
|
First-time
Adoption of International Financial Reporting Standards
|
January
1, 2009
|
|
Amendment
of IFRS 2
|
Share
based payments
|
January
1, 2009
|
|
Amendment
of IFRS 3R
|
Business
Combinations
|
July
1, 2009
|
|
IFRS
8
|
Operating
Segments
|
January
1, 2009
|
|
Amendment
of IAS 1R
|
Presentation
of financial statements – reviewed presentation
|
January
1, 2009
|
|
Amendment
of IAS 23
|
Borrowing
costs
|
January
1, 2009
|
|
Amendment
of IAS 27R
|
Consolidated
and Individual Financial Statements
|
July
1, 2009
|
|
Amendment
of IAS 32 y IAS 1
|
Financial
Instruments: Disclosure and Presentation - puttable financial instruments
and obligations arising on liquidation
|
January
1, 2009
|
|
Amendment
of IAS 39
|
Financial
Instruments: Recognition and Measurement
|
July
1, 2009
|
|
Interpretations
|
Date
of mandatory application
|
|
|
IFRIC
13
|
Customer
fidelity programs
|
July
1, 2008
|
|
IFRIC
16
|
Hedges
of a net investment in a foreign operation
|
October 1,
2008
|
We have
opted for the early adoption of IFRS 8 “Operating Segments”. The adoption of
these standards, amendments and interpretations has not had a significant impact
on the Company’s financial position or
consolidated results in the initial period of application, although it has
entailed new disclosures in the accompanying Audited Consolidated Financial
Statements.
C. Research and Development, Patents and Licenses,
Etc.
The Company does not incur any material
research and development expenses. The Company has a technological development
unit responsible for developing solutions to satisfy technical needs of
different business units of the Company. No separate investment budget is
allocated to that unit’s activities, which are based on
specific project tasks.
The Company holds no material patents
and does not grant others material licenses on its intellectual property. In
connection with its provision of telecommunications services,
the Company plans infrastructure development based upon present and projected
future demand for such services. The Company mainly acquires the necessary
technology, including equipment, from third parties.
D. Trend Information
Regulatory
Environment
The Chilean Government has historically
regulated local telephony services in Chile. The Chilean government, through the
Chilean Antitrust Authority, the agency responsible for making certain
determinations relating to competitive conditions in the
telecommunications industry, has determined that Telefónica Chile is a dominant operator of
local telephony in many regions of Chile. As a result, the Company is subject to
tariff decrees that regulate certain rates and fees the Company can charge for local telephony
services in most of the country. Tariff regulation, which is set every five
years, may have a significant impact on Company revenues and its ability to
compete in the marketplace, as the Company is required to charge the same tariff to all customers in a
designated tariff area.
Recent trends seen outside of
Chile have shown an increased use of IP
telephony as a substitute for traditional voice services at lower prices. The
Telecommunications Law in Chile requires a regulation to be defined for these services
to be offered to the public. Currently IP telephony may only be offered to
corporate customers for internal use. See “Item 4. Information on the
Company—Business Overview—Licenses and
Tariffs.”
The
Chilean Economy
The Company’s operations are located almost entirely
in Chile; therefore, the Company’s operating and financial performance is
sensitive to, and dependent upon, the level of economic activity in Chile. For the last seven years the Chilean
economy has experienced positive growth, with an expansion of GDP at rates
of 6.0% in 2004, 5.6% in
2005, 4.6% in 2006, 4.7% in 2007. Despite the economy’s growth in 2008, in the final part of
the year, the Chilean economy began to slow down due to the current situation
faced by many developed economies, resulting in a
real growth rate of 3.2%. The Central Bank’s concern for price stability has
translated into the application of an inflation targeted monetary approach. Inflation reached
2.4% in 2004, 3.7% in 2005, 2.6% in 2006, 7.8% in 2007 and 7.1% in
2008. The current account had a surplus of 2.2% of GDP in 2004, 1.2% in 2005,
4.9% in 2006
and 4.4% in
2007, while in 2008 there was a deficit of 2.0%. Annual average
unemployment declined from 9.0% in 2002 to 7.7% in 2008; therefore, household spending
has contributed to
the recent years’ expansion. During 2008, fiscal revenue
remained strong, driven especially by the high prices of commodities in the
first half of the year, particularly copper, resulting in a fiscal surplus
equal to an estimated 5.2% of GDP.
Meanwhile, domestic demand increased by approximately 7.4%, private consumption grew by
approximately 4.3% and
investment grew by approximately 19.5%. In spite of the favorable economic
climate, there can be no assurance that the consumption of the
Company’s products and services will grow in the
same proportion.
Increased
Competition, New Entrants and M&A Activity
Telefónica Chile faces intense competition in every
aspect of its business. Telefónica Chile competes with both mobile telephony and other fixed and
cable telephony operators, none of which are subject to the same tariff
regulations as the Company and therefore compete under different conditions.
Nevertheless, the Company remains
the leading fixed telephony
operator. In 2004 and 2005, the competitive
environment led to significant merger and acquisition activity, primarily in the
cable operator business, where the top two companies consolidated and, combined,
had nearly 90% of the pay television market, while also becoming a relevant player in broadband
and fixed telephony. Additionally, in the mobile telephony business, in 2004,
Telefónica Móviles (“TEM”) acquired Bellsouth in Chile and the mobile subsidiary of
Telefónica Chile in order to merge these two
companies. During 2005, the Mexican operator
America Móvil (a subsidiary
of Telmex) acquired the local mobile operator Smartcom, Telecom Italia sold its
controlling stake in Entel to the local group Almendral, and the fixed network
operator Manquehue Net was acquired by the local data transmission
operator, GTD Group. In June 2006, Telefónica Chile entered the pay television market,
where the dominant operator is the cable company VTR, and has managed to gain
significant market share. In 2008, Telmex started building a hybrid fiber coaxial network with
voice, broadband and pay television services. Telmex had already entered
the residential segment through a bundled offer of telephony, broadband and
satellite television. The telephony and broadband services are provided over WiMax, while its acquisition of
ZAP TV allowed it to bundle these services with satellite television. The mobile
telephony market has continued to grow, reaching a penetration in the market of
about 95 lines per 100 inhabitants as of December 31, 2008, as compared with only 20 lines per 100
inhabitants in fixed line service. The Company has experienced substitution
since the introduction of mobile communications service, which has contributed
to the declines in number of fixed lines, volume of local traffic and domestic LD traffic.
See also “Item 4. Information on the
Company—Business Overview.”
E. Off-Balance Sheet
Arrangements
There are no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on the Company’s financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
F. Tabular Disclosure of Contractual
Obligations
The following table summarizes the
Company’s contractual cash obligations and
commercial commitments as of December 31, 2008 and the liquidity requirements
for such obligations in the future periods specified.
|
Payments
due by period in millions of constant Chilean pesos
as
of December 31, 2008
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
1
year
|
1-3-years
|
3-5
years
|
More
than
5
years
|
|||||||||||||||
|
Long-term
debt, including current maturities (1)
|
469,635 | 130,007 | 174,651 | 161,212 | 3,765 | |||||||||||||||
|
Capital
(finance) lease obligations (1)
|
367 | 51 | 101 | 101 | 114 | |||||||||||||||
|
Operating
lease obligations
|
– | – | – | – | – | |||||||||||||||
|
Purchase
obligations
|
– | – | – | – | – | |||||||||||||||
|
Other
long-term liabilities reflected on the Company’s balance sheet under IFRS
(2)
|
397,114 | 228,324 | 3,697 | 7,428 | 157,665 | |||||||||||||||
|
Other
accounts payable and due to related company (1)
|
40,277 | 40,277 | - | - | - | |||||||||||||||
|
Total
contractual obligations
|
907,393 | 398,659 | 178,449 | 168,741 | 161,544 | |||||||||||||||
|
(1)
|
Includes accrued interest as of
December 31,
2008.
|
|
(2)
|
Other long-term liabilities
include dividends payable, notes payable, miscellaneous accounts payable,
accruals, withholdings and deferred taxes, severance indemnity
obligations and other
liabilities.
|
A. Directors
and Senior Management
The
Company is managed by its Board of Directors, which, in accordance with the
Company’s estatutos, or
bylaws, must consist of seven directors and their respective alternate
directors. Six of the directors, together with their respective alternate
directors, are elected by holders of the Series A Common Stock, each for a
three-year term, at the General Annual Shareholders’ Meeting. Holders of the
Series B Common Stock elect one director and one alternate director for a
three-year term at the General Annual Shareholders’ Meeting.
If a
vacancy occurs on the Board of Directors during the course of any three-year
term (for example, upon resignation of a director), the alternate director
corresponding to the vacant position serves as director for the balance of the
term. If such alternate director resigns, dies or by virtue of law becomes
unable to serve as a director, the Board of Directors then appoints a new
alternate director to serve until the date of the next General Annual
Shareholders’ Meeting, when an election of the entire Board of Directors must
take place.
Telefónica
Chile’s Board of Directors was elected for a three-year term at the General
Annual Shareholders’ Meeting held April 13, 2007. Alternate directors
participate in discussions at the Board meetings but are entitled to vote only
when their respective principal directors are absent. The bylaws also require
that the directors and alternate directors elected by the holders of Series B
Common Stock be shareholders of the Company.
The Board
of Directors appoints a General Manager (also known as the Chief Executive
Officer) and such other executive officers as are deemed appropriate to
implement the Board’s policies and decisions. The Chief Executive Officer of a
public Chilean corporation cannot also serve as a director of such
corporation.
The Board
of Directors must meet at least once per month.
As of
March 1, 2008, the Company’s directors and executive officers were:
Directors
(1)
|
Name
|
Position
|
|
|
Emilio
Gilolmo López
|
Chairman
of the Board of Directors and Director Series A
Common
Stock
|
|
|
Narcís
Serra Serra
|
Deputy
Chairman of the Board of Directors and Director
Series
A Common Stock
|
|
|
Andrés
Concha Rodríguez
|
Director
Series A Common Stock
|
|
|
Fernando
Bustamante Huerta
|
Director
Series A Common Stock
|
|
|
Patricio
Rojas Ramos
|
Director
Series A Common Stock
|
|
|
Hernán
Cheyre Valenzuela
|
Director
Series A Common Stock
|
|
|
Marco
Colodro Hadjes
|
Director
Series B Common Stock
|
|
|
José
María Álvarez-Pallete
|
Alternate―Director
Series A Common Stock
|
|
|
Manuel
Álvarez-Tronge
|
Alternate―Director
Series A Common Stock
|
|
|
Raúl
Morodo Leoncio
|
Alternate―Director
Series A Common Stock
|
|
|
Benjamin
Holmes Bierwirth
|
Alternate―Director
Series A Common Stock
|
|
|
Carlos
Díaz Vergara
|
Alternate―Director
Series A Common Stock
|
|
|
Mario
Vázquez Mari
|
Alternate―Director
Series A Common Stock
|
|
|
Alfonso
Ferrari Herrero
|
Alternate―Director
Series B Common Stock
|
Executive
Officers
|
Name
|
Position
|
|
|
Oliver
Alexander Flögel(2)
|
Chief
Executive Officer (CEO)
|
|
|
Victor
Galilea Page
|
General
Counsel and Secretary of the Board of Directors
|
|
|
Isabel
Margarita Bravo Collao
|
Financial
Officer
|
|
|
Gustavo
Marambio(3)
|
Technology
and Operations Officer
|
|
|
César
Valdés Morales
|
Commercial
and Administrative Services Officer
|
|
|
Mauricio
Monteiro de Azevedo
|
Small
and Medium Business Officer
|
|
|
Rafael
Zamora Sanhueza(4)
|
Strategic
Planning and Regulation Officer
|
|
|
Francisco
Javier de Miguel del Val
|
Internal
Auditing Officer
|
|
Name
|
Position
|
|
|
Pedro
Pablo Lazo(5)
|
Corporate
Communications Business Officer
|
|
|
Rubén
Sepúlveda Miranda
|
Human
Resources Officer
|
|
|
Fernando
García Muñoz
|
Management
Control and Chief Accounting Officer
|
|
|
Humberto
Soto Velasco
|
Regulation
and Wholesalers Officer
|
|
|
Juan
Antonio Etcheverry
|
Residential
Business Officer
|
(1) The
Board of Directors was elected for a three-year period at the General
Shareholder’s Meeting held on April 13, 2007.
(2)
Oliver Flögel was appointed as Chief Executive Officer from January 1, 2009 to
succeed José Moles, who left that position on December 31, 2008.
(3)
Gustavo Marambio was appointed as Technology and Operations Officer on April 1,
2009, to succeed Manuel Plaza.
(4)
Rafael Zamora was appointed as Corporate Strategy Development and Regulation
Officer on March 1, 2009. Mr. Zamora was formerly the Telefónica Empresas
Officer.
(5) Pedro
Pablo Lazo was appointed as Telefónica Empresas Officer on March 1, 2009, to
succeed Rafael Zamora.
Certain
of the Company’s directors also serve as directors or officers of other
companies, including related companies (where noted below) and other companies
in the Chilean telecommunications industry. See “Item 7. Major Shareholders and
Related Party Transactions.”
Set forth
below is a brief biographical description of the directors and executive
officers of the Company. All ages of directors and executive officers are stated
as of December 31, 2008.
Directors
Emilio Gilolmo López, 67,
became a Series A director and the Chairman of the Board of Directors in April
2006. Within the Telefónica Group he has served as member of the Board of
Sogecable S.A. and Chairman of Lolafilms S.A. He has vast experience in the
banking industry and as a professor in constitutional law at Complutense
University of Madrid and the diplomatic academy. He is Vice President of the
Spanish Federation of Human Rights Protection, of the “Club Siglo XXI” and
sponsor of the Ortega y Gasset Foundation. He holds a law degree from the
Universidad de Madrid.
Narcís Serra Serra, 66,
became a Series A director and Deputy Chairman of the Board in July 2004. He is
the Chairman of Fundación CIDOB, of the National Museum of Art of Catalunya,
Deputy Chairman of Catalunya’s Advisory Board of Telefónica S.A., member of the
Board of TELESP, Telefónica Internacional, S.A. and Caixa Catalunya. Currently,
he is a professor of Economic Theory at Universidad Autónoma de Barcelona. He
holds an economics degree from Universidad de Barcelona and a Ph.D. in economics
from Universidad Autónoma de Barcelona.
Andrés Concha Rodríguez, 65,
became a Series A director on April 26, 2001. He holds a bachelor’s degree in
economics from the University of Chile. At present, he is the General Director
of the Chilean Federation of Industry, member of the Board of Security Holdings,
a financial institution, and a member of the Board of Pilmaiquen Electrical
Co.
Fernando Bustamante Huerta,
69, became a Series A director on April 26, 2001. He was the Chairman of the
Board of Metro S.A. He is a general manager and partner of Inversiones El Olivar
Ltda. He holds an accounting degree from Universidad de Chile.
Patricio Rojas Ramos, 48,
became a Series A director in April 2005. He is a partner of P. Rojas &
Asociados, an economic consulting company. Currently, he is professor of the
Department of Economics at the Universidad Católica de Chile. He holds an
economics degree from the Universidad Católica de Chile and a Ph.D. from
MIT.
Hernán Cheyre Valenzuela, 54,
became a Series A director on April 15, 2004. He is the Chairman of Econsult, a
consulting company. He holds a commercial engineering degree from the
Universidad Católica de Chile and a master’s degree in economics from the
University of Chicago.
Raúl Morodo Leoncio, 74,
became a Series A director on April 23, 2008. He is a professor of
constitutional law at the Complutense University of Madrid and former
vice-chancellor of the Universidad Internacional Menéndez y Pelayo. As a
diplomat, he was the Spanish ambassador to UNESCO, Portugal and Venezuela. He
holds a law degree from the Universidad de Salamanca.
Marco Colodro Hadjes, 67,
became a Series B director on January 28, 2005. He has been Manager of
International Commerce of Banco Central de Chile, Deputy Chairman of Banco del
Estado de Chile and Chairman of Televisión Nacional de Chile. He holds an
economics degree from the Universidad de Chile and a doctorate from the
University of Paris.
José María Álvarez-Pallete,
45, became a director on April 22, 2003. In September 1999, he became Chief
Financial Officer of Telefónica, S.A. He was appointed Chairman and Chief
Executive Officer of Telefónica Internacional on July 24, 2002. He is a member
of the following Boards of Directors: Telefónica de España, Telefónica Móviles,
Telefónica Móviles España, Telefónica Data, Telefónica Internacional, Telefónica
de Argentina, Telesp, Telefónica Chile, Telefónica de Perú, Cointel, Compañía de
Teléfonos de Chile Transmisiones Regionales, Telefónica Larga Distancia de
Puerto Rico, China Netcom, and the Supervisory Board of Cesky Telecom. Mr.
Álvarez-Pallete holds a graduate degree in economics from the Complutense
University of Madrid. He also studied economics at the Université Libre de
Belgique.
Manuel Álvarez Tronge, 52,
became a Series A alternate director in April 2006. He also served as Secretary
of the Board of Telefónica Internacional S.A. in Spain. He worked as a lawyer at
the Superintendencia de Seguros de la Nación (the National Superintendent of
Insurance) and served as Counsel of the Ministry of Justice of Peru and a Legal
Manager of Perez Companc S.A. He has also been a professor at Austral, Saint
Andrews and Buenos Aires Universities. He holds a law degree from the
Universidad de Buenos Aires.
Benjamin Holmes Bierwirth,
59, became an alternate Series A director in April 2005. He is a member of the
Board of Zofri S.A., La Fuente Editores and Laboratorio City. He is also the
Chairman of Sociedad de Inversiones y Asesorías Frutillar and founding partner
of Portal del Arte S.A. He holds a commercial engineering degree from the
Universidad de Chile.
Carlos Díaz Vergara, 46,
became an alternate Series A director on April 15, 2004. He is a member of the
Risk Rating Commission for securities that can be purchased by pension funds.
Currently, he holds the positions of Dean and Professor at the School of
Business and Economics at the Universidad de los Andes and Professor in the
Department of Economics at the Universidad Católica de Chile. He holds a
commercial engineering degree from the Universidad Católica de Chile, and has a
master’s degree in economics from the University of California, Los
Angeles.
Mario Vásquez Mari, 73, became an alternate
Series A director in April 2007. He is a member of the following Boards of
Directors: Telefónica Latinoamérica, Telefónica Argentina S.A., Telefónica
Holdings S.A. and Fundación Telefónica in Argentina, among other companies and
foundations. Moreover, he is president of Río Seguros S.A. and is professor of
auditing in the Faculty of Economics of the University of Buenos Aires. He holds
a degree in Public Auditing from the University of Buenos Aires.
Alfonso Ferrari Herrero, 67,
became an alternate Series B director on April 26, 2001. He is a director of
Telefónica S.A., Telefónica Internacional S.A. and Telefónica de Perú S.A.A.,
the Chairman of the Commission of Appointments and Payments of Telefónica, and
President of the Audit Committee of Telefónica de Perú. He holds a Ph.D. in
electrical engineering from Madrid University’s Polytechnic School and a
master’s degree in business administration from Harvard University.
Executive
Officers
Oliver Alexander Flögel, 37,
was appointed on Janaury 1, 2009 as the Chief Executive Officer of Telefónica
Chile. Prior to joining the Company, he was the General Director of Telefónica
Móviles Chile. He holds a Degree in Business Administration and a Bachelor
of Information Systems from the European University in Belgium and a
Masters
in Corporate Finance from the Centre for Macroeconomic Studies of Argentina.
Within the Telefónica Group, he held positions in Río de Janeiro, Brazil, Buenos
Aires, Argentina, Madrid, Spain and Santiago de Chile, where he worked for over
14 years in the finance, corporate development and mergers & acquisitions
departments.
Victor Galilea Page, 49, has
been the Secretary of the Board of Directors and General Counsel of Telefónica
Chile since November 2008. Prior to joining the Company, he was the legal and
regulatory affairs officer at Telefónica Móviles Chile and previously held the
same position at Bellsouth Comunicaciones in Chile. He holds a law degree from
the Universidad de Chile.
Isabel Margarita Bravo
Collao, 41, Financial Officer of Telefónica Chile. She joined the finance
division of Telefónica Chile in November of 1990 and was the head of the
Investor Relations division until 2001, when she was appointed to her current
position. She holds a Commercial Engineering degree from Universidad de Santiago
de Chile and a Masters degree in Finance from Universidad Adolfo
Ibáñez.
Gustavo Marambio, 55,
Technology and Operations Officer, joined Telefónica Chile in April 2009. Prior
to joining the Company, he was Technology officer at Telefónica Móviles Chile
since 2002. Within the Telefónica Group, he held positions in CRT Celular
Brazil. He holds a degree in electronic civil engineering and has a master’s
degree in administration.
César Valdés Morales, 44,
Chief Commercial and Administrative Services Officer, joined Telefónica Chile in
1991. He has held executive positions at both the Company, in the Systems
Development area, and within Telefónica Latin America, in Global Project
Development and IT Services and Development. He holds a degree in industrial
civil engineering from the Universidad Católica de Chile, as well as
postgraduate degrees in company and IT management.
Mauricio Monteiro de Azevedo,
38, Small and Medium Business and Professionals Officer, joined Telefónica Chile
in November 2007. He has served as commercial director of the TOP business
segment at Telefónica Brazil. He holds a degree in Production Engineering from
Universidad Federal de Rio de Janeiro and an MBA from the University of
Michigan.
Juan Antonio Etcheverry, 42,
Residential Business Officer, joined Telefónica Chile in January 2007. He holds
a degree in industrial civil engineering from the Universidad de
Chile.
Francisco Javier de Miguel del
Val, 41, Internal Auditing Officer, joined Telefónica Chile in February
2007. Prior to joining the Company, he held positions as head of financial
management and manager of internal auditing for Telefónica Spain. He holds a
degree in law from the Universidad Autónoma de Madrid, a master’s degree in
taxation from the Centro de Estudios Financieros and a master’s degree in real
estate law and legal practice from the Universidad Complutense de
Madrid.
Rubén Sepúlveda Miranda, 43,
the Human Resources Officer, joined the Company in June 2006. He holds a degree
in commercial engineering and a master’s degree in human resources management
from the Universidad de Santiago de Chile, as well as a diploma in strategic
human resources management from the Universidad Adolfo Ibañez as well as a
master’s degree in human resources administration and management from
Universidad de Santiago de Chile.
Fernando García Muñoz, 36,
Management Control and Chief Accounting Officer, joined Telefónica Chile in
2007. He holds a degree in economics and business science from CUNEF,
Universidad Complutense and an MBA from the Instituto de Empresas of Madrid.
Prior to joining the Company, he held positions in the management control,
strategy and corporate development and human resources departments within the
Telefónica Group
Humberto Soto Velasco, 50,
the Regulation and Wholesalers Officer, joined Telefónica Chile in July 2002. He
holds an electrical civil engineering degree from the Universidad de
Chile.
Rafael Zamora Sanhueza, 43,
the Corporate Strategy Development and Regulation Officer, joined Telefónica
Chile in 1991. His experience at the Company includes head positions in the
control and planning area, as well as the residential and corporate customers
areas. He holds a degree in civil industrial engineering and a master’s degree
in industrial engineering from the Universidad de Chile.
Pedro Pablo Lazo, 48, the
Telefónica Empresas Officer, joined Telefonica Chile in March 1, 2009. Prior to
joining the Company, he was the Corporate Segment officer at Telefónica Móviles
Chile since 2005. He holds a degree in civil engineering from the Universidad
Católica de Chile.
B. Compensation
of Directors and Officers
Each
director and alternate director, with the exception of the Chairman of the Board
and the Deputy Chairman of the Board, receives compensation equal to 120 UTMs (US$7,099 as of December 31,
2008) per month for attending Board meetings and for expenses, provided
he has attended at least one Board meeting in the month.
The
Chairman of the Board of Directors receives twice the compensation received by
other directors. The Deputy Chairman of the Board of Directors receives 1.5
times the compensation received by other directors.
The
compensation for Board members and their alternate directors is decided at the
General Annual Shareholders’ Meeting. For the year ended December 31, 2008, the
compensation paid to directors and executive officers of the Company was as
follows:
|
Name
|
Position
|
Total
Compensation
(in
thousands of
constant
Ch$ as of
December
31, 2008)
|
||||
|
Emilio Gilolmo López
|
Chairman and Director Series A
Common Stock
|
105,325 | (1) | |||
|
Narcís Serra
Serra
|
Deputy Chairman and Director
Series A Common Stock
|
73,699 | ||||
|
Andrés Concha
Rodriguez
|
Director Series A Common
Stock
|
54,900 | (2) | |||
|
Fernando Bustamante
Huerta
|
Director Series A Common
Stock
|
53,621 | ||||
|
Patricio Rojas
Ramos
|
Director Series A Common
Stock
|
61,287 | (3) | |||
|
Hernán Cheyre
Valenzuela
|
Director Series A Common
Stock
|
62,566 | (2)(3) | |||
|
Marco Colodro
Hadjes
|
Director Series B Common
Stock
|
53,621 | ||||
|
José María Álvarez-Pallete
|
Alternate—Director Series A Common
Stock
|
31,225 | ||||
|
Manuel Álvarez
Tronge
|
Alternate—Director Series A Common
Stock
|
40,262 | ||||
|
Benjamin Holmes
Bierwirth
|
Alternate—Director Series A Common
Stock
|
61,287 | (3) | |||
|
Carlos Díaz Vergara
|
Alternate—Director Series A Common
Stock
|
61,287 | (3) | |||
|
Mario Vázquez Mari
|
Alternate—Director Series A Common
Stock
|
53,621 | ||||
|
Raúl Morodo
Leoncio
|
Alternate—Director Series A Common
Stock
|
40,047 | ||||
|
Alfonso Ferrari
Herrero
|
Alternate—Director Series B Common
Stock
|
45,028 | (4) | |||
|
Sub-Total
(Directors)
|
760,088 | |||||
|
Executives
|
8,043,008 | (5) | ||||
|
Total
|
8,803,096 | |||||
(1)
Includes Ch$7,029 for service on the Directors Committee.
(2)
Includes Ch$1,279 for service on the Audit Committee.
(3)
Includes Ch$7,666 for service on the Directors Committee.
(4)
Includes Ch$321 for service on the Audit Committee.
(5) This
sum represents the compensation paid to 63 executives of the
Company.
Since
2001, the Company’s subsidiaries do not compensate their directors.
Consequently, during 2008, no fees were paid to directors of subsidiaries. In
the case of each subsidiary, the decision to eliminate directors’ fees was
adopted by the respective boards of directors and approved by their
shareholders.
The
Company does not compensate directors by other means such as through bonuses,
profit-sharing plans, stock option plans, or pension, retirement or similar
benefits.
C. Board
Practices
The
Company’s directors are elected for a three-year term at the General Annual
Shareholders’ Meeting. The current Board of Directors was elected at the General
Annual Shareholders’ Meeting held on April 13, 2007. The Company has no service
contracts with its directors.
If a
vacancy occurs on the Board of Directors, the respective alternate director will
assume the duties of the vacant directorship for the remainder of the term. Upon
any alternate director’s resignation, death, or legal disqualification, the
Board may appoint a replacement to serve until the next General Shareholders’
Meeting, where elections shall be held for the entire Board.
Directors
Committee
According
to Law 19,705, effective as of December 20, 2000, all limited liability public
companies with a market capitalization greater than UF1,500,000 (equivalent to
approximately US$50.6 million as of December 31, 2008) must appoint a directors
committee composed of three directors, the majority of whom must be independent
from the controlling shareholder.
The
Company’s Directors Committee was created on April 14, 2005. The current members
of the Directors Committee were elected by the Board of Directors at a meeting
held on April 23, 2007. The budget for this committee and the monthly
compensation of the committee members and alternate committee members for the
year 2008 were approved at the General Annual Shareholders’ Meeting of the
Company held on April 14, 2008.
The main
functions of the Directors Committee are (i) to review the account inspectors’
report and the external auditors’ report, (ii) to propose external auditors and
local credit-rating agencies to the Company’s Board of Directors, (iii) to
examine all applicable transactions involving directors and related parties
under Articles 44 and 89 of the Chilean Corporations Law and (iv) to review the
salaries and bonuses of the Company’s senior executives. In addition, Telefónica
Chile’s Directors Committee examines all transactions involving the Company’s
CEO and other senior executive officers. The Directors Committee examines,
proposes and makes recommendations to the Board of Directors that are not
binding upon the Board.
During
2008, the Directors Committee held monthly meetings to review the matters
entrusted to it as is stipulated in the corresponding Committee acts.
Additionally, the Committee approved the quarterly financial statements
submitted to it by management.
Each
member and alternate member of the Directors Committee receives compensation
equal to UF30 (approximately US$1,011 as of December 31, 2008) per month for
attending Directors Committee meetings, provided that he has attended at least
one Directors Committee meeting in such month. The annual budget of the
Directors Committee amounts to Ch$75 million (approximately US$117,841 as of
December 31, 2008). During 2008, the Directors Committee made no use of the
budget.
As of
December 31, 2008, the Directors Committee was comprised of the following
persons:
|
Regular
Member
|
Alternate
Member
|
|
|
Emilio
Gilolmo López
|
José
María Álvarez-Pallete
|
|
|
Patricio
Rojas Ramos
|
Benjamin
Holmes Bierwirth
|
|
|
Hernán
Cheyre Valenzuela
|
Carlos
Díaz Vergara
|
Audit
Committee
On July
21, 2005, an Audit Committee was created with a total of three independent
members, in compliance with Rule 10A-3 of the Securities and Exchange Commission
under the Sarbanes-Oxley Act. The Board of Directors named Mr. Andrés Concha,
Mr. Alfonso Ferrari and Mr. Hernán Cheyre as audit committee members, with Mr.
Cheyre serving as financial expert.
The audit
committee supervises the process of financial reporting, internal control
systems over financial reporting and general oversight of the external auditors,
as well as dealing with any related complaints.
At the
Annual General Shareholders’ Meeting held on April 14, 2008, compensation for
audit committee members was set at UF15 per session, with a maximum of six
sessions per year. For more information on executive compensation paid in 2007,
see “—Compensation of Directors and Officers” above. The expense budget for the
audit committee was set at Ch$37 million (approximately US$58,135) for the year
2008.
For
further information about significant differences in the Company’s corporate governance practices
from U.S. companies listed with the NYSE, please see “Item 16G. Corporate
Governance.”
D. Employees
As of
December 31, 2008, Telefónica Chile (excluding its subsidiaries) employed 3,892
persons. Telefónica Chile’s subsidiaries employed 621 persons as of December 31,
2008.
The table
below sets forth the total number of employees as of December 31 of each year
indicated, and the percent change from December 31 of the preceding
year.
|
Year
|
Number
of Employees
|
%
Change
|
||
|
2006
|
3,660
|
-6.4%
|
||
|
2007
|
4,291
|
+17.2
|
||
|
2008
|
4,513
|
+5.2%
|
The table
below sets forth the breakdown of the Company’s employees as of December 31 of
each year indicated, and the change from December 31, 2007 to December 31,
2008.
|
Number
of Employees
|
||||||||||||||||
|
Company
Segment
|
2006
|
2007
|
2008
|
%
Change Between 2008 and 2007
|
||||||||||||
|
Parent
Company
|
2,962 | 3,619 | 3,892 | 7.5 | % | |||||||||||
|
Long
Distance
|
29 | 46 | 24 | (47.8 | )% | |||||||||||
|
Corporate Customer
Communications
|
412 | 340 | 332 | (2.4 | )% | |||||||||||
|
Others
|
257 | 286 | 265 | (7.3 | )% | |||||||||||
|
Total
|
3,660 | 4,291 | 4,513 | 5.2 | % | |||||||||||
The 5.2%
increase in total employment with respect to 2007 is due primarily to a new
customer support service platform that involves opening new stores.
Additionally, during the year the Company incorporated the remaining of the
outsourced labor according to the Outsourcing Law, effective since January 1,
2007, that required companies to incorporate as permanent employees certain
independent contractors who previously were considered outsourced
labor.
In 2006,
eight collective bargaining agreements were finalized with 21 unions
representing 2,589 Company employees. 100% of unionized employees had signed a
contract for a period of three to four years. The most relevant change
introduced in these collective bargaining agreements was the inclusion of
variable compensation linked directly to business targets. During this process,
certain union organizations decided to discontinue application of Article 369
after having applied it since 2002.
In 2007, a collective bargaining
agreement was finalized with one union, OITT, representing 309
employees.
In 2008,
the collective labor agreement with the Chilean telecommunications union,
SINTELFI, (which represents 1,605 employees or 35.4% of the Company’s employees,
more than any other union) was negotiated in advance of its expiration. The
agreement modified the parameters for determining annual compensation and
incentives, basing them on performance, productivity and alignment with business
objectives.
As of December 31, 2008, 3,009 employees, or 66.8% of Company employees, were unionized,
represented by 22 unions under ten collective bargaining agreements. As of
December 31, 2008, 100% of unionized employees have signed three to four year
contracts.
As of
December 31, 2008, the Company’s severance indemnity provisions were Ch$49,646
million (US$78.0 million).
Under the
law enacted in November 1980 that privatized the Chilean social security system,
the Company is required to deduct from employees’ monthly wages a contribution
to a personal pension fund owned by each employee, managed by Administradoras de Fondos de
Pensiones or AFPs (Chilean pension funds), individually selected by the
employee. Compulsory contribution, which currently amounts to approximately 13%
of monthly taxable income (“MTI”) (up to a maximum MTI of UF60, equivalent to
approximately US$2,022 per month), includes the costs of life insurance and
disability insurance coverage. The Company’s statutory social security
obligation is fully satisfied by the deduction and delivery to the corresponding
AFP of such monthly contributions on behalf of the respective
employees.
Additionally,
Chilean employees contribute 7% of their monthly taxable income (up to a maximum
of UF60, equivalent to approximately US$2,022 per month), to an ISAPRE (Chilean
Health Insurance System) individually selected by the employee.
E. Share
Ownership
As of
March 31, 2009, two shares of Series B Common Stock were owned by Mr. Marco
Colodro and one such share was
owned by Mr. Alfonso Ferrari. None of these persons owns more than 1% of
any class of the Company’s outstanding shares. In addition, none of the persons
listed in Item 6.B as directors own shares of Telefónica Larga Distancia
S.A.
As of
February 28, 2009, 51 non-executive employees of the Company owned 45,777 shares
of Series A Common Stock and 16 non-executive employees of the Company owned
11,998 shares of Series B Common Stock, collectively representing 0.01% of the
Company’s outstanding shares. There are no plans for employees to purchase stock
options.
A. Major Shareholders
The following table sets forth certain
information, on a subscribed share basis, as of January 31, 2009 with respect to
each shareholder known to the Company to own beneficially 5% or more of any
class of the Company’s shares of common stock and all
directors and executive
officers of the Company as a group:
|
Name and Address of Beneficial
Owner
|
Series of
Common
Stock
|
Number of Shares Beneficially
Owned
|
% of
Series
|
% of
Total
|
||||||||||||
|
Telefónica Internacional Chile
S.A.
|
A
|
387,993,524 | 44.4 | 40.5 | ||||||||||||
|
Av. Providencia 111, 23rd floor
Santiago, Chile
|
B
|
41,739,487 | 50.2 | 4.4 | ||||||||||||
|
Inversiones Telefónica Internacional Holding
Ltda.(1)
|
A
|
313,718,590 | 35.9 | 32.8 | ||||||||||||
|
Av. Vitacura 2736, 2nd
floor
Santiago, Chile
|
B
|
38,784,326 | 46.6 | 4.1 | ||||||||||||
|
Citibank, N.A., as
depositary(1)(2)
|
A
|
160,221,031 | 18.3 | 16.7 | ||||||||||||
|
111 Wall
Street
New York, NY 10043, USA
|
||||||||||||||||
|
(1)
|
As of January 31, 2009,
Inversiones
Telefónica
Internacional Holding Ltda (“Inversiones Telefónica”) held 38,681,635 ADSs, which are registered under Citibank, N.A., as
depositary, representing 154,726,540 shares of Series A
Common Stock or 17.7%
and 16.2% of the
Series A Common Stock and the outstanding capital
stock of the Company,
respectively.
|
|
(2)
|
Pursuant
to the requirements of Chilean law, all shares of Series A Common Stock
represented by ADSs are registered to the
Depositary.
|
As a result of the tender offer launched
on September 17, 2008 by Inversiones Telefónica for all of the Company’s shares not owned by TIC, in October 2008 it acquired 51.9% of Telefónica Chile’s outstanding capital stock. As a result of a subsequent tender
offer launched on December 2, 2008 by Inversiones Telefónica for all
remaining outstanding capital stock, in January 2009 it acquired an
additional 1.1% of
Telefónica Chile’s outstanding capital stock, increasing its ownership percentage to
53.0%.
As of December 31, 2006, 2007, and 2008,
Citibank, N.A., as depositary for the Company’s American Depositary Receipts
(“ADRs”), owned approximately 11.0%, 16.0% and
16.8% of the Company’s outstanding capital stock, respectively. As of January 31, 2008, ADR holders
(through the Depositary) held 16.7% of Telefónica Chile’s outstanding capital stock, represented by 35 registered holders. The remaining 83.3%
of the Company’s outstanding capital stock was held in Chile, represented by 9,848 shareholders. All of the
Company’s shareholders have
identical voting rights. The Company’s Series A Shareholders vote to elect
six of the seven members of the board of directors and the Series B shareholders
elect one member to the board of directors.
The following table provides
information, as of January
31, 2009, with respect to
the shares owned by the persons listed in Item 6.B as directors and
officers.
|
Name
|
Number of Series A
Shares
|
Number of Series B
Shares
|
% of Series A
Shares
|
% of Series B
Shares
|
% of
Total
|
|||||||||||||||
|
Marco Colodro
Hadjes
|
- | 2 | - | - | - | |||||||||||||||
|
Alfonso Ferrari
Herrero
|
- | 1 | - | - | - | |||||||||||||||
Controlling
Shareholders
TIC owns 44.9% of the outstanding capital stock of the Company. Additionally,
Inversiones Telefónica,
which is a subsidiary of TIC, owns 53.0% of the outstanding capital stock of the Company. TIC is 99.9% owned by
Telefónica Chile Holding
B.V., which is indirectly wholly-owned by Telefónica. Thus, collectively,
Telefónica owns 97.9% of
the of the outstanding
capital stock of the
Company.
B. Related Party
Transactions
Article 89 of the Chilean Corporations
Law requires that a company’s transactions with related parties
(defined as entities that belong to the same group of companies) be on similar
terms to those customarily prevailing in the market. Directors and executive officers of
companies that violate Article 89 are liable for losses or damages resulting
from such violations. In addition, Article 44 of the Chilean Corporations Law
provides that any transaction in which a director has a personal interest or is acting on behalf of a
third party may be approved in advance by the board of directors only if the
board of directors is informed of such director’s interest and if the terms of such
transaction are similar to those prevailing in the market. If a transaction involves an amount
greater than UF20,000 (equivalent to US$674,132 as of December 31, 2008), the
board of directors must be presented with a report as to whether the terms of
the proposed transaction are comparable to those prevailing in the market before such transaction
takes effect. If it is impossible for the board of directors to determine the
prevailing market terms, the board can appoint two independent appraisers and
make a decision regarding the transaction in question only after the reports of both appraisers are
received. If the opinions of two independent appraisers significantly differ, or
if the terms and conditions of the action or contract in question are
unfavorable to the shareholders of the Company, shareholders representing at least 5% of the issued voting
stock may request that the board of directors summon a special meeting of
shareholders to approve such transaction. Two-thirds of the issued voting stock
must approve the transaction at such meeting. Resolutions approving such transactions must be reported
to the Company’s shareholders at the next
shareholders’ meeting. Violation of Article 44 may
result in imposition of administrative or criminal sanctions upon responsible
parties, and the Company, its shareholders, or interested third parties who suffer
losses as a result of such violation have the right to receive compensation in
certain situations.
In accordance with Section 402 of the
Sarbanes-Oxley Act of 2002, since July 2002, the Company has not and will not
extend any loans to
directors and officers. As of December 31, 2008, the Company does not have any
outstanding loans to its directors or executive officers.
In the ordinary course of its business,
the Company engages in a variety of transactions with certain of its affiliates, primarily for the
purchase, at fair market prices negotiated on an arm’s-length basis, of goods or services
that may also be provided by other suppliers. The Directors Committee is
informed of all such transactions in advance, and such transactions are approved by the Board
of Directors. See “Item 6.
Directors, Senior Management and Employees—Directors Committee.” Below are descriptions of such
transactions with affiliates that are material
to either the Company or the related
counterparty. Financial information concerning
these transactions is also set forth in Note 7 to the Audited Consolidated
Financial Statements of the
Company. As of December 31, 2008, the receivables from related parties
amounted to Ch$28,301 million (US$44.5 million) and the accounts payable to related
parties amounted to Ch$40,276 million (US$63.3 million). The income and expenses
from related party transactions resulted in a net expense of
Ch$69,374 million (US$109.0 million).
Transactions with Telefónica España
Since June 30, 1992, the Company, through its subsidiary
Telefónica Larga Distancia,
has had a correspondence agreement with Telefónica providing for the exchange of
international
LD traffic between
Chile and Spain. This agreement, which has an
indefinite term subject to
cancellation by either party on six months’ notice, generated income of Ch$1,316
million and Ch$719 million (US$1.1 million) for the years ended December
31, 2007 and 2008, respectively. The outstanding balances under the agreement in
favor of the Company, as of
December 31, 2008 and 2007, were Ch$2,532 million (US$4.0 million) and
Ch$2,816 million, respectively. The outstanding
balances payable by the Company as of December 31, 2008 and 2007 amounted to
Ch$1,125 million (US$1.8 million) and Ch$696 million respectively.
Transactions with Telefónica Internacional Chile
S.A.
In 1997, the Company entered into an
agreement of technical service with TIC for the coordination of certain joint
activities among the members of the Telefónica Group on behalf of the Company. Under the
agreement, the Company incurred expenses of Ch$536 million (US$0.8 million) in
2008 and Ch$606 million in 2007. Outstanding balances in favor of the Company as
of December 31,
2008 and 2007 amounted to
Ch$440 million (US$0.7 million) and Ch$667 million respectively.
Transactions with Terra Networks Chile
S.A.
On April 30, 1998, the Company entered
into an agreement with Terra Networks Chile S.A. (“Terra Networks Chile”), a subsidiary of Telefónica, pursuant to which the
Company provides collection
services to Terra Networks Chile. Furthermore, on June 1, 1999, the Company entered into an agreement
with Terra Networks Chile pursuant to which Terra Networks Chile provides
Internet access to certain Chilean schools, the costs of which are to be paid by the Company to
Terra Networks Chile. Telefónica Chile also has an agreement to purchase
online advertising from Terra Networks Chile for itself and its subsidiaries. In
January 2007, Telefónica
Chile and Terra Networks Chile signed
a three-year agreement to outsource the
provision of Internet access to the Company’s broadband customers. Pursuant to such
agreements, the Company recorded net expenses of Ch$7,924 million (US$12.5
million) in 2008 and Ch$10,359 million in 2007. The Company had balances receivable from Terra
Networks Chile of Ch$354 million (US$0.6 million) and Ch$460 million as of
December 31,
2008 and 2007,
respectively. Balances payable to Terra Networks Chile from the Company under
these agreements amounted to Ch$3,152 million (US$5.0 million) and Ch$2,621
million as of December 31,
2008 and 2007,
respectively.
Transactions with Atento Chile
S.A.
On September 1, 1999, the Company and Atento Chile S.A.
(“Atento Chile”), a 28.84% affiliate of the Company,
signed an outsourcing
agreement. The agreement comprises several contracts for services to be provided
by Atento Chile to the Company’s business units and customers. Such
services include directory assistance, technical assistance and customer
complaint management, as well as general commercial and sales
information. These contracts were all in effect during 2008. Similar agreements,
involving all of the Company’s subsidiaries, were also in effect
during 2008. Pursuant to all of the agreements discussed above, the Company
recorded total net expenses of Ch$22,224
million (US$39.4 million) and Ch$23,781 million in 2008 and 2007, respectively.
The outstanding balances payable to Atento Chile were Ch$3,912 million
(US$6.1 million) and
Ch$3,532 million as of
December 31, 2008 and 2007,
respectively. The outstanding balances payable in favor of the Company as of
December 31,
2008 and 2007 were Ch$528
million (US$0.8 million) and Ch$554 million, respectively.
Transactions with Correspondents of
Telefónica
Group
In 2004, correspondent agreements were entered into with
members of Telefónica
Group. These members are
Telefónica Argentina,
Telefónica Sao Paulo,
Telefónica Guatemala,
Telefónica Perú, Telefónica Puerto Rico and other mobile
companies within Telefónica
Group such as Telefónica Móvil El Salvador and Telcel Venezuela.
These agreements generated net income of
Ch$3,364 million (US$5.3 million) and Ch$743 million for the years
ended December 31,
2008 and 2007 respectively.
The outstanding balances payable by the Company as of December 31, 2008 and 2007 were Ch$7,799 million (US$12.3
million) and Ch$6,100 million, respectively. The outstanding balances in favor
of the Company as of December 31, 2008 and 2007 were Ch$12,353 million
(US$19.4 million) and Ch$7,550 million, respectively.
Transactions with Telefónica Móviles de Chile S.A.
As of December 31, 2008 and 2007, respectively, the Company
recognized a balance in its favor of Ch$8,112 million (US$12.7 million) and
Ch$7,707 million, mainly related to access charges and rental of capacity. As of December 31, 2008 and 2007, respectively, the Company
recognized a balance payable of Ch$10,956 million (US$17.2 million) and
Ch$15,252 million, mainly related to mobile interconnections (CPP). Transactions
with Telefónica
Móviles de Chile
for the years ended December 31, 2008 and
2007 generated net expenses of Ch$25,226 million (US$39.6 million) and Ch$29,500
million, respectively.
Transactions with Telefónica Móviles Chile Affiliates
As a result of LD contracts with
Telefónica Móviles Chile Inversiones S.A., Telefónica Móviles Chile S.A. and Telefónica Móviles Chile Larga Distancia S.A., the
Company recognized a total balance in its favor of Ch$419 million (US$0.7
million) and Ch$415 million as of December 31, 2008 and 2007, respectively,
and a total balance payable of Ch$284
million (US$0.4 million) and Ch$48 million as of December 31, 2008 and 2007,
respectively. For the years ended December 31, 2008 and 2007 these contracts
generated total net income of Ch$903 million (US$1.4 million) and Ch$1,156 million, respectively.
Transactions with Telefónica International Wholesale Services
Group
The Company has an agreement with
companies belonging to the Telefónica Wholesale International Services Group (“TIWS”), for international data traffic
services. The agreements
with the TIWS companies were all effective during 2008 and have different
expiration dates, depending on the nature of each specific contract. These
agreements generated net expenses of Ch$13,769 million (US$21.6 million) and
Ch$9,060 million for the years ended December 31, 2008 and 2007, respectively. The outstanding
balances under the agreement in favor of Telefónica Chile as of December 31, 2008 and 2007 were Ch$1,007 million (US$1.6
million) and Ch$848 million, respectively. The Company had balances payable of Ch$8,834
million (US$13.9 million) and Ch$8,388 million as of December 31, 2008 and 2007,
respectively.
C. Interest of Experts and
Counsels
Not applicable.
A. Consolidated Statements and Other
Financial
Information
See “Item 18. Financial
Statements” for a listing
of the Company’s Audited Consolidated Financial
Statements, included in this Annual Report.
Legal Proceedings
Unless expressly stated otherwise in
this section, the amounts of judgments and claims for damages, as stated in
Chilean pesos, do not include adjustment for inflation, interest and costs,
which may be required at final judgment. When a judgment or claim is stated in a
readjusting unit of currency, such as the UF, no further inflation adjustment is
required.
a) Lawsuit against the State of Chile:
|
|
(i)
|
Having exhausted all administrative
remedies aimed at correcting the errors and illegal actions taken in the
tariff-setting process of 1999, in March 2002, the Company filed a lawsuit for
damages against the
|
|
|
|
Government of Chile in the amount of Ch$181,038 million (US$284.4 million), plus readjustments and interest, covering past and future damages incurred up to May 2004. |
The judicial process is currently at the
sentencing stage.
|
|
(ii)
|
Telefónica Chile and Telefónica Larga Distancia filed an
indemnity suit against the State of Chile, claiming damages caused
by, and due to, modification of the
telecommunications cable network carried out by highway concessionaires
from 1996 to 2000.
|
The amount of the damages claimed consists in both
companies having been obligated to pay to transfer their telecommunications
networks due to the construction of public works concessioned under the
Concessions Law in the amount of:
|
|
a.
|
Compañía de Telecomunicaciones de
Chile S.A.:
Ch$1,929
million
(historical) (US$3.0 million);
and
|
|
|
b.
|
Telefónica Larga Distancia S.A.
(“TLD”): Ch$2,865 million (historical)
(US$4.5 million)
|
On March
24, 2008, the final first instance sentence was notified and it rejected the
Company’s complaint, without costs. The Company is appealing this
sentence.
b) Lawsuits
|
|
(i)
|
Voissnet
|
On July
12, 2007, Voissnet filed a complaint before the Tribunal de Libre Competencia
(the “Competition Tribunal”) against Telefónica Chile for alleged cross-subsidy
in the joint commercialization of its broadband and fixed telephony services by
taking advantage of its dominant position in those markets.
Telefónica
Chile requested that the complaint be rejected, mainly due to its contention
that voice and broadband package offers were made in response to competitive
dynamics and that the Company did not engage in practices that restricted
competition. The evidence stage has been completed.
In
addition, on August 29, 2008, Voissnet presented a second complaint to the
Antitrust Authority against Telefónica Chile, this time for alleged tied sale in
the commercialization of broadband with telephone services.
Telefónica
Chile requested that the complaint be rejected, with costs. The
Antitrust Authority stated it would issue a combined ruling on both
claims.
|
|
(ii)
|
VTR
Telefónica S.A.
(“VTR”)
|
On May 8,
2008, Telefónica Chile and VTR agreed to a settlement covering all judicial and
administrative conflicts related to “800” number services and reciprocal access
charges to be paid between the companies. In accordance with the terms of the
settlement, both parties will make reciprocal discounts and Telefónica Chile has
paid VTR Ch$12,036 million (US$18.9 million). As a result of
such settlement, all related proceedings have been terminated without
sanction.
|
|
(iii)
|
Manquehue
Net
|
On June 24, 2003, Telefónica Chile filed a breach of contract claim before
an arbitrator against Manquehue Net in the amount of Ch$3,648 million
(US$7.3 million) plus sums accrued
during the proceeding. On the same date, Manquehue Net filed a discount compliance
complaint for UF107,000 (US$4.3 million) in addition to a claim to obligate
related to the signing of “700” number service
contracts.
On April 11, 2005, the arbitrator
accepted the complaint of Telefónica Chile, ordering Manquehue Net to pay approximately Ch$452
million (US$0.9 million), and at the same time accepted the complaint filed by
Manquehue Net ordering Telefónica Chile to pay UF47,600 (US$1.9
million).
Telefónica Chile filed ordinary public law motions
against both sentences
which are currently pending before the Santiago Court of
Appeals.
|
|
(iv)
|
Chilectra and
CGE
|
In June
2006, Telefónica Chile filed complaints against Chilectra S.A. and Río Maipo
(today CGE Distribución), requesting an adjusted refund of the Reimbursable
Financial Contributions that the Company paid between 1992 and 1998, in virtue
of the Electric Law. The amounts Telefónica Chile seeks to be restored amount to
Ch$899.7 million (US$1.8 million) and Ch$117.4 million (US$0.2 million),
respectively.
|
|
(v)
|
Telmex Servicios
Empresariales S.A. (“Telmex
Servicios”)
|
During
the first quarter of 2008, Telmex Servicios filed a complaint before the
Antitrust Authority against Telefónica Chile for alleged restriction of
competition related to the process by which the Company was awarded the
concession for local public wireless service of the 3,400–3,600 MHz band. Telmex
Servicios requested that the government fine the Company 18,000 UTA (US$1.1 million). The Company rejected
all elements of the complaint. The proceeding is at the hearing
stage.
In
addition, Telefónica Chile and TLD were sued by Telmex Servicios before the
Antitrust Authority for restricting competition by providing long-distance
services through Telefónica Chile’s prepaid card, called “Tarjeta Línea Propia,”
and requested that the government fine each company UTA 20,000 (US$1.2 million). The
Company and TLD requested the rejection of all elements of the complaint with
costs.
|
|
(vi)
|
Empresa
Ferrocarriles del Estado de Chile (“EFE”)
|
EFE filed
an ordinary lawsuit for the enforcement of obligations resulting from the
Regulation on Railway Crossing, Parallelism and Support, and demanded payment of
a sum of no less than UTM 48,298.44 (US$2.8 million), for construction and/or
annual passage relating to the Company’s use of land adjacent to the railway,
plus indemnity for material damages and pain and suffering alleged to have been
experienced, with adjustments, interest and costs, notwithstanding the sums
accrued during the proceeding.
On March
25, 2008, the final first instance sentencing was passed, fully rejecting the
complaint, which is being appealed by EFE.
|
|
(vii)
|
Theoduloz
Slier and Ochoa Soriano versus Zalaquett Zalaquett and Telefónica
Chile
|
Executive
lawsuit of commitment to file complaint by Rodemilia Theoduloz Slier and Matilde
Ochoa Soriano against Armando Zalaquett Zalaquett and Telefónica Chile. The suit
arises from Mr. Zalaquett’s sale of shares of the Company’s common stock for
which he subscribed, but did not pay for. The commitment to perform the lawsuit
would consisit of the delivery of 14,468,895 Series A shares of Telefónica Chile
by Mr. Zalaquett to Ms. Theoduloz and Ms. Ochoa.
Telefónica
Chile opposed the execution, since Mr. Zalaquett is not a shareholder of the
Company. This is currently in process.
|
|
(viii)
|
Other
Lawsuits
|
During the last quarter of 2007,
resolutions issued by the Ministry of Transportation and Telecommunications were
notified, in which fines were assessed due to non-compliance with previous
resolutions that amounted to UTM 33,700 (US$1.1 million). Telefónica Chile has filed appeals against those
resolutions, which are currently in process and pending sentence. It should be
noted that the
resolutions consider daily fines, which
as of December 31, 2007 are estimated to amount to close to UTM 1,200 (US$70,991).
Management and its internal and external
legal counsel periodically monitor the evolution of the lawsuits and
contingencies affecting the Company during the normal course of its operations,
analyzing in each case the possible effects on the Company’s financial condition. Based on this
analysis and the information available to date, management and its legal counsel
believe that it is unlikely that the Company’s income and equity will be
significantly affected by loss contingencies in addition to those already recorded in the
financial statements.
Dividend Policy and
Dividends
Dividend Policy
Telefónica Chile’s dividend policy (including the policy
set by the Board of Directors with respect to the payment of interim dividends
for each year) is announced
at the General Annual Shareholders’ Meetings of the Company. At such
meetings, the Board of Directors presents for the shareholders’ consideration and approval its
proposals for a final dividend for the preceding year.
The Company implements its dividend policy in compliance with
Chilean law, pursuant to which the Company’s bylaws provide that the Company must
distribute a cash dividend in an amount at least equal to 30% of its net income
for the relevant year, unless otherwise decided by unanimous vote of the shareholders of the issued
and subscribed shares.
On September 21, 2004, Telefónica Chile’s Board of Directors amended the
Company’s dividend policy, increasing the
distribution of dividends to 100% of annual profits. This policy has been
maintained since
2005.
The dividend policy for future years
will be in line with the Company’s financial plan, which focuses
primarily on a gradual increase in the rate of self-financing, so as to adjust
the financial structure of the Company to the requirements of the development plan. However,
this dividend policy will depend on several factors, including the amount of net
income generated each year, economic projections that may periodically be made,
or certain other events that may affect the Company’s ability to distribute dividends. The
availability of funds will also determine the degree of compliance with the
dividend policy. Telefónica
Chile’s Board of Directors plans to maintain a
dividend policy in accord with the Company’s cash flow for the coming years and the projected performance of
its financial indicators. The 2009 dividend policy contemplates distributing
100% of net profits for each fiscal year through the payment of an interim
dividend in November and a final dividend in May of the following year, subject to approval at the
respective General Annual Shareholders’ Meeting.
At its meeting on February 26,
2007, the
Company’s Board of Directors modified the
dividend policy by adding the following: “In addition to paying dividends
equivalent to 100% of net
income, for the following fiscal year, to the extent that there is a free cash
flow and the Company’s business-related obligations have been
fulfilled, the Board’s intention is to distribute a portion
of this free cash flow to shareholders. This distribution will be proposed at a
shareholders’ meeting to be called for this
purpose.”
Dividends
Dividends are paid to shareholders of
record on the fifth business day (including Saturdays) prior to the payment
date. The following table sets forth the amounts per share of annual dividends paid
out of the Company’s earnings in the years 2004 through
2008. These amounts represent, for each year, a sum of the interim dividends
plus the final dividend paid with respect to such year.
|
Dividends
Paid
|
Total Dividends
Paid
|
|||||||||||||||||||
|
Per Share(1)
|
Per Share(1)
|
Per
ADS
|
||||||||||||||||||
|
Fiscal
Year
|
Dividends against Net
Income
|
Additional
Dividends
|
Total (Ch$)(2)
|
Total (US$)(3)
|
Total (US$)(3)
|
|||||||||||||||
|
2004
|
264.6 | (4) | 394.3 | (5) | 658.9 | 1.182 | 4.728 | |||||||||||||
|
2005
|
69.8 | (6) | 51.0 | (7) | 120.8 | 0.236 | 0.943 | |||||||||||||
|
2006
|
16.3 | (8) | 42.0 | (9) | 58.3 | 0.110 | 0.440 | |||||||||||||
|
2007
|
19.4 | (10) | 51.0 | (11) | 70.4 | 0.142 | 0.567 | |||||||||||||
|
2008
|
11.3 | (12) | 41.0 | (13) | 52.3 | 0.082 | 0.329 | |||||||||||||
|
(1)
|
Represents dividend amounts paid
with respect to Series A and B Common Stock. Per share information does
not take into account any Chilean withholding
tax.
|
|
(2)
|
Amounts shown are presented in
Chilean historic pesos.
|
|
(3)
|
Translated into U.S. dollars at
the Observed Exchange Rates as of December 31 of the respective year. Per
ADS information is based on four underlying shares of Series A Common
Stock per one ADS and
does not take into account any Chilean or U.S. withholding
tax.
|
|
(4)
|
Includes a final dividend
corresponding to the period 2003 for an amount of Ch$3.2 per share, and
interim dividends of Ch$131.44 and Ch$130.00 per share charged against
2004 net
income.
|
|
(5)
|
Dividend charged to retained
earnings as of December 31,
2003.
|
|
(6)
|
Includes a final dividend of
Ch$58.8 charged to net income as of December 31, 2004. It also includes an
interim dividend of Ch$11 per share charged to 2005 net
income.
|
|
(7)
|
Dividend charged to retained
earnings as of December 31,
2004.
|
|
(8)
|
Includes a final dividend of
Ch$15.31 per share charged to 2005 net income and an interim dividend of
Ch$11.0 per share, charged to 2006 net
income.
|
|
(9)
|
At the extraordinary
shareholders’ meeting held on April 20, 2006, a
capital reduction was approved in the amount of Ch$40.2 billion,
equivalent to Ch$42 per share, which was paid on June 15,
2006.
|
|
(10)
|
Includes a final dividend of
Ch$13.44 per share charged to 2006 net income and an interim dividend of Ch$6.0 per share,
charged to 2007 net income.
|
|
(11)
|
At the extraordinary
shareholders’ meeting held on April 13, 2007, a
capital reduction was approved in the amount of Ch$48.8 billion, or Ch$51
per share, which was paid on June 12, 2007.
|
|
(12)
|
Includes a final dividend of
Ch$5.28 per share charged to 2007 net income and an interim dividend of
Ch$6.0 per share, charged to 2008 net
income.
|
|
(13)
|
At the extraordinary
shareholders’ meeting held on April 14, 2008, a
capital reduction was approved in the amount of Ch$39.2 billion,
or Ch$41 per share, which was paid on June 13, 2007.
|
The final dividend corresponding to 2008
net income will be presented for approval at the General Annual
Shareholders’ Meeting on April 23, 2009. The total amount of the dividend is expected to be Ch$11,874
million, equivalent to Ch$12.41 per share. Dividends are calculated on the basis
of net income in Chilean
GAAP. To see a detailed description of the main
differences between Chilean GAAP and IFRS, see Note 3 to the Audited Consolidated Financial Statements of the Company.
On May 7, 2004, a final dividend charged against net
income of the period 2003 was paid for an amount of Ch$3.2 per
share.
On July 15, 2004, as a result of the Telefónica Móvil de Chile S.A. sale, shareholders agreed to approve the dividend
payment of US$800 million. The Board of Directors agreed to pay US$200 million
of the dividend as an interim dividend for 2004 and shareholders approved a
US$600 million dividend to be charged against retained earnings. Therefore, the distribution was an
interim dividend of US$0.21 per share, charged against fiscal year 2004 profits
and a dividend of US$0.63 per share, charged against accumulated retained
earnings. These dividends were paid on August 31, 2004. See “Item 4. Information On The
Company—Divestitures.”
On November 4, 2004, in line with the dividend policy
approved in September 2004, the Company distributed an interim gross dividend of
Ch$130 per share (US$0.21 per share), charged against fiscal year
2004.
Dividends paid during 2004, as part of
the Telefónica
Móvil de Chile S.A.
transaction and the new dividend policy, resulted in the distribution of 29% of
the value of the stock.
On May 30, 2005, a final dividend charged against net
income 2004 was paid for an
amount of Ch$58.8 per share (US$0.10 per share). Also, on May 30, 2005, an interim dividend of Ch$51.0 per
share (US$0.10 per share) was paid and charged to 2004 retained
income.
On November 30, 2005, an interim dividend of Ch$11 per share
(US$0.02 per share) was
paid and charged to 2005 net income.
On June 22, 2006, a final dividend of Ch$15.31 per share
(US$0.03 per share) was paid and charged to 2005 net income.
On June 15, 2006, a capital reduction of Ch$42.0 per
share (US$0.08 per share) was paid to shareholders.
On November 23, 2006, an interim dividend of Ch$11.0 per
share (US$0.02 per share) was paid to shareholders and charged to 2006 net
income.
On May 16, 2007, a final dividend of Ch$13.4 per share
(US$0.03 per share) was paid to shareholders and charged to 2006 net
income.
On June 12, 2007, a capital reduction of
Ch$51.0 per share (US$0.08 per share) was paid to shareholders.
On November 21, 2007, an interim dividend of Ch$6.0 per
share (US$0.01 per share) was paid to shareholders and charged to 2007 net income.
On May 14, 2008, a final dividend of Ch$5.3 per share
(US$0.01 per share) was paid to shareholders and charged to 2007 net
income.
On June 13, 2008, a capital reduction of
Ch$41.0 per share (US$0.08 per share) was paid to shareholders.
On December 10, 2008, an interim dividend of Ch$6.0 per
share (US$0.01 per share) was paid to shareholders and charged to 2008 net
income.
Dividends received by the
Company’s shareholders that are not Chilean
residents, including holders of ADSs, are subject to Chilean withholding tax. See
“Item 10. Additional
Information—Taxation—Chilean Tax
Considerations.”
As a general requirement, shareholders
who are not residents of Chile must register with the Central Bank to
have dividends, sale proceeds, or other amounts with respect to their shares
remitted outside of Chile through the formal currency market.
Under the Foreign Investment Contract (as described below in “Item 10. Additional
Information—Exchange Controls and Other Limitations
Affecting Security Holders”), the Depositary has been granted
access to the Formal Exchange Market to convert cash dividends from pesos to
dollars and to pay such dollars to ADR holders outside of Chile. As a result of
the cancellation of the ADR facility, the Depositary will cease distributing any dividends paid after
May 6, 2009. Any such dividends will be
collected and distributed to ADR holders upon their withdrawal of the shares
underlying the ADRs or upon the liquidation of such shares by the Depository,
which will commence on July 7, 2009.
B. Significant Changes
No
undisclosed significant change has occurred since the date of the Audited
Consolidated Annual Financial Statements.
A. Offer and Listing
Details
Common Stock Prices and Related
Matters
Shares of the Company’s Series A Common Stock and Series B
Common Stock are currently traded in Chile on the Bolsa de Comercio de Santiago
(the “Santiago Stock
Exchange”), the Bolsa de
Corredores-Bolsa de Valores (the
“Valparaíso Stock Exchange”) and on the Bolsa Electrónica de Chile-Bolsa de Valores (the
“Electronic Stock
Exchange”) (collectively,
the “Chilean Stock
Exchanges”). The Santiago
Stock Exchange is Chile’s principal exchange accounting for
86.6% of all equity traded in Chile during 2008. Additionally, approximately 13.1% of equity
trading in Chile during 2008 was conducted on the
Electronic Stock Exchange, an electronic trading market that was created by
banks and non-member brokerage houses, and less than 0.3% of equity trades in
Chile occurred on the Valparaíso Stock Exchange in
2008.
From July 20, 1990 to February 19, 2009,
shares of Series A Common Stock were traded in the United States on the New York Stock Exchange (the
“NYSE”) in the form of ADSs, which are
evidenced by ADRs. Originally, each ADS represented 17 shares of
Series A Common Stock. Effective January 2, 1997, this ratio was changed to four shares
of Series A Common Stock per ADS. Pursuant to the requirements of Chilean law,
all shares of Series A Common Stock represented by ADSs are owned of record by Citibank, N.A., as
depositary.
On
February 18, 2009, Telefónica Chile and the Depositary amended the deposit
agreement governing the ADR facility. The deposit agreement was amended to
shorten the period following the termination of the ADR facility before the
Depositary may begin to
liquidate the shares underlying the ADSs. Subsequently, Telefónica Chile
terminated the deposit agreement. Telefónica Chile expects such termination will
become effective in May 2009 and that the Depositary will begin liquidating any
underlying shares in July 2009.
In
addition, on February 19, 2009,
Telefónica Chile
voluntarily withdrew its ADSs from listing on the New York Stock Exchange (the
“NYSE”) pursuant to Rule 12d2-2(c) under the
Exchange Act. The Company’s Series A Common Stock and Series B
Common Stock continue to trade on the Chilean Stock Exchanges.
The table below sets forth, for the
periods indicated, the reported high and low closing sales prices for the shares
of the Company’s Series A Common Stock and Series B Common Stock on
the Santiago Stock Exchange and the high and low sales prices of the ADSs as
reported by the NYSE.
|
Santiago Stock
Exchange
|
NYSE
|
|||||||||||||||||||||||
|
(Ch$ per Share(1))
|
(US$ per ADS(2)(3))
|
|||||||||||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||||
|
Series
A
|
Series
B
|
Series
A
|
Series
B
|
|||||||||||||||||||||
|
Yearly
|
||||||||||||||||||||||||
|
2004
|
2,390 | 2,150 | 1,450 | 1,240 | 16.83 | 9.40 | ||||||||||||||||||
|
2005
|
1,710 | 1,610 | 1,091 | 1,000 | 11.88 | 8.55 | ||||||||||||||||||
|
2006
|
1,264 | 1,080 | 860 | 779 | 9.70 | 6.40 | ||||||||||||||||||
|
2007
|
1,330 | 1,125 | 925 | 880 | 9.94 | 7.46 | ||||||||||||||||||
|
2008
|
1,105 | 990 | 705 | 630 | 9.21 | 5.24 | ||||||||||||||||||
|
Quarterly
|
||||||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
First
quarter
|
1,260 | 1,100 | 1,055 | 961 | 9.43 | 8.04 | ||||||||||||||||||
|
Second
quarter
|
1,330 | 1,125 | 1,140 | 1,020 | 9.92 | 8.75 | ||||||||||||||||||
|
Third
quarter
|
1,285 | 1,081 | 1,050 | 980 | 9.94 | 8.15 | ||||||||||||||||||
|
Fourth
quarter
|
1,245 | 1,110 | 925 | 880 | 9.90 | 7.46 | ||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
First
quarter
|
990 | 900 | 740 | 785 | 8.75 | 6.00 | ||||||||||||||||||
|
Second
quarter
|
1,000 | 900 | 740 | 660 | 9.21 | 5.68 | ||||||||||||||||||
|
Third
quarter
|
995 | 884 | 705 | 630 | 7.44 | 5.27 | ||||||||||||||||||
|
Fourth
quarter
|
1,105 | 990 | 845 | 880 | 7.75 | 5.24 | ||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
First
quarter
|
1,100 | 990 | 870 | 990 | 7.94 | 5.80 | ||||||||||||||||||
|
Monthly
|
||||||||||||||||||||||||
|
2008
|
||||||||||||||||||||||||
|
November
|
1100 | 990 | 970 | 980 | 7.33 | 5.60 | ||||||||||||||||||
|
December
|
1,105 | 980 | 1,074 | 980 | 7.10 | 6.00 | ||||||||||||||||||
|
Santiago Stock
Exchange
|
NYSE
|
|||||||||||||||||||||||
|
(Ch$ per Share(1))
|
(US$ per ADS(2)(3))
|
|||||||||||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||||
|
Series
A
|
Series
B
|
Series
A
|
Series
B
|
|||||||||||||||||||||
|
2009
|
||||||||||||||||||||||||
|
January
|
1,100 | 990 | 1,003 | 990 | 7.94 | 5.75 | ||||||||||||||||||
|
February(3)
|
980 | 990 | 900 | 990 | 6.80 | 5.80 | ||||||||||||||||||
|
March
|
900 | 990 | 870 | 990 | - | - | ||||||||||||||||||
|
April (through April 15
)
|
890 | 990 | 850 | 990 | - | - | ||||||||||||||||||
|
(1)
|
Chilean pesos are reflected at
historic values.
|
|
(2)
|
One ADS represents four shares of
Series A Common Stock.
|
|
(3)
|
The ADSs were suspended from
listing on the NYSE on February 19, 2009.
|
On Janaury 31, 2009, there were
40,055,257 ADSs (equivalent to 160,221,031 shares of Series A Common Stock)
outstanding, held by
approximately 35 registered holders. On that date, such ADSs represented 16.7%
of the total number of issued and outstanding shares of the Company’s common stock.
Debt Securities
As of December 31, 2008, the Company
does not have debt securities that trade in the
over-the-counter market in the United States.
B. Plan of Distribution
Not applicable.
C. Markets
See “—Offer and Listing Details—Common Stock Prices and Related
Matters”
above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the
Issue
Not applicable.
A. Share Capital
Not applicable.
B. Memorandum and Articles of
Association
Set forth below is certain information
concerning Telefónica
Chile’s capital stock and a brief summary of certain significant
provisions of the Company’s bylaws and Chilean law. This
description does not purport to be complete and is qualified by reference to the
bylaws, which have been attached as an exhibit to this Annual
Report.
Organization and Register
Telefónica Chile is a publicly held stock corporation
(sociedad anónima abierta)
organized under the laws of Chile and was incorporated on November 18, 1930, as recorded on page 426 No. 158 of the
Commercial Record of Santiago of the year 1931, and has a duration through August 10, 2068. The purpose of the Company is to
provide a broad range of telecommunications and related broadcasting services,
as more fully set forth in Article Four of the bylaws.
Shareholders’ Rights
Shareholders’ rights in Chilean companies are governed generally
by a company’s bylaws (which effectively serve the
purpose of both the articles, or certificate, of incorporation and the bylaws of
a corporation in the United
States). Additionally, the
Chilean Corporations Law and Supreme Decree 587 (the “regulations on corporations”) govern the operation of companies and
provide for the upholding of shareholder rights.
The Chilean securities markets are
principally regulated by the Chilean Security and Exchange Commission (the
“SVS”) under the Securities Market Law and
the Corporations Law. These two laws contain disclosure requirements, impose
restrictions on insider trading and price manipulation, and provide for the
protection of minority investors. The Corporations Law clarifies rules and requirements for
establishing “open” corporations while eliminating
authority supervision of “closed” companies. Open corporations are those
which: (i) have 500 or more shareholders, (ii) have 100 or more shareholders who
own as a group together at least 10% of the subscribed
capital (excluding those whose individual holdings exceed such percentage) or
(iii) register in the securities record on a voluntary basis or in compliance
with a legal requirement. Telefónica Chile is an open corporation. The Securities Market Law establishes
requirements for public offerings, stock exchanges and brokers and outlines
disclosure requirements for companies that issue publicly offered
securities.
Under Articles 12 and 54 and Title XV of
the Securities Market Law,
certain information regarding transactions in shares of open corporations must
be reported to the SVS and the Chilean exchanges on which such shares are listed
must be informed. Holders of shares of open corporations are required to report
the following to the SVS and the relevant Chilean
exchange:
|
|
(i)
|
any acquisition or sale of shares
that results in the holder’s acquiring or disposing of 10% or
more of an open corporation’s capital;
and
|
|
|
(ii)
|
any acquisition or sale of shares
or options to buy or sell shares, in any amount, if made by
a holder of 10% or more of an open corporation’s capital or if made by a
director, liquidator, main officer, general manager or manager of such
corporation.
|
Persons or entities intending to acquire
control of an open corporation are also required to inform the
public in advance through a notice published in a Chilean newspaper. The notice
must disclose the price and conditions of any negotiations. Prior to such
publication, a written communication to such effect must be sent to the SVS and the relevant Chilean
exchange.
Under Articles 28, 29, and 67 No. 5 of
the Chilean Corporate Law, a capital reduction requires the approval of
shareholders by a shareholders’ meeting with a minimum quorum of
two-thirds of the outstanding shares with voting rights. In addition,
there must be a publication of the reform extract accepting a capital reduction
and after a 30-day waiting period, the capital reduction will become effective
through either the allotment of capital or the company’s purchase of its own shares. The 30-day
time period provides third parties and minority shareholders the opportunity to
exercise their corresponding rights through revocable shares. In addition, under
Article 69 of the Tax Code, a company cannot realize capital reductions without previous
authorization of the Internal Tax Service.
Capitalization
Under Chilean law, a corporation issues
its stock as soon as the shareholders authorize an increase in such
corporation’s capital. When a shareholder subscribes
for shares, the shares are
registered with such shareholder’s name, and the shareholder is treated
as a shareholder for all purposes, except receipt of dividends, unless otherwise
stipulated in the bylaws of the corporation. The shareholder becomes eligible
to receive dividends once such shareholder
has paid for the shares. If a shareholder does not pay for shares for which such
shareholder has
subscribed on or prior to the date
agreed upon for payment, the corporation is entitled to auction the shares on
the stock exchange, and has a cause of action
against the shareholder for the difference between the subscription price and
the price received at auction. However, until such shares are sold at auction,
the shareholder continues to exercise all his rights (except the right to receive dividends).
Authorized shares that have not been paid for within the maximum period of three
years from the date of issuance determine that the capital of the corporation is
automatically reduced to the amount effectively paid within such period.
The Company’s bylaws authorize two classes of common
stock, Series A Common Stock and Series B Common Stock. The rights of both
series of shares are identical, except that the holders of Series B Common Stock
are entitled as a class only to (i) elect one of seven directors and an
alternate director for that director and (ii) name one of three liquidators of
Telefónica Chile in the event of its
dissolution.
Director
Requirements
The bylaws establish that the Board of
Directors shall consist of seven directors, six to be elected by
the holders of Series A Common Stock and one to be elected by the holders of
Series B Common Stock. One alternate director will be elected for each director
and will replace that director if the director is unable to attend a meeting or serve a full term.
Only the director and alternate director elected by the holders of the Series B
Common Stock are required to be stockholders in the Company.
The Company’s bylaws (Article 18), as well as the
Chilean Corporations Law (Article 38), stipulate that the Board of
Directors can only be fully dissolved by a General or Special
Shareholders’ Meeting (as defined below). The
individual or collective dissolution of the Board of Directors by one or more of
the Board members is not allowed.
The bylaws require that any act or
contract by the Company in which a director or an officer, or a party related to
them, holds an interest must be previously approved by two-thirds of the Board
of Directors, and the terms of the act or contract must be adjusted to similar conditions to
those prevailing in the market.
The Company’s bylaws include a chapter governing the
creation and functions of the Directors Committee, which was created by the
Board of Directors on April 26, 2001. For more information on the Directors Committee, see
“Item 6. Directors, Senior
Management and Employees—Board Practices—Directors
Committee.”
Preemptive Rights and Increases of Share
Capital
The Chilean Corporations Law grants
certain preemptive rights to shareholders of all Chilean companies. Thus, options to
purchase shares from capital increases or convertible securities have to be
offered, at least one time, preferentially to shareholders on a pro rata
basis.
Dividend and Liquidation
Rights
In accordance with Chilean
law, the Company must
distribute mandatory cash dividends of at least 30% of its net income of the
year calculated in accordance with Chilean GAAP, unless otherwise decided by a
unanimous vote of the shareholders. See “Item 8. Financial
Information—Dividend Policy and Dividends.” In addition, dividends can only be paid
from net income or retained earnings.
At the option of the Company, the
portion of any dividend that exceeds the mandatory limits established pursuant
to Chilean law may be paid in cash, in shares of the Company or in shares of open
corporations held by the Company. Shareholders who do not expressly elect to
receive a dividend other than in cash are legally presumed to have decided to
receive the dividend in cash.
Dividends that are declared
but not paid within the
appropriate time period set forth in the bylaws for payment of such dividends
(as to minimum dividends, 30 days after declaration; as to optional dividends,
the date set for payment at the time of declaration) are adjusted to reflect
the change in the value of the UF from
the date set for payment to the date such dividends are actually paid. Such
dividends also accrue interest for adjustable operations during such period. The
right to receive a dividend lapses if it is not claimed within five years after the time the dividend
becomes due. In the event of a liquidation of the Company, the holders of fully
paid shares would participate in a pro rata distribution of assets available
after all creditors have been paid.
Shareholders’ Meetings and Voting Rights
The General Annual
Shareholders’ Meeting of the Company is held during
the first four months of each year. Extraordinary meetings of shareholders may
be called by the Board of Directors when deemed appropriate or when requested by
shareholders representing
at least 10% of the issued voting shares or by the SVS. Notice to convene the
General Annual Shareholders’ Meeting or an Extraordinary
Shareholders’ Meeting is given by means of a notice
published in a newspaper of Telefónica Chile’s corporate domicile (currently, Santiago)
or in the Official Gazette in the prescribed manner by the law and its rule.
Notice must also be mailed to each shareholder and given to the SVS at least 15
days prior to the meeting.
The quorum to constitute a
shareholders’ meeting is established by the presence,
in person or by proxy, of shareholders representing at least the absolute
majority of the issued voting shares of the Company; if a quorum is not present
at the first meeting, the meeting can be reconvened and shareholders present at the reconvened
meeting are deemed to constitute a quorum regardless of the percentage of the
shares represented. The agreements will be adopted by the absolute majority of
the present or represented shares with voting rights. However, if a shareholders’ meeting is called for the purpose of:
(i) transformation, merger or division of the Company, (ii) an amendment to the
term of duration or early dissolution, (iii) a change in corporate domicile,
(iv) a decrease of corporate capital, (v) approval of capital contributions
or assessments of assets other than cash, (vi) modification of the faculties
reserved to shareholders or limitations of attributions on the Board of
Directors, (vii) reduction in the number of Directors comprising the Board, (viii) the sale, transfer or
disposition of 50% or more of the Company’s assets, either including or excluding
their corresponding liability, or the formulation or modification of any
business plan which includes the sale, transfer or disposition of the Company’s asset in such percentage, (ix) the
form of distributing corporate benefits, (x) real or personal guarantees to
caution liabilities of any third party, in an amount exceeding 50% of the
Company’s total assets, (xi) the purchase by the
Company of the Company’s issued stock in accordance with
Articles 27A and 27B of Law 18,046, (xii) corrections of formal defects with
regard to the Company’s incorporation or amendments to the
bylaws relating to any of the matters enumerated above or (xiii) any other matter as required by the bylaws,
the vote required at such meeting is two-thirds of the issued voting Shares as
established in Article 44 of the bylaws of the Company.
Chilean law does not require a publicly
traded company to provide the level and type of information that United States securities laws require a reporting
company to provide to its shareholders in connection with a solicitation of
proxies. Under Chilean law, a notice of a shareholders’ meeting listing matters to be addressed
at the meeting must be mailed not later than 15
days prior to the date of a meeting. In the case of a General Annual
Shareholders’ Meeting, an annual report of the
Company’s activities, which includes audited
financial statements for the Company, must also be mailed to certain shareholders (corresponding
to the higher value between (i) those shareholders owning 90% of the shares, and
(ii) those shareholders representing 35% of total shareholders which have an
investment higher than 120 UF). Additionally, the Company regularly provides, and management
intends to continue to provide, a proposal for the final dividend and a
statement of the proposed dividend policy for interim dividends for the then
current year. See “Item 8.
Financial Information—Dividend Policy and Dividends.”
The Chilean Corporations Law provides
that, whenever shareholders representing 10% or more of the issued voting shares
so request, a summary of the comments and proposals that shareholders requested
in relation to the businesses of the company must be included as an exhibit to the
company’s annual report. The Chilean
Corporations Law also provides that, whenever the board of directors of an open
company convenes a general meeting of shareholders, solicits proxies for the
meeting, and distributes information supporting its decisions or
other similar materials, it must include pertinent comments and proposals
requested by such shareholders.
Only shareholders registered as such
with the Company at least five days prior to the date of a
shareholders’ meeting are entitled to attend and vote
their shares. Shareholders may appoint another individual (who need not be a
shareholder) as their proxy to attend and vote on their behalf. Every
shareholder entitled to attend and vote at a shareholders’ meeting has one vote for each share subscribed. The
Company’s bylaws (Article 46), as well as the
Chilean Corporations Law (Article 68), stipulate that the shares belonging to
shareholders who, during a period of over five years, have not collected
dividend payments that the Company has distributed and have
not attended shareholders’ meetings that were held, are not
considered for quorum purposes or for the voting majorities required at the
shareholders’ meetings. When one of the mentioned
conditions ceases to occur, those shares must again be considered for
the above-mentioned purposes.
Subject to the terms of the Deposit
Agreement among the Company, the Bank of New York, as Depositary, and the owners
and holders of ADRs, dated as of July 19, 1990, as amended and restated in the Amended and Restated Deposit
Agreement among the Company, Citibank, N.A., as Depositary, and the owners and
holders of ADRs, dated as of January 2, 1997, and the Second Amended and
Restated Deposit Agreement, dated as of June 1, 1998, among Telefónica Chile, Citibank, N.A., as
Depositary, and the owners and holders of ADRs, as amended, the holders of ADRs
have the right to instruct the Depositary as to the exercise of voting rights
with respect to the underlying common shares. The Depositary is not permitted to vote any of the
underlying shares as to which it has received no instructions from the holders
of ADRs.
Approval of Financial
Statements
The Board of Directors is required to
submit the Company’s financial statements to the
shareholders annually for
their approval. If the shareholders reject the financial statements, the Board
of Directors must submit new financial statements not later than 60 days from
the date of the meeting. If the shareholders reject the new financial
statements, the entire Board of Directors is deemed
removed from office and a new Board of Directors is elected at the same meeting.
Directors who individually approved such financial statements rejected by the
Company’s shareholders are disqualified for
re-election for the ensuing period.
Right of Dissenting Shareholders to
Tender Their Shares
The Chilean Corporations Law provides
that, at an extraordinary shareholders’ meeting on any of the resolutions
enumerated below, dissenting shareholders acquire the right to
withdraw from a Chilean
company and to compel that company to repurchase their shares, subject to
certain terms and conditions.
Dissenting shareholders are defined as
(i) shareholders who vote against a resolution and thus acquire the right to
withdraw from the company
or (ii) shareholders who are absent from a shareholders’ meeting and who state in writing to the
company their opposition to the resolution adopted at such a meeting. Dissenting
shareholders must manifest their withdrawal rights by tendering their
stock to the company within 30 days of
adoption of the resolution in question.
The price paid to a dissenting
shareholder of an open company for such shares is the weighted average of the
closing sale prices for the company’s shares, as reported on the
relevant stock exchanges,
for the 60-day period preceding the event giving rise to the withdrawal
right.
Under the Chilean Corporations Law, a
dissenting shareholder’s right to withdraw arises upon adoption
of resolutions concerning the following matters:
|
|
(a)
|
transformation of the
company;
|
|
|
(b)
|
merger of the company with another
entity;
|
|
|
(c)
|
disposition of 50% or more of the
corporate assets under the terms described in “Item 10. Additional
Information—Memorandum and Articles of
Association—Shareholders’ Meetings and Voting Rights”;
|
|
|
(d)
|
grant of real or personal
guarantees to secure third-party obligations in an amount exceeding 50% of
the corporate assets;
|
|
|
(e)
|
creation of preferential rights
for a class of shares or modification of those already existing, in
which case the right
to withdraw only accrues to the dissenting shareholder of the class or
classes of shares adversely
affected;
|
|
|
(f)
|
corrections of formal defects with
regard to the company’s incorporation or amendments to
the bylaws relating to any of the matters enumerated above;
or
|
|
|
(g)
|
such other causes as may be
established by the Company’s bylaws and the Chilean
Law.
|
Registrations and
Transfers
The Company’s shares are registered by the Company
acting as its own transfer agent, as is customary among Chilean corporations. In the case of jointly
owned shares, an attorney-in-fact must be appointed to represent the joint
owners in the Company.
C. Material Contracts
There were no material contracts signed
in the year 2008.
D. Exchange Controls and Other
Limitations Affecting
Security Holders
Telefónica Chile has outstanding ADRs and debt
securities. Each of these securities is subject to requirements as to issuance
and other matters established by the Central Bank.
The Central Bank is, among other things,
responsible for monetary
policies and for exchange controls in Chile. Appropriate registration of a foreign
investment in Chile permits the investor to access the
formal currency market. Foreign investments can be registered with the Foreign
Investment Committee under Decree-Law 600 of 1974, as
amended, or with the Central Bank under the Central Bank Act. The Central Bank
Act is an organic constitutional law that required a “special majority” vote of the Chilean Congress to be
modified.
Chapter XIV of Title I of the Compendium of Rules on Foreign
Exchange (the “Compendium”) issued by the Central Bank authorizes
qualifying Chilean issuers to offer convertible debentures or debt securities
both in Chile and abroad. Pursuant to an amendment of the Compendium issued
by the Central Bank on April 19, 2001, any
new international issue of convertible debentures or debt securities must be
carried out through the Formal Exchange Market, and the participants must inform
the Central Bank of the issuance. However, all issuances of debt made prior to the April 19, 2001
amendment of the Compendium, including certain of the debt securities of the
Company, remain subject to the rules and regulations as in effect at the time of
their respective issuances.
The following is a summary
of the relevant portions of
the Central Bank’s regulations regarding issuance of
convertible debentures and debt securities denominated in currencies other than
pesos in the international markets. This summary does not purport to be complete
and is qualified in its entirety by reference to
Resolution No. 254-15-921029, which has been incorporated by reference as an
exhibit to the Company’s Registration Statement on Form F-3
(File No. 333-5184), as filed with the Commission on July 22, 1996 and as
amended on January 7, 1999, and by reference to the
resolutions of the Central Bank authorizing the issuance of the debt securities
which are the subject of the above-referenced Registration
Statement.
Debt securities must have an average
weighted term of not less than four years, weighted on the basis of
principal installments and on the assumption that, if the issuer has the ability
to call the debt securities, they will be deemed to have been called at the
earliest possible date for purposes of this requirement. Convertible debt securities offered
internationally must first be offered to existing shareholders of the issuer in
a preemptive rights offering. Subscribers in such an offering must purchase the
debentures with pesos and receive peso-payable debt securities whereas international investors must
purchase the debt securities in a foreign currency. Persons not residing or
domiciled in Chile may exchange their peso-payable debt
securities for the foreign-currency payable debt securities, subject to
compliance with certain conditions.
The Compendium also requires that the
foreign currency proceeds from the international sale of debt securities either
be brought to Chile and exchanged for Chilean pesos in the Formal Exchange
Market or be held outside of Chile and used for (i) direct payment abroad of
expenses incurred in connection with import operations, contracting services
abroad or the issue of securities abroad, (ii) repayment at maturity of external
indebtedness registered with, and approved by, the Central Bank and (iii) direct investment in
financial instruments abroad. If the foreign currency proceeds are used to
finance investments outside of Chile or to repay obligations of foreign
branches and/or subsidiaries, no access to the Formal Exchange Market is
given.
Until September of 1998, the Compendium
made foreign loans granted to (including international debt offerings issued by)
Chilean individuals or companies subject to a mandatory deposit of an amount
equal to 30% of the proceeds of the loan in a one-year, non-interest bearing U.S. dollar
account with the Central Bank (or to payment of a charge to the Central Bank on
the next business day after the time the foreign currency is converted into
Chilean
pesos in an amount equal to interest on
such deposit at the rate of the twelve-month LIBOR for
U.S. dollar deposits plus 4.0% for one year). On June 26, 1998, the Central Bank
lowered the amount of this mandatory deposit to 10% of loan proceeds, and
further reduced this amount to 0% on September 17, 1998. Although the mandatory deposit was eliminated
from the Compendium on April 19, 2001, it is still within the Central
Bank’s powers, to reinstate such mandatory
deposit requirement.
International investors must purchase
internationally offered debt securities with foreign currency and receive foreign
currency-payable securities.
A foreign investment and exchange
contract was entered into by the Central Bank, the Company and the Bank of New
York, as depositary in 1990 (the “Foreign Investment Contract”) pursuant to Article 47 of the Central Bank Act and to
Chapter XXVI of the Compendium (“Chapter XXVI”). On December 30, 1996, the Foreign
Investment Contract was amended to incorporate the designation of Citibank N.A.
as the successor depositary for Telefónica Chile’s ADR program. Although an amendment made
by the Central Bank on April 19, 2001, repealed Chapter XXVI, it continues to be
enforceable with respect to contracts entered into pursuant to Chapter XXVI,
such as the Foreign Investment Contract. As a result of the termination of the Company’s ADR facility, the Company expects to
cancel the Foreign Investment Contract at an as yet undetermined date in the
future.
The following is a summary of certain
provisions of the Foreign Investment Contract. This summary does not purport to be complete and is
qualified in its entirety by reference to Chapter XXVI and the Foreign
Investment Contract.
Under Chapter XXVI and the Foreign
Investment Contract, the Central Bank grants to the Depositary, on behalf of ADR
holders, and to any
non-Chilean investor who withdraws shares of Series A Common Stock upon delivery
of ADRs (such shares being referred to herein as “Withdrawn Shares”) access to the formal currency market
to convert pesos to dollars (and remit such dollars outside of Chile) with respect to shares of Series A
Common Stock represented by ADSs or Withdrawn Shares, including amounts received
as (a) cash dividends, (b) proceeds from the sale in Chile of Withdrawn Shares
(subject to receipt by the Central Bank of a certificate from the holder of the Withdrawn
Shares (or from an institution authorized by the Central Bank) that such
holder’s residence and domicile are outside of
Chile and a certificate from a Chilean exchange (or from a brokerage or
securities firm established in Chile) that such Withdrawn Shares were
sold on a Chilean exchange), (c) proceeds from the sale in Chile of rights to
subscribe for additional shares of Series A Common Stock, (d) proceeds from the
liquidation, merger or consolidation of the Company and (e) other distributions, including
without limitation, those resulting from any recapitalization, as a result of
holding shares of Series A Common Stock represented by ADSs or Withdrawn Shares.
Transferees of Withdrawn Shares are not entitled to any of the foregoing rights under Chapter XXVI.
Investors receiving Withdrawn Shares in exchange for ADRs have the right to
redeposit such shares in exchange for ADRs, provided that the conditions to
redeposit are satisfied.
Shares of Series A Common Stock acquired
as described above may be
deposited for ADRs and receive the benefits of the Foreign Investment Contract,
subject to receipt by the Central Bank of a certificate from the Depositary
stating that such deposit has been made and that the related ADRs have
been issued along with a declaration from
the person making such deposit waiving the benefits of the Foreign Investment
Contract with respect to the deposited shares.
Access to the Formal Exchange Market
under any of the circumstances described above is not automatic. Pursuant to Chapter XXVI, such
access requires the Central Bank’s approval of a request presented
through a banking institution established in Chile. The Foreign Investment Contract
provides that, if the Central Bank has not acted on such request within a period of seven business days,
the request will be deemed approved.
The Central Bank regulations provide
that a person who brings foreign currency to Chile for the purpose of purchasing shares of
Series A Common Stock must convert such currency into pesos on the same date and has five
banking business days within which to invest in such shares in order to receive
the benefits of the Foreign Investment Contract. If such person decides within
such period not to acquire the shares, such person can access the Formal Exchange Market to
reacquire dollars, provided that the applicable request is presented to the
Central Bank within seven banking business days of the initial conversion into
pesos. Shares of Series A Common Stock acquired as described above may be deposited for ADSs and receive
the benefits of the Foreign Investment Contract, subject to: (i) receipt by the
Central Bank of a certificate from the Depositary stating that such deposit has
been made and
that the related ADRs have been issued
and (ii) receipt by the custodian bank for
the ADRs of a declaration from the person making such deposit waiving the
benefits of the Foreign Investment Contract with respect to the deposited
shares.
Under current Chilean law and judicial
precedents, the Foreign
Investment Contract cannot be changed unilaterally by the Central Bank. While
the authorization to issue the debt securities is a unilateral act of the
Central Bank, other authorizations of the Central Bank have not been
historically rescinded. Although this area was significantly liberalized
as a result of the amendment made by the Central Bank on April 19, 2001,
additional Chilean restrictions applicable to the holders of debt securities or
ADRs, to the disposition of any such security, or the repatriation of the proceeds from such
disposition, may be imposed in the future. There can be no assessment of the
duration or impact of such restrictions, if imposed.
The Central Bank regulations that became
effective on July 4, 1995 (the “New Central Bank Regulations”) required persons bringing foreign
currency into Chile for the purpose of acquiring pesos to purchase securities to
either (1) establish a non-interest bearing deposit with the Central Bank of
Chile for a one-year term in an amount equal to 30% of foreign currency brought into Chile, or
(2) pay a charge to the Central Bank at the time the foreign currency is
converted into pesos in an amount equal to interest on such deposit for one year
at the rate of twelve-month LIBOR plus 4%. The New Central Bank Regulations were amended in October 1996
to make them applicable to persons bringing foreign currency into Chile for the purpose of purchasing
securities from certain issuers thereof as part of a capital increase by the
issuer. However, these rules do not apply to foreign investments made for
purposes of purchasing newly issued shares under Chapter XXVI and an ADR
investment contract. The New Central Bank Regulations apply to subsequent
transactions in which foreign currency is brought into Chile to purchase securities in secondary market
transactions. On September 17, 1998, the Central Bank eliminated this mandatory
deposit requirement. Despite this elimination, the Central Bank may at any time
reinstate its deposit requirements in any amount up to 40%. Although the mandatory deposit was
eliminated from the Compendium on April 19, 2001, its imposition still
constitutes one of the Central Bank’s powers.
The New Central Bank Regulations may
affect the price and volume of trading in securities in Chile, including the price and volume of trading in
the Company’s common stock. The New Central Bank
Regulations may also affect the amount of any differential in prices between
ADSs evidencing securities of Chilean issuers, including the Company’s ADSs, and prices of the underlying securities in Chile, including the common stock. However,
the Company is unable to assess at this time the impact of the New Central Bank
Regulations on the securities markets in Chile, the market for the Company’s common stock in Chile or the market for its ADRs. The Company is
unable to predict whether (and, if so, how or when) the New Central Bank
Regulations will be modified or terminated or what effect any such modifications
or termination will have on the securities markets in Chile, the market for the Company’s common stock or the market for its
ADRs.
E. Taxation
The following discussion contains a
description of the material Chilean and material U.S. federal income tax
consequences of the ownership and disposition of shares of Series A Common Stock or ADSs (evidenced by ADRs)
representing shares of Series A Common Stock by certain holders. This summary is
based upon the tax laws of Chile and the United States as of the date of this annual report, which
are subject to change, possibly with retroactive effect, and to differing
interpretations. You should consult your own tax advisers as to the Chilean,
U.S. federal or other tax consequences of
the ownership and disposition of shares of Series A Common Stock or ADSs,
including, in particular, the effect of any state, local or
non-U.S., or non-Chilean tax laws.
Chilean Tax
Considerations
The following discussion summarizes the
principal Chilean tax consequences of the ownership and disposition of shares of
Series A Common Stock, or any ADSs representing such Series A Common Stock by
an individual holder who is not domiciled or resident in Chile or by a legal
entity not organized under the laws of Chile and with no permanent establishment
in Chile (a “Foreign
Holder”). For purposes of
Chilean taxation, an individual holder is a
resident of Chile if such holder has resided in
Chile for more than six consecutive months in
any one calendar year, or for a total of more than six months in two consecutive
years. A Chilean citizen generally will be treated as a domiciliary and resident of
Chile for Chilean tax purposes unless such
person can demonstrate the contrary.
To date, there is no income tax treaty
in force between Chile and the United States.
Deposit and Withdrawal of Series A
Common Stock in Exchange
for ADSs
The deposit and withdrawal of shares of
Series A Common Stock in exchange for ADSs is not subject to any Chilean taxes.
As to the tax basis of shares of Series A Common Stock received by a Foreign
Holder in exchange for ADSs, the Company has obtained a Ruling (the “Ruling”) from the Chilean tax authorities that
provides that the Chilean tax authorities will abide by the valuation procedure
set forth in the Depositary Agreement, which values shares at the highest price
at which shares of Series A Common Stock were traded on the
Santiago Stock Exchange on the date of the withdrawal of the shares of Series A
Common Stock from the Depositary.
Taxation of
Dividends
Cash dividends paid by the Company with
respect to the shares of Series A Common Stock held by Foreign Holders will be
subject to a Chilean withholding tax at the rate of 35% (the “Withholding Tax”), which is withheld and paid over by
the Company. A credit against the Withholding Tax is available based on the
level of corporate income tax actually paid by the Company on the
income to be distributed (the “First Category Tax”). Full applicability of the First
Category Tax credit at the 17.0% rate results in an effective Withholding Tax
rate of 21.7%. Consequently, the effective Withholding Tax rate with respect to dividends
fluctuates between 21.7% and 35.0%, depending on whether or not the income distributed by the Company was subject to the First Category Tax and
the distribution amount.
The First Category Tax credit, if
available, does not reduce
the Withholding Tax on a one-for-one basis because it also increases the base on
which the Withholding Tax is imposed. In addition, if the Company distributes
less than all of its distributable income, the credit for First Category Tax
paid by the Company is reduced proportionately. The
example below illustrates the effective Chilean Withholding Tax burden on a cash
dividend received by a Foreign Holder, assuming a Withholding Tax rate of 35%,
an effective First Category Tax at the maximum rate of 17.0%, and a distribution of 100% of the
Company’s net income that is distributable after
payment of the First Category Tax.
|
Example:
|
Ch$
|
|||
|
Company taxable
income
|
100 | |||
|
First Category Tax (17% of
Ch$100)
|
(17 | ) | ||
|
Net distributable
income
|
83 | |||
|
Dividend distributed by the
Company
|
83 | |||
|
Withholding
Tax
|
||||
|
(35% of the Company’s taxable
income)
|
(35 | ) | ||
|
Credit for First Category
Tax
|
17 | |||
|
Net Withholding
Tax
|
(18 | ) | ||
|
Net dividend
received
|
65 | (83-18) | ||
|
Effective dividend withholding tax
rate
|
21.7 | % (18/83) | ||
The foregoing tax consequences apply to cash
dividends paid by the Company to the Depositary as representative of the holders
of ADSs. The Ruling provides that disbursements of such cash dividends by the
Depositary to the holders of ADSs will not be subject to additional Chilean taxation. Dividend distributions
made in property (other than shares of Series A Common Stock) will be subject to
the same Chilean tax rules as cash dividends based on the fair market value of
such property. Stock dividends are not subject to Chilean
taxation.
A capital reduction, such as the one
that was approved by the Company’s shareholders at the April 14, 2008
shareholders’ meeting, is generally tax-free to
holders of Series A Common Stock or ADSs except in certain circumstances, such
as the existence of: (i)
pending taxable net income from prior periods, (ii) pending net income (retained
earnings), and (iii) capitalized share premiums generated by above market price
capital increases on which the Company elected to not pay taxes at
the time of issuance. The effective tax
rate applicable to the capital reduction paid in 2008 was 21.7%, due to the fact
that condition (i), pending taxable net income from prior periods, was met. The
average First Category Tax credit rate applicable to the capital reduction was 17% of the amount
paid.
Taxation of Capital Gain on the
Sale of Shares of Series A Common Stock and
ADSs
|
|
(1)
|
The Ruling provides that gains
from sales or other dispositions of ADSs are not subject to any Chilean
taxes, provided that such sales occur outside of
Chile.
|
|
|
(2)
|
Taxation of shares acquired on or
before April 19, 2001:
|
A gain recognized on a sale or exchange
of shares (as distinguished from sales or exchanges of ADSs representing such
shares) acquired on or before April 19, 2001 will be subject to both a 17% Chilean
income tax and the 35% Chilean withholding tax (the former being creditable
against the latter) if either the foreign holder:
|
|
Has held the shares for less than
one year since exchanging ADSs for the shares;
or
|
|
|
Acquired and disposed of the shares in
the ordinary course of its business or as an habitual trader of
shares.
|
In all other cases, gain on the disposal
of shares acquired on or before April 19, 2001 will be subject to a 17% Chilean
income tax but will not be subject to the 35% Chilean withholding
tax.
This rule also applies for the disposal
of shares not qualifying for the exemption in (3), below.
|
|
(3)
|
Taxation on shares acquired after
April 19, 2001:
|
On November 7, 2001, the income tax law
was amended in order to create a tax exemption on capital gains
arising from the sale of shares of listed companies traded in the stock markets.
Although there are certain restrictions established in the amended income tax
law, in general terms, the amendment provides that in order to have access to the capital gain
exemption: (i) the shares must be of a public stock corporation with a certain
minimum level of trading in a stock exchange, (ii) the sale must be carried out
in a Chilean stock exchange, or in another stock exchange authorized by the SVS, or in a tender
offer subject to Chapter XXV of the Chilean Securities Market Law, (iii) the
shares which are being sold must have been acquired on a stock exchange, or in a
tender offer subject to Chapter XXV of the Chilean Securities Market Law, or in an initial public
offering (due to the creation of a company or to a capital increase), or due to
the exchange of convertible bonds, and (iv) the shares must have been acquired
after April 19, 2001.
The tax basis of shares received in
exchange for ADSs will be
the acquisition value of the shares. The valuation procedure set forth in the
deposit agreement, which values shares at the highest price at which they trade
on the Santiago Stock Exchange on the day of the exchange, will
determine the acquisition value for this purpose.
Consequently, the conversion of ADSs into shares and the immediate sale of the
shares for the value established under the deposit agreement will not generate a
capital gain subject to taxation in Chile.
The distribution and exercise of preemptive rights
relating to shares of Series A Common Stock will not be subject to Chilean
taxes. However, amounts received in exchange for the sale of preemptive rights
will be subject to Chilean income taxes at an effective rate of 35%.
For
Chilean tax purposes, you will be treated as having sold ADSs and purchased
shares of Series A Common Stock at the expiration of the 60-day period
commencing on the Termination Date. If you have not exchanged your
ADSs for the underlying shares of Series A Common Stock by that date, you will
be treated as having sold the shares when the Depositary sells them on your
behalf after the expiration of the 60-day period. See “Item 3. Key
Information—Risk Factors—Risks Relating to
the Company’s ADSs—The termination of
the deposit agreement relating to the Company’s ADSs may impair ADS
holders’ ability to transfer their ADSs, delay
ADS holders’ receipt of any dividends and result in
the cancellation of the ADSs and the subsequent sale of the
securities underlying the ADSs.”
Other Chilean Taxes
Although there is no direct authority on
this point, as a practical matter there are no Chilean inheritance, gift
or succession taxes applicable to the ownership, transfer or disposition of ADSs
by a Foreign Holder, but such taxes generally will apply to the transfer at
death or by gift of the shares of Series A Common Stock by a Foreign Holder.
There are no Chilean stamp, issue, registration or similar taxes or duties
payable by holders of debt securities and holders of shares of Series A Common Stock or
ADSs.
Withholding Tax
Certificates
Upon request, the Company will provide
to Foreign Holders appropriate documentation evidencing the payment of the
Chilean Withholding Tax (net of the applicable First Category Tax). For further
information, the investor
should contact the Depositary before the termination of the
Deposit
Agreement, which is
expected to occur on or about May 7, 2009, at:
Citigroup
Depositary Receipt
Services
388 Greenwich Street, 14th floor
New York, New York 10013, USA
Material U.S. Federal Income Tax
Considerations
The following are the material
U.S. federal income tax consequences to U.S.
Holders described herein of owning and disposing of shares of Series A Common
Stock or ADSs, but it does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a particular person’s decision to hold such
securities. The discussion applies only if you hold shares of Series
A Common Stock or ADSs as capital assets for U.S. federal tax purposes and it does not describe all of
the tax consequences that may be relevant to holders subject to special rules,
such as:
|
|
certain
financial institutions;
|
|
|
insurance
companies;
|
|
|
dealers
and traders in securities;
|
|
|
persons
holding shares of Series A Common Stock or ADSs as part of a hedge,
“straddle,” integrated transaction or similar
transaction;
|
|
|
persons
whose functional currency for U.S. federal income tax purposes is not the
U.S. dollar;
|
|
|
partnerships
or other entities classified as partnerships for U.S. federal income tax
purposes;
|
|
|
persons
liable for the alternative minimum
tax;
|
|
|
tax-exempt
organizations;
|
persons
holding shares of Series A Common Stock or ADSs that own or are deemed to own
ten percent or more of the Company’s voting stock;
persons
who acquired the Company’s ADSs or shares of Series A Common Stock pursuant to
the exercise of any employee stock option or otherwise as compensation;
or
persons
holding shares in connection with a trade or business conducted outside of the
United States.
If an entity that is classified as a
partnership for U.S. federal income tax purposes holds
shares of Series A Common Stock or ADSs, the U.S. federal income tax treatment of a
partner will generally depend on the status of the partner and upon the
activities of the partnership. Partnerships
holding shares of Series A Common Stock or ADSs and partners in such
partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of
holding and disposing of the shares of Series A Common Stock or ADSs.
This discussion is based on the Internal
Revenue Code of 1986, as amended (the “Code”), administrative pronouncements,
judicial decisions and final, temporary and proposed Treasury regulations, all
as of the date hereof. These authorities are subject to change, possibly
with retroactive effect. This discussion is also based in part on
representations by the Depositary and assumes that each obligation under the
Deposit
Agreement and any related
agreement will be performed in accordance with its terms.
You are a “U.S. Holder” if for U.S. federal tax purposes you are a beneficial owner of the
Company’s shares of Series A Common Stock or ADSs and if you
are:
|
|
a
citizen or individual resident of the United
States;
|
a
corporation, or other entity taxable as a corporation, created or organized in
or under the laws of the United States or any political subdivision thereof;
or
|
|
an
estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source.
|
The summary of material U.S. federal income tax consequences set out
below is intended for general informational purposes only. You should
consult your tax adviser with respect to the particular tax consequences to you
of owning or disposing of shares of Series A Common Stock or ADSs, including the
applicability and effect of state, local, non-U.S. and other tax laws and the
possibility of changes in tax laws.
In general, if you own ADSs, you will be
treated as the owner of the shares of the Series A Common Stock
represented by those ADSs
for U.S. federal income tax
purposes. Accordingly, no gain or loss will be recognized if you
exchange ADSs for the underlying shares represented by those ADSs, including in connection with the
termination of the Deposit Agreement, see “Item 3. Key
Information—Risk
Factors—Risks
Relating to the Company’s ADSs—The termination of
the deposit agreement relating to the Company’s ADSs may impair ADS
holders’ ability to transfer their ADSs, delay ADS
holders’ receipt of any dividends and result in
the cancellation of the ADSs and the subsequent sale of the securities
underlying the ADSs.”
The U.S. Treasury has expressed concerns
that parties to whom American depositary shares are pre-released or
intermediaries in the chain
of ownership between U.S. Holders and the issuer of the security underlying the
American depositary shares
may be taking actions that
are inconsistent with the claiming of foreign tax credits for U.S. Holders of
American depositary
shares. Such actions would also be inconsistent
with the claiming of the reduced rate of tax, described below, applicable to
dividends received by certain non-corporate holders. Accordingly, the
analysis of the creditability of Chilean taxes, and the availability
of the reduced tax rate for dividends
received by certain non-corporate holders, each described below, could be
affected by actions taken by such parties or intermediaries.
Please consult your tax adviser concerning the U.S. federal, state, local and
foreign tax consequences of
purchasing, owning and disposing of shares of Series A Common Stock or ADSs in
your particular circumstances.
This discussion assumes that the Company
is not, and will not become a passive foreign investment company, as described
below.
Taxation of
Distributions
Distributions paid on ADSs or shares of
Series A Common Stock will be treated as dividends to the extent paid out of
current or accumulated earnings and profits (as determined under U.S. federal income tax
principles). Distributions in excess of current and
accumulated earnings and profits will be treated first as a tax-free return of
capital to the extent of the U.S. Holder’s basis in the shares and then as
capital gain.
Subject to applicable limitations and
the discussion above
regarding concerns expressed by the U.S. Treasury, dividends paid by qualified
foreign corporations to certain non-corporate U.S. Holders in taxable years
beginning before January 1, 2011, may be taxable at a maximum rate of
15%. A foreign corporation is treated as a qualified foreign
corporation with respect to dividends paid on stock that is readily tradable on
a securities market in the United States, such as the New York Stock Exchange
where the Company’s ADSs were traded in 2008. The Company’s ADSs
ceased to be traded on the New York Stock Exchange in February
2009. You should consult your tax
adviser to determine
whether the favorable rate
applied to dividends you received and whether you are subject to any
special rules that limit your ability to be taxed at this favorable
rate.
The amount of a dividend will include
any amounts withheld by us in respect of Chilean taxes on the
distribution. The amount of the dividend will be treated as
foreign-source dividend income to you and will not be eligible for the dividends-received deduction
generally allowed to U.S. corporations under the
Code. Dividends will be included in your income on the date of your,
or in the case of ADSs, the Depositary’s, receipt of the
dividend. The amount of any dividend income paid in Chilean pesos will be a U.S.
dollar amount calculated by reference to the exchange rate for converting
Chilean pesos into U.S. dollars in effect on the date of such receipt regardless
of whether the payment is in fact converted into U.S. dollars. If the dividend is
converted into U.S. dollars on the date of receipt, you generally should not be
required to recognize foreign currency gain or loss in respect of the dividend
income. You may have foreign
currency gain or loss if the amount of such dividend is not converted into U.S.
dollars on the date of such receipt.
Subject to applicable limitations that
may vary depending upon your circumstances and subject to the discussion above
regarding concerns expressed by the U.S. Treasury, Chilean income taxes (after reduction for the credit
for First Category Tax) withheld from dividends on shares of Series A Common
Stock or ADSs will be creditable against your U.S. federal income tax
liability. The rules governing foreign tax credits are complex and,
therefore, you should consult your tax
adviser regarding the availability of foreign tax credits in your particular
circumstances. Instead of claiming a credit, you may, at your
election, deduct such Chilean taxes in computing your taxable income,
subject to generally applicable limitations
under U.S. law. An election to deduct
foreign taxes instead of claiming foreign tax credits must apply to all taxes
paid or accrued in the taxable year to foreign countries and possessions of the
United States.
Sale or Other Disposition of Shares of Series A
Common Stock or ADSs
For U.S. federal income tax purposes, gain or
loss you realize on the sale or other disposition of shares of Series A Common
Stock or ADSs, including sales of shares by the Depositary at the
expiration of the 60-day period commencing on the Termination Date on behalf of
ADS holders who do not exchange their ADSs for the underlying Series A common
stock of the Company prior to the expiration of such period, will be capital gain or loss, and will be long-term
capital gain or loss if you held the shares of Series A Common Stock or ADSs for
more than one year. The amount of your gain or loss will equal the
difference between your tax basis in the shares of Series A Common Stock or ADSs disposed of and the amount
realized on the disposition, in each case as determined in U.S.
dollars. If a Chilean tax is withheld on the sale or disposition of
shares of Series A Common Stock or ADSs, your amount realized will include the
gross amount of the proceeds of such sale or
disposition before deduction of the Chilean tax. See “—Chilean Tax Considerations–Taxation of Capital Gain on the
Sale of Shares of Series A Common Stock and
ADSs” for a description of
when a disposition may be subject to taxation by Chile. Such gain or loss will
generally be U.S.-source gain or loss for foreign tax credit purposes.
U.S. Holders should consult
their tax adviser as to whether the Chilean tax on gains may be creditable
against the holder’s U.S. federal income tax on foreign-source income
from other sources
Passive Foreign Investment Company
Rules
The Company believes that it was not a
“passive foreign investment
company” (“PFIC”) for U.S. federal income tax purposes for its 2008 taxable
year. However,
because PFIC status depends upon the composition of a company’s income and assets (including, among
others, less than 25%-owned equity investments) from time to time, there can be
no assurance that the Company will not be considered a PFIC for any
taxable year. If the Company were a
PFIC for any taxable year during which a U.S. Holder held shares of Series A
Common Stock or ADSs, gain recognized by such U.S. Holder on a sale or other
disposition (including certain pledges) of the shares of Series A
Common Stock or ADSs would be allocated
ratably over the U.S. Holder’s holding period for the shares of
Series A Common Stock or
ADSs. The amount
allocated to the taxable year of the sale or other disposition and to any year
before the Company became a PFIC would be taxed as ordinary
income. The amount allocated to each other taxable year would be
subject to tax at the highest rate in effect for individuals or corporations, as
appropriate, for such taxable year, and an interest charge would be imposed on
the amount allocated to such taxable
year. Further, similar rules would apply to any distribution in
respect of shares of Series A Common Stock or ADSs in excess of 125% of the
average of the annual distributions on shares of Series A Common Stock or ADSs
received by a U.S. Holder during the
preceding three years or such holder’s holding period, whichever is
shorter. Certain elections may be available that would result in
alternative treatments (such as a mark-to-market treatment) of the shares of
Series A Common Stock or ADSs. U.S.
Holders should consult their tax advisers to determine whether such elections
are available and, if so, what the consequences of the alternative treatments
would be in their particular
circumstances.
Information Reporting and
Backup
Withholding
Payments of dividends and sales proceeds
that are made within the United States or through certain U.S.-related financial
intermediaries generally are subject to information reporting and may be subject to backup withholding unless (i) you
are a corporation or other
exempt recipient or (ii) in the case of backup withholding, you provide a
correct taxpayer identification number and certify that you are not subject to
backup withholding.
The amount of any backup withholding
from a payment to you will
be allowed as a credit against your U.S. federal income tax liability and may
entitle you to a refund, provided that the required information is timely
furnished to the Internal Revenue Service.
U.S. Holders of the Company’s shares of Series A Common Stock or ADSs should consult their tax
adviser as to the Chilean, U.S. federal, state, local and other tax consequences
of the ownership and disposition of the Company’s shares of Series A Common Stock or ADSs based upon their particular
circumstances.
F. Dividends and Paying
Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Telefónica Chile will provide without charge to each
person to whom this Annual Report is delivered, upon written, e-mail or oral
request from any such
person, a copy of any or all of the documents referenced in this Annual Report.
Written requests for such copies should be directed to either of the following
contacts:
Compañía de Telecomunicaciones de Chile
S.A.
Avenida Providencia 111, 22nd
floor
Santiago, Chile
Attention: Isabel M.
Bravo
Finance Director
E-mail and oral requests for copies of
such documents may be made to Telefónica Chile at imbravo@telefonicachile.cl or at 56-2-691-2905.
I. Subsidiary
Information
Not applicable.
Overview
The following discussion about the
Company’s risk management activities includes
forward-looking statements that involve risk and uncertainties. Actual results
could differ materially from those projected in such forward-looking
statements.
The Company faces market risk exposure
in two categories: interest rate fluctuations and exchange rate
fluctuations.
The primary interest rate risk that the
Company faces is the effect on its fluctuating rate loans of a rise in the LIBOR rate. The
Company had outstanding as of December 31, 2008 long-term fluctuating rate-based
loans in the amount of Ch$395,114 million (US$620.8 million), including current
maturities and accrued interest. As of December 31, 2007, long-term fluctuating rate-based loans
in the amount of Ch$319,371 million (US$501.8 million), including current
maturities and accrued interest, were outstanding.
The primary exchange rate risk that the
Company faces is the depreciation of the peso against the U.S. dollar, due to the fact that
a substantial portion of the Company’s long-term liabilities are
dollar-denominated while the Company’s revenues are largely denominated in
Chilean pesos. The Company had, as of December 31, 2008,
Ch$318,471 million (US$500.4 million) in
dollar-denominated, interest-bearing, long-term liabilities (including current
maturities and accrued interest) compared to Ch$249,223 million (US$391.6
million) in dollar-denominated, interest-bearing, long-term liabilities,
including current maturities and accrued
interest as of December 31, 2007.
The Company periodically reviews its
exposure to risks arising from fluctuations in foreign exchange rates and
interest rates, and determines at its senior management level how to hedge such risks. Subject to this review
process, the Company manages foreign currency and interest rate risks through
hedging transactions in the Chilean and foreign derivative markets and through
other mechanisms, such as the purchasing in the Chilean capital markets of dollar-denominated marketable
securities with floating LIBOR-based interest rates. The Company has entered
into interest rate swaps, forward rate agreements, cross-currency swaps,
interest rate collars and foreign currency forward contracts with respect to a portion of its borrowings.
The Company uses such derivative instruments to reduce risk by offsetting market
exposure. The derivative instruments held by the Company are not leveraged and
are not held for trading.
In the normal course of
business, the Company also
faces risks that are either non-financial or non-quantifiable. Such risks
principally include political risk, credit risk and legal risk, and are not
represented in the tables below. See “Item 3. Key Information—Risk Factors.”
Risk of Variations in Floating Interest
Rates
Of the Company’s long-term interest-bearing debt
denominated in foreign currencies, as of December 31, 2008, 100% was
floating-rate debt, having remained the same as of December 31, 2007.
In 2008 and 2007, all of
the Company’s foreign currency long-term
floating-rate debt was tied to LIBOR. In addition, part of the
Company’s Chilean peso-denominated debt is
variable-rate UF-denominated. In 2008, of the total Chilean
peso-denominated debt, 50.6% was floating-rate debt and 49.4% was fixed-rate
debt.
As of December 31, 2008, 62.4% of the
Company’s long-term interest-bearing debt,
including current portion and foreign currency- and Chilean peso-denominated debt, was
exposed to interest rate
fluctuations. Of the
remaining 37.6% of the
Company’s interest-bearing debt that was insulated from interest rate
fluctuations, 21.7% was
hedged through the instruments set forth in the following
table and 15.9% was
fixed-rate debt. As of December 31, 2008, the Company had outstanding
cross-currency swaps for a
liability of Ch$101,833 million (US$160.0 million), which serve to hedge against
dollar-peso exchange rate fluctuations and, at the same time, effectively change
its floating rate to a fixed rate.
As of December 31, 2007, 34.8% of
the Company’s long-term interest-bearing debt,
including current portion and foreign currency- and Chilean peso-denominated debt, was
exposed to interest rate
fluctuations. Of the
remaining 65.2% of the Company’s interest-bearing debt that was insulated from interest rate fluctuations, 31.9% was hedged through the
instruments set forth in
the following table and
17.9% was fixed-rate debt. As of December 31, 2007, the Company had outstanding
cross-currency swaps for a liability of Ch$183,850 million (US$288.9
million), which serve to
hedge against dollar-peso exchange rate fluctuations and, at the same time,
effectively change its floating rate to a fixed rate.
The Company’s higher exposure to floating interest rates is part of a strategy employed by the Company to focus on long-term efficiency in financial expenses.
The objective of this strategy is to reduce the impact of inflation on
the financial results and cash flow of the
Company by hedging
interest-bearing debt against inflation risk (nominalization until maturity). This strategy aims to fix interest rates when market
interest rates are low and to allow floating rates when interest rates are
high.
The following table summarizes the
long-term interest-bearing debt obligations (including current
maturities and accrued
interest) and derivative instruments held by the Company as of December 31, 2008
and 2007. The Company enters into interest rate swaps, cross-currency swaps
and/or zero-cost collar contracts or any other hedging instrument to achieve
synthetically the appropriate level of variable
and fixed-rate debt approved by senior management. For debt, the tables present
principal payment obligations by maturity date and the related average interest
rate. For collars, the tables present the notional amounts and cap and floor rates by contractual
dates. Average interest rates for liabilities are calculated based on the
prevailing interest rate as of December 31 of each year, for each loan.
Dollar-denominated liabilities have been converted into Chilean pesos based on the Observed Exchange Rate as
of December 31, 2008, which was Ch$636.45 per US$1.00.
|
As
of December 31, 2008
|
||||||||||||||||||||||||||||||||||||||||||||
|
Expected
Maturity Date
|
Fair
Value (2)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Average
interest rate (1)
|
2009
|
2010
|
2011
|
2012
|
2013
|
There-after
|
Total
Long Term Debt (incl. 2009 maturities)
|
Underlying
Debt
|
Associated
Derivatives
|
Total
|
||||||||||||||||||||||||||||||||||
|
Liabilities
|
(Ch$
Equivalent in millions)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Long-Term
Interest Bearing
|
||||||||||||||||||||||||||||||||||||||||||||
|
Debt:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Ch$-denominated)
|
4.10 | % | 1,701 | 1,535 | 1,538 | 64,689 | 1,547 | 3,879 | 74,889 | 74,879 | -3,662 | 71,217 | ||||||||||||||||||||||||||||||||
|
(US$-denominated)
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
|
Variable
Rate
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Ch$-denominated)
|
2.61 | % | 392 | 76,251 | - | - | - | - | 76,643 | 76,643 | -4,465 | 72,178 | ||||||||||||||||||||||||||||||||
|
(US$-denominated)
(3)
|
2.67 | % | 127,965 | - | 95,429 | - | 95,077 | - | 318,471 | 318,471 | -25,478 | 292,993 | ||||||||||||||||||||||||||||||||
|
(EURO-denominated)
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
|
Interest
Rate Derivatives
|
(Ch$
Equivalent in millions)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cross-Currency
Swaps
|
||||||||||||||||||||||||||||||||||||||||||||
|
Notional
Amount of Variable to Fixed
|
31,823 | 70,010 | - | - | ||||||||||||||||||||||||||||||||||||||||
|
(US$-denominated)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Average
pay Rate
|
1.93 | % | 3.57 | % | - | |||||||||||||||||||||||||||||||||||||||
|
Average
receive Rate
|
3.45 | % | 4.24 | % | - | |||||||||||||||||||||||||||||||||||||||
|
Notional
Amount of Variable to Variable
|
130,561 | 76,264 | 25,458 | 95,468 | ||||||||||||||||||||||||||||||||||||||||
|
(US$-denominated)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Average
pay Rate
|
2.30 | % | 3.18 | % | 3.53 | % | 2.89 | % | ||||||||||||||||||||||||||||||||||||
|
Average
receive Rate
|
9.25 | % | 9.51 | % | 9.68 | % | 8.59 | % | ||||||||||||||||||||||||||||||||||||
|
Notional
Amount of Fixed to Variable
|
12,779 | 64,358 | ||||||||||||||||||||||||||||||||||||||||||
|
(US$-denominated)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Average
pay Rate
|
3.79 | % | 1.86 | % | ||||||||||||||||||||||||||||||||||||||||
|
Average
receive Rate
|
9.56 | % | 9.55 | % | ||||||||||||||||||||||||||||||||||||||||
|
(1)
|
“Average interest rate” means, for variable rate debt,
the average prevailing interest rate as of December 31, 2008 on
Telefónica
Chile’s variable rate debt and, for
fixed rate debt, the
average prevailing interest rate as of December 31, 2008 on
Telefónica
Chile’s fixed rate
debt.
|
|
(2)
|
These figures were calculated
based on the discounted value of future cash flows expected to be received
or paid, considering current discount rates that reflect the different
risks involved.
|
|
(3)
|
These figures were calculated
based on the Observed Exchange Rate as of December 31, 2008, which was
Ch$636.45 per US$1.00.
|
|
As
of December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||||||
|
Expected
Maturity Date
|
Fair
Value (2)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Average
interest rate (1)
|
2008
|
2009
|
2010
|
2011
|
2012
|
There-after
|
Total
Long Term Debt (incl. 2008 maturities)
|
Underlying
Debt
|
Associated
Derivatives
|
Total
|
||||||||||||||||||||||||||||||||||
|
Liabilities
|
(Ch$
Equivalent in millions)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Long-Term
Interest Bearing
|
||||||||||||||||||||||||||||||||||||||||||||
|
Debt:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Ch$-denominated)
|
4.14 | % | 1,591 | 1,404 | 1,404 | 1,404 | 58,761 | 4,949 | 69,513 | 69,501 | -74 | 69,575 | ||||||||||||||||||||||||||||||||
|
(US$-denominated)
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
|
Variable
Rate
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Ch$-denominated)
|
3.18 | % | 480 | - | 69,669 | - | - | - | 70,149 | 70,149 | - | 70,149 | ||||||||||||||||||||||||||||||||
|
(US$-denominated) (3)
|
5.23 | % | 75,845 | 99,074 | - | 74,304 | - | - | 249,223 | 249,223 | -68,634 | 317,857 | ||||||||||||||||||||||||||||||||
|
(EURO-denominated)
|
- | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
|
Interest
Rate Derivatives
|
(Ch$
Equivalent in millions)
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cross-Currency
Swaps
|
||||||||||||||||||||||||||||||||||||||||||||
|
Notional
Amount of Variable to Fixed
|
74,534 | 49,689 | - | 59,627 | - | - | ||||||||||||||||||||||||||||||||||||||
|
(US$-denominated)
(3)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Average
pay Rate
|
2.49 | % | 3.46 | % | - | 4.21 | % | - | ||||||||||||||||||||||||||||||||||||
|
Average
receive Rate
|
5.25 | % | 5.31 | % | - | 5.25 | % | - | ||||||||||||||||||||||||||||||||||||
|
Notional
Amount of Variable to Variable
|
49,689 | 14,907 | ||||||||||||||||||||||||||||||||||||||||||
|
(US$-denominated)
|
||||||||||||||||||||||||||||||||||||||||||||
|
Average
pay Rate
|
6.95 | % | 7.28 | % | ||||||||||||||||||||||||||||||||||||||||
|
Average
receive Rate
|
5.26 | % | 5.23 | % | ||||||||||||||||||||||||||||||||||||||||
|
(1)
|
“Average interest rate” means, for variable rate
debt, the average
prevailing interest rate as of December 31, 2007 on Telefónica Chile’s variable rate debt and, for
fixed rate debt, the average prevailing interest rate as of December 31,
2007 on Telefónica
Chile’s fixed rate
debt.
|
|
(2)
|
These figures were calculated based on the discounted
value of future cash flows expected to be received or paid, considering
current discount rates that reflect the different risks
involved.
|
|
(3)
|
These figures were calculated
based on the Observed Exchange Rate as of December 31, 2007, which was
Ch$496.89 per US$1.00.
|
Risk of Variations in Foreign Currency Exchange
Rates
As of December 31, 2008, 67.8% of the
Company’s interest-bearing debt (including
current portion) was U.S. dollar-denominated and fully hedged against exchange
rate variations between the peso-UF and the U.S. dollar through the instruments set forth
in the tables below. The remaining 32.2% of the Company’s interest-bearing debt was UF- or
Chilean peso-denominated and, therefore, not subject to exchange rate risk. As
of December 31, 2007, 64.1% of the Company’s interest-bearing debt (including current
portion) was dollar-denominated and fully hedged against exchange rate
variations between the peso-UF and the U.S. dollar through the instruments set
forth in the tables below. The remaining 35.9% of the Company’s interest-bearing debt was UF- or Chilean
peso-denominated and therefore not subject to exchange rate
risk.
Telefónica Chile enters into forward contracts pursuant
to which it agrees to purchase U.S. dollars for UF at an agreed exchange rate on
a particular date. The
maturities of the forward contracts match certain of Telefónica Chile’s foreign exchange-denominated
liabilities in order to hedge those liabilities. The purpose of the
Company’s foreign-currency hedging activities is
to protect the Company from the risk of devaluation of the Chilean
peso against the U.S. dollar. Telefónica Chile’s risk is the replacement cost, at
current market value, of the transactions in the event of default by
counterparties. Management believes that the risk of incurring such losses is remote and that any losses
would be immaterial, although no assurance can be given to this
effect.
As of December 31, 2008, the Company had
the equivalent of Ch$318,471 million (US$500.4 million) in U.S.
dollar-denominated, interest-bearing, long-term debt (including current portion)
outstanding. Telefónica
Chile’s debt denominated in foreign currencies
was in U.S. dollars. To reduce the impact of any depreciation of the Chilean
peso against the U.S. dollar, as of December 31, 2008, the Company had entered into, on a short-term basis,
exchange
rate forward contracts for U.S. dollars
in exchange for Chilean pesos or UF in the amount of Ch$2,759 million (US$4.3
million), and had entered into a cross-currency interest rate swap for the
purchase of U.S. dollars in the equivalent amount of
Ch$473,168 million (US$743.5 million).
As of December 31, 2007, the Company had
the equivalent of Ch$249,102 million (US$391.4 million) in U.S.
dollar-denominated, interest-bearing, long-term debt (including current
portion) outstanding.
Telefónica Chile’s debt denominated in foreign currencies
is in U.S. dollars. To reduce the impact of any depreciation of the Chilean peso
against the U.S. dollar, as of December 31, 2007, the Company had entered into,
on a short-term basis, exchange rate forward contracts
for U.S. dollars in exchange for Chilean pesos or UF in the amount of Ch$6,731
million (US$10.6 million), and had entered into a cross-currency interest rate
swap for the purchase of U.S. dollars in the equivalent amount of Ch$316,602 million (US$497.4
million).
The tables below provide information
about the Company’s borrowings and derivative financial
instruments that are sensitive to foreign currency exchange rates. For the U.S.
dollar-denominated debt, the tables present principal cash flows by maturity
date. For the forward contracts, the tables present the amount of foreign
currency that Telefónica
Chile has contracted to purchase and the average UF-US$ exchange rates by
contractual dates.
|
As
of December 31, 2008
Expected
Maturity Date
|
||||||||||||||||||||||||||||||||||||
|
Average
interest rate(1)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
Long Term Debt (incl. 2009 maturities)
|
Fair
Value
|
||||||||||||||||||||||||||||
|
(Ch$
Equivalent in millions)
|
||||||||||||||||||||||||||||||||||||
|
On-Balance
Sheet Financial Instruments
|
||||||||||||||||||||||||||||||||||||
|
Liabilities
Long-Term Interest Bearing Debt:
|
||||||||||||||||||||||||||||||||||||
|
Fixed
Rate (US$)
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Variable
Rate (US$)
|
2.67 | % | 127,965 | - | 95,429 | - | 95,077 | - | 318,471 | 318,471 | ||||||||||||||||||||||||||
|
Expected
transaction date
|
||||||||||||||||||||||||||||||||||||
|
Anticipated
Transactions and Related Derivatives
|
||||||||||||||||||||||||||||||||||||
|
Forward
Exchange Agreements
|
||||||||||||||||||||||||||||||||||||
|
(Receive
US$/Pay Ch$): Liability
|
2,759 | - | - | - | - | - | 2,759 | 2,759 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (Ch$/US$)
|
0.9747 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
|
(Receive
Real/Pay US$): Liability
|
67 | - | - | - | - | - | 67 | 67 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (US$/Real)
|
1.7697 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
|
Cross-Currency
Swaps(2)
|
||||||||||||||||||||||||||||||||||||
|
(Receive
US$/Pay UF): Liability
|
34,838 | - | 71,748 | - | - | - | 106,586 | 106,586 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (UF/US$)
|
0.0325 | - | 0.0304 | - | - | - | - | - | ||||||||||||||||||||||||||||
|
(Receive
US$/Pay Ch$): Liability
|
95,984 | - | 23,789 | - | 69,381 | - | 189,154 | 189,154 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (Ch$/US$)
|
1.0054 | - | 0.9344 | - | 0.7268 | - | - | - | ||||||||||||||||||||||||||||
|
(Receive
UF/Pay US$): Liability
|
32,862 | 71,799 | 12,038 | 60,729 | - | - | 177,428 | 177,428 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (US$/UF)
|
0.9364 | 0.9414 | 0.9420 | 0.9436 | - | - | - | - | ||||||||||||||||||||||||||||
|
(1)
|
“Average interest rate” means, for variable rate debt,
the average prevailing interest rate as of December 31, 2008 on
Telefónica
Chile’s variable rate debt and, for
fixed rate debt, the average prevailing interest rate as of December 31,
2008 on Telefónica
Chile’s fixed rate
debt.
|
|
(2)
|
The UF-dollar exchange rate
differs from the peso-dollar exchange rate in that the UF automatically
adjusts in accordance with Chilean inflation and is tied in part to the
peso-dollar exchange
rate.
|
|
As
of December 31, 2007
Expected
Maturity Date
|
||||||||||||||||||||||||||||||||||||
|
Average
Interest Rate(1)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
Long Term Debt (incl. 2008 maturities)
|
Fair
Value
|
||||||||||||||||||||||||||||
|
(Ch$
Equivalent in millions)
|
||||||||||||||||||||||||||||||||||||
|
On-Balance
Sheet Financial Instruments
|
||||||||||||||||||||||||||||||||||||
|
Liabilities
Long-Term Interest Bearing Debt:
|
||||||||||||||||||||||||||||||||||||
|
Fixed
Rate (US$)
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
|
Variable
Rate (US$)
|
5.23 | % | 75,845 | 99,074 | - | 74,304 | - | - | 249,223 | 249,223 | ||||||||||||||||||||||||||
|
Expected
transaction date
|
||||||||||||||||||||||||||||||||||||
|
Anticipated
Transactions and Related Derivatives
|
||||||||||||||||||||||||||||||||||||
|
Forward
Exchange Agreements
|
||||||||||||||||||||||||||||||||||||
|
(Receive
US$/Pay Ch$): Liability
|
6,731 | - | - | - | - | - | 6,731 | 6,731 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (Ch$/US$)
|
1.0161 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
|
(Receive
Real/Pay US$): Liability
|
147 | - | - | - | - | - | 147 | 147 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (US$/Real)
|
2.1743 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||
|
Cross-Currency
Swaps(2)
|
||||||||||||||||||||||||||||||||||||
|
(Receive
US$/ Pay UF): Liability
|
97,167 | 64,616 | - | 73,377 | - | - | 235,160 | 235,160 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate (UF/US$)
|
0.0329 | 0.0329 | - | 0.0311 | - | - | - | - | ||||||||||||||||||||||||||||
|
(Receive
US$/Pay Ch$): Liability
|
63,719 | - | - | 17,723 | - | - | 81,442 | 81,442 | ||||||||||||||||||||||||||||
|
Average
Contractual Exchange Rate ($/US$)
|
1.2836 | - | - | 1.1948 | - | - | - | - | ||||||||||||||||||||||||||||
|
(1)
|
“Average interest rate” means, for variable rate debt,
the average prevailing interest rate as of December 31, 2007 on
Telefónica Chile’s variable rate debt and, for
fixed rate debt, the average prevailing interest rate as of December 31,
2007 on Telefónica
Chile’s fixed rate
debt.
|
|
(2)
|
The UF-dollar exchange rate
differs from the peso-dollar exchange rate in that the UF
automatically adjusts
in accordance with Chilean inflation and is tied in part to the
peso-dollar exchange rate.
|
In addition, during 2008, the Company
held marketable securities such as Chilean peso-denominated debentures of the
Chilean Central Bank (“BCP”) and Chilean Central Bank Discount Notes
(“PDBC”). The total fair value of these
securities as of December 31, 2008 was Ch$13,229 million (US$20.8
million).
During 2007, the Company held U.S.
dollar-denominated marketable securities such as U.S. dollar- denominated debentures of the Chilean Central
Bank (“BCU”), UF-denominated marketable securities
issued by the Chilean Central Bank (“CERO”) and other time deposits with maturity
over 90 days. The total fair value of these securities as of December
31, 2007 was Ch$13,274 million (US$20.9
million).
The tables below provide information
about the Company’s U.S. dollar-denominated marketable
securities that are sensitive to foreign currency exchange rates and present
principal cash flows by maturity date.
|
As
of December 31, 2008
Maturity
Date(1)
|
||||||||||||||||||||||||||||||||
|
Interest
Rate
|
2009
|
2010
|
2011
|
2012
|
2013
|
No
Contractual Maturity
|
Fair
Value
|
|||||||||||||||||||||||||
|
Marketable
securities(2):
|
in
millions of Ch$ as of December 31, 2008
|
|||||||||||||||||||||||||||||||
|
BCP
|
6.45 | % | 8,035 | - | - | - | - | - | 8,035 | |||||||||||||||||||||||
|
PDBC
|
7.89 | % | 5,194 | - | - | - | - | - | 5,194 | |||||||||||||||||||||||
|
Total
|
7.01 | % | 13,229 | - | - | - | - | - | 13,229 | |||||||||||||||||||||||
|
(1)
|
These figures, calculated based on
the Observed Exchange Rate as of December 31, 2008, which was Ch$636.45
per US$1.00, reflect the amount Telefónica Chile would receive if the
U.S. dollar-denominated marketable securities were held to
maturity.
|
|
(2)
|
Securities coupon. Effective
average rates for BCP and PDBC are 6.45% and 7.89%,
respectively.
|
|
As
of December 31, 2007
Maturity
Date(1)
|
||||||||||||||||||||||||||||||||
|
Interest
Rate
|
2008
|
2009
|
2010
|
2011
|
2012
|
No
Contractual Maturity
|
Fair
Value
|
|||||||||||||||||||||||||
|
Marketable
securities (2):
|
in
millions of Ch$ as of December 31, 2007
|
|||||||||||||||||||||||||||||||
|
CERO
|
2.6%
+ UF
|
3,563 | - | - | - | - | - | 3,563 | ||||||||||||||||||||||||
|
BCU
|
5.00 | % | 1,800 | - | - | - | - | - | 1,800 | |||||||||||||||||||||||
|
Time
deposits over 90 days maturity
|
2.59 | % | 7,911 | - | - | - | - | - | 7,911 | |||||||||||||||||||||||
|
Total
|
3.18 | % | 13,274 | - | - | - | - | - | 13,274 | |||||||||||||||||||||||
|
(1)
|
These figures, calculated based on
the Observed Exchange Rate as of December 31, 2007, which was Ch$496.89
per US$1.00, reflect the amount Telefónica Chile would receive if the U.S.
dollar-denominated marketable securities were held to
maturity.
|
|
(2)
|
Securities coupon. Effective
average rates for CERO, BCU and time deposits are
2.6%, 5.0%, and 2.59%,
respectively.
|
Not applicable.
None.
None.
Evaluation of
Disclosure Controls and Procedures. Under the supervision and with the
participation of the Company’s management, including the Chief Executive
Officer, Chief Financial Officer and Chief Accounting Officer, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of December 31, 2008. Based on that
evaluation, the Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer have concluded that these
controls and procedures are effective in ensuring that all material information
required to be filed in this Annual Report has been made known to them in a timely
fashion.
Management’s Annual Report on
Internal Control over Financial Reporting. The management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as
a process designed by, or under the supervision of, the Company’s Chief Executive Officer, Chief
Financial Officer and Chief Accounting Officer and effected by the
Company’s Board of Directors, management and
other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles
and includes those policies and procedures that:
|
|
·
|
pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the
transaction and dispositions of the assets of the
Company;
|
|
|
·
|
provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance
with authorizations of management and
directors of the Company;
and
|
|
|
·
|
provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could have a
material effect on the financial
statements.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may
deteriorate.
The Company’s management assessed the effectiveness
of the Company’s internal control over financial
reporting as of December 31, 2008. In making this assessment, the
Company’s management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework.
Based on its assessment, management
believes that, as of December 31, 2008, the
Company’s internal control over financial
reporting is effective based on those criteria.
Ernst & Young Ltda., the independent
registered public accounting firm that has audited the Company’s financial statements, has issued an
attestation report on the
Company’s internal control over financial
reporting as of December 31, 2008. This attestation report appears
on page F-2 of the Audited Consolidated Financial
Statements
Changes in Internal
Controls. There was no
change in the Company’s internal control over financial
reporting that occurred during the fiscal year ended December 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial
reporting.
On July 21, 2005, an Audit Committee was created with a
total of three independent members pursuant to the requirements of the
Sarbanes-Oxley Act. The members of this Committee are Mr. Andrés Concha, Mr. Alfonso Ferrari and Mr. Hernán Cheyre. Mr. Hernán Cheyre was appointed as Audit
Committee Financial Expert as defined by the Securities and Exchange Commission
and is independent as that term is defined by the
New York Stock Exchange.
The
Company has adopted a code of ethics that applies to its Principal Executive
Officer, Principal Financial Officer, Principal Accounting Officer, Controller
and other persons performing similar functions. The complete code of ethics is
available on the Telefónica Chile website (www.telefonicachile.cl).
Ernst &Young Ltda. has served as the
Company’s independent public accountant for each
of the financial years in
the two-year period ended December 31, 2008, for which audited financial
statements appear in this annual report on Form 20-F.
The following table presents the
aggregate fees for professional services and other services rendered by Ernst
& Young Ltda. (the
“current audit
firm”) to the Company in
2007 and 2008.
|
As of December
31,
|
||||||||
|
2007
|
2008
|
|||||||
|
(in thousands of Chilean
pesos)
|
||||||||
|
Audit fees(1)
|
519,549 | 502,502 | ||||||
|
Audit-related fees(2)
|
- | 107,337 | ||||||
|
Tax fees(3)
|
- | - | ||||||
|
All other fees(4)
|
- | - | ||||||
|
Total
|
519,549 | 609,839 | ||||||
|
(1)
|
Audit fees consist of fees billed
for the annual audit services engagement and other audit services, which
are those services that only the external auditor reasonably can provide,
and include the group audit, statutory audits, comfort letters and
consents, attest
services, and assistance with and review of documents filed with the
SEC.
|
|
(2)
|
Audit-related fees consist of fees
billed for assurance and related services that are reasonably related to
the performance of the audit or review of the Company’s financial statements or that are
traditionally performed by the external auditor, and include consultations
concerning financial accounting and reporting standards, internal
|
| control reviews of new systems, programs and projects, review of security controls and operational effectiveness of systems, review of plans and controls for shared service centers, due diligence related to acquisitions, accounting assistance and audits in connection with proposed or completed acquisitions, and employee benefit plan audits. |
|
(3)
|
Tax fees include fees billed for
tax compliance services, including the preparation of original and amended
tax returns and claims for refund, tax consultations, such as assistance
and representation in connection with tax audits and appeals,
tax advice related to
mergers and acquisitions, transfer pricing, and requests for rulings or
technical advice from taxing authorities, tax-planning services, and
expatriate tax-planning and
services.
|
|
(4)
|
All other fees include fees billed
for training, forensic accounting, data security
reviews, treasury control reviews and process improvement and advice, and
environmental, sustainability and corporate social responsibility advisory
services.
|
Audit Committee Pre-Approval Policies
and Procedures
According to Article 52 of Chilean Corporations Law
No. 18,046, the engagement of external auditors is approved by shareholders each
year at the Company’s General Annual
Shareholders’ Meeting. As such, the Board of
Directors of the Company does not have a policy for hiring external auditors. The
Company’s Directors Committee is responsible for
the proposal of external auditors made by the Board to shareholders at the
General Annual Shareholders’ Meeting in accordance with the Chilean
Corporations Law. At the General Annual Shareholders’ Meeting held in April 2005, Company
Shareholders approved the engagement of Ernst & Young Ltda. for the
twelve-month period ending April 2006. At the General Annual
Shareholders’ Meeting held on April 20, 2006, Company
shareholders approved the engagement of Ernst & Young
Ltda. for the twelve-month period ending April 2007, for the amounts of UF20,000
for the audit and between UF7,700 to UF12,000 for compliance work relating to
the Sarbanes Oxley Act requirements. At the General Annual Shareholders’ Meeting held on April 13, 2007, Company shareholders approved the
engagement of Ernst & Young Ltda. for the twelve-month period ending April
2008, for an amount of UF26,316 for the audit including the compliance work
relating to the Sarbanes Oxley Act requirements. At the General
Annual Shareholders’ Meeting held on April 14, 2008, Company shareholders approved the
engagement of Ernst & Young Ltda. for the twelve-month period ending April
2009, for an amount of UF23,742 for the audit including the compliance work relating to the
Sarbanes Oxley Act requirements.
During 2008, the Company’s principal accountants did not render
any non-audit services. The Company has not permitted the principal accountants
to render any non-audit services. The Company’s Directors Committee approves all
audit, audit-related services, tax services and other services provided by
auditing firms. The Audit Committee’s main duties are related to independent
audits, disclosure of financial statements and internal
audits.
Not applicable.
The following table sets forth the
purchases of equity securities by the Company and its affiliates.
|
Period
|
(a)
Total Number of Shares (or Units) Purchased
|
(b)
Average Price Paid per Share (or Units)
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May
Yet be Purchased Under the Plans or Programs
|
||||
|
November
1 – November 30, 2008
|
496,341,699(1)
|
· Ch$1,100 per
Series A share (Ch$4,400 per ADS)
· Ch$990 per
Series B share
|
—
|
—
|
||||
|
January
1 – January 31, 2009
|
10,893,011(2)
|
· Ch$1,100 per
Series A share (Ch$4,400 per ADS)
· Ch$990 per
Series B share
|
—
|
—
|
|
(1)
|
All
purchased shares were acquired pursuant to the terms of a tender offer
announced on September 11, 2008 by Inversiones Telefónica for all
527,424,074 shares of the Company not owned by its affiliates. The tender
offer expired at 12:00 midnight, Santiago, Chile time, on October 30, 2008
and at 12:00 midnight, New York City time, on October 31,
2008.
|
|
(2)
|
All
purchased shares were acquired pursuant to the terms of a tender offer
announced on December 2, 2008 by Inversiones Telefónica for all 31,082,375
shares of the Company not owned by its affiliates. The tender offer
expired at 3:30 p.m., New York City time, on January 6,
2009.
|
Not applicable.
The
following is a comparison of corporate governance practices followed by U.S.
companies listed with the NYSE and the Company’s practices:
According
to the NYSE, listed U.S. companies must have a majority of independent directors
who must meet at regularly scheduled executive sessions without management.
According to Chilean law, the Company’s directors cannot serve as executives,
accountants, auditors or CEO of the Company, though they need not be otherwise
“independent” as defined by the NYSE. The Company’s directors may meet
individually or collectively with those they deem necessary to inform themselves
and to make decisions regarding the Company. See “Item 6. Directors, Senior
Management and Employees” for a list of the Company’s board
members.
According
to the NYSE, listed U.S. companies must adopt corporate guidelines that govern
directors’ responsibilities, qualifications, compensation and education,
management succession and an annual performance evaluation of the board. Chilean
law, which the Company
follows, dictates the composition, duration, duties and responsibilities of
board members, as well as sanctions for non-compliance with these. Chilean law
also requires that, at each General Annual Shareholders’ Meeting, board
remuneration must be approved, which was done on April 14, 2008. See “Item 6.
Directors, Senior Management and Employees—Compensation of Directors and
Officers.”
According
to the NYSE, listed U.S. companies must have an internal audit function to
provide management with ongoing assessments of the company’s risk management
process and the system of internal controls. Although there is no local law
requirement to do so, the Company does have an internal audit department that
conducts the assessment.
According
to the NYSE, listed U.S. companies, beginning the earlier of the first annual
shareholders’ meeting after January 15, 2004 and October 31, 2004, must have an
audit committee consisting of a minimum of three independent Board members who
are financially literate and at least one who is a designated financial expert,
while foreign companies, such as Telefónica Chile, have to meet this requirement
starting on July 31, 2005. Listed U.S. companies must also have compensation and
nominating and corporate governance committees composed entirely of independent
directors. Chilean law does not require these committees. However, Chilean Law
does require open stock companies with a market capitalization above UF1.5
million (approximately US$50.6 million) to have a Directors Committee, made up
of three board members who are “independent,” as defined by Chilean law below,
of the controlling shareholders and whose remuneration is determined by
shareholders at the General Annual Shareholders’ Meeting, to perform the
following functions:
a) review
and approve reports from account inspectors and external auditors, as well as
the Company’s balance sheet and financial statements;
b) propose
external auditors and rating agencies to the board;
c) review
and inform the board of related party transactions;
d) review
compensation and compensation plans for company executives; and
e) any
other matters stipulated according to company bylaws, board, or shareholders’
meeting decisions.
Chilean
law states that a director is independent when, excluding the votes from the
controlling shareholder and their related parties, the director would have been
elected. Accordingly, a director that is independent under Chilean law may not
be independent under the NYSE’s corporate governance rules or under the SEC’s
audit committee independence rules. The Company’s Directors Committee consists
of three board members and their respective alternates, two of which are
independent of the controlling shareholder, as defined by Chilean law. Chilean
law has no requirement for members to be financial experts.
According
to the NYSE, listed U.S. companies’ CEOs must certify to the NYSE each year that
they are not aware of any violation by the company of NYSE corporate governance
listing standards. According to Chilean law, there is no such requirement, and
this provision of the NYSE does not apply to foreign private issuers, such as
Telefónica Chile. However, according to the NYSE, all foreign private issuers,
including Telefónica Chile, must report to the NYSE when they become aware of a
violation of the corporate governance listing standards and must provide an
annual written affirmation to the NYSE of its compliance with the applicable
NYSE audit committee rules and disclosure of significant differences with NYSE
corporate governance rules applicable to domestic companies.
|
Exhibit
No.
|
Description
|
|
|
1.1
|
English translation of the bylaws
(estatutos) of the Company, as amended,
which includes its corporate charter.
|
|
|
2.1
|
The instruments defining the rights of holders of
the outstanding long-term debt securities of the Company and its
subsidiaries are omitted pursuant to Instruction 2(b)(i) of the
Instructions to the Exhibits of Form 20-F. The Company hereby agrees to
furnish copies of these instruments to the Securities and
Exchange Commission upon request.
|
|
|
4.1
|
English translation of Contract
for the Sale of Sonda Shares between Telefónica Empresas CTC Chile S.A. and
Inversiones Pacífico
II Limitada dated September 26, 2002.(1)
|
|
|
4.2
|
English translation of Contract for the
Sale of Sonda Shares between Telefónica Empresas CTC Chile S.A. and
Inversiones Santa Isabel Limitada dated September 26, 2002.(1)
|
|
|
4.3
|
English translation of the Option
Agreement between Telefónica Empresas CTC Chile S.A.
and Inversiones Santa
Isabel Limitada dated September 26, 2002.(1)
|
|
|
4.4
|
English translation of Contract
for the Sale of Sonda Shares between the seller Telefónica Empresas CTC Chile S.A. and
the buyers Inversiones Pacífico II Limitada, Inversiones
Atlántico Limitada and Santa Isabel
Limitada dated August 27, 2003.(2)
|
|
|
4.5
|
English translation of Contract
for the Sale of 9% ownership interest in
Publiguías between
the seller Telefónica
Chile S.A. and the buyer Telefónica Publicidad e
Información S.A.
(TPI) dated April 26,
2004. (3)
|
|
|
4.6
|
English translation of Contract
for the Sale of Telefónica Móvil de Chile S.A. shares between
the seller Telefónica
Chile S.A. and the buyer Telefónica Móviles S.A. (TEM) dated July 23,
2004.
(3)
|
|
|
8.1
|
List of Subsidiaries of
the
Company.
|
|
|
11.1
|
Code of Ethics.(2)
|
|
|
12.1
|
Certification of the Chief
Executive Officer of Compañía de Telecomunicaciones de Chile
S.A. furnished pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
12.2
|
Certification of the Chief
Financial Officer of
Compañía de
Telecomunicaciones de Chile S.A. furnished pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
12.3
|
Certification of the Chief
Accounting Officer of Compañía de Telecomunicaciones de Chile
S.A. furnished pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
13.1
|
Certification of the Chief
Executive Officer of Compañía de Telecomunicaciones de Chile
S.A. furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
13.2
|
Certification of the Chief Financial
Officer of Compañía
de Telecomunicaciones de Chile S.A. furnished pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
|
13.3
|
Certification of the Chief
Accounting Officer of
Compañía de
Telecomunicaciones de Chile S.A. furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(1)
|
Filed as an Exhibit to the
Company’s annual report on Form 20-F for
the fiscal year ended
December 31, 2002 and incorporated by reference
hereto.
|
|
(2)
|
Filed as an Exhibit to the
Company’s annual report on Form 20-F for
the fiscal year ended December 31, 2003 and incorporated by reference
hereto.
|
|
(3)
|
Filed
as an Exhibit to the Company’s annual report on Form 20-F for the fiscal
year ended December 31, 2004 and incorporated by reference
hereto.
|
SIGNATURES
The registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly
caused and authorized the undersigned to sign this annual report on
its behalf.
|
Compañía de Telecomunicaciones de
Chile, S.A.
|
|||
|
By:
|
/s/ Isabel Margarita
Bravo
|
||
|
Name:
|
Isabel Margarita
Bravo
|
||
|
Title:
|
Principal Financial
Officer
|
||
Date:
April 27, 2009
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Audited
Consolidated Financial Statements as of
December 31, 2007 and 2008
together with the Reports of Independent
Registered Public Accounting Firm
(Translation
of financial statements originally issued in Spanish)
TABLE
OF CONTENTS
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Page
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F-1
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F-2
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F-3
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F-5
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F-6
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F-7
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F-9
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Ch$
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:
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Chilean
pesos
|
|
ThCh$
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:
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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
|
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US$
|
:
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United
States of American dollars
|
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ThUS$
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:
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Thousands
of United States of American
dollars
|
To the
Board of Directors and Shareholders of Compañía de Telecomunicaciones de Chile
S.A.:
We have
audited the accompanying consolidated” balance sheets of Compañía de
Telecomunicaciones de Chile S.A. and its subsidiaries (the “Company”) as of
December 31, 2008 and 2007, and the related consolidated statements of income,
changes in equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Compañía de
Telecomunicaciones de Chile S.A. and its subsidiaries as of December 31, 2008
and 2007, and the results of their operations and their cash flows for the years
then ended in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2008, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated April 23, 2009, expressed an
unqualified opinion thereon.
ERNST
& YOUNG LTDA.
Santiago,
Chile
April 23,
2009.
Accounting
Firm on Internal Control over Financial Reporting
To the
Board of Directors and Shareholders of
Compañía
de Telecomunicaciones de Chile S.A.:
We have
audited Compañía de Telecomunicaciones de Chile S.A.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Compañía de
Telecomunicaciones de Chile S.A’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Compañía de Telecomunicaciones de Chile SA. maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008, based on the COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Compañía de
Telecomunicaciones de Chile S.A. and subsidiaries as of December 31, 2008 and
2007, and the related consolidated statements of income, changes in equity and
cash flows for the years then ended and our report dated April 23, 2009,
expressed an unqualified opinion thereon.
ERNST
& YOUNG LTDA.
Santiago,
Chile
April 23,
2009.
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
|
|
As
of December 31, 2007 and 2008
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|
|
|
As
of December 31,
|
||||||||||||||||
|
Notes
|
2007
|
2008
|
2008
|
|||||||||||||
|
ThCh$
|
ThCh$
|
ThUS$
|
||||||||||||||
|
ASSETS
|
||||||||||||||||
|
CURRENT
ASSETS
|
||||||||||||||||
|
Cash
and cash equivalents
|
(16 | ) | 73,084,451 | 71,555,375 | 112,428 | |||||||||||
|
Financial
assets at fair value with changes in
income
|
(17 | ) | 13,273,715 | 13,228,981 | 20,786 | |||||||||||
|
Other
financial assets
|
59,081 | 64,081 | 102 | |||||||||||||
|
Trade
and other accounts receivable, net
|
(12a | ) | 192,537,092 | 172,159,162 | 270,499 | |||||||||||
|
Accounts
receivable from related entities
|
(13a | ) | 19,781,435 | 28,301,797 | 44,468 | |||||||||||
|
Inventory
|
(26 | ) | 6,953,964 | 6,920,235 | 10,873 | |||||||||||
|
Derivative
financial instruments
|
(15 | ) | 131,288 | 3,365,982 | 5,289 | |||||||||||
|
Prepayments
|
4,831,472 | 4,522,589 | 7,106 | |||||||||||||
|
Prepaid
taxes
|
(22 | ) | 18,498,736 | 26,907,759 | 42,278 | |||||||||||
|
Non-current
assets and surrendered units available
for sale
|
(10 | ) | - | 2,206,275 | 3,466 | |||||||||||
|
TOTAL
CURRENT ASSETS
|
329,151,234 | 329,232,236 | 517,295 | |||||||||||||
|
NON-CURRENT
ASSETS
|
||||||||||||||||
|
Other
financial assets
|
142,217 | 141,613 | 223 | |||||||||||||
|
Trade
and other accounts receivable, net
|
(12a | ) | 13,054,409 | 14,559,192 | 22,876 | |||||||||||
|
Investments
in associates accounted for using the
equity method
|
(11a | ) | 7,621,158 | 9,415,278 | 14,793 | |||||||||||
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Goodwill
|
(8 | ) | 16,704,516 | 16,704,516 | 26,246 | |||||||||||
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Intangible
assets, net
|
(7 | ) | 40,314,006 | 32,343,927 | 50,819 | |||||||||||
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Property,
plant and equipment, net
|
(9 | ) | 1,028,280,547 | 1,011,576,568 | 1,589,405 | |||||||||||
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Deferred
tax assets
|
(23b | ) | 26,678,328 | 34,519,405 | 54,237 | |||||||||||
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Derivative
financial instruments
|
(15 | ) | - | 36,963,243 | 58,077 | |||||||||||
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Prepayments
|
1,597,921 | - | - | |||||||||||||
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TOTAL
NON-CURRENT ASSETS
|
1,134,393,102 | 1,156,223,742 | 1,816,676 | |||||||||||||
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TOTAL
ASSETS
|
1,463,544,336 | 1,485,455,978 | 2,333,971 | |||||||||||||
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
|
|
As
of December 31, 2007 and 2008
|
|
As
of December 31,
|
||||||||||||||||
|
Notes
|
2007
|
2008
|
2008
|
|||||||||||||
|
ThCh$
|
ThCh$
|
ThUS$
|
||||||||||||||
|
LIABILITIES
|
||||||||||||||||
|
CURRENT
LIABILITIES
|
||||||||||||||||
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Interest
bearing loans
|
(18 | ) | 77,916,022 | 130,058,223 | 204,350 | |||||||||||
|
Trade
and other accounts payable
|
(19 | ) | 166,450,285 | 196,722,872 | 309,094 | |||||||||||
|
Accounts
payable to related entities
|
(13b | ) | 33,448,644 | 40,276,614 | 63,283 | |||||||||||
|
Provisions
|
(20 | ) | 16,230,842 | 7,072,336 | 11,112 | |||||||||||
|
Taxes
payable
|
12,969,059 | 9,663,951 | 15,184 | |||||||||||||
|
Deferred
revenue
|
(27 | ) | 6,523,421 | 5,712,886 | 8,976 | |||||||||||
|
Post
employment benefits obligations
|
(21a | ) | 1,996,786 | 2,898,105 | 4,554 | |||||||||||
|
Derivative
financial instruments
|
(15 | ) | 23,464,760 | 6,253,701 | 9,826 | |||||||||||
|
TOTAL
CURRENT LIABILITIES
|
338,999,819 | 398,658,688 | 626,379 | |||||||||||||
|
NON-CURRENT
LIABILITIES
|
||||||||||||||||
|
Interest
bearing loans
|
(18 | ) | 310,968,960 | 339,944,454 | 534,126 | |||||||||||
|
Deferred
tax liabilities
|
(23b | ) | 112,060,323 | 95,247,850 | 149,655 | |||||||||||
|
Deferred
revenue
|
(27 | ) | 4,153,591 | 3,930,500 | 6,176 | |||||||||||
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Post
employment benefits obligations
|
(21a | ) | 30,838,659 | 42,464,712 | 66,721 | |||||||||||
|
Derivative
financial instruments
|
(15 | ) | 45,373,745 | 470,129 | 738 | |||||||||||
|
TOTAL
NON-CURRENT LIABILITIES
|
503,395,278 | 482,057,645 | 757,416 | |||||||||||||
|
EQUITY
|
||||||||||||||||
|
Issued
capital
|
(14 | ) | 737,179,111 | 697,935,671 | 1,096,607 | |||||||||||
|
Other
reserves
|
(1,984,475 | ) | (974,362 | ) | (1,531 | ) | ||||||||||
|
Accumulated
deficit
|
(114,299,735 | ) | (92,361,776 | ) | (145,120 | ) | ||||||||||
|
Equity
attributable to equity holders of the parent
|
620,894,901 | 604,599,533 | 949,956 | |||||||||||||
|
Minority
interests
|
(28 | ) | 254,338 | 140,112 | 220 | |||||||||||
|
TOTAL
EQUITY
|
621,149,239 | 604,739,645 | 950,176 | |||||||||||||
|
TOTAL
LIABILITIES AND EQUITY
|
1,463,544,336 | 1,485,455,978 | 2,333,971 | |||||||||||||
The
accompanying notes 1 to 33 are an integral part of these consolidated financial
statements
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
|
|
For
the years ended December 31, 2007 and 2008
|
|
For
the years ended December 31,
|
||||||||||||||||
|
Notes
|
2007
|
2008
|
2008
|
|||||||||||||
|
ThCh$
|
ThCh$
|
ThUS$
|
||||||||||||||
|
STATEMENTS
OF INCOME
|
||||||||||||||||
|
Revenues
|
(24a | ) | 696,299,994 | 738,730,748 | 1,160,705 | |||||||||||
|
Other
operating income
|
(24b | ) | 9,058,620 | 28,131,051 | 44,200 | |||||||||||
|
Employee
expenses
|
(21b | ) | (86,268,253 | ) | (101,028,517 | ) | (158,737 | ) | ||||||||
|
Depreciation
and amortization
|
(181,590,936 | ) | (167,573,526 | ) | (263,294 | ) | ||||||||||
|
Other
miscellaneous operating expenses
|
(24c | ) | (357,908,345 | ) | (411,078,189 | ) | (645,892 | ) | ||||||||
|
Financial
expenses (net)
|
(24d | ) | (11,044,665 | ) | (27,009,483 | ) | (42,438 | ) | ||||||||
|
Participation
in profits of associates accounted for
using
the equity method
|
(11a | ) | 1,782,776 | 1,606,957 | 2,525 | |||||||||||
|
Foreign
currency exchange differences
|
(29,792,788 | ) | (7,503,534 | ) | (11,790 | ) | ||||||||||
|
Profit
before taxes
|
40,536,403 | 54,275,507 | 85,279 | |||||||||||||
|
Income
taxes
|
(23c | ) | (8,980,234 | ) | (6,368,935 | ) | (10,007 | ) | ||||||||
|
PROFIT
FOR THE YEAR
|
31,556,169 | 47,906,572 | 75,272 | |||||||||||||
|
Profit
attributable to equity holders of the parent
|
31,646,817 | 47,975,468 | 75,380 | |||||||||||||
|
Loss
attributable to minority interests
|
(28 | ) | (90,648 | ) | (68,896 | ) | (108 | ) | ||||||||
|
PROFIT
FOR THE YEAR
|
31,556,169 | 47,906,572 | 75,272 | |||||||||||||
|
PROFIT
PER SHARE
|
||||||||||||||||
|
COMMON
SHARES
|
||||||||||||||||
|
Basic
and diluted profit per share attributable to equity holders of the parent
(in thousands)
|
(25 | ) | 0.0331 | 0.0501 | 0.00007864 | |||||||||||
The
accompanying notes 1 to 33 are an integral part of these consolidated financial
statements
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
|
|
Years
ended December 31, 2007 and 2008
|
|
Issued capital
|
Other
reserves
|
|||||||||||||||||||||||||||
|
Ordinary
shares
|
Currency
translation difference
|
Other profit
(loss) directly recognized in equity
|
Retained
earnings (accumulated deficit)
|
Total
equity
attributable to holders of the parent
|
Minority
interests
|
Total
equity
|
||||||||||||||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
||||||||||||||||||||||
|
Beginning
balance
|
785,994,122 | (53,857 | ) | (419,649 | ) | (136,607,945 | ) | 648,912,671 | 1,148,576 | 650,061,247 | ||||||||||||||||||
|
Profit
(loss) for the period
|
- | - | - | 31,646,817 | 31,646,817 | (90,648 | ) | 31,556,169 | ||||||||||||||||||||
|
Dividends
declared
|
- | - | - | (10,856,131 | ) | (10,856,131 | ) | - | (10,856,131 | ) | ||||||||||||||||||
|
Capital
decrease
|
(48,815,011 | ) | - | - | - | (48,815,011 | ) | - | (48,815,011 | ) | ||||||||||||||||||
|
Other
increases (decreases) in net equity (1)
|
- | (501,366 | ) | (1,009,603 | ) | 1,517,524 | 6,555 | (803,590 | ) | (797,035 | ) | |||||||||||||||||
|
Changes
for the period
|
(48,815,011 | ) | (501,366 | ) | (1,009,603 | ) | 22,308,210 | (28,017,770 | ) | (894,238 | ) | (28,912,008 | ) | |||||||||||||||
|
Balance
December 31, 2007
|
737,179,111 | (555,223 | ) | (1,429,252 | ) | (114,299,735 | ) | 620,894,901 | 254,338 | 621,149,239 | ||||||||||||||||||
|
Profit
(loss) for the period
|
- | - | - | 47,975,468 | 47,975,468 | (68,896 | ) | 47,906,572 | ||||||||||||||||||||
|
Dividends
declared
|
- | - | - | (17,611,683 | ) | (17,611,683 | ) | - | (17,611,683 | ) | ||||||||||||||||||
|
Capital
decrease
|
(39,243,440 | ) | - | - | - | (39,243,440 | ) | - | (39,243,440 | ) | ||||||||||||||||||
|
Other
increases (decreases) in net equity (1)
|
- | 1,264,741 | (254,628 | ) | (8,425,826 | ) | (7,415,713 | ) | (45,330 | ) | (7,461,043 | ) | ||||||||||||||||
|
Changes
for the period
|
(39,243,440 | ) | 1,264,741 | (254,628 | ) | 21,937,959 | (16,295,368 | ) | (114,226 | ) | (16,409,594 | ) | ||||||||||||||||
|
Balance
December 31, 2008
|
697,935,671 | 709,518 | (1,683,880 | ) | (92,361,776 | ) | 604,599,533 | 140,112 | 604,739,645 | |||||||||||||||||||
|
(1)
|
Includes
effects on income and expenses not recognized in income for the
year.
|
The
accompanying notes 1 to 33 are an integral part of these consolidated financial
statements
|
COMPAÑÍA
DE TELECOMUNICACIONES DE CHILE S.A. AND
SUBSIDIARIES
|
|
For
the years ended December 31, 2007 and 2008
|
|
For
the years ended December 31,
|
||||||||||||||||
|
Notes
|
2007
|
2008
|
2008
|
|||||||||||||
|
ThCh$
|
ThCh$
|
ThUS$
|
||||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||||||
|
Profit
for the year
|
31,556,169 | 47,906,572 | 75,272 | |||||||||||||
|
Non-cash
adjustments
|
||||||||||||||||
|
Depreciation
|
(9 | ) | 163,675,505 | 148,942,657 | 234,020 | |||||||||||
|
Amortization
of intangible assets
|
(7 | ) | 17,915,431 | 18,630,869 | 29,273 | |||||||||||
|
Net
foreign currency exchange differences
|
29,792,788 | 7,503,534 | 11,790 | |||||||||||||
|
Gain
on sales of property, plant and equipment
|
(1,905,371 | ) | (2,914,178 | ) | (4,579 | ) | ||||||||||
|
Gain
on sales of Telefónica Asistencia y Seguridad S.A. assets
|
(24b | ) | - | (15,487,114 | ) | (24,333 | ) | |||||||||
|
Equity
in earnings of equity method investees
|
(11 | ) | (1,782,776 | ) | (1,606,957 | ) | (2,525 | ) | ||||||||
|
Provisions
and write offs
|
(20,742,443 | ) | (36,450,839 | ) | (57,272 | ) | ||||||||||
|
Deferred
tax provision
|
(21,392,240 | ) | (24,653,550 | ) | (38,736 | ) | ||||||||||
|
Financial
instruments designated at fair value with changes in
income
|
(3,130,684 | ) | (44,734 | ) | (70 | ) | ||||||||||
|
Other
debits to income that do not represent cash flow
|
12,230,622 | 22,921,343 | 36,014 | |||||||||||||
|
Total
non-cash adjustments
|
174,660,832 | 116,841,031 | 183,582 | |||||||||||||
|
Total
cash flows before changes in working capital
|
206,217,001 | 164,747,603 | 258,854 | |||||||||||||
|
Working
capital increase (decrease)
|
||||||||||||||||
|
Changes
in operating assets (increase) decrease
|
||||||||||||||||
|
Inventories
|
3,070,747 | 663,231 | 1,042 | |||||||||||||
|
Trade
and other accounts receivable
|
9,120,037 | 18,873,147 | 29,654 | |||||||||||||
|
Prepayments
|
(480,295 | ) | (308,883 | ) | (485 | ) | ||||||||||
|
Other
assets
|
3,509,435 | (9,651,117 | ) | (15,163 | ) | |||||||||||
|
Changes
in operating liabilities increase (decrease)
|
||||||||||||||||
|
Trade
and other accounts payable
|
12,110,740 | 17,770,802 | 27,921 | |||||||||||||
|
Deferred
revenue
|
(6,754,731 | ) | (810,536 | ) | (1,274 | ) | ||||||||||
|
Taxes
payable
|
(4,756,957 | ) | (3,305,108 | ) | (5,193 | ) | ||||||||||
|
Post-employment
benefits obligations
|
1,660,841 | 901,319 | 1,416 | |||||||||||||
|
Other
liabilities
|
5,261,470 | (10,743,439 | ) | (16,880 | ) | |||||||||||
|
Total
decrease in working capital, net
|
22,741,287 | 13,389,416 | 21,038 | |||||||||||||
|
NET
CASH FLOWS FROM OPERATING ACTIVITIES
|
228,958,288 | 178,137,019 | 279,892 | |||||||||||||
The
accompanying notes 1 to 33 are an integral part of these consolidated financial
statements
|
COMPAÑÍA
DE TELECOMUNICACIONES DE CHILE S.A. AND
SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the years ended December 31, 2007 and
2008
|
|
For
the years ended December 31,
|
||||||||||||||||
|
Notes
|
2007
|
2008
|
2008
|
|||||||||||||
|
ThCh$
|
ThCh$
|
ThUS$
|
||||||||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||||||
|
Sales
of property, plant and equipment
|
2,034,548 | 6,172,059 | 9,698 | |||||||||||||
|
Proceeds
from sale of financial instruments
|
16,284,344 | 42,925,248 | 67,445 | |||||||||||||
|
Sales
of Telefónica Asistencia y Seguridad S.A.
assets
|
- | 15,487,114 | 24,334 | |||||||||||||
|
Dividends
received
|
1,816,920 | 433,661 | 681 | |||||||||||||
|
Received
of interest investments
|
513,009 | 419,953 | 660 | |||||||||||||
|
Acquisition
of property, plant & equipment
|
(141,303,917 | ) | (147,989,087 | ) | (232,523 | ) | ||||||||||
|
Purchases
of financial instruments
|
(7,581,418 | ) | (45,615,551 | ) | (71,672 | ) | ||||||||||
|
NET
CASH FLOWS USED IN INVESTING ACTIVITIES
|
(128,236,514 | ) | (128,166,603 | ) | (201,377 | ) | ||||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||||||
|
Repayments
of borrowings
|
(1,345,320 | ) | (96,930,593 | ) | (152,299 | ) | ||||||||||
|
Proceeds
from borrowings
|
- | 95,467,500 | 150,000 | |||||||||||||
|
Dividends
paid
|
(18,609,376 | ) | (10,792,959 | ) | (16,958 | ) | ||||||||||
|
Capital
decrease
|
(48,815,011 | ) | (39,243,440 | ) | (61,660 | ) | ||||||||||
|
NET
CASH FLOWS USED IN FINANCING ACTIVITIES
|
(68,769,707 | ) | (51,499,492 | ) | (80,917 | ) | ||||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
31,952,067 | (1,529,076 | ) | (2,403 | ) | |||||||||||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
41,132,384 | 73,084,451 | 114,831 | |||||||||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
73,084,451 | 71,555,375 | 112,428 | |||||||||||||
|
SUPPLEMENTAL CASH
INFORMATION:
|
||||||||||||||||
|
Interest
paid
|
(19,103,755 | ) | (33,483,405 | ) | (52,609 | ) | ||||||||||
The
accompanying notes 1 to 33 are an integral part of these consolidated financial
statements
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
|
1.
|
Corporate
information:
|
Compañía de Telecomunicaciones de Chile
S.A. and subsidiaries (“Telefónica Chile S.A” or “the Company”) provides
telecommunications services in Chile, consisting of fixed telecommunications, television, long distance, corporate
communications and other services. The Company is located in Santiago, Chile, at Avenida Providencia No.
111.
The Company is an open stock corporation
that is registered with the Securities Registry under No. 009 and therefore is
subject to supervision by the Chilean Superintendency of Securities and
Insurance (“SVS”) as well as by the United States Securities and Exchange
Commission (“SEC”) since the listing of its shares on the New York Stock Exchange in United States (“ADRs”) in
1990.
Telefónica Chile S.A., is part of the Telefónica
Group. Its parent company is Telefónica Internacional S.A., which
is
headquartered in
Spain.
The consolidated financial statements of
Telefónica Chile S.A. for the year ended as of December 31, 2008 were approved and authorized for
issuance at the Board of Directors Meeting held on April 23, 2009.
The subsidiary companies registered in
the Securities Registry are:
|
Subsidiary
|
Taxpayer
number
|
Registration
number
|
Participation
percentage
(direct
and indirect)
|
|
|
2007
%
|
2008
%
|
|||
|
Telefónica
Larga Distancia S.A.
|
96.551.670-0
|
456
|
99.87
|
99.89
|
|
Telefónica
Asistencia y Seguridad S.A. (1)
|
96.971.150-8
|
863
|
99.99
|
-
|
(1) On
December 31, 2008 Telefónica Chile S.A absorbed subsidiary Telefónica Asistencia
y Seguridad S.A, through the acquisition of the participation of Telefónica
Gestión de Servicios Compartidos Chile S.A. in that company, equivalent to
0.001%, resulting in ownership of all the shares of that company by Telefónica
Chile S.A.
|
2.
|
Significant accounting
principles:
|
(a) Accounting period
These consolidated financial statements (hereinafter, “financial
statements”) cover the years ended December 31, 2007 and 2008.
(b) Basis of preparation
The financial statements have been
prepared in accordance with International Financial Reporting Standards (IFRS)
as issued by the International Accounting
Standards Board (IASB).
The figures included in
these financial statements are expressed in thousands of Chilean pesos, since
the Chilean peso is the Company’s functional and reporting currency. All values are rounded to the nearest
thousand, except when otherwise indicated.
(c) Basis of
presentation
The financial statements for
December 31,
2007 and their
corresponding notes are shown in a comparative manner to the financial
statements for 2008.
For the convenience of the reader these
financial statements have been translated from Spanish to
English.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
(d) Basis of
consolidation:
These financial statements include the
assets, liabilities, income and cash flows of Compañía de Telecomunicaciones de
Chile S.A. and its subsidiaries as of December 31, 2007 and 2008. All intercompany balances, income and
expenses and unrealized gains and losses resulting from intercompany
transactions have been
eliminated in
full and the participation
of minority investors has been recognized under the heading “Minority interests” (see Note
28).
Minority interests represent the portion
of profit or loss and net assets of certain subsidiaries that is not held by the parent Company
and are presented separately in the consolidated statement of income and within
equity in the consolidated balance sheet, separately from parent shareholders'
equity.
The financial statements of the
consolidated companies cover the years ended on the same date as the individual
financial statements of the parent company, and have been prepared applying
uniform accounting policies.
The companies included in the
consolidation are:
|
Taxpayer
No.
|
Company
Name
|
Participation
percentage
|
|||
|
2007
|
2008 | ||||
|
Total
|
Direct
|
Indirect
|
Total
|
||
|
96.551.670-0
|
Telefónica
Larga Distancia S.A.
|
99.87
|
99.89
|
-
|
99.89
|
|
96.961.230-5
|
Telefónica
Gestión de Servicios Compartidos Chile S.A.
|
99.99
|
99.99
|
-
|
99.99
|
|
74.944.200-k
|
Fundación
Telefónica Chile
|
50.00
|
50.00
|
-
|
50.00
|
|
96.971.150-8
|
Telefónica
Asistencia y Seguridad S.A. (1)
|
99.99
|
-
|
-
|
-
|
|
90.430.000-4
|
Telefónica
Empresas Chile S.A.
|
99.99
|
99.99
|
-
|
99.99
|
|
78.703.410-1
|
Telefónica
Multimedia Chile S.A.
|
99.99
|
99.99
|
-
|
99.99
|
|
96.811.570-7
|
Instituto
Telefónica Chile S.A.
|
99.99
|
-
|
99.99
|
99.99
|
(1) On
December 31, 2008 Telefónica Chile S.A absorbed subsidiary Telefónica Asistencia
y Seguridad S.A, through the acquisition of the participation of Telefónica
Gestión de Servicios Compartidos Chile S.A. in that company, equivalent to
0.001%, resulting in ownership of all the shares of that company by Telefónica
Chile S.A.
(e) Foreign currency
translation
Assets and liabilities in US$ (United
States dollars), Euros, Brazilian Real, UF (Unidades de Fomento) and JPY
(Japanese Yen), have been converted to Chilean pesos using the observed exchange
rates as of December 31 of each year as follows:
|
YEAR
|
US$
|
EURO
|
REAL
|
JPY
|
UF
|
|
2007
|
496.89
|
730.94
|
280.32
|
4.41
|
19,622.66
|
|
2008
|
636.45
|
898.81
|
271.70
|
7.05
|
21,452.57
|
Foreign currency exchange differences are recognized in income for the year
under “Foreign currency exchange differences”.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
(e) Foreign currency
translation, continued
The closing exchange rates for the year
have been used in the conversion of the financial statements of foreign
companies, with the exception of: i) capital and reserves, which have been
converted at the historical exchange rate; and ii) income statements and statements of cash flows, which have been converted
at the average exchange rate for the year.
Foreign currency translation difference
originated as a consequence of the application of these criteria is included in “Currency translation
difference”, deducting the
part corresponding to minority interests, which is presented under the heading
“Minority interests”.
Convenience of converting to
United States dollars
The financial statements are presented
in Chilean pesos, the Company’s functional currency. Conversion from
Chilean pesos to United States dollars is only included for the convenience of
the reader, using the exchange rate reported by the Banco Central de Chile as of
December 31, 2008 of Ch$ 636.45 per US$ 1.00. Convenience conversions
should not be considered to be a representation that the amount in Chilean pesos
has been or could now or in the future be converted to United States dollars at this or any other exchange
rate.
(f) Investment in related
companies
The Company’s investment in the
companies over which it exercises significant influence without exercising
control, is recorded using the equity method. The investment is
recorded initially at cost and its book value is modified based on the
participation in the income of the associated company at each
year-end. If it records net income or losses directly in its net
shareholders’ equity, the Company also recognizes the participation
corresponding to it in those items.
(g) Goodwill
Goodwill represents the surplus of the
acquisition cost in comparison to the fair value, as of the acquisition
date, of identifiable assets, liabilities and
contingent liabilities acquired. After initial recognition, goodwill
is recorded at cost less any accumulated impairment loss.
The Company tests goodwill impairment
annually and when there are indicators that the
net carrying amount might not be fully
recoverable. The impairment test which is based on fair value is performed for each
cash generating unit for which the goodwill has been allocated. If that fair value is less than the carrying
amount, an irreversible
impairment loss is recognized in the income statement.
(h) Intangible assets
Intangible assets are recorded at their
acquisition or production cost, less accumulated amortization and less any
accumulated impairment loss.
All recognized intangibles assets have defined useful lives and are
amortized over their estimated useful lives and as of the balance sheet date are
analyzed for the existence of events or changes indicating that the net book
value might not be recoverable, in which case they are tested for
impairment.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
(h) Intangible
assets,
continued
The methods and periods of amortization
applied are reviewed at each year-end and if necessary, are adjusted in a
prospective manner.
The Company amortizes intangibles assets
on a straight line basis over the follow estimated useful lives: software
licenses 3 years and rights to underwater cable with a maximum of 15
years.
(i) Property, plant and
equipment
Property, plant and equipment items are
valued at acquisition cost, less accumulated depreciation and less applicable impairment losses. Land is
not depreciated.
Acquisition cost includes external costs
plus internal costs comprising consumption of warehouse materials, cost of
direct labor used in the installation and imputation of indirect costs necessary
for the intended use of the
asset.
Interest and other financial expenses
incurred and directly attributable to the acquisition or construction of
qualifying assets, may
be capitalized. Qualifying assets, under the criteria
of the Telefónica Group, are assets that require at least 18 months of
preparation for their use or sale. At year-end 2007 and 2008
there are no capitalized interests.
Costs for improvements that result in increased productivity, efficiency, or extension of the useful
lives of assets, are capitalized as higher cost of such assets when they comply
with the requirements to be recognized as an asset.
Repair and maintenance expenses are
charged to the income statement account for the year in which they are
incurred.
(j) Depreciation of property, plant and
equipment:
The Company depreciates property, plant and equipment from the
moment in which the assets are in a condition to be used, distributing the cost
of assets in a straight-line method over the estimated useful lives which are
summarized in the following detail:
|
Assets
|
Range of
years
|
|
Buildings and
components
|
40
|
|
Plant
and equipment:
|
|
|
Central
office telephone equipment
|
7 a 12
|
|
External
Plant
|
20
|
|
Subscribers’
equipment
|
2 a 7
|
|
Information
technology equipment
|
4
|
|
Fixed
installations and accessories
|
7
|
|
Motor
vehicles
|
7
|
|
Leasehold
improvements
|
5
|
Estimated residual values, the depreciation methods and usefull lives applied, are reviewed at each year-end
and, if applicable are adjusted in a prospective manner.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
(k) Non-current assets destined for
sale
Non-current assets destined for sale are
measured at the lower of the book and fair values, less the cost to sell. Assets are included in this
heading when the book value can be recovered through a sales transaction, which
is highly likely to take place and when they are immediately available in their
present condition. Management must be committed to a plan to sell the
asset and must have actively begun a program to find a buyer and complete the
plan. Likewise, it must be expected that the sale will qualify for
full completion within a year following its classification
date.
Property, plant and equipment classified
as held for sale is not depreciated.
(l) Impairment of non-current
assets
At each year-end the existence of
possible impairment of non-current assets other then goodwill is evaluated. Should such
indications exist, the Company estimates the recoverable value of the asset,
which is the greater of fair value less cost to sell or value in use. Such value
in use is determined through discounting estimated future cash
flows. When an asset’s recoverable value is below its net book value,
an impairment is considered to exist.
In order to calculate impairment, the
Company estimates the profitability of assets assigned to the different cash
generating units based on
the expected cash flows.
The discount rates used are determined
before taxes and are adjusted by the corresponding country risk and business
risk. Thus, in
2008 the rate used was 12%. No impairment adjustments were made in
2007 and 2008.
(m) Leases
Leased assets for which the renter
maintains a significant part of the risks and benefits inherent to the rented
property, are considered operating leases. Payments made under
agreements of this nature are charged to the income statement account in a
straight-line method over the term of the lease.
Leased assets for which the significant
risks and benefits characteristic of the leased property are transferred to the
Company, are considered financial leases and the asset and the associated debt
is recorded at the beginning of the term of the lease for the amount of the fair
value of the leased asset or the present value of the minimum agreed
installments, if these are lower. Financial expenses are charged to the
income statement account over the life of the agreement. Depreciation
of these assets is included in total depreciation of the property, plant and
equipment heading. The Company carries out procedures to determine
whether an arrangement
contains a lease. At 2007
and 2008 year-end; no embedded leases were
identified.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
(n) Income taxes
The income tax expense for each year
comprises current and deferred income taxes.
Tax credits and liabilities for the current year and
prior years are measured at the estimated amount recoverable or payable to the
tax authorities. The Company uses the tax rates and government
regulations current as of each year-end to calculate those amounts, which for
2008 and 2007 is 17%.
The deferred tax amount is obtained from
analyzing temporary differences that arise due to differences between the tax
and book values of assets and liabilities, mainly allowance for doubtful
accounts, depreciation of property, plant and equipment, staff severance
indemnities and tax losses.
Under Chilean tax regulations tax loss carry forwards can be realized as
future tax benefits with no
time restrictions.
Temporary differences generally become
taxable or deductible when the related asset is recovered or the related
liability is settled. A deferred tax liability or asset represents
the amount of tax payable or refundable in future years under the currently
enacted tax laws and
rates as a result of
temporary differences at the end of the current year.
Deferred tax assets and liabilities are
not discounted at their current value and are classified as
non-current.
(o) Financial assets and
liabilities
All purchases and sales of financial
assets are recognized at fair value on the negotiation date, which is the date
on which the commitment to purchase or sell the asset
occurs.
|
|
i)
|
Financial
investments
|
Marketable financial assets, i.e.
investments made in order to obtain short-term yields due to changes in prices,
are classified within the category of “at fair value with changes in income” and
are presented as current assets. This category is used for financial
assets for which an investment and de-investment strategy is
established. All financial assets included in this category are
recorded at fair value, which is obtained from observable market
data. The resulting gains
or losses from variations
in their fair value at each year-end is recognized in the income statement whether they are realized or
not.
|
|
ii)
|
Accounts
receivable
|
Accounts receivable correspond to
financial assets with fixed and determinable payments that are not traded in
an active market. Trade
accounts receivable are recognized for the amount of the invoice and adjusted with an allowance
for doubtful accounts.
The allowance is calculated by applying different percentages based on age factors until 100% is reached for debts exceeding 120 days and
other specific account analyses.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
|
(o)
|
Financial
assets and liabilities,
continued
|
|
|
ii)
|
Accounts
receivable, continued
|
Short-term trade accounts receivable are
not discounted. The Company has determined that the calculation of
the amortized cost is the same as the invoiced amount since the transaction has
no significant associated costs.
|
|
iii)
|
Cash and cash
equivalents
|
Cash and cash equivalents recognized in
the financial statements comprise cash and bank checking accounts, time deposits
and other very liquid investments with an original maturity of three months or
less. These items are recorded at their historical cost, which does
not significantly differ from their realization value.
|
|
iv)
|
Interest bearing
loans
|
Financial liabilities are valued at
amortized cost using the effective interest rate method. Any difference
between the cash received and the reimbursement value is imputed directly to
income over the term of the agreement. Financial obligations are
presented as non-current liabilities when their expiry term exceeds twelve
months.
|
|
v)
|
Derivative financial
instruments
|
The Company uses derivative financial instruments to manage exposure to
exchange rate and interest rate risks. The Company’s objective in
maintaining derivatives is to minimize these risks using the most effective
method to eliminate or reduce the impact of these exposures.
Derivative financial instruments are carried at fair value, presenting them as
financial assets or as financial liabilities depending on whether the fair value
is positive or negative, respectively. They are classified as current
or non-current depending on whether they mature in less or more than twelve
months. Likewise, derivative financial instruments that meet all requirements to be treated
as hedge instruments for long-term items, are presented as non-current assets or
liabilities, according to their terms.
Hedging of the risk associated to the
variation of the exchange rate of a firm committed transaction can receive the
treatment of a fair value hedge or of a cash flow hedge.
Changes in the fair value of derivatives that have been assigned as and fulfill the requirements to be
treated as fair value hedge instruments, are recognized in the income
statement.
Changes in the fair value of derivatives
that meet the requirements of and have been assigned as cash flow hedges, that
are highly effective, are recognized in shareholders’ equity. The
part considered ineffective is imputed directly to income. When the
forecast transaction or the firm commitment are
recognized in the accounting records of a
non-financial asset or liability, net income or losses accumulated in
shareholders’ equity become part of the initial cost of the corresponding asset
or liability. On the other hand, net income or losses previously recognized in
shareholders’ equity are recognized to income in the same period in which
the hedged transaction affects net income.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
|
(o)
|
Financial
assets and liabilities,
continued
|
|
|
v)
|
Derivative
financial instruments,
continued
|
Initially the Company formally documents
the hedge relationship between the derivative and the hedged item, as well as
the risk management objectives and strategies pursued when establishing the
hedge. This documentation includes identification of the hedge
instrument, the hedged item or operation and the nature of the hedged risk.
Likewise, it states the manner for evaluating its level of effectiveness in
compensating the exposure of the hedged element to changes, whether in its fair
value or cash flows attributable to the risk being hedged. Evaluation
of the effectiveness is prospective and retroactive, both at the beginning of
the hedge relationship as well as systematically throughout the period for which
it was designated.
The fair value of the derivatives
portfolio reflects estimations that are based on calculations made using
observable market data, and specific tools for valuation and management of the
risk of derivatives widely used by various financial
entities.
|
(p)
|
Inventory
|
Materials stored for installation in
investment projects, as well as inventory for consumption and replacement are
valued at cost or net realization value, whichever is
lower. Inventory movements are controlled for using the FIFO
method.
When cash flows related to inventory
purchases are the object of an effective hedge, the corresponding net income
or loss accumulated in shareholders’ equity
becomes part of the cost of the inventory
acquired.
The value of products that are obsolete,
defective or have a slow turnover has been reduced to their possible net
realization value, which has been determined on the basis of a study of
materials with slow turnover.
|
(q)
|
Provisions
|
|
|
(i)
|
Post-employment
benefits
|
The Company is obligated to pay staff
severance indemnities in respect of collective negotiation agreements,
which are provisioned using the method of actuarial value of the accrued cost of
the benefit, using an annual discount rate of 6% and 4.8% in 2007 and 2008,
respectively, as detailed in Note 3, considering estimations such as future
permanence, employee mortality rate and future salary increases determined on
the basis of actuarial calculations. Discount rates are determined by reference
to market interest curves.
|
|
(ii)
|
Other
Provisions
|
Provisions are recognized when the
Company has a present legal or constructive obligation, as a consequence of a past
event, whose settlement requires an output of resources that is considered
probable and can be reliably estimated. That obligation can be legal
or implied, derived from, among other factors,
regulations, contracts, habitual practices or public commitments that create
valid third-party expectations that the Company will assume certain
liabilities.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
|
(r)
|
Revenues and
expenses
|
Revenues and expenses are recognized in the income statement based on
the accrual criteria, i.e. when the real
flow of goods and services that they represent is produced, regardless of the
moment at which the cash flows.
The Company’s revenues are produced
mainly by providing the following telecommunications services: traffic,
connection charges, monthly
fees for the use of the
network, interconnection, network and equipment rental, sale of equipment and
other services, such as value added services (data or text messaging, among
others) or maintenance. Products and services can be sold separately
or jointly, in commercial packages.
Income from traffic is based on the
call initiation establishment tariff, plus tariffs per
call, which vary depending on the time consumed by the user, the distance of the
call and type of service. Traffic is recorded as income as
income as it is used. The amount corresponding to traffic that
has been pre-paid and use is pending generates deferred income
which is recorded in liabilities. Prepaid cards usually have an
expiry period of up to twelve months, and any unused prepaid traffic is recognized directly in income when the card expires, since as
of that moment the Company has no remaining obligations to provide the
service.
In the case of sale of traffic, as well
as of other services, through a fixed tariff for a certain period of time (flat
rate), income is recognized using the straight-line method over the period of
time covered by the rate paid by the customer.
Income from connection charges
originated when customers connect to the Company’s network are deferred and
recognized in income over the average estimated term
of the duration of the relationship with the customer, and vary depending on the type of
service. All associated costs, except those related to extension of
the network, and administrative and commercial expenses, are recognized in the
income statement when they are incurred.
Monthly fees are recognized to income using the straight-line
method in the corresponding period. Rentals and other services are
recognized to income as the service is
provided.
Income from interconnection of
fixed-mobile and mobile-fixed calls, as well as from other services used by
customers, are recognized in the period in which those calls are
made.
Commercial package offers that combine
different elements, in the activities of telephone service, Internet and
television, are analyzed to determine whether it is necessary to separate the
different elements identified, applying in each case the appropriate revenue
recognition criteria. Total income from the package is distributed
among its identified elements by function of their respective fair
values (i.e. the fair value of each individual component in relation to the
total fair value of the package).
All expenses related to these mixed
commercial offers are recognized in the income statement as they are
incurred.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
|
(s)
|
Significant estimates, judgments
and assumptions
|
Below we show the main assumptions, judgments and other relevant sources of
uncertainty in the estimations made as of the closing date, which could have a
significant effect on the financial statements in the future:
|
|
(i)
|
Property, plant and equipment, goodwill and other intangible
assets
|
The accounting treatment of investment
in property, plant and equipment and other intangible assets considers estimations made to determine
the useful lives used to calculate depreciation and amortization.
Determination of useful lives requires
estimations regarding expected technological evolution and alternate uses of the
assets. The hypothesis regarding the technological framework and its
future development imply a significant degree of judgment as the moment and
nature of future technological changes are hard to foresee.
|
|
(ii)
|
Deferred
taxes
|
The Company evaluates the recoverability
of deferred tax assets based on estimations of future income. That
realizability depends in last instance on the
Company’s capacity to generate taxable income throughout the period in which the
deferred tax assets are
deductible. The analysis
takes into consideration the foreseen schedule for reversal of deferred tax
liabilities, as well as estimated taxable profits on the basis of internal
projections which are updated to reflect the most recent operating trends.
Determination of the adequate
classification of tax items depends on various factors, including estimation of
the time and realization of deferred tax assets and the expected amount of tax
payments. Actual income tax collection and payment flows
could result in amount different than the estimations made by
the Company, as a consequence of changes in government legislation or unforeseen
future transactions that could affect tax balances.
|
|
(iii)
|
Provisions
|
Due to the uncertainties inherent to the
estimations necessary to determine the amount of provisions, real disbursements
could differ from the amounts originally recognized on the basis of the
estimations made.
Determination of the amount of the
provision is based on the best estimation of the disbursement that will be
necessary to settle the corresponding obligation, taking into consideration all
the information available at the closing date, including the opinion of
independent experts such as legal advisors or consultants.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
|
(s)
|
Significant
estimates, judgments and assumptions,
continued
|
|
|
iv)
|
Recognition of
revenues
|
Agreements that combine more than one
element
Commercial package offers that combine
different elements are analyzed to determine whether it is necessary to separate
the different elements identified, applying the appropriate revenue recognition
criteria in each case. Total income from the package is distributed
among its identified elements based upon their respective fair
values.
Determination of the fair values of each
of the elements identified implies the need to perform complex estimations due
to the nature of the business.
A change in the estimation of the
relative fair value could affect the distribution of revenues among the
components and as a consequence of this, revenues for future
years.
|
|
v)
|
Post-employment
benefits
|
The cost of defined benefit post retirement
plans as well as the present value of the obligation is determined using
actuarial valuations. The actuarial valuation involves making assumptions about
discount rates, future salary increases, mortality rates and future pension
increases. All assumptions are reviewed at each reporting date. In determining
the appropriate discount rate management considers the interest rates of
corporate bonds in the country with an AA rating. The mortality rate is based on
publicly available mortality tables for the specific
country.
Future salary increase and pension
increases are based on expected future inflation rates for the specific
country.
Further details about the assumptions
used are given in Note 21.
|
|
vi)
|
Financial assets and
liabilities
|
Where the fair value of financial assets
and financial liabilities recorded in the balance sheet cannot be derived from
active markets, they are determined using valuation techniques including the
discounted cash flows model. The inputs to these models are taken from
observable markets where possible, but where this is not feasible, a degree of
judgment is required in establishing fair values. The judgments include
considerations of inputs such as liquidity risk, credit risk and volatility.
Changes in assumptions about these factors could affect the reported fair value
of financial instrument.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
2.
|
Significant
accounting principles,
continued
|
|
(t)
|
Methods of
consolidation
|
Consolidation has been carried out by
applying the following methods of consolidation:
Global integration method for companies
over which control is exerted, whether through effective dominion or due to the
existence of agreements with the rest of the shareholders.
All balances and transactions between
consolidated companies have been eliminated in the consolidation
process. Likewise the margins included in the transactions performed
by companies that are dependent on other Company companies for goods or services
that can be capitalized, have been eliminated in the consolidation
process.
The income statement account and the
consolidated statement of cash flows gather, respectively, the revenues and
expenses and cash flows of the companies that stop forming part of the Company
up to the date on which the participation has been sold or the company has been
liquidated.
The value of the participation of
minority shareholders in the shareholders’ equity and income of the dependent
companies consolidated through global integration is presented under “Minority
Participations” and “Income Attributable to Minority Participations”,
respectively.
|
(u)
|
New IFRS and interpretations of
the IFRS Interpretations Committee
(IFRIC)
|
The following published IFRS and
interpretations of the IFRIC have been issued are still not effective to the Company.
|
Standard
and Standard Amendments
|
Date
of mandatory application
|
|
|
Amendment
of IFRS 1
|
First-time
Adoption of International Financial Reporting Standards
|
January
1, 2009
|
|
Amendment
of IFRS 2
|
Share
based payments
|
January
1, 2009
|
|
Amendment
of IFRS 3R
|
Business
Combinations
|
July
1, 2009
|
|
IFRS
8
|
Operating
Segments
|
January
1, 2009
|
|
Amendment
of IAS 1R
|
Presentation
of financial statements – reviewed presentation
|
January
1, 2009
|
|
Amendment
of IAS 23
|
Borrowing
costs
|
January
1, 2009
|
|
Amendment
of IAS 27R
|
Consolidated
and Individual Financial Statements
|
July
1, 2009
|
|
Amendment
of IAS 32 y IAS 1
|
Financial
Instruments: Disclosure and Presentation - puttable financial instruments
and obligations arising on liquidation
|
January
1, 2009
|
|
Amendment
of IAS 39
|
Financial
Instruments: Recognition and Measurement
|
July
1, 2009
|
|
Interpretations
|
Date
of mandatory application
|
|
|
IFRIC
13
|
Customer
fidelity programs
|
July
1, 2008
|
|
IFRIC
16
|
Hedges
of a net investment in a foreign operation
|
October 1,
2008
|
The
Company has chosen the option of early adoption of IFRS 8 Operating
Segments.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
3.
|
First-time Application
of International Financial Reporting Standards
(IFRS)
|
Telefónica
Chile has prepared financial statements in accordance with accounting principles
applied locally in Chile until the year ended as of December 31, 2007, which for
the purpose of reporting to the Securities and Exchange Commission (SEC), were
presented with a note of reconciliation from Chile GAAP to US
GAAP. These financial statements, as of December 31, 2008, are the
first financial statements the Company has presented in accordance with IFRS. In
addition, the 2007 financial statements are presented under the same standard
for comparison purposes.
The
Company has presented financial information to its parent company in Spain under
IFRS, for consolidation purposes, since the year ended as of December 31, 2005,
considering January 1, 2004 as the transition date.
Transition
of the consolidated financial statements of Telefónica Chile to IFRS has been
carried out through the application of IFRS 1: First-time adoption of
International Financial Reporting Standards, applying the exemption provided in
paragraph 24 a), and considering first-time application adjustments
retroactively from the date adopted by the parent company, Telefónica S.A., i.e.
January 1, 2004.
IFRS 1
allows first-time adopters certain exemptions from general
requirements. The main exceptions applied by Telefónica Chile are as
follows:
|
|
-
|
IFRS
3: Business Combinations has not been applied to the acquisition of
subsidiaries or interest in associates that occurred prior to January 1,
2004.
|
|
|
-
|
IAS
16: Property, plant and equipment and IAS 38: Intangibles
assets, were continued to be carried at their respective carrying amounts
(deemed cost) under former Chile GAAP without restating them to fair value
at January 1, 2004.
|
|
|
-
|
IAS
19: Actuarial gains and losses accumulated from pensions and other
benefits have been recognized directly in retained earnings as of January
1, 2004.
|
|
|
-
|
IAS
21: Accumulated foreign currency translation from all foreign operations
are considered to be zero as of January 1,
2004.
|
The
preparation of our consolidated financial statements under IFRS required a
series of modifications in the presentation and valuation of the standards
applied by the Company until December 31, 2007, since certain IFRS principles
and requirements are substantially different from equivalent local accounting
principles.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
3.
|
First-time
Application of International Financial Reporting Standards
(IFRS),
continued
|
The
following is a detailed description of the main differences between Chilean GAAP
and IFRS applied by the Company and the impact on equity as of December 31, and
January 1, 2007 and on profit for the year ended December 31, 2007, the date of
transition to IFRS with adjustments retroactively as of January 1,
2004.
|
|
a)
|
Reconciliation
of Shareholders’ Equity under Chilean GAAP and IFRS as of January 1 and
December 31, 2007:
|
|
Thousands
of Chilean pesos
|
Equity
As
of 1/01/07
|
Equity
As
of 12/31/07
|
||||||
|
Shareholders’
equity according to CH GAAP
|
900,760,875 | 906,533,598 | ||||||
|
Price-level
restatement
|
(103,944,708 | ) | (186,946,628 | ) | ||||
|
Deferred
taxes, complementary accounts
|
(92,134,324 | ) | (73,576,581 | ) | ||||
|
Capitalization
of interest
|
(54,898,253 | ) | (47,156,181 | ) | ||||
|
Minimum
dividend
|
(12,824,318 | ) | (5,113,188 | ) | ||||
|
Post-employment
benefits
|
(8,433,637 | ) | (7,611,038 | ) | ||||
|
Deferred
taxes effects of IFRS adjustments
|
26,600,262 | 37,172,471 | ||||||
|
Goodwill
|
4,375,033 | 5,944,523 | ||||||
|
Other
minor items
|
(9,480,544 | ) | (8,118,917 | ) | ||||
|
Minority
interest
|
40,861 | 21,180 | ||||||
|
Equity
according to IFRS
|
650,061,247 | 621,149,239 | ||||||
|
|
b)
|
Reconciliation
of profit for the year ended December 31, 2007 under Chilean
GAAP and IFRS:
|
|
Thousands
of Chilean pesos
|
Profit
year
ended 12/31/07
|
|||
|
Net
income according to CH GAAP
|
10,856,131 | |||
|
Price-level
restatement
|
(15,746,064 | ) | ||
|
Deferred
taxes, complementary accounts
|
14,134,785 | |||
|
Capitalization
of interest
|
7,742,072 | |||
|
Post-employment
benefits
|
822,599 | |||
|
Deferred
taxes effects of IFRS adjustments
|
10,098,703 | |||
|
Goodwill
|
1,569,490 | |||
|
Other
minor items
|
2,098,134 | |||
|
Minority
interest
|
(19,681 | ) | ||
|
Profit
according to IFRS
|
31,556,169 | |||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
3.
|
First-time
Application of International Financial Reporting Standards
(IFRS),
continued
|
|
|
a)
|
Price-level
restatement
|
Chilean
GAAP requires that the financial statements be adjusted to reflect the effect of
the loss in the purchasing power of the Chilean peso in the financial position
and operating income of the reporting entities. The method described
below is based on a model that requires calculation of net income or loss due to
net inflation attributed to the monetary assets and liabilities exposed to
variations in the purchasing power of the local currency. Historical
costs of non-monetary assets and liabilities, shareholders’ equity accounts and
income statement accounts have been restated to reflect the variation in the CPI
from the date of acquisition up to year-end. The gain or loss in the
purchasing power included in net income or losses reflects the effects of the
Chilean inflation on the monetary assets and liabilities maintained by the
Company.
IFRS does
not consider indexation due to inflation, in countries that are not
hyperinflationary, such as Chile. Therefore, income statement and
balance sheet accounts are not restated for inflation purposes and variations
are nominal. The effect of price-level restatement mainly affects
assets, depreciation and shareholders’ equity items. The effect of
the application of price-level restatement described above, are included in the
reconciliation.
|
|
b)
|
Deferred
taxes
|
|
|
i)
|
Complementary accounts
|
As of
January 1, 2000, the company recorded income tax in accordance with Technical
Bulletin No. 60 issued by the Chilean Association of Accountants and their
corresponding modifications, recognizing (using the liabilities method) the
deferred tax effects of temporary differences between the financial and tax base
of assets and liabilities. The effect of deferred tax assets and
liabilities not recorded before January 1, 2000 has been recorded as a
transition provision. Those complementary assets or liabilities are
amortized against income during the estimated periods of reversal corresponding
to the underlying temporary differences to which the deferred tax assets or
liabilities are related. The effects of these previously described
complementary accounts, which have been eliminated under IFRS, are included in
the reconciliation.
|
|
ii)
|
Effect of deferred taxes due to
IFRS adjustments
|
Under
IFRS, companies must record deferred taxes in accordance with IAS 12 “Income
Taxes”, which requires a focus on assets and liabilities for the accounting and
reporting of income tax, under the following basic principles: (a) a deferred
tax liability or asset is recognized for estimated tax purposes attributable to
temporary differences and tax loss carry forwards; (b) measurement of deferred
tax assets and liabilities is based on the provisions of the enacted tax law and
the effect of future changes in laws or tax rates are not anticipated; and (c)
the measurement of deferred tax assets is only recognized, if on the basis of
the weight of the available evidence, it is probable it will be realized. The
effects of deferred tax assets and liabilities adjustments due to conversion are
included in the reconciliation.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
3.
|
First-time
Application of International Financial Reporting Standards
(IFRS),
continued
|
|
|
c)
|
Capitalization of
interest
|
Under
Chilean GAAP, all interest on debt directly associated to construction projects
is capitalized, including interest, price-level restatement, and related foreign
currency results. Up to the end of 2002, all the Company’s debts were
considered to be directly associated to construction
projects. Capitalization of interest costs associated to projects
under construction is optional when they are incurred on debt that is not
directly related to such projects. In 2003 under Chile GAAP, the
Company has discontinued capitalization of interest on its construction in
progress since it has not incurred new debts that could be associated to such
construction and the short-term nature of the items that are currently being
included in the category of construction in progress. Under IFRS,
capitalization of interest is necessary for interest that could have been
avoided if the expense for the associated asset had not been
realized. Qualifying
assets, under the criteria of the Telefónica Group, are assets that require at
least 18 months of preparation for their use or sale. The effects of the previously
described recognized income are included in the reconciliation.
The
effects of the application of price-level restatement described in the following
paragraph on property, plant and equipment and their accumulated depreciation,
are included in the reconciliation.
|
|
d)
|
Minimum
Dividend
|
According
to the requirements of Law No. 18,046, the Company must distribute a minimum
dividend in cash equivalent to 30% of net income. Considering the
cash situation, levels of projected investments and solid financial indicators
for 2005 and the following years, on April 14, 2005, the Ordinary Shareholders’
Meeting modified the dividend distribution policy informed at the Ordinary
Shareholders’ Meeting of April 2004 and agreed to distribute 100% of net income
generated during the respective year under Chilean GAAP. Since the
payment of these dividends agree by Ordinary Shareholders’ Meeting is a legal
requirement in Chile, it must be accrued for IFRS purposes to recognize the
corresponding decrease in shareholders’ equity as of each balance sheet
date. Under Chilean GAAP, these dividends are not recorded until they
have received final approval from the Shareholders’ Meeting generally held in
April of the following year. The effects of the adjustment of these
dividends on consolidated shareholders’ equity are shown in the
reconciliation.
|
|
e)
|
Post-employment
benefits
|
According
to the Company’s employment contracts and collective negotiation agreements, it
has a commitment to pay a lump sum to each employee upon termination of their
employment, whether due to death, termination, resignation or
retirement. Up to November 31, 2004 the Company determined these
obligations using the present value method, on the basis of current salaries and
an average estimation of the permanence of each employee at the end of the year,
applying a discount rate of 7%.
Since
December 2004 the Company changed its estimation of staff severance indemnities
by means of incorporating certain additional variables through an actuarial
valuation. This method uses variables such as personnel turnover
rates, average salary increases, labor force mortality and average life of
service as underlying estimations. For CH GAAP the costs resulting
from these changes in estimations were recognized as deferred expenses and
amortized over the period of future permanence of employees. The
effects of amortization of deferred charges described above are included in the
reconciliation. For IFRS purposes, those costs were recognized
directly in retained earnings on that date.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
3.
|
First-time
Application of International Financial Reporting Standards
(IFRS),
continued
|
|
|
e)
|
Post-employment
benefits,
continued
|
During
2006, the Company evaluated the interest rate used for actuarial calculations,
resulting in a reduction of the discount rate from 7% to 6%. The
cost, resulting from this additional assumption change, was deferred and
amortized over the period of future permanence of employees for CH
GAAP. For IFRS purposes, those costs have been recognized in Other
Reserves under Shareholders’ Equity. These adjustments, as well as
the effects of amortization of the deferred charges described above, are
included in the reconciliation.
|
|
f)
|
Goodwill
|
Under CH GAAP, as of January 1, 2004 the assets
acquired and liabilities assumed are recorded at fair value and the excess of
the purchase price of the investments over the fair value of the assets acquired
and liabilities assumed is recorded as goodwill. Under this
regulation goodwill resulting from business combinations is amortized using the
straight-line method over a maximum period of 20 years. As goodwill
is not amortized under IFRS, the adjustments presented in the reconciliation
reverses the effects of amortization of goodwill recorded under Chilean
GAAP.
|
4.
|
Accounting
Changes
|
|
|
a)
|
Accounting
Changes:
|
During the years covered by these
consolidated financial statements, accounting principles have been applied
consistently.
|
|
b)
|
Changes in
estimations:
|
|
|
i)
|
Turnover
rate
|
During the first half of 2008 the
turnover rate used to calculate staff severance indemnities was
evaluated. After completing this evaluation, the Company decided to
increase the turnover rate from 2.3% to 5.5%. As a result of this
modification, in 2008 the Company recorded a charge to shareholders’ equity in
the amount of ThCh$5,356,385, in “Other miscellaneous
reserves”.
|
|
ii)
|
Discount
rate
|
The interest rate used to calculate the
current value of staff severance indemnities was evaluated in December
2008. After completing this analysis the Company decided to reduce
the discount rate from 6% to 4.8%. As a result of this modification,
the company recorded a charge to shareholders’ equity in the amount of
ThCh$4,004,377, in “Other
miscellaneous reserves”.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
5.
|
Financial
information by segments
|
Telefónica Chile discloses segment information in
accordance with IFRS 8, “Operating Segments” which establishes the standards for
reporting operating segments and related disclosures for products and services
and geographical areas. Operating segments are defined as components
of an entity for which there is separate financial information that is regularly
used by the main decision maker to decide how to assign resources and to
evaluate performance. The Company presents segment information that
is used by management for internal decision making purposes.
The Company manages and measures the
performance of its operations by business segment. The operating
segments reported internally are as follows:
|
|
a)
|
Fixed
Telecommunications
|
Fixed telephony services include basic
services, line connections and installations, value added services, handset
commercialization marketing and dedicated lines, and broadband
services. Consistent with the financial statements, revenues are
recorded as the services are provided.
|
|
b)
|
Television
|
Multimedia services include development,
installation, maintenance, marketing and operations cable, satellite and
regular television
using any physical or
technical means, including individual paid services or multiple basic channels,
special or paid, videos on demand and interactive or multimedia television
services. Consistent with the financial statements, revenue is recognized as the services are
delivered. The Multimedia segment began operating in
2006.
|
|
c)
|
Long
Distance
|
The Company provides national and
international long distance services. The long distance business
segment also rents its long distance network to other telecommunications
operators, such as long distance carriers, mobile telephony operators and
Internet service suppliers. Consistently with the financial
statements, revenue is recognized as the services are
provided.
|
|
d)
|
Corporate Communications and
Data
|
The corporate communications service
includes sale and rental of telecommunications equipment and sale of networks to
corporate customers, rental of networks associated to private corporate customer
network projects, and data transmission services. Revenue is recognized as the services are
provided or at the point of sale.
|
|
e)
|
Others
|
Other services mainly include public
telephony services and interconnection services provided to other local
networks. Revenue is recognized as the services are
provided.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
5.
|
Financial
information by segments, continued
|
Relevant information regarding Compañía
de Telecomunicaciones de Chile S.A. and its main subsidiaries, which represent
different segments, together with information regarding other subsidiaries is as
follows:
For 2007:
|
For
the year ended as of December 31, 2007
|
Fixed
Telecommunications
|
Long
Distance
|
Corporate
Communication and Data
|
Television
|
Other
|
Eliminations
|
Total
|
|||||||||||||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
||||||||||||||||||||||
|
Revenue
from external customers
|
533,271,399 | 56,044,545 | 79,389,896 | 25,273,785 | 2,320,369 | - | 696,299,994 | |||||||||||||||||||||
|
Revenue
between segments
|
55,240,907 | 35,227,203 | 11,546,661 | 78,163 | 11,064,435 | (113,157,369 | ) | - | ||||||||||||||||||||
|
Other
operating income
|
10,659,887 | 117,523 | 432,547 | 281,068 | 7,390 | (2,439,795 | ) | 9,058,620 | ||||||||||||||||||||
|
Employee
expenses
|
(69,234,927 | ) | (1,056,395 | ) | (10,947,487 | ) | (305,853 | ) | (4,723,591 | ) | - | (86,268,253 | ) | |||||||||||||||
|
Depreciation
and amortization
|
(145,561,815 | ) | (10,838,011 | ) | (17,915,854 | ) | (7,272,395 | ) | (2,861 | ) | - | (181,590,936 | ) | |||||||||||||||
|
Other
operating expenses
|
(335,307,689 | ) | (52,638,281 | ) | (54,425,957 | ) | (22,635,748 | ) | (8,497,834 | ) | 115,597,164 | (357,908,345 | ) | |||||||||||||||
|
Interest
income
|
8,784,713 | 3,346,095 | 1,073,385 | 136,910 | 30,744 | (6,367,748 | ) | 7,004,099 | ||||||||||||||||||||
|
Interest
expenses
|
(22,274,318 | ) | - | (2,288 | ) | (1,805,432 | ) | (334,474 | ) | 6,367,748 | (18,048,764 | ) | ||||||||||||||||
|
Financial
expenses, net
|
(13,489,605 | ) | 3,346,095 | 1,071,097 | (1,668,522 | ) | (303,730 | ) | - | (11,044,665 | ) | |||||||||||||||||
|
Participation
in profit of associated companies accounted for using the equity
method
|
30,416,564 | 30,526 | 62,352 | - | 15 | (28,726,681 | ) | 1,782,776 | ||||||||||||||||||||
|
Foreign
currency exchange differences
|
(30,203,860 | ) | (128,805 | ) | 190,120 | 323,600 | 26,157 | - | (29,792,788 | ) | ||||||||||||||||||
|
Profit
before taxes
|
35,790,861 | 30,104,400 | 9,403,375 | (5,925,902 | ) | (109,650 | ) | (28,726,681 | ) | 40,536,403 | ||||||||||||||||||
|
Income
tax expense
|
(5,513,727 | ) | (3,970,017 | ) | (939,748 | ) | 1,254,628 | 188,630 | - | (8,980,234 | ) | |||||||||||||||||
|
Profit
for the year
|
30,277,134 | 26,134,383 | 8,463,627 | (4,671,274 | ) | 78,980 | (28,726,681 | ) | 31,556,169 | |||||||||||||||||||
|
Segment
assets
|
1,553,067,931 | 201,164,625 | 111,248,488 | 57,795,489 | 7,236,182 | (466,968,379 | ) | 1,463,544,336 | ||||||||||||||||||||
|
Investment in
associated companies accounted for using the equity
method
|
260,778,488 | 72,808 | 148,405 | 155 | - | (253,378,698 | ) | 7,621,158 | ||||||||||||||||||||
|
Capital
expenditures
|
94,309,306 | 4,057,119 | 9,509,574 | 33,388,505 | 39,413 | - | 141,303,917 | |||||||||||||||||||||
|
Segment
liabilities
|
904,591,112 | 46,439,207 | 37,475,916 | 46,361,849 | 6,006,425 | (198,479,412 | ) | 842,395,097 | ||||||||||||||||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
5.
|
Financial
information by segment,
continued
|
For 2008:
|
For
the year ended as of December 31, 2008
|
Fixed
Telecommunications
|
Long
Distance
|
Corporate
Communication and Data
|
Television
|
Other
|
Eliminations
|
Total
|
|||||||||||||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
||||||||||||||||||||||
|
Revenue
from external customers
|
553,530,249 | 55,697,408 | 88,479,708 | 39,234,870 | 1,788,513 | - | 738,730,748 | |||||||||||||||||||||
|
Revenue
between segments
|
68,838,306 | 46,126,912 | 11,984,786 | 11,025 | 12,775,281 | (139,736,310 | ) | - | ||||||||||||||||||||
|
Other
operating income
|
26,618,572 | 26,179 | 1,888,055 | 9,191 | 75 | (411,021 | ) | 28,131,051 | ||||||||||||||||||||
|
Employee
expenses
|
(85,718,332 | ) | (941,408 | ) | (9,044,699 | ) | (307,868 | ) | (5,016,210 | ) | - | (101,028,517 | ) | |||||||||||||||
|
Depreciation
and amortization
|
(130,152,306 | ) | (10,455,669 | ) | (16,177,350 | ) | (10,783,683 | ) | (4,518 | ) | - | (167,573,526 | ) | |||||||||||||||
|
Other
operating expenses
|
(379,693,991 | ) | (60,303,802 | ) | (66,707,230 | ) | (33,733,612 | ) | (10,786,885 | ) | 140,147,331 | (411,078,189 | ) | |||||||||||||||
|
Interest
income
|
10,111,216 | 5,783,764 | 446,973 | 26,025 | 10,300 | (11,048,137 | ) | 5,330,141 | ||||||||||||||||||||
|
Interest
expenses
|
(38,400,778 | ) | - | (821,794 | ) | (4,066,921 | ) | (98,268 | ) | 11,048,137 | (32,339,624 | ) | ||||||||||||||||
|
Financial
expenses, net
|
(28,289,562 | ) | 5,783,764 | (374,821 | ) | (4,040,896 | ) | (87,968 | ) | - | (27,009,483 | ) | ||||||||||||||||
|
Participation
in profit of associated companies accounted for using the equity
method
|
33,893,397 | 25,296 | 51,668 | - | 241 | (32,363,645 | ) | 1,606,957 | ||||||||||||||||||||
|
Foreign
currency exchange differences
|
(7,594,025 | ) | 1,358,947 | (278,147 | ) | (1,090,503 | ) | 100,194 | - | (7,503,534 | ) | |||||||||||||||||
|
Profit
before taxes
|
51,432,308 | 37,317,627 | 9,821,970 | (10,701,476 | ) | (1,231,277 | ) | (32,363,645 | ) | 54,275,507 | ||||||||||||||||||
|
Income
tax expense
|
(3,648,275 | ) | (4,514,753 | ) | (309,863 | ) | 2,149,529 | (45,573 | ) | - | (6,368,935 | ) | ||||||||||||||||
|
Profit
for the year
|
47,784,033 | 32,802,874 | 9,512,107 | (8,551,947 | ) | (1,276,850 | ) | (32,363,645 | ) | 47,906,572 | ||||||||||||||||||
|
Segment
assets
|
1,573,219,794 | 233,730,250 | 110,425,109 | 89,098,702 | 8,014,499 | (529,032,376 | ) | 1,485,455,978 | ||||||||||||||||||||
|
Investment in
associated companies accounted for using the equity
method
|
266,472,815 | 79,225 | 205,378 | - | 12 | (257,342,152 | ) | 9,415,278 | ||||||||||||||||||||
|
Capital
expenditures
|
100,213,694 | 9,256,961 | 18,302,502 | 20,215,930 | - | - | 147,989,087 | |||||||||||||||||||||
|
Segment
liabilities
|
939,895,525 | 52,414,709 | 43,215,545 | 86,146,707 | 7,180,239 | (248,136,392 | ) | 880,716,333 | ||||||||||||||||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
6.
|
Business
combinations
|
During 2007 and 2008 there have been no
business combinations, and there are no significant variations in the
consolidation perimeter.
|
7.
|
Intangibles
|
The detail of intangible assets for 2007 and 2008
is as follows:
|
2007
|
2008
|
|||||||||||||||||||||||
|
Description
|
Gross
intangible
ThCh$
|
Accumulated
amortization
ThCh$
|
Net
intangible
ThCh$
|
Gross
intangible ThCh$
|
Accumulated
amortization
ThCh$
|
Net
intangible
ThCh$
|
||||||||||||||||||
|
Licenses
(software)
|
107,358,267 | (81,351,128 | ) | 26,007,139 | 118,019,057 | (98,869,654 | ) | 19,149,403 | ||||||||||||||||
|
Underwater
cable rights
|
17,041,652 | (2,734,785 | ) | 14,306,867 | 17,041,652 | (3,847,128 | ) | 13,194,524 | ||||||||||||||||
|
Total
|
124,399,919 | (84,085,913 | ) | 40,314,006 | 135,060,709 | (102,716,782 | ) | 32,343,927 | ||||||||||||||||
Movement of intangible assets for 2007
and 2008 is as follows:
|
2007
ThCh$
|
2008
ThCh$
|
|||||||
|
Movements
|
||||||||
|
Beginning
balance
|
44,326,334 | 40,314,006 | ||||||
|
Additions
|
13,903,103 | 10,660,790 | ||||||
|
Amortization
|
(17,915,431 | ) | (18,630,869 | ) | ||||
|
Ending
balance
|
40,314,006 | 32,343,927 | ||||||
Licenses correspond to software
licenses, which are obtained through non-renewable contracts therefore the
Company has defined that they have definite useful lives of 3
years.
Intangible assets are amortized using
the straight-line method over their estimated useful
lives. Amortization for each period is recognized in the statement of
income under “Depreciation and Amortization”. Intangible assets are
subjected to impairment each time there are indications of a potential loss of
value. In the financial statements for 2007 and 2008 no
impairment has been
recognized.
In the “Additions” column, the main
additions for 2007 and 2008 correspond to investments in information
applications.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
8.
|
Goodwill
|
Goodwill movement for 2007 and 2008 is
as follows:
|
Taxpayer
number
|
Company
|
2006
balance
ThCh$
|
Additions
ThCh$
|
Eliminations
ThCh$
|
2007
balance
ThCh$
|
||||||||||||||
| 96.551.670-0 |
Telefónica
Larga Distancia S.A.
|
16,045,361 | - | - | 16,045,361 | ||||||||||||||
| 96.811.570-7 |
Instituto
Telefónica Chile S.A.
|
38,923 | - | - | 38,923 | ||||||||||||||
| 96.834.320-3 |
Telefónica
Internet Empresas S.A.
|
620,232 | - | - | 620,232 | ||||||||||||||
|
Total
|
16,704,516 | - | - | 16,704,516 | |||||||||||||||
|
Taxpayer
number
|
Company
|
2007
balance ThCh$
|
Additions
ThCh$
|
Eliminations
ThCh$
|
2008
balance
ThCh$
|
||||||||||||||
| 96.551.670-0 |
Telefónica
Larga Distancia S.A.
|
16,045,361 | - | - | 16,045,361 | ||||||||||||||
| 96.811.570-7 |
Instituto
Telefónica Chile S.A.
|
38,923 | - | - | 38,923 | ||||||||||||||
| 96.834.320-3 |
Telefónica
Internet Empresas S.A.
|
620,232 | - | - | 620,232 | ||||||||||||||
|
Total
|
16,704,516 | - | - | 16,704,516 | |||||||||||||||
Impairment tests have been determined
using the recoverable value of the assets. The calculation is made considering
internal and external source factors. Internal factors considered include
budgets and average term of asset performance, plus the experience of the
Company on its business environment. External factors considered include a
constant growth rate of the cash flows generated throughout the terms over 5
years, and discount rates deemed appropriate for the business and the assets
under analysis (see note 31 for more details about market
conditions)
|
9.
|
Property,
plant and equipment
|
The detail of property, plant and equipment items
for 2007 and 2008 and their corresponding accumulated depreciation is as follows:
|
2007
|
2008
|
|||||||||||||||||||||||
|
Description
|
Gross
property, plant & equipment
ThCh$
|
Accumulated
depreciation
ThCh$
|
Net
property, plant & equipment
ThCh$
|
Gross
property, plant & equipment
ThCh$
|
Accumulated
depreciation
ThCh$
|
Net
property, plant & equipment
ThCh$
|
||||||||||||||||||
|
Construction
in progress
|
83,157,667 | - | 83,157,667 | 89,191,982 | - | 89,191,982 | ||||||||||||||||||
|
Land
|
24,355,712 | - | 24,355,712 | 23,150,505 | - | 23,150,505 | ||||||||||||||||||
|
Buildings
|
700,193,694 | (337,079,728 | ) | 363,113,966 | 702,347,554 | (348,691,682 | ) | 353,655,872 | ||||||||||||||||
|
Plant
and equipment
|
2,537,817,647 | (1,985,219,970 | ) | 552,597,677 | 2,610,651,306 | (2,073,352,304 | ) | 537,299,002 | ||||||||||||||||
|
Information
technology equipment
|
68,459,539 | (64,655,519 | ) | 3,804,020 | 71,370,615 | (66,349,059 | ) | 5,021,556 | ||||||||||||||||
|
Fixed
installations and accessories
|
26,962,493 | (25,997,842 | ) | 964,651 | 29,076,625 | (26,460,955 | ) | 2,615,670 | ||||||||||||||||
|
Motor
vehicles
|
545,592 | (378,815 | ) | 166,777 | 598,678 | (407,213 | ) | 191,465 | ||||||||||||||||
|
Leasehold
improvements
|
7,556,895 | (7,436,818 | ) | 120,077 | 1,512,586 | (1,062,070 | ) | 450,516 | ||||||||||||||||
|
Total
|
3,449,049,239 | (2,420,768,692 | ) | 1,028,280,547 | 3,527,899,851 | (2,516,323,283 | ) | 1,011,576,568 | ||||||||||||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
9.
|
Property,
plant and equipment,
continued
|
Movements of property, plant and
equipment items for 2007 are as follows:
|
Movement
|
Construction
in progress
ThCh$
|
Land
ThCh$
|
Buildings,
net
ThCh$
|
Plant
and equipment, net
ThCh$
|
Information
technology equipment, net
ThCh$
|
Fixed
installations and accessories, net
ThCh$
|
Motor
vehicles, net
ThCh$
|
Leasehold
improvements, net
ThCh$
|
Property,
plant and equipment, net
ThCh$
|
|||||||||||||||||||||||||||
|
Beginning
balance
|
88,968,046 | 24,480,728 | 374,844,302 | 561,418,380 | 8,344,756 | 1,495,587 | 115,287 | 388,037 | 1,060,055,123 | |||||||||||||||||||||||||||
|
Additions
|
141,303,917 | - | - | - | - | - | - | - | 141,303,917 | |||||||||||||||||||||||||||
|
Withdrawals
|
- | (156,270 | ) | (714,719 | ) | (7,683,291 | ) | (629,486 | ) | (6,630 | ) | (1,631 | ) | (210,961 | ) | (9,402,988 | ) | |||||||||||||||||||
|
Depreciation
expense
|
- | - | (18,354,365 | ) | (136,873,942 | ) | (7,718,819 | ) | (649,861 | ) | (21,519 | ) | (56,999 | ) | (163,675,505 | ) | ||||||||||||||||||||
|
Other
increases (decreases)
|
(147,114,296 | ) | 31,254 | 7,338,748 | 135,736,530 | 3,807,569 | 125,555 | 74,640 | - | - | ||||||||||||||||||||||||||
|
Movement
subtotal
|
(5,810,379 | ) | (125,016 | ) | (11,730,336 | ) | (8,820,703 | ) | (4,540,736 | ) | (530,936 | ) | 51,490 | (267,960 | ) | (31,774,576 | ) | |||||||||||||||||||
|
Balance
December 31, 2007
|
83,157,667 | 24,355,712 | 363,113,966 | 552,597,677 | 3,804,020 | 964,651 | 166,777 | 120,077 | 1,028,280,547 | |||||||||||||||||||||||||||
Movements of property, plant and
equipment items for 2008 are as follows:
|
Movements
|
Construction
in progress
ThCh$
|
Land
ThCh$
|
Buildings,
net
ThCh$
|
Plant
and equipment, net
ThCh$
|
Information
technology equipment, net
ThCh$
|
Fixed
installations and accessories, net
ThCh$
|
Motor
vehicles, net
ThCh$
|
Leasehold
improvements, net
ThCh$
|
Property,
plant and equipment, net
ThCh$
|
|||||||||||||||||||||||||||
|
Beginning
balance
|
83,157,667 | 24,355,712 | 363,113,966 | 552,597,677 | 3,804,020 | 964,651 | 166,777 | 120,077 | 1,028,280,547 | |||||||||||||||||||||||||||
|
Additions
|
147,989,087 | - | - | - | - | - | - | - | 147,989,087 | |||||||||||||||||||||||||||
|
Transfers
to non-current assets and surrendered units held for sale
(1)
|
- | (1,429,874 | ) | (776,401 | ) | - | - | - | - | - | (2,206,275 | ) | ||||||||||||||||||||||||
|
Withdrawals
|
- | (292,710 | ) | (3,637,903 | ) | (8,641,453 | ) | (877,361 | ) | (94,707 | ) | - | - | (13,544,134 | ) | |||||||||||||||||||||
|
Depreciation
expense
|
- | - | (18,181,364 | ) | (126,840,706 | ) | (3,385,722 | ) | (420,740 | ) | (28,339 | ) | (85,786 | ) | (148,942,657 | ) | ||||||||||||||||||||
|
Other
increases (decreases)
|
(141,954,772 | ) | 517,377 | 13,137,574 | 120,183,484 | 5,480,619 | 2,166,466 | 53,027 | 416,225 | - | ||||||||||||||||||||||||||
|
Movement
subtotal
|
6,034,315 | (1,205,207 | ) | (9,458,094 | ) | (15,298,675 | ) | 1,217,536 | 1,651,019 | 24,688 | 330,439 | (16,703,979 | ) | |||||||||||||||||||||||
|
Balance
December 31, 2008
|
89,191,982 | 23,150,505 | 353,655,872 | 537,299,002 | 5,021,556 | 2,615,670 | 191,465 | 450,516 | 1,011,576,568 | |||||||||||||||||||||||||||
(1)
See
Note 10.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
9.
|
Property,
plant and equipment,
continued
|
Material real property originating from
net financial leases amounts to ThCh$396.508 y ThCh$388,775 and is recorded in the
buildings category for 2007 and 2008, respectively.
Other decreases correspond to transfers
from assets under construction to property, plant and
equipment.
The net amount of Property, Plant and
Equipment items which are temporarily out of service as of December 31, 2007 and 2008 is not
significant.
The Company does not keep assets that
are not in use other than those classified as held for sale.
During the normal course of its
operations the Company monitors both new and existing assets, and their
depreciation rates, aligning them to technological evolution and
development of the markets in which it competes.
|
10.
|
Non-current
assets and surrendered items held for
sale
|
Non-current assets and surrendered items
held for sale correspond to land and buildings that have been destined for sale
in accordance with the Company’s rationalization program for 2009, the detail of
which for 2007 and 2008 is as follows:
|
Non-current
assets and surrendered sets items for sale
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Land
|
- | 1,429,874 | ||||||
|
Buildings
|
- | 776,401 | ||||||
|
Total
|
- | 2,206,275 | ||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
11.
|
Investment
in associates
|
|
|
a)
|
The detail of associated companies as well as the
Company’ shares of
their summary financial information for 2007 and 2008 is as
follows:
|
|
RUT
|
Name
|
Investment
balance
|
Participation
percentage
|
Current
assets
|
Non-current
assets
|
Current
liabilities
|
Non-current
liabilities
|
Ordinary
revenues
|
Ordinary
expenses
|
Profit
|
|
Foreign
|
TBS
Celular Participación S.A.
|
3,171,941
|
2.61
|
285,038
|
3,539,920
|
126,988
|
3,697,969
|
85,220
|
87,525
|
20,660
|
|
96.895.220-k
|
Atento
Chile S.A.
|
4,449,217
|
28.84
|
5,680,354
|
1,793,406
|
3,003,670
|
4,470,090
|
14,039,885
|
12,166,742
|
1,762,116
|
|
Total
|
7,621,158
|
1,782,776
|
|
RUT
|
Name
|
Investment
balance
|
Participation
percentage
|
Current
assets
|
Non-current
assets
|
Current
liabilities
|
Non-current
liabilities
|
Ordinary
revenues
|
Ordinary
expenses
|
Profit
|
|
Foreign
|
TBS
Celular Participación S.A.
|
3,675,447
|
2.61
|
454,403
|
4,534,166
|
344,581
|
4,643,988
|
55,773
|
56,539
|
54,763
|
|
96.895.220-k
|
Atento
Chile S.A.
|
5,739,831
|
28.84
|
6,945,614
|
1,431,814
|
2,603,462
|
5,773,966
|
14,979,872
|
13,427,677
|
1,552,194
|
|
Total
|
9,415,278
|
1,606,957
|
For 2007 and 2008 the Company has
investments in two associated companies, the first is TBS Celular Participación
S.A. with 2.61% participation. The country of origin is Brazil, its functional currency is the real
and the main activity is “Telecommunications”.
The second is Atento Chile S.A. with
28.84% participation. The country of origin is Chile, its functional currency is the Chilean
peso and its main activity is “Call Center Services”.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
11.
|
Investment
in associates,
continued:
|
|
|
b)
|
The movement of participations in
associated companies during 2007 and 2008 is as
follows:
|
|
|
2007
|
2008
|
||||||||||||||||||||||
|
Movement
|
|
TBS
Celular Participación S.A.
|
Atento
Chile S.A.
|
Total
|
TBS
Celular Participación S.A.
|
Atento
Chile S.A.
|
Total
|
|||||||||||||||||
|
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
||||||||||||||||||
|
Beginning
balance
|
3,566,516 | 3,836,918 | 7,403,434 | 3,171,941 | 4,449,217 | 7,621,158 | ||||||||||||||||||
|
Participation
in common profits
|
20,660 | 1,762,116 | 1,782,776 | 54,763 | 1,552,194 | 1,606,957 | ||||||||||||||||||
|
Dividends
received
|
- | (1,816,920 | ) | (1,816,920 | ) | (147,382 | ) | (433,661 | ) | (581,043 | ) | |||||||||||||
|
Increase
(decrease) in foreign currency translation
|
(555,223 | ) | - | (555,223 | ) | 709,518 | - | 709,518 | ||||||||||||||||
|
Other
increase (decrease)
|
139,988 | 667,103 | 807,091 | (113,393 | ) | 172,081 | 58,688 | |||||||||||||||||
|
Movement subtotal
|
(394,575 | ) | 612,299 | 217,724 | 503,506 | 1,290,614 | 1,794,120 | |||||||||||||||||
|
Ending
balance
|
3,171,941 | 4,449,217 | 7,621,158 | 3,675,447 | 5,739,831 | 9,415,278 | ||||||||||||||||||
|
12.
|
Trade
accounts receivable and other accounts
receivable
|
|
|
a)
|
The
detail of current and non-current receivables is as
follows:
|
|
2007
ThCh$
|
$2008
ThCh$
|
|||||||||||||||
|
Description
|
Current
|
Non-current
|
Current
|
Non-current
|
||||||||||||
|
Trade
accounts receivable
|
266,197,278 | 3,650,874 | 268,943,152 | 6,046,424 | ||||||||||||
|
Miscellaneous
receivables
|
5,835,933 | 9,403,535 | 10,459,421 | 8,512,768 | ||||||||||||
|
Allowance
for doubtful accounts
|
(79,496,119 | ) | - | (107,243,411 | ) | - | ||||||||||
|
Total
|
192,537,092 | 13,054,409 | 172,159,162 | 14,559,192 | ||||||||||||
|
|
b)
|
Movements
of allowance for doubtful accounts are as
follows:
|
|
2007
|
2008
|
|||||||
|
Movements
|
ThCh$
|
ThCh$
|
||||||
|
Beginning
balance
|
66,746,428 | 79,496,119 | ||||||
|
Provision
|
19,631,252 | 35,753,879 | ||||||
|
Write-off
|
(6,881,561 | ) | (8,006,587 | ) | ||||
|
Movement
subtotals
|
12,749,691 | 27,747,292 | ||||||
|
Ending
balance
|
79,496,119 | 107,243,411 | ||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
13.
|
Accounts
receivable from and payable to related
entities
|
|
|
a)
|
Receivables for transactions of
sales from related parties are as
follows:
|
|
Name
|
Taxpayer
No.
|
Nature
of the relationship
|
2007
|
2008
|
|
ThCh$
|
ThCh$
|
|||
|
Current
|
Current
|
|||
|
Telefónica
Ingeniería de Seguridad S.A.
|
59.083.900-0
|
Relationship
w/parent co.
|
18,657
|
42,806
|
|
Telefónica
Móviles Chile S.A.
|
87.845.500-2
|
Relationship
w/parent co.
|
7,077,478
|
8,111,836
|
|
Telefónica
Internacional Chile S.A.
|
96.527.390-5
|
Parent
company
|
-
|
22,136
|
|
Telefónica
Móviles Chile Inversiones S.A.
|
96.672.150-2
|
Relationship
w/parent co.
|
17,140
|
22,136
|
|
Telefónica
Móviles Chile Larga Distancia S.A.
|
96.672.160-k
|
Relationship
w/parent co.
|
363,601
|
396,609
|
|
Terra
Networks Chile S.A.
|
96.834.230-4
|
Relationship
w/parent co.
|
422,520
|
353,783
|
|
Atento
Chile S.A.
|
96.895.220-k
|
Associate
|
508,724
|
527,937
|
|
Telefónica
International Wholesale Services Chile S.A.
|
96.910.730-9
|
Relationship
w/parent co.
|
695,087
|
923,581
|
|
Telefónica
Móviles Soluciones y Aplicaciones S.A.
|
96.990.810-7
|
Relationship
w/parent co.
|
120,104
|
146,837
|
|
Atento
Colombia S.A.
|
Foreign
|
Relationship
w/parent co.
|
5,090
|
35,930
|
|
Colombia
Telecomunicaciones S.A.E.S.P.(Telecom.)
|
Foreign
|
Relationship
w/parent co.
|
149,515
|
338,853
|
|
Fundación
Telefónica Brasil
|
Foreign
|
Relationship
w/parent co.
|
2,154
|
-
|
|
Fundación
Telefónica Perú
|
Foreign
|
Relationship
w/parent co.
|
2,154
|
-
|
|
Media
Networks Perú S.A.C.
|
Foreign
|
Relationship
w/parent co.
|
2,154
|
-
|
|
Otecel
S.A.
|
Foreign
|
Relationship
w/parent co.
|
75,848
|
103,341
|
|
Telefónica
Argentina
|
Foreign
|
Relationship
w/parent co.
|
2,692,563
|
3,653,283
|
|
Telefónica
Data Corp
|
Foreign
|
Relationship
w/parent co.
|
33,629
|
33,629
|
|
Telefónica
Data Corp USA Inc.
|
Foreign
|
Relationship
w/parent co.
|
24,242
|
56,231
|
|
Telefónica
de España
|
Foreign
|
Relationship
w/parent co.
|
1,953,904
|
2,531,621
|
|
T.
Moviles España
|
Foreign
|
Relationship
w/parent co.
|
81,607
|
-
|
|
T.
Perú
|
Foreign
|
Relationship
w/parent co.
|
551,127
|
3,292,271
|
|
T.Gestiona
Perú
|
Foreign
|
Relationship
w/parent co.
|
2,154
|
-
|
|
T.Internacional
S.A.U. - España
|
Foreign
|
Relationship
w/parent co.
|
427,305
|
408,212
|
|
T.Moviles
de Argentina
|
Foreign
|
Relationship
w/parent co.
|
43,088
|
43,088
|
|
T.Moviles
de Colombia
|
Foreign
|
Relationship
w/parent co.
|
47,397
|
852
|
|
T.Moviles
de Panamá
|
Foreign
|
Relationship
w/parent co.
|
10,772
|
-
|
|
T.Moviles
El Salvador
|
Foreign
|
Relationship
w/parent co.
|
2,154
|
840
|
|
T.Moviles
Guatemala
|
Foreign
|
Relationship
w/parent co.
|
19,390
|
13,375
|
|
T.Moviles
Perú
|
Foreign
|
Relationship
w/parent co.
|
32,316
|
-
|
|
T.Sol.Inf.Com.España
|
Foreign
|
Relationship
w/parent co.
|
1,522,632
|
1,522,632
|
|
Telcel
Venezuela
|
Foreign
|
Relationship
w/parent co.
|
2,278,654
|
5,191,572
|
|
Telefónica
Celular De Nicaragua
|
Foreign
|
Relationship
w/parent co.
|
1,140
|
-
|
|
Telefónica
I + D - España
|
Foreign
|
Relationship
w/parent co.
|
103,341
|
115,369
|
|
Telefónica
Multimedia S.A.C. Peru
|
Foreign
|
Relationship
w/parent co.
|
77,829
|
90,065
|
|
Telefónica
S.A.
|
Foreign
|
Relationship
w/parent co.
|
102,231
|
124,039
|
|
Telefónica
Serv.Comerciales S.A.C.
|
Foreign
|
Relationship
w/parent co.
|
2,154
|
-
|
|
Telecomunicaciones
Sao Paulo
|
Foreign
|
Relationship
w/parent co.
|
187,435
|
88,323
|
|
Terra
Brasil
|
Foreign
|
Relationship
w/parent co.
|
17,236
|
17,236
|
|
TIWS
España
|
Foreign
|
Relationship
w/parent co.
|
83,210
|
83,210
|
|
TLD
Puerto Rico
|
Foreign
|
Relationship
w/parent co.
|
-
|
10,164
|
|
Vivo
Brasil
|
Foreign
|
Relationship
w/parent co.
|
23,699
|
-
|
|
TOTAL
|
19,781,435
|
28,301,797
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
13.
|
Accounts
receivable from and payable to related entities,
continued
|
|
|
b)
|
Payables for transactions of
purchase from related parties are as
follows:
|
|
Company
|
Taxpayer
No.
|
Nature
of the relationship
|
2007
|
2008
|
|
ThCh$
|
ThCh$
|
|||
|
current
|
current
|
|||
|
T.Ingeniería
Seguridad
|
59083900-0
|
Relationship
w/parent co.
|
1,584
|
112,000
|
|
T.
Moviles Chile S.A.
|
87845500-2
|
Relationship
w/parent co.
|
14,005,859
|
10,956,223
|
|
Terra
Netwoorks Chile
|
93834230-4
|
Relationship
w/parent co.
|
2,407,010
|
3,152,262
|
|
T.
Internacional Chile
|
96527390-5
|
Relationship
w/parent co.
|
612,227
|
439,956
|
|
T.Moviles
Chile Inv.
|
96672150-2
|
Relationship
w/parent co.
|
-
|
94,590
|
|
T.
Moviles Chile LD
|
96672160-k
|
Relationship
w/parent co.
|
43,766
|
189,570
|
|
Atento
Chile
|
96895220-k
|
Associate
|
3,243,700
|
3,912,051
|
|
TIWS
Chile
|
96910730-9
|
Relationship
w/parent co.
|
7,702,499
|
8,834,478
|
|
Colombia
Telecomunicaciones
|
Foreign
|
Relationship
w/parent co.
|
145,963
|
296,803
|
|
Media
Networks Peru
|
Foreign
|
Relationship
w/parent co.
|
15,910
|
7,489
|
|
Otecel
S.A. - Ecuador
|
Foreign
|
Relationship
w/parent co.
|
-
|
18,372
|
|
T.
Argentina
|
Foreign
|
Relationship
w/parent co.
|
1,016,503
|
2,599,853
|
|
T.
España
|
Foreign
|
Relationship
w/parent co.
|
6,986
|
1,125,292
|
|
T.
Peru
|
Foreign
|
Relationship
w/parent co.
|
188,173
|
2,105,468
|
|
T.Gestiona
España
|
Foreign
|
Relationship
w/parent co.
|
68,201
|
137
|
|
T.Moviles
El Salvador
|
Foreign
|
Relationship
w/parent co.
|
7,643
|
64,990
|
|
T.Moviles
Guatemala
|
Foreign
|
Relationship
w/parent co.
|
1,970
|
38,444
|
|
Telcel
Venezuela
|
Foreign
|
Relationship
w/parent co.
|
-
|
76,814
|
|
Telefónica
Data Usa Inc
|
Foreign
|
Relationship
w/parent co.
|
-
|
3,829
|
|
Telefónica
Federal Telefe - Argentina
|
Foreign
|
Relationship
w/parent co.
|
9,084
|
14,260
|
|
Telefónica
Gestión Servicios Compartidos Peru
|
Foreign
|
Relationship
w/parent co.
|
927
|
2,068
|
|
Telefónica
I + D - España
|
Foreign
|
Relationship
w/parent co.
|
1,270,040
|
2,016,069
|
|
Telefónica
Internacional
|
Foreign
|
Relationship
w/parent co.
|
-
|
178,772
|
|
Telefónica
Multimedia S.A.C. Peru
|
Foreign
|
Relationship
w/parent co.
|
1,331,185
|
708,939
|
|
Telefónica
S.A.
|
Foreign
|
Relationship
w/parent co.
|
482,788
|
597,576
|
|
Telefónica
Serv. De Música -España
|
Foreign
|
Relationship
w/parent co.
|
33,546
|
113,510
|
|
Telecomunicaciones
Sao Paulo
|
Foreign
|
Relationship
w/parent co.
|
832,846
|
2,580,330
|
|
Tevefe
|
Foreign
|
Relationship
w/parent co.
|
-
|
18,360
|
|
TLD
Puerto Rico
|
Foreign
|
Relationship
w/parent co.
|
20,234
|
18,109
|
|
Total
|
33,448,644
|
40,276,614
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
13.
|
Accounts
receivable from and payable to related entities,
continued
|
|
|
c)
|
Transactions:
|
|
Company
|
RUT
|
Nature
of the relationship
|
Transaction
description
|
2007
|
2008
|
|
ThCh$
|
ThCh$
|
||||
|
Atento
Chile
|
96895220-k
|
Associate
|
Sale
|
1,542,156
|
1,627,679
|
|
Costs
|
(22,485,981)
|
(23,355,730)
|
|||
|
Atento
Colombia
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
5,980
|
30,415
|
|
Otecel
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
180,586
|
263,275
|
|
Costs
|
(73,289)
|
(34,632)
|
|||
|
Sao
Paulo Telecom.Part
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
69,994
|
-
|
|
Costs
|
(72,763)
|
-
|
|||
|
Telefónica
Argentina
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
2,105,054
|
2,285,725
|
|
Costs
|
(2,710,768)
|
(3,624,216)
|
|||
|
Telefónica Centroam.
Guat.Hold
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
16,819
|
15,258
|
|
Costs
|
(82,034)
|
(50,247)
|
|||
|
Telefónica El Salvador
Hold
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
11,612
|
4,340
|
|
Costs
|
(72,675)
|
(147,483)
|
|||
|
Telefónica
España
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
1,696,939
|
1,284,590
|
|
Costs
|
(531,315)
|
(611,686)
|
|||
|
Telefónica I+D
España
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
11,731
|
-
|
|
Telefónica. Ingeniería
Seguridad
|
59083900-0
|
Relationship
w/parent co.
|
Sale
|
85,451
|
20,017
|
|
Costs
|
(186,191)
|
(134,035)
|
|||
|
Telefónica
Internacional
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
205,400
|
-
|
|
Costs
|
-
|
(306,374)
|
|||
|
Telefónica Internacional
Chile
|
96527390-5
|
Relationship
w/parent co.
|
Sale
|
-
|
11,141
|
|
Costs
|
(555,266)
|
(526,241)
|
|||
|
Telefónica Moviles
Chile
|
87845500-2
|
Relationship
w/parent co.
|
Sale
|
16,944,206
|
21,786,162
|
|
Costs
|
(42,893,952)
|
(45,036,521)
|
|||
|
Telefónica Moviles Chile
Inversio
|
96672150-2
|
Relationship
w/parent co.
|
Sale
|
73,400
|
83,242
|
|
Costs
|
-
|
(636,655)
|
|||
|
Telefónica. Moviles Chile
Larga D.
|
96672160-k
|
Relationship
w/parent co.
|
Sale
|
942,963
|
1,363,848
|
|
Costs
|
(1,201)
|
-
|
|||
|
Telefónica
Peru
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
1,444,564
|
2,250,563
|
|
Costs
|
(1,382,680)
|
(1,114,007)
|
|||
|
Telefónica. Telecom,
Colombia
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
84,554
|
271,518
|
|
Costs
|
(199,244)
|
(293,447)
|
|||
|
Telefónica
USA
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
8,627
|
26,886
|
|
Costs
|
-
|
(4,032)
|
|||
|
Telcel
Venezuela
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
1,947,477
|
5,198,488
|
|
Costs
|
(101,406)
|
(24,388)
|
|||
|
Telefónica
S.A.
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
-
|
26,114
|
|
Costs
|
(482,788)
|
(668,512)
|
|||
|
Telesp
Fija
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
104,430
|
145,168
|
|
Costs
|
(965,607)
|
(1,964,664)
|
|||
|
Terra
Chile
|
93834230-4
|
Relationship
w/parent co.
|
Sale
|
1,829,465
|
1,029,135
|
|
Costs
|
(10,606,583)
|
(7,834,867)
|
|||
|
TIWS
Chile
|
96910730-9
|
Relationship
w/parent co.
|
Sale
|
1,326,566
|
1,311,363
|
|
Costs
|
(7,828,079)
|
(13,117,590)
|
|||
|
TIWS
España
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
66,510
|
-
|
|
Costs
|
-
|
(6,641)
|
|||
|
TLD
Puerto Rico
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
10,298
|
30,354
|
|
Costs
|
(35,090)
|
(56,618)
|
|||
|
TmAS
|
Foreign
|
Relationship
w/parent co.
|
Sale
|
217,519
|
160,086
|
|
Costs
|
-
|
(1,579)
|
|||
|
Media
Network Latam SAC
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
-
|
(32,370)
|
|
Telefónica
Gestión SS Compartidos España
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
(234,608)
|
-
|
|
Telefónica
Multimedia SAC
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
(1,669,700)
|
(2,230,535)
|
|
T.Servicios
de Música
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
(33,546)
|
(410,846)
|
|
Telefe
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
(7,018)
|
(32,662)
|
|
Tevefe
Comercialización
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
-
|
(18,360)
|
|
TWIS
América
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
(1,276,450)
|
(790,906)
|
|
TWIS
USA
|
Foreign
|
Relationship
w/parent co.
|
Costs
|
(22,980)
|
-
|
Article 89 of the Corporations Law
requires that a company’s transactions with related companies (defined as
entities belonging to the same group of companies) be on similar terms as those
normally prevailing in the market.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
13.
|
Accounts
receivable from and payable to related entities,
continued
|
|
|
d)
|
Transactions, continued:
|
There have been charges and credits to
current accounts in the accounts receivable of companies due to billing for sale
of materials, equipment and services.
The conditions of the Mercantile Current
Account and Mandate are current and non-current respectively, accruing interest
at a variable interest rate that adjusts to market
conditions.
Sales and service rendering expire in
the short-term (less than one year) and the expiry conditions for each case vary
by virtue of the transaction that
generates them.
|
|
e)
|
Remuneration and benefits received
by the Company’s key
employees:
|
|
Remunerations
received by key management employees
|
2007
|
2008
|
|
ThCh$
|
ThCh$
|
|
|
Salaries
|
6,929,350
|
8,043,008
|
|
Post
employment benefits
|
2,729,072
|
562,936
|
|
Total
|
9,658,422
|
8,605,944
|
“Salaries” correspond to gross
remunerations and incentives paid to the Executives of the Company and its
subsidiaries, the General Manager and first-line Managers, including
subsidiaries. “Post employment benefits” correspond to indemnities
paid.
|
14.
|
Equity
|
(a) Capital:
As of
December 31, 2007 and 2008, the Company’s paid-in capital is composed as
follows:
Number
of shares:
|
Series
|
Number of
shares subscribed
|
Number
of shares paid
|
Number 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
|
|
Total
|
957,157,085
|
957,157,085
|
957,157,085
|
The
shares do not have a nominal value. There were no issuance and purchase of
shares
Capital:
|
2007
|
2008
|
|||
|
Series
|
Subscribed
capital
|
Paid-in capital
|
Subscribed
capital
|
Paid-in capital
|
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
|
|
A
|
673,130,040
|
673,130,040
|
637,296,227
|
637,296,227
|
|
B
|
64,049,071
|
64,049,071
|
60,639,444
|
60,639,444
|
|
Total
|
737,179,111
|
737,179,111
|
697,935,671
|
697,935,671
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
14.
|
Equity,
continued
|
(b) Distribution
of shareholders:
As
established in Circular No. 792 issued by the Superintendency of Securities and
Insurance of Chile, the distribution of shareholders based on their
participation in the Company as of December 31, 2008 is as follows:
|
Type
of Shareholder
|
Participation
percentage %
|
Number
of shareholders
|
|
Participation
of 10% or more
|
97.685097
|
3
|
|
Less
than 10% participation:
|
-
|
-
|
|
Investment
equal to or exceeding UF 200
|
1.723737
|
558
|
|
Investment
under UF 200
|
0.591166
|
9,455
|
|
Total
|
100
|
10,016
|
|
Company’s
parent
|
97.68
|
3
|
The
Extraordinary Shareholders’ Meeting held on October 7, 2008, in relation to the
Takeover Bid (OPA) (“Oferta Pública de Adquisición de Acciones”) of Compañía de
Telecomunicaciones de Chile S.A., rejected modification of the Company’s bylaws,
requested to eliminate the restrictions and references in accordance with Title
XII of Decree Law No. 3,500, which refers among other things to maximum
permitted concentration of 45%.
On
October 11, 2008, the Company’s Board of Directors, accepting the petition of
shareholders AFP Capital S.A., AFP Cuprum S.A. and AFP Provida, holders of over
10% of the shares, and within the process of the Takeover Bid (OPA) made by
Inversiones Telefónica Internacional Holding Ltda., subsidiary of Telefónica
S.A. (Spain), agreed to call an Extraordinary Shareholders’
Meeting.
On
October 28, 2008, the Extraordinary Shareholders’ Meeting approved modification
of the Company bylaws with the restrictions and references mentioned in the
first paragraph, with this allowing Inversiones Telefónica Internacional Holding
Ltda. to acquire 51.85% of the shares of Telefónica Chile S.A.
As of
December 31, 2008, Telefónica S.A (Spain), through its subsidiaries Inversiones
Telefónica Internacional Holding Ltda. and Telefónica Internacional Chile S.A.,
holders of 51.85% and 44.9%, respectively, have indirectly become owners of
96.75% of the Company’s shareholders’ equity.
(c) Dividends:
|
|
i)
|
Dividends
policy:
|
In
accordance with Law No. 18,046, unless a different agreement is adopted
unanimously at the Shareholders’ Meeting, when there is net income, at least 30%
of it must be distributed as dividends.
The
Ordinary Shareholders’ Meeting held on April 14, 2005 considering the cash
situation, the projected investment levels and solid financial indicators,
modified the dividends policy, informed at the Ordinary Shareholders’ Meeting of
April 2004, and agreed to distribute 100% of net income generated during the
respective year, through an interim dividend in November of each year and a
final dividend in May of the following year.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
14.
|
Equity,
continued
|
(c) Dividends,
continued
|
|
ii)
|
Capital
decrease and dividends distributed:
|
On April
13, 2007, the Ordinary Shareholders’ Meeting approved payment of final dividend
No. 173 in the amount of ThCh$ 12,866,433, equivalent to Ch$ 13.44234 per share,
in respect of profit 2006. The dividend was paid on May 15,
2007.
Additionally,
the Extraordinary Shareholders’ Meeting held on April 13, 2007, approved
modification of the Company’s bylaws in order to perform a capital decrease of
ThCh$ 48,815,011 for the purpose of distributing additional cash to shareholders
in 2007. The capital distribution was equivalent to Ch$51 per
share.
On
October 24, 2007, the Board of Directors agreed to pay interim dividend No. 174
of Ch$6 per share, equivalent to ThCh$ 5,742,943 in respect of profit generated
by the Company through September 30, 2007.
On April
14, 2008, the Ordinary Shareholders’ Meeting approved payment of final dividend
No. 175, in the amount of ThCh$ 5,050,016, equivalent to Ch$ 5.276058 per share,
in respect of profit for 2007. The dividend was paid in May
2008.
Additionally,
the Extraordinary Shareholders’ Meeting held on April 14, 2008 approved
modification of the Company’s bylaws in order to decrease capital in the amount
of ThCh$ 39,243,440, for the purpose of distributing additional cash to the
shareholders in 2008. The capital distribution was equivalent to Ch$
41 per share. The dividend was paid in June 2008.
On
November 19, 2008, the Board of Directors agreed to pay interim dividend No. 176
of Ch$6 per share, equivalent to ThCh$ 5,742,943, in respect of profit for
2008. The dividend was paid in December 2008.
(d) Other
reserves:
The detail of Other in “Other reserves” for 2007 and 2008 corresponds to the effective
portion of the change in fair value of derivative instruments designated as
hedge instruments of forecasted transactions.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
15.
|
Derivative
financial instruments
|
The composition of derivative financial
instruments for 2007 and 2008 is as
follows:
|
Description
|
2007
|
2008
|
||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||
|
Current
ThCh$
|
Non-current
ThCh$
|
Current
ThCh$
|
Non-current
ThCh$
|
Current
ThCh$
|
Non-current
ThCh$
|
Current
ThCh$
|
Non-current
ThCh$
|
|
|
Hedge,
cash flows derivatives
|
3,835
|
-
|
1,433,087
|
-
|
66,928
|
-
|
2,658,139
|
-
|
|
Hedge,
interest rate derivatives
|
94,228
|
-
|
570,947
|
-
|
-
|
-
|
2,663,505
|
-
|
|
Hedge,
foreign currency derivatives
|
33,225
|
-
|
21,460,726
|
45,373,745
|
3,299,054
|
36,963,243
|
932,057
|
470,129
|
|
Total
|
131,288
|
-
|
23,464,760
|
45,373,745
|
3,365,982
|
36,963,243
|
6,253,701
|
470,129
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
15.
|
Derivative
financial instruments,
continued
|
The detail of derivatives for 2007 is as
follows:
|
Type
of derivative
|
Type
of contract
|
CONTRACT
DESCRIPTION
|
Value
of
the hedged
item
ThCh$
|
Affected
accounting accounts
|
||||||||||
|
Asset
/ Liability
|
Effect
on income
|
|||||||||||||
|
Contract
value
|
Maturity
or
expiry term
|
Specific
Item
|
Purchase/
sale position |
Hedged
item or transaction
|
||||||||||
|
Name
|
Amount
|
Name
|
Amount
ThCh$
|
Realized
ThCh$
|
Unrealized
ThCh$
|
|||||||||
|
S
|
CCPE
|
150,000,000
|
III
Q 2008
|
Cross
Currency Swap
|
P
|
Obligation
in US$
|
150,000,000
|
74,533,500
|
Asset
|
74,172,949
|
(10,288,340)
|
-
|
||
|
Liability
|
(97,167,238)
|
|||||||||||||
|
S
|
CCPE
|
100,000,000
|
II
Q 2009
|
Cross
Currency Swap
|
P
|
Obligation
in US$
|
100,000,000
|
49,689,000
|
Asset
|
49,669,022
|
(6,456,140)
|
-
|
||
|
Liability
|
(64,615,995)
|
|||||||||||||
|
S
|
CCPE
|
120,000,000
|
II
Q 2011
|
Cross
Currency Swap
|
P
|
Obligation
in US$
|
120,000,000
|
59,626,800
|
Asset
|
59,653,568
|
(9,382,483)
|
-
|
||
|
Liability
|
(73,377,129)
|
|||||||||||||
|
S
|
CCPE
|
100,000,000
|
IV
Q 2009
|
Cross
Currency Swap
|
P
|
Obligation
in US$
|
100,000,000
|
49,689,000
|
Asset
|
49,639,748
|
(4,259,237)
|
(201,837)
|
||
|
Liability
|
(63,718,533)
|
|||||||||||||
|
S
|
CCPE
|
30,000,000
|
II
Q 2011
|
Cross
Currency Swap
|
P
|
Obligation
in US$
|
30,000,000
|
14,906,700
|
Asset
|
14,832,944
|
(5,917,546)
|
(242,767)
|
||
|
Liability
|
(17,722,570)
|
|||||||||||||
|
FR
|
CI
|
13,331,151
|
I
Q 2008
|
Exchange
Rate
|
P
|
-
|
-
|
-
|
Asset
|
6,624,114
|
(7,856)
|
-
|
||
|
Liability
|
(6,731,323)
|
|||||||||||||
|
FR
|
CI
|
641,546
|
I Q
2008
|
Exchange
Rate
|
P
|
-
|
-
|
-
|
Asset
|
179,838
|
33,227
|
-
|
||
|
Liability
|
(146,612)
|
|||||||||||||
|
Exchange
insurance expired during the period (net)
|
1,352,024
|
|||||||||||||
|
Asset
|
254,772,183
|
|||||||||||||
|
Liability
|
(323,479,400)
|
|||||||||||||
|
TOTAL
|
(34,926,351)
|
(444,604)
|
||||||||||||
|
Types of
derivatives:
|
Types of
contract:
|
|
FR:
Forward
|
CCPE:
Existing items hedge contract (“contrato de cobertura de partidas
existents”)
|
|
S :
Swap
|
CCTE:
Expected transactions hedge contract (“Contrato de cobertura para
transacciones esperadas”)
|
|
CI :
Investment contract (“Contrato de
inversion”)
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
15.
|
Derivative
financial instruments,
continued
|
The detail of derivatives for 2008 is as
follows:
|
Type
of derivative
|
Type
of contract
|
CONTRACT
DESCRIPTION
|
Value
of
the hedged
Item
ThCh$
|
Affected
accounting accounts
|
|||||||||||
|
Contract
value
|
Maturity
or expiry
term
|
Specific
Item
|
Purchase/ sale position |
Asset
/ Liability
|
Effect
on income
|
||||||||||
|
Hedged
item or transaction
|
|||||||||||||||
|
Name
|
Amount
|
Name
|
Amount
|
Realized
|
Unrealized
|
||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
|||||||||||||
|
S
|
CCPE
|
90,000,000
|
II
Q 2011
|
Exchange
Rate
|
P
|
Obligation
in US$
|
90,000,000
|
57,280,500
|
Asset
|
57,280,500
|
8,310,742
|
-
|
|||
|
Liability
|
(58,890,139)
|
||||||||||||||
|
S
|
CCTE
|
50,000,000
|
II
Q 2009
|
Exchange
Rate
|
P
|
Obligation
in US$
|
50,000,000
|
31,822,500
|
Asset
|
31,822,500
|
4,008,263
|
53,097
|
|||
|
Liability
|
(34,838,128)
|
||||||||||||||
|
S
|
CCTE
|
150,000,000
|
IV
Q 2009
|
Exchange
Rate
|
P
|
Obligation
in US$
|
150,000,000
|
95,467,500
|
Asset
|
95,467,500
|
16,726,495
|
(624,722)
|
|||
|
Liability
|
(95,983,900)
|
||||||||||||||
|
S
|
CCTE
|
60,000,000
|
II
Q 2011
|
Exchange
Rate
|
P
|
Obligation
in US$
|
60,000,000
|
38,187,000
|
Asset
|
38,187,000
|
6,924,409
|
(772,371)
|
|||
|
Liability
|
(36,647,111)
|
||||||||||||||
|
S
|
CCTE
|
150,000,000
|
II
Q 2013
|
Exchange
Rate
|
P
|
Obligation
in US$
|
150,000,000
|
95,467,500
|
Asset
|
95,467,500
|
16,770,262
|
113,766
|
|||
|
Liability
|
(69,381,040)
|
||||||||||||||
|
S
|
CCTE
|
1,635,880
|
II
Q 2009
|
Exchange
Rate
|
P
|
Obligation
in US$
|
1,635,880
|
35,093,835
|
Asset
|
35,093,835
|
1,390,798
|
(476,007)
|
|||
|
Liability
|
(32,862,612)
|
||||||||||||||
|
S
|
CCTE
|
3,555,000
|
II
Q 2010
|
Exchange
Rate
|
P
|
Obligation
in US$
|
3,555,000
|
76,263,886
|
Asset
|
76,263,886
|
2,594,842
|
(1,009,603)
|
|||
|
Liability
|
(71,798,629)
|
||||||||||||||
|
S
|
CCTE
|
595,690
|
II
Q 2011
|
Exchange
Rate
|
P
|
Obligation
in US$
|
595,690
|
12,779,088
|
Asset
|
12,779,088
|
509,914
|
(160,366)
|
|||
|
Liability
|
(12,038,430)
|
||||||||||||||
|
S
|
CCTE
|
3,000,000
|
IV
Q 2012
|
Exchange
Rate
|
P
|
Obligation
in US$
|
3,000,000
|
64,357,710
|
Asset
|
64,357,710
|
1,954,656
|
-
|
|||
|
Liability
|
(60,728,625)
|
||||||||||||||
|
FR
|
CI
|
4,342,148
|
I Q
2009
|
Exchange
Rate
|
P
|
Obligation
in US$
|
4,342,148
|
2,763,560
|
Asset
|
2,763,560
|
46,678
|
-
|
|||
|
Liability
|
(2,713,048)
|
||||||||||||||
|
FR
|
CCPE
|
104,548
|
I Q
2009
|
Exchange
Rate
|
P
|
Obligation
in US$
|
104,548
|
66,539
|
Asset
|
66,539
|
-
|
20,250
|
|||
|
Liability
|
(46,289)
|
||||||||||||||
|
FR
|
CCTE
|
185,018
|
II
Q 2009
|
Exchange
Rate
|
P
|
Obligation
in US$
|
185,018
|
50,267
|
Asset
|
50,267
|
-
|
(16,271)
|
|||
|
Liability
|
(66,539)
|
||||||||||||||
|
Exchange
insurance expired during the year (net)
|
(2,329,175)
|
||||||||||||||
|
Asset
|
509,599,885
|
||||||||||||||
|
Liability
|
(475,994,490)
|
||||||||||||||
|
TOTAL
|
-
|
56,907,884
|
(2,872,227)
|
||||||||||||
|
Type of
derivatives:
|
Types of
contract:
|
|
FR:
Forward
|
CCPE:
Existing items hedge contract (“contrato de cobertura de partidas
existents”)
|
|
S :
Swap
|
CCTE:
Expected transactions hedge contract (“Contrato de cobertura para
transacciones esperadas”)
|
|
CI :
Investment contract (“Contrato de
inversion”)
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
16.
|
Cash
and cash equivalents
|
The composition of cash and cash equivalents for 2007 and 2008 is as
follows:
|
Description
|
2007
ThCh$
|
2008
ThCh$
|
|
Cash
(a)
|
5,386,166
|
11,089,444
|
|
Time
deposits (b)
|
67,698,285
|
50,928,621
|
|
Public
offer promissory notes (c)
|
-
|
9,537,310
|
|
Total
|
73,084,451
|
71,555,375
|
|
|
a)
|
Cash
|
Cash
corresponds to money held in cash and bank accounts; the book value is the same
as the fair value.
|
|
b)
|
Time
deposits
|
Time
deposits, with original expiry in less than three months, are recorded at fair
value and detailed, for 2007 and 2008, as follows:
|
Placement
|
Entity
|
Currency
|
Original
currency principal (thousands)
|
Annual
rate %
|
Maturity
|
Local
currency principals ThCh$
|
Accrued
interest local currency ThCh$
|
2007
Total
ThCh$
|
|
12-Nov-07
|
BBVA
|
CLP
|
600,000
|
6.12
|
03-Jan-08
|
600,000
|
4,998
|
604,998
|
|
12-Nov-07
|
BCO
SANTANDER
|
CLP
|
1,900,000
|
6.24
|
03-Jan-08
|
1,900,000
|
16,137
|
1,916,137
|
|
13-Nov-07
|
BBVA
|
CLP
|
900,000
|
6.12
|
03-Jan-08
|
900,000
|
7,344
|
907,344
|
|
13-Nov-07
|
BANK
BOSTON
|
CLP
|
700,000
|
6.00
|
03-Jan-08
|
700,000
|
5,600
|
705,600
|
|
21-Nov-07
|
CORP
BANCA
|
CLP
|
6,100,000
|
6.24
|
21-Jan-08
|
6,100,000
|
42,293
|
6,142,293
|
|
21-Nov-07
|
BCO
SANTANDER
|
CLP
|
600,000
|
6.36
|
21-Jan-08
|
600,000
|
4,240
|
604,240
|
|
21-Nov-07
|
BCO
SANTANDER
|
CLP
|
1,600,000
|
6.36
|
14-Jan-08
|
1,600,000
|
11,307
|
1,611,307
|
|
22-Nov-07
|
BBVA
|
CLP
|
2,300,000
|
6.18
|
09-Jan-08
|
2,300,000
|
15,399
|
2,315,399
|
|
23-Nov-07
|
BBVA
|
CLP
|
1,900,000
|
6.18
|
10-Jan-08
|
1,900,000
|
12,394
|
1,912,394
|
|
27-Nov-07
|
BBVA
|
CLP
|
2,700,000
|
6.18
|
11-Jan-08
|
2,700,000
|
15,759
|
2,715,759
|
|
28-Nov-07
|
BCO
CHILE
|
CLP
|
3,400,000
|
6.36
|
14-Jan-08
|
3,400,000
|
19,296
|
3,419,296
|
|
29-Nov-07
|
BCO
CHILE
|
CLP
|
3,100,000
|
6.36
|
02-Jan-08
|
3,100,000
|
17,526
|
3,117,526
|
|
30-Nov-07
|
BCO
CHILE
|
CLP
|
3,400,000
|
6.36
|
25-Jan-08
|
3,400,000
|
18,620
|
3,418,620
|
|
30-Nov-07
|
BCI
|
CLP
|
1,300,000
|
6.12
|
21-Jan-08
|
1,300,000
|
6,851
|
1,306,851
|
|
07-Dec-07
|
BCO
FALABELLA
|
CLP
|
2,100,000
|
6.06
|
24-Jan-08
|
2,100,000
|
8,484
|
2,108,484
|
|
07-Dec-07
|
BCO
SECURITY
|
CLP
|
900,000
|
6.36
|
24-Jan-08
|
900,000
|
3,816
|
903,816
|
|
10-Dec-07
|
BCO
SECURITY
|
CLP
|
1,500,000
|
6.36
|
21-Jan-08
|
1,500,000
|
5,565
|
1,505,565
|
|
11-Dec-07
|
CITIBANK
NA
|
CLP
|
5,100,000
|
5.88
|
11-Jan-08
|
5,100,000
|
16,660
|
5,116,660
|
|
14-Dec-07
|
BANK
BOSTON
|
CLP
|
2,600,000
|
6.96
|
14-Jan-08
|
2,600,000
|
8,545
|
2,608,545
|
|
14-Dec-07
|
CORP
BANCA
|
CLP
|
1,400,000
|
6.84
|
14-Jan-08
|
1,400,000
|
4,522
|
1,404,522
|
|
14-Dec-07
|
BCO
SECURITY
|
CLP
|
600,000
|
6.72
|
14-Jan-08
|
600,000
|
1,904
|
601,904
|
|
14-Dec-07
|
BCI
|
CLP
|
4,900,000
|
6.6
|
14-Jan-08
|
4,900,000
|
15,272
|
4,915,272
|
|
18-Dec-07
|
BCI
|
CLP
|
4,100,000
|
7.2
|
20-Feb-08
|
4,100,000
|
10,660
|
4,110,660
|
|
26-Dec-07
|
BCO
SANTANDER
|
CLP
|
1,900,000
|
7.32
|
20-Feb-08
|
1,900,000
|
1,932
|
1,901,932
|
|
27-Dec-07
|
BCO
SANTANDER
|
CLP
|
4,500,000
|
7.2
|
20-Mar-08
|
4,500,000
|
3,600
|
4,503,600
|
|
27-Dec-07
|
BCO
FALABELLA
|
CLP
|
1,400,000
|
6.96
|
20-Mar-08
|
1,400,000
|
1,083
|
1,401,083
|
|
27-Dec-07
|
BCI
|
CLP
|
100,000
|
6.72
|
20-Mar-08
|
100,000
|
75
|
100,075
|
|
28-Dec-07
|
BANK
BOSTON
|
CLP
|
3,000,000
|
7.08
|
01-Feb-08
|
3,000,000
|
1,770
|
3,001,770
|
|
28-Dec-07
|
BANK
BOSTON
|
CLP
|
2,000,000
|
7.08
|
12-Feb-08
|
2,000,000
|
1,180
|
2,001,180
|
|
26-Dec-07
|
CITIBANK
NY
|
USD
|
700
|
3.85
|
04-Jan-08
|
347,823
|
186
|
348,009
|
|
04-Dec-07
|
BCI
|
UF
|
17
|
1.2
|
04-Mar-08
|
331,731
|
299
|
332,030
|
|
10-Dec-07
|
BCI
|
USD
|
159
|
5.23
|
09-Jan-08
|
78,990
|
241
|
79,231
|
|
10-Dec-07
|
BCI
|
USD
|
113
|
5.23
|
09-Jan-08
|
56,013
|
170
|
56,183
|
|
Total
|
67,414,557
|
283,728
|
67,698,285
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
16.
|
Cash
and cash equivalents,
continued
|
|
|
b)
|
Time
deposits, continued
|
|
Placement
|
Entity
|
Currency
|
Original
currency principal (thousands)
|
Annual
rate %
|
Maturity
|
Local
currency principal ThCh$
|
Accrued
interest local currency
ThCh$
|
2008
Total
ThCh$
|
|
01-Dec-08
|
BANCO
SANTANDER
|
CLP
|
6,200,000
|
8.88
|
20-Jan-09
|
6,200,000
|
45,879
|
6,245,879
|
|
02-Dec-08
|
BANCO
SANTANDER
|
CLP
|
3,500,000
|
8.88
|
20-Feb-09
|
3,500,000
|
25,037
|
3,525,037
|
|
02-Dec-08
|
BANCO
SANTANDER
|
CLP
|
2,000,000
|
8.88
|
20-Feb-09
|
2,000,000
|
14,307
|
2,014,307
|
|
03-Dec-08
|
BCI
|
CLP
|
3,000,000
|
8.88
|
16-Feb-09
|
3,000,000
|
20,720
|
3,020,720
|
|
03-Dec-08
|
BCI
|
CLP
|
2,300,000
|
8.88
|
18-Feb-09
|
2,300,000
|
15,885
|
2,315,885
|
|
04-Dec-08
|
BBVA
|
CLP
|
3,900,000
|
8.82
|
12-Feb-09
|
3,900,000
|
25,799
|
3,925,799
|
|
05-Dec-08
|
BANCO
CHILE
|
CLP
|
2,450,000
|
8.4
|
05-Jan-09
|
2,450,000
|
14,863
|
2,464,863
|
|
09-Dec-08
|
BBVA
|
CLP
|
2,500,000
|
8.34
|
07-Jan-09
|
2,500,000
|
12,742
|
2,512,742
|
|
15-Dec-08
|
BCI
|
CLP
|
3,600,000
|
8.64
|
14-Jan-09
|
3,600,000
|
13,824
|
3,613,824
|
|
15-Dec-08
|
BANCO
CHILE
|
CLP
|
600,000
|
8.52
|
14-Jan-09
|
600,000
|
2,272
|
602,272
|
|
16-Dec-08
|
BANK
BOSTON
|
CLP
|
3,500,000
|
8.52
|
26-Jan-09
|
3,500,000
|
12,425
|
3,512,425
|
|
23-Dec-08
|
BANCO
SANTANDER
|
CLP
|
4,500,000
|
8.88
|
23-Mar-09
|
4,500,000
|
8,880
|
4,508,880
|
|
24-Dec-08
|
BBVA
|
CLP
|
2,900,000
|
8.88
|
12-Jan-09
|
2,900,000
|
5,007
|
2,905,007
|
|
24-Dec-08
|
BCI
|
CLP
|
3,000,000
|
7.2
|
12-Jan-09
|
3,000,000
|
4,200
|
3,004,200
|
|
24-Dec-08
|
BANCO
SANTANDER
|
CLP
|
1,300,000
|
7.8
|
12-Jan-09
|
1,300,000
|
1,972
|
1,301,972
|
|
30-Dec-08
|
BCI
|
CLP
|
600,000
|
7.2
|
06-Jan-09
|
600,000
|
120
|
600,120
|
|
30-Dec-08
|
BBVA
|
CLP
|
3,200,000
|
8.64
|
09-Feb-09
|
3,200,000
|
768
|
3,200,768
|
|
30-Dec-08
|
BANCO
CHILE
|
CLP
|
700,000
|
8.4
|
29-Jan-09
|
700,000
|
163
|
700,163
|
|
02-Dec-08
|
BCI
|
UF
|
17
|
2.5
|
03-Mar-09
|
363,858
|
733
|
364,591
|
|
10-Dec-08
|
BCI
|
CLP
|
101,511
|
0.72
|
09-Jan-09
|
101,511
|
512
|
102,023
|
|
10-Dec-08
|
BCI
|
USD
|
71
|
2.43
|
09-Jan-09
|
44,927
|
64
|
44,991
|
|
31-Dec-08
|
CITIBANK
NY
|
USD
|
695
|
-
|
02-Jan-09
|
442,153
|
-
|
442,153
|
|
Total
|
50,702,449
|
226,172
|
50,928,621
|
|
|
c)
|
Public offer promissory
notes
|
Public
offer promissory notes, corresponding to financial instruments issued by the
State, are recorded at fair value and for 2008 are as follows:
|
Code
|
Dates
|
Counterpart
|
Original
currency
|
Subscription
value ThCh$ |
Annual
rate
|
Final
value
|
Instrument
identification
|
Accounting
value 2008
|
|
|
Beginning
|
Ending
|
%
|
ThCh$
|
ThCh$
|
|||||
|
CRV
|
22-Dec-08
|
05-Jan-09
|
HSBC
|
CLP
|
3,400,000
|
7.56%
|
3,406,426
|
BCU0300510
|
3,406,426
|
|
CRV
|
30-Dec-08
|
06-Jan-09
|
HSBC
|
USD
|
3,455,924
|
0.40%
|
3,455,962
|
BCU0500910
|
3,455,962
|
|
BCP0600109
|
05-Dec-08
|
02-Jan-09
|
Banco
Central
|
CLP
|
2,674,922
|
6.00%
|
2,674,922
|
BCP0600109
|
2,674,922
|
|
Total
|
9,530,846
|
9,537,310
|
9,537,310
|
||||||
As of
December, 31, 2007 the Company has not registered balance for this
transactions.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
17.
|
Marketable
financial investments
|
The
composition of marketable financial investments for 2007 and 2008 is as
follows:
|
Financial
assets at fair value with changes in incomes
|
2007
|
2008
|
|
ThCh$
|
ThCh$
|
|
|
Financial
assets at fair value with changes in incomes
|
13,273,715
|
13,228,981
|
|
Total
|
13,273,715
|
13,228,981
|
Marketable
financial investments correspond to time deposits due in over three months and
Central Bank promissory notes, these investments are valued at fair value with
an effect on income.
The
detail for 2007 and 2008 is as follows:
|
Instrument
|
Date
|
Par
value
|
Accounting
value
|
Market
value
|
||
|
Purchase
|
Maturity
|
ThCh$
|
ThCh$
|
Rate
|
ThCh$
|
|
|
CERO010508
|
04-Sept-07
|
01-May-08
|
2,703,102
|
2,723,704
|
2.6%
+ UF
|
2,723,704
|
|
CERO010508
|
04-Sept-07
|
01-May-08
|
242,294
|
244,187
|
2.6%
+ UF
|
244,187
|
|
CERO010708
|
04-Sept-07
|
01-Jul-08
|
590,877
|
595,418
|
2.6%
+ UF
|
595,418
|
|
BCU0500308
|
17-Oct-07
|
01-Mar-08
|
1,766,039
|
1,799,643
|
5.00%
|
1,799,643
|
|
BBVA
|
24-Oct-07
|
21-Feb-08
|
2,130,236
|
2,141,503
|
2.80%
|
2,141,503
|
|
HSBC
|
26-Oct-07
|
25-Feb-08
|
1,824,613
|
1,832,139
|
2.25%
|
1,832,139
|
|
HSBC
|
02-Nov-07
|
12-Mar-08
|
1,516,774
|
1,522,615
|
2.35%
|
1,522,615
|
|
CITIBANK
NA
|
13-Dec-07
|
10-Jun-08
|
2,411,130
|
2,414,506
|
2.80%
|
2,414,506
|
|
Total
31/12/2007
|
13,185,065
|
13,273,715
|
13,273,715
|
|||
|
Instrument
|
Date
|
Par
value
|
Accounting
value
|
Market
value
|
||
|
Purchase
|
Maturity
|
ThCh$
|
ThCh$
|
Rate
|
ThCh$
|
|
|
BCP0600109
|
03-Sept-08
|
02-Jan-09
|
2,500,000
|
2,574,183
|
6.00%
|
2,574,183
|
|
BCP0600109
|
26-Sept-08
|
02-Jan-09
|
72,100
|
72,077
|
6.00%
|
72,077
|
|
BCP0800709
|
14-Jul-08
|
01-Jul-09
|
1,000,000
|
1,044,021
|
8.00%
|
1,044,021
|
|
BCP0800709
|
25-Sept-08
|
01-Jul-09
|
769,600
|
772,575
|
8.00%
|
772,575
|
|
BCP0600809
|
26-Sept-08
|
03-Aug-09
|
1,040,000
|
1,019,967
|
6.00%
|
1,019,967
|
|
BCP0600809
|
03-Dec-08
|
03-Aug-09
|
2,500,000
|
2,552,145
|
6.00%
|
2,552,145
|
|
PDBC020209
|
09-Oct-08
|
02-Feb-09
|
2,734,108
|
2,781,255
|
7.48%
|
2,781,255
|
|
PDBC080609
|
24-Sept-08
|
08-Jun-09
|
2,358,986
|
2,412,758
|
8.37%
|
2,412,758
|
|
Total
31/12/2008
|
12,974,794
|
13,228,981
|
13,228,981
|
|||
For the years ended December 31, 2007 and 2008 the effect on income is ThCh$
335,793 and ThCh$ 85,781,
respectively.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
18.
|
Interest
bearing loans
|
The composition of interest bearing loans for 2007 and 2008 is as
follows:
|
Interest
bearing loans
|
2007
|
2008
|
||
|
Current
ThCh$
|
Non-current
ThCh$
|
Current
ThCh$
|
Non-current
ThCh$
|
|
|
Bank
loans
|
76,325,196
|
243,046,267
|
128,357,903
|
266,756,643
|
|
Obligations
without guarantees
|
1,573,268
|
67,717,704
|
1,681,627
|
72,981,753
|
|
Subtotal
of interest bearing loans
|
77,898,464
|
310,763,971
|
130,039,530
|
339,738,396
|
|
Financial
leases
|
17,558
|
204,989
|
18,693
|
206,058
|
|
Financial
lease subtotal
|
17,558
|
204,989
|
18,693
|
206,058
|
|
Total
|
77,916,022
|
310,968,960
|
130,058,223
|
339,944,454
|
Financial leases are included in the
buildings category (see note on property, plant and equipment). The
present value of minimum net long-term lease payments is ThCh$ 222,018 and ThCh$ 224,751 as of December 31, 2007 and 2008,
respectively. Total imputable interest is ThCh$ 143,037.
Financing
In 2008, the Company continued its
strategy of strengthening its financial structure. During the last six years,
the Company achieved a significant decrease in its total financial debt through
increased cash flow, which enabled the Company to reduce its debt through
several debt repayments.
During 2008, the Company’s main source
of financing was operating cash flow. These resources allowed investments of
Ch$147,989 million (US$232.5 million) for capital expenditures
and the payment of
dividends and return of capital equivalent to Ch$50,036 million (US$78.6
million).
Debt refinancing
On June 12, 2008, the Company renegotiated an
international loan in the amount of US$ 150 million. The international bank loan
has been structured as a “club deal”, with the participation of the following
banks: Banco Santander, Banesto, Bank of Tokyo, BBVA, Caja Madrid, EDC and Rabobank. The funds were used
to refinance a syndicated loan that was to mature in December
2008.
Outstanding indebtedness
Following its privatization in 1988, the
Company pursued an aggressive development plan to expand its fixed line network
and develop other telecommunications services, such as LD service, mobile
telephony and data transmission services. To fund the capital expenditures
associated with this expansion, the Company has raised capital by issuing debt
through domestic and international offerings, including the issuance of Yankee
and Euro Bonds, and has borrowed funds from commercial banks in the form of
syndicated and bilateral loans. The Company has also accessed the local Chilean
capital markets through the issuance of medium and long-term bonds, primarily
sold to pension funds, insurance companies and other institutional investors,
commercial paper, and through borrowing from commercial
banks.
At December 31, 2008, the Company’s
financial debt amount to Ch$ 436.388 million, which decreased as compared with
2007, due to the amortization of US$ 150 million of credit
derivatives in August 2008 and the amortization of
Series F bonds in April and October 2008. The repayment of Series F bonds
amounted to US$ 2.3 million.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
18.
|
Interest
bearing loans,
continued
|
The detail of interest bearing loans for 2007 and 2008
is as follows:
|
Total
|
Short-term
portion
|
Long-term
portion
|
Type
of debt
|
Amount
of original principal lent
|
Interest
rate
|
Expiry
|
|||||||
|
Long-term
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
& thereon
|
|||||||
|
|
|
||||||||||||
|
Long-term
obligations including current expiries 2007:
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
||||||||
|
Long-term
obligations with banks:
|
|
|
|
|
|
|
|
||||||
|
CALYON,
New
York and
others
|
99,221,370
|
145,202
|
99,076,168
|
99,076,168
|
-
|
-
|
-
|
-
|
-
|
Syndicated
loan
|
US$
200 million
|
Libor
+ 0.35
|
2009
|
|
BBVA
Bancomer and others
|
74,907,681
|
606,111
|
74,301,570
|
-
|
-
|
74,301,570
|
-
|
-
|
-
|
Syndicated
loan
|
US$
150 million
|
Libor
+ 0.334
|
2011
|
|
CITIBANK
NY
|
75,094,002
|
75,094,002
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Syndicated
loan
|
US$
150 million
|
Libor
+ 0.60
|
2008
|
|
Banco
Santander
|
70,148,410
|
479,881
|
69,668,529
|
-
|
69,668,529
|
-
|
-
|
-
|
-
|
Bilateral
loan
|
UF
3,555,000
|
TAB
360 + 0.325
|
2010
|
|
Total
long-term obligations with banks
|
319,371,463
|
76,325,196
|
243,046,267
|
99,076,168
|
69,668,529
|
74,301,570
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Bonds
:
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Series
F
|
11,920,151
|
1,554,724
|
10,365,427
|
1,382,056
|
1,382,056
|
1,382,056
|
1,382,056
|
1,382,056
|
3,455,147
|
Local
bond
|
UF 500,000
|
6.00%
|
2016
|
|
Series
L
|
57,370,821
|
18,544
|
57,352,277
|
-
|
-
|
-
|
57,352,277
|
-
|
-
|
Local
bond
|
UF 3,000,000
|
3.75%
|
2012
|
|
Total
Bonds
|
69,290,972
|
1,573,268
|
67,717,704
|
1,382,056
|
1,382,056
|
1,382,056
|
58,734,333
|
1,382,056
|
3,455,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
Lease
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Lease
obligations
|
222,547
|
17,558
|
204,989
|
19,586
|
21,848
|
24,372
|
27,187
|
30,328
|
81,668
|
Leasing
|
-
|
8.10%
|
2016
|
|
Total
|
388,884,982
|
77,916,022
|
310,968,960
|
|
|
|
|
|
|
|
|||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
18.
|
Interest
bearing loans,
continued
|
|
Total
|
Short-term
portion
|
Long-term
portion
|
Type
of debt
|
Original
amount of principal lent
|
Interest
rate
|
Maturity
|
|||||||
|
Long-term
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
and thereon
|
|||||||
|
|
|||||||||||||
|
Long-term
obligations including current expiries 2008:
|
|
||||||||||||
|
|
|
||||||||||||
|
Long-term
obligations with banks:
|
|
|
|
|
|
|
|||||||
|
CALYON,
New
York and
others
|
127,228,913
|
127,228,913
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Syndicated
loan
|
US$
200 million
|
Libor
+ 0.35
|
2009
|
|
BBVA
Bancomer and others
|
95,904,683
|
476,141
|
95,428,542
|
-
|
95,428,542
|
-
|
-
|
-
|
-
|
Syndicated
loan
|
US$
150 million
|
Libor
+ 0.334
|
2011
|
|
BBVA
Bancomer and others
|
95,338,062
|
260,986
|
95,077,076
|
-
|
-
|
-
|
95,077,076
|
-
|
-
|
Syndicated
loan
|
US$
150 million
|
Libor
+ 0.60
|
2013
|
|
Banco
Santander
|
76,642,888
|
391,863
|
76,251,025
|
76,251,025
|
-
|
-
|
-
|
-
|
-
|
Bilateral
loan
|
UF
3,555,000
|
TAB360
+ 0.325
|
2010
|
|
Total
long-term obligations with banks
|
395,114,546
|
128,357,903
|
266,756,643
|
76,251,025
|
95,428,542
|
-
|
95,077,076
|
-
|
-
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Bonds
:
|
|
|
|
|
|
|
|
|
|
|
|||
|
Series
F
|
11,475,504
|
1,640,913
|
9,834,591
|
1,513,014
|
1,513,014
|
1,513,014
|
1,513,014
|
1,513,014
|
2,269,521
|
Local
bond
|
UF 500,000
|
6.00%
|
2016
|
|
Series
L
|
63,187,876
|
40,714
|
63,147,162
|
-
|
-
|
63,147,162
|
-
|
-
|
-
|
Local
bond
|
UF 3,000,000
|
3.75%
|
2012
|
|
Total
Bonds
|
74,663,380
|
1,681,627
|
72,981,753
|
1,513,014
|
1,513,014
|
64,660,176
|
1,513,014
|
1,513,014
|
2,269,521
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|||||
|
Lease
obligations:
|
|
|
|
|
|
|
|
|
|
||||
|
Lease
obligations
|
224,751
|
18,693
|
206,058
|
21,656
|
25,088
|
29,065
|
33,672
|
39,009
|
57,568
|
Leasing
|
-
|
8.10%
|
2016
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Total
|
470,002,677
|
130,058,223
|
339,944,454
|
|
|
|
|
|
|||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
19.
|
Trade and
other accounts payable
|
The composition of creditors and other accounts payable for
2007 and 2008 is as follows:
|
Description
|
2007
ThCh$ Current
|
2008
ThCh$ Current
|
|
Debts
due to purchases or services provided
|
119,057,099
|
102,029,176
|
|
Real
property providers
|
26,841,124
|
59,144,482
|
|
Dividends
pending payment
|
6,771,524
|
13,470,974
|
|
Accounts
payable to employees
|
8,473,852
|
14,487,260
|
|
Others
|
5,306,686
|
7,590,980
|
|
Total
|
166,450,285
|
196,722,872
|
The detail of debts due to purchases or services
provided corresponding to foreign and
domestic suppliers for 2007
and 2008 are as follows:
|
Debts
due to purchases or services provided
|
2007
ThCh$
|
2008
ThCh$
|
|
Domestic
|
109,764,352
|
93,039,321
|
|
Foreign
|
9,292,747
|
8,989,855
|
|
Total
|
119,057,099
|
102,029,176
|
|
20.
|
Provisions
|
The composition of provision for
2007 and 2008 is as
follows:
|
Description
|
2007
|
2008
|
|
ThCh$
|
ThCh$
|
|
|
Legal
and Regulatory
|
10,622,554
|
2,303,708
|
|
Other
(1)
|
5,608,288
|
4,768,628
|
|
Total
|
16,230,842
|
7,072,336
|
(1)
The Other provision covers all labor and administrative aspects with a probable
possibility of occurrence.
Provision movements for 2008 are as
follows:
|
Movements
|
2007
ThCh$
|
2008
ThCh$
|
|
Beginning
balance
|
8,854,274
|
16,230,842
|
|
Increase
in existing provisions
|
8,876,568
|
1,337,684
|
|
Provision
used
|
(1,500,000)
|
(10,496,190)
|
|
Movement
subtotal
|
7,376,568
|
(9,158,506)
|
|
Ending
balance
|
16,230,842
|
7,072,336
|
The movement (increase and use) in provisions corresponds mainly to legal claims.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
21.
|
Employee
benefits and expenses
|
|
|
a)
|
Post employment
benefits
|
Post employment benefits for 2007 and
2008 are as follows:
|
Post employment
benefits
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Current
amount of liability recognized for termination benefits
|
1,996,786 | 2,898,105 | ||||||
|
Non-current
amount of liability recognized for termination benefits
|
30,838,659 | 42,464,712 | ||||||
|
Total
|
32,835,445 | 45,362,817 | ||||||
There are no assets associated to the
plan.
Post employment provision movements for
2007 and 2008 are as follows:
|
Movements
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Beginning
balance
|
30,929,501 | 32,835,445 | ||||||
|
Service
costs
|
2,862,257 | 4,991,085 | ||||||
|
Interest
costs
|
1,855,770 | 1,579,385 | ||||||
|
Actuarial
(profits)/losses
|
- | 9,360,762 | ||||||
|
Benefits
paid
|
(2,812,083 | ) | (3,403,860 | ) | ||||
|
Movement
subtotal
|
1,905,944 | 12,527,372 | ||||||
|
Ending
balance
|
32,835,445 | 45,362,817 | ||||||
Actuarial assumptions used for 2007 and 2008 are as
follows:
|
Actuarial
hypotheses used
|
2007
|
2008
|
|
Discount
rate
|
6.00%
|
4.81%
|
|
Expected
salary increase rate
|
1.50%
|
1.50%
|
|
Mortality
table
|
RV-85
|
RV-2004
|
|
Turnover
rate
|
2.34%
|
5.46%
|
“Post employment benefits” are
calculated by an external qualified actuary, using market variables and
estimations in accordance with actuarial calculation methodology.
|
|
b)
|
Employee
expenses
|
The detail of these expenses for 2007 and 2008 is as
follows:
|
Employee
expenses
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Wages
and salaries
|
81,550,226 | 94,458,047 | ||||||
|
Post
employment benefit obligations expense
|
4,718,027 | 6,570,470 | ||||||
|
Total
employee benefits
|
86,268,253 | 101,028,517 | ||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
22.
|
Prepaid
taxes
|
The detail of prepaid taxes for 2007 and 2008 is as
follows:
|
Description
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Value
added tax
|
8,741,157 | 9,415,618 | ||||||
|
Income
tax
|
(30,510,355 | ) | (29,476,371 | ) | ||||
|
Prepaid
income tax and other credits
|
40,267,934 | 46,968,512 | ||||||
|
Total
|
18,498,736 | 26,907,759 | ||||||
|
23.
|
Income
tax
|
|
|
a) General
information:
|
As of December 31, 2007 and 2008 the
parent company has established a first category (corporate) income tax
provision, since it has a positive taxable base of ThCh$ 139,296,346 and ThCh$
118,074,188, respectively.
In addition, as of December 31, 2007 and
2008 a provision was established for first
category income tax originated by subsidiaries,
whose taxable income base amounted to ThCh$
40,176,330 and ThCh$
55,316,230, respectively.
As of December 31, 2007 and 2008 the tax losses accumulated by subsidiaries amount to ThCh$
12,268,988 and ThCh$ 24,534,879 respectively.
According to current legislation, tax
years subject to possible review by the fiscal authority, contemplate for most
of the taxes to which the Company’s operations are subject to, transactions
generated from 2006 to date.
During the course of its normal
operations, the Company is subject to the regulations and supervision of the
Chilean Internal Revenue Service, which could cause differences to arise in the
application of tax determination criteria. Management estimates, on
the basis of information available to date, that there are no significant
additional liabilities that have not been recorded for this concept in the
financial statements.
The Companies of the group with a
positive balance in the Retained Taxable Earnings Registry and their associated
credits are as follows:
|
|
Taxable
net income with
15%
credit ThCh$
|
Taxable
net income with
15%
credit ThCh$
|
Taxable
net income with
16%
credit
ThCh$ |
Taxable
net income with
16.5%
credit ThCh$
|
Taxable
net income with
17%
credit
ThCh$ |
Taxable
net income without
credit
ThCh$
|
Amount of Credit ThCh$ |
|
Subsidiaries
|
|||||||
|
Telefónica
Larga Distancia S.A.
|
2,563,759
|
-
|
971,330
|
695,362
|
124,233,536
|
7,046,625
|
26,220,237
|
|
Telefónica
Empresas Chile S.A.
|
-
|
-
|
-
|
54
|
35,439,982
|
2,257,039
|
7,258,793
|
|
Telefónica
Gestión de Servicios Compartidos Chile S.A.
|
-
|
-
|
-
|
-
|
693,620
|
85,272
|
142,067
|
|
Telefónica
Chile S.A.
|
114
|
-
|
-
|
6,675,243
|
250,990,983
|
20,817,977
|
52,726,798
|
|
Total
|
2,563,873
|
-
|
971,330
|
7,370,659
|
411,358,121
|
30,206,913
|
86,347,895
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
23.
|
Income
tax,
continued
|
|
|
b)
|
Deferred
taxes:
|
As of December 31, 2007 and 2008,
accumulated balances of temporary differences originated net deferred tax
liabilities in the amount of ThCh$ 85,381,995 and ThCh$ 60,728,445, respectively and their detail is as
follows:
|
Description
|
2007
|
2008
|
||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
|
|
Allowance for doubtful
accounts
|
11,425,854
|
-
|
19,428,286
|
-
|
|
Vacation
provision
|
1,215,427
|
-
|
1,493,407
|
-
|
|
Property, plant and equipment
depreciation
|
-
|
104,001,485
|
-
|
92,822,682
|
|
Staff severance
indemnities
|
-
|
3,648,950
|
-
|
2,425,168
|
|
Tax loss
carryforward
|
2,085,728
|
-
|
4,170,929
|
-
|
|
Other
events
|
11,951,319
|
4,409,888
|
9,426,783
|
-
|
|
Total
|
26,678,328
|
112,060,323
|
34,519,405
|
95,247,850
|
c)
Income tax reconciliation:
For years ended December 31, 2007 and 2008 the reconciliation of taxes
starting with profit before taxes is as follows:
|
2007
|
2008
|
|||
|
Description
|
Tax
Base
ThCh$
|
Tax
Rate 17%
ThCh$
|
Tax
Base
ThCh$
|
Tax
Rate 17%
ThCh$
|
|
Profit
before taxes
|
40,536,403
|
6,891,189
|
54,275,507
|
9,226,836
|
|
Permanent
differences
|
12,288,497
|
2,089,045
|
(16,811,182)
|
(2,857,901)
|
|
Price-level
restatement of equity
|
(18,242,028)
|
(3,101,145)
|
(30,694,056)
|
(5.217,989)
|
|
Price-level
restatement of investments
|
8,054,426
|
1,369,252
|
17,103,408
|
2,907,579
|
|
Income
from investments in related companies
|
(1,698,359)
|
(288,721)
|
(2,492,245)
|
(423,682)
|
|
Resolution
of prior year uncertainties (1)
|
9,362,417
|
1,591,611
|
-
|
-
|
|
Prior
year income tax deficit/(surplus)
|
2,095,703
|
356,270
|
282,381
|
48,004
|
|
Adjustment
dissolution investments
|
7,230,214
|
1,229,136
|
-
|
-
|
|
A/R
write-off rejected for tax purposes
|
4,053,993
|
689,179
|
-
|
-
|
|
Others
(2)
|
1,432,131
|
243,463
|
(1,010,670)
|
(171,813)
|
|
Total
tax expense of companies
|
8,980,234
|
6,368,935
|
||
|
Breakdown
of current/deferred expense
|
||||
|
Income
Tax 17%
|
30,510,355
|
29,476,371
|
||
|
35%
Single Tax
|
110,023
|
26,502
|
||
|
Prior
current year deficit/(surplus)
|
356,272
|
1,076,639
|
||
|
Total
income tax expense
|
30,976,650
|
30,579,512
|
||
|
Total
deferred income tax expense/(revenue)
|
(21,996,416)
|
(24,210,577)
|
||
|
Effective
rate
|
11,7%
|
22,2%
|
||
|
|
(1)
|
During
2007 certain uncertainties related to unrecognized tax benefits have been
resolved. The tax benefit recognized was offset by deferred tax expense
related to the increase of the deferred tax liability arising also from
recognition of the tax
benefit.
|
|
|
(2)
|
Include
adjustments for
the accrued
and/or
paid expenses rejected
for
tax purposes,
6% property,
plant and equipment credit, among
others.
|
During 2007 and 2008 adjustments were
recorded to the beginning balance of deferred taxes due to differences between
the recorded and real bases.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
24.
|
Revenue
and expenses
|
|
|
a)
|
The detail of revenue for 2007 and 2008 is as
follows:
|
|
Classes
of ordinary income
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Sale
of goods
|
16,195,587 | 16,188,353 | ||||||
|
Services
rendered
|
680,104,407 | 722,542,395 | ||||||
|
Total
|
696,299,994 | 738,730,748 | ||||||
|
|
b)
|
The detail of other operating
income for 2007 and 2008 is as
follows:
|
|
Other
revenues
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Work
performed for real property
|
7,862,781 | 9,362,763 | ||||||
|
Revenue
from disposal of material real property
|
482,244 | 3,029,202 | ||||||
|
Subsidies
|
221,026 | 215,058 | ||||||
|
Gain
on sales of Telefónica Asistencia y Seguridad S.A. assets and suscribed
portfolio
|
- | 15,487,114 | ||||||
|
Other
current management revenues
|
492,569 | 36,914 | ||||||
|
Total
|
9,058,620 | 28,131,051 | ||||||
|
|
c)
|
The detail of other miscellaneous operating expenses for 2007 and 2008 is as
follows:
|
|
Other
expenses
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Interconnections
|
120,610,244 | 118,703,867 | ||||||
|
Other
exterior services
|
46,507,962 | 55,384,255 | ||||||
|
Allowance
for doubtful accounts
|
19,631,252 | 35,753,879 | ||||||
|
Media
rental
|
23,882,345 | 33,688,404 | ||||||
|
Sales
commissions
|
27,112,139 | 25,934,685 | ||||||
|
Plant
maintenance
|
18,907,014 | 25,702,929 | ||||||
|
Customer
service
|
19,427,522 | 25,205,712 | ||||||
|
Computer
services
|
19,505,348 | 20,141,274 | ||||||
|
Cost
of utilities
|
11,837,240 | 16,324,861 | ||||||
|
Cost
of sale of equipment and cards
|
10,100,833 | 12,106,108 | ||||||
|
Fines,
sanctions, contingencies
|
13,939,859 | 9,848,077 | ||||||
|
Advertising
|
7,431,638 | 8,629,058 | ||||||
|
External
administrative services
|
2,469,586 | 4,136,212 | ||||||
|
Cost
prepaid expenses
|
1,295,247 | 1,410,524 | ||||||
|
Others
|
15,250,116 | 18,108,344 | ||||||
|
Total
|
357,908,345 | 411,078,189 | ||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
24. Revenue
and expenses,
continued
|
|
d)
|
The detail of financial expenses, net,
for 2007 and 2008 is
as follows:
|
|
Financial
expenses, net
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Financial
income
|
||||||||
|
Interest
on financial instruments
|
3,565,008 | 5,177,927 | ||||||
|
Other
financial revenues
|
3,439,091 | 152,214 | ||||||
|
Total
financial revenues
|
7,004,099 | 5,330,141 | ||||||
|
Financial
expenses
|
||||||||
|
Interest
on bank loans
|
(17,297,284 | ) | (12,130,948 | ) | ||||
|
Interest
on obligations and bonds
|
(3,234,043 | ) | (3,443,473 | ) | ||||
|
Financial
lease
|
(26,580 | ) | (26,603 | ) | ||||
|
Interest
rate hedges (Cross Currency Swap)
|
3,308,052 | (16,182,548 | ) | |||||
|
Other
financial expenses
|
(798,909 | ) | (556,052 | ) | ||||
|
Total
financial expenses
|
(18,048,764 | ) | (32,339,624 | ) | ||||
|
Total,
net
|
(11,044,665 | ) | (27,009,483 | ) | ||||
25. Profit per
share
The detail of profits per share
for 2007 and 2008 is as
follows:
|
Basic
profit per share
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Earning
attributable to holders of instruments of participation in the net
shareholders’ equity of the parent
|
31,646,817 | 47,975,468 | ||||||
|
Income
available for common shareholders, basic
|
31,646,817 | 47,975,468 | ||||||
|
Number of
shares
|
Number of
shares
|
|||||||
|
Weighted
average number of shares, basic
|
957,157,085 | 957,157,085 | ||||||
|
Basic
profit (loss) per share in thousands
|
0.0331 | 0.0501 | ||||||
Earning per share figures have been calculated
dividing the respective income amount by the weighted average number of common
shares outstanding during the year. The Company has not issued
convertible debt or other equity securities. Consequently, there are
no potentially diluting effects on income per share.
26. Inventory
The detail of inventory for 2007 and 2008 is as
follows:
|
Description
|
2007
ThCh$
|
2008
ThCh$
|
||||||
|
Merchandise
|
8,976,644 | 9,639,875 | ||||||
|
Allowance
for obsolescence
|
(2,022,680 | ) | (2,719,640 | ) | ||||
|
Total
|
6,953,964 | 6,920,235 | ||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
27.
|
Deferred
revenue
|
The detail of deferred revenue for 2007 and 2008 is as
follows:
|
2007
ThCh$
|
2008
ThCh$
|
|||||||||||||||
|
Deferred
income
|
Current
|
Non-current
|
Current
|
Non-current
|
||||||||||||
|
Beginning
balance
|
(13,278,153 | ) | (4,361,390 | ) | (6,523,422 | ) | (4,153,591 | ) | ||||||||
|
Endowments
|
(19,471,710 | ) | (40,211 | ) | (37,243,382 | ) | (51,242 | ) | ||||||||
|
Eliminations/applications
|
26,226,442 | 248,010 | 38,053,918 | 274,333 | ||||||||||||
|
Movement
subtotal
|
6,754,732 | 207,799 | 810,536 | 223,091 | ||||||||||||
|
Ending
balance
|
(6,523,421 | ) | (4,153,591 | ) | (5,712,886 | ) | (3,930,500 | ) | ||||||||
|
28.
|
Minority
interest
|
Minority interest corresponds to
recognition of the portion of shareholders’ equity and income of subsidiaries
belonging to third parties. The detail for the years ended as of
December 31,
2007 and 2008,
respectively, is as follows:
|
Subsidiaries
|
Minority
interest
percentage
|
Shareholders’
equity
minority
interest
|
Participation
in profit
revenue
(loss)
|
|||||||||||||||||||||
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
|||||||||||||||||||
|
%
|
%
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
|||||||||||||||||||
|
Telefónica
Larga Distancia S.A.
|
0.13 | 0.10 | 201,261 | 188,922 | 32,599 | 32,986 | ||||||||||||||||||
|
Fundación
Telefónica
|
50 | 50 | 53,066 | (48,818 | ) | (123,250 | ) | (101,884 | ) | |||||||||||||||
|
Telefónica
Gestión de Servicios Compartidos Chile S.A.
|
0.001 | 0.001 | 11 | 8 | 3 | 2 | ||||||||||||||||||
|
Total
|
254,338 | 140,112 | (90,648 | ) | (68,896 | ) | ||||||||||||||||||
|
29.
|
Contingencies and
restrictions
|
|
|
a)
|
Lawsuit
against the State of Chile:
|
|
|
(i)
|
Having exhausted all
administrative remedies aimed at correcting the illegal actions taken in
the tariff setting process of 1999, in 2002 the Company filed a lawsuit
for damages against the Government in the amount of ThCh$ 181,038,411,
plus readjustments and interest, covering past and future damages incurred
up to May 2004.
|
The
judicial process is currently at the stage of dictating sentence.
|
|
(ii)
|
Telefónica Chile and Telefónica
Larga Distancia filed a damage indemnity complaint against the Government
of Chile in ordinary treasury lawsuit, claiming damages caused due to
modification of telecommunications networks in respect to the works
carried out by highway concessionaries from 1996 to
2000.
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
29.
|
Contingencies
and restrictions, continued
|
|
|
a)
|
Lawsuit against the State of
Chile, continued:
|
|
|
iii)
|
The amount of damages claimed,
consisting in both companies having been forced to pay to transfer their
telecommunications networks due to the construction of public works
concessions protected by the Concessions Law, is as
follows:
|
|
|
a.- Compañía
de Telecomunicaciones de Chile S.A.: ThCh$
1,929,207
|
|
|
b.- Telefónica
Larga Distancia S.A.: ThCh$
2,865,209
|
On March
24, 2008, final first instance sentence was notified rejecting the complaint
without costs. This sentence has been appealed.
|
|
b)
|
Lawsuits:
|
|
|
(i)
|
Voissnet
S.A.:
|
|
|
On July 12, 2007 Voissnet filed a complaint before
the Antitrust Commission (TDLC) against Telefónica Chile for alleged cross subsidy in the
joint commercialization of its broadband and fixed telephone services,
taking advantage of its dominant position in those
markets.
|
|
|
Telefónica Chile, in its answer requested that the
complaint be rejected, with costs, since the voice and broadband package
offers are due to a competitive dynamic, and that it has not incurred in
practices that attempt against free competition. The evidence
stage has been completed.
|
|
|
On August 29, 2008, Voissnet filed a second
complaint against Telefónica Chile before the Antitrust Commission,
this time for alleged bundled sale in the commercialization of
broadband with telephone
services.
|
|
|
Telefónica Chile answered the complaint and
requested full rejection, with costs. The TDLC decided both processes should be
combined.
|
|
|
(ii)
|
Complaint
filed by VTR Telefónica S.A.:
|
|
|
On
May 8, 2008, Telefónica Chile and VTR signed a transaction ending all
judicial and administrative conflicts related to reciprocal access charges
payable between the companies and 800-type services. Both companies
perform reciprocal discounts and legal compensation is given
for the
amounts owed, which resulted in Telefónica Chile
paying to
VTR the sum of ThCh$
12,036,787. Likewise, on the basis that the Transaction
produces the indefectible termination of the judicial process which has an
incidence on the procedure filed with the Ministry of Transportation and
Telecommunications, the parties filed a writ requesting termination of the
procedures without sanction requesting that that it be filed
away.
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
29.
|
Contingencies
and restrictions,
continued:
|
|
|
b)
|
Lawsuits, continued:
|
|
|
(iii)
|
Manquehue
Net:
|
On June
24, 2003, Telefónica Chile filed a forced contract compliance with damage
indemnity complaint against Manquehue Net in the amount of Ch$ 3,647 million, in
addition to the sums accrued during substantiation of the proceeding, before the
mixed arbitration court of Mr. Victor Vial del Río. On the same date,
Manquehue Net filed a complaint regarding compliance with discounts (in the
amount of Ch$ 2,295 million), in addition to a complaint regarding the
obligation to perform (signing of 700 service contract).
On April
11, 2005, the Arbitrator notified the fist instance sentence accepting the
complaint made by Telefónica Chile condemning Manquehue Net to pay approximately
Ch$ 452 million, and at the same time accepted the
complaint of Manquehue Net condemning Telefónica Chile to pay Ch$ 1,021
million.
Telefónica
Chile filed appeals against both sentences, currently pending before the
Santiago court of Appeals.
|
|
(iv)
|
Chilectra
and CGE:
|
In June
2006, Telefónica Chile filed complaints against Chilectra S.A. and Río Maipo
(currently CGE Distribución), requesting readjusted refund of the Reimbursable
Financial Contributions (AFR) (“Aportes Financieros Reembolsables”) that the
company paid between 1992 and 1998, in virtue of the Electricity
Law. The amounts requested for restitution amount to Ch$ 899 million
and Ch$ 117 million, respectively.
|
|
(v)
|
Labor
lawsuits:
|
During
the ordinary course of operations, labor lawsuits have been filed against the
Company, which do not represent significant contingencies to date.
|
|
(vi)
|
Lawsuit
filed by Telmex Servicios Empresariales
S.A.:
|
During
the first quarter of 2008, Telmex Servicios Empresariales S.A. filed
a complaint before the Antitrust Commission against Telefónica Chile, for
alleged violation of free competition related to the tender process for the
local public wireless 3,400 – 3,600 MHz band concession, requesting payment of a
government fine in the amount of Ch$ 8,132 million.
The
Company answered the complaint within the deadline, requesting rejection of all
its parts. The process is at the hearing stage.
Telefónica
Chile and TLD were sued by Telmex Servicios Empresariales S.A., before the
Antitrust Commission (Case No. C 181-2008), for the execution of acts contrary
to free competition in providing long-distance services through the Telefónica
Chile prepayment card denominated “Tarjeta Línea Propia” (TLP), requesting a
fine of Ch$ 9,036 million for each of the companies.
The
complaint was answered, requesting full rejection, with costs.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements,
continued
|
29.
|
Contingencies
and restrictions,
continued:
|
|
|
b)
|
Lawsuits, continued:
|
|
(vii)
|
Empresa
Ferrocarriles del Estado de
Chile:
|
Ordinary
lawsuit regarding forced compliance with agreed upon or consented obligations
derived from the Regulation on Railroad Line Crossing, Parallelism, and Support,
in which in addition payment of a sum of no less than Ch$ 1,818 million was
claimed, for the construction or annual passage, relating to railroad crossings
plus indemnity for material damages and pain and suffering that are claimed to
have been suffered, with readjustments, interest and costs and without prejudice
of the sums accrued during the proceeding process .
Final
first instance sentence was dictated on March 25, 2008, fully rejecting the
complaint which is being appealed by Empresa Ferrocarriles del
Estado.
|
(viii)
|
Theoduloz
Slier and Ochoa Soriano versus Zalaquett Zalaquett and Telefónica
Chile:
|
Ms.
Rodemilia Theoduloz Slier and Matilde Ochoa Soriano filed a complaint
against Armando Zalaquett Zalaquett and Telefónica Chile, claimingan executive
obligation to deliver 14,468,895 Series A shares of Telefónica Chile owned by
Armando Zalaquett Zalaquett. Telefónica Chile opposed the execution, since Mr.
Zalaquett is not a Company shareholder. Currently underway.
|
(ix)
|
Other
complaints:
|
During
the last quarter of 2007 there was a notification of the resolutions dictated by
the Ministry of Transportation and Telecommunication which applied fines for
non-compliance with the previous resolutions, which altogether amount to Ch$
1,268 million. Telefónica Chile filed appeals for each of them which
are currently in process and pending sentencing. It should be noted
that the resolutions consider daily fines, which as of December 31, 2007 are
estimated to amount to a figure of close to Ch$ 45 million.
Management
and its internal and external legal advisors, periodically monitor the evolution
of the lawsuits and contingencies that affect the Company in the normal course
of its operations, analyzing in each case the possible effect on the financial
statements. Based on this analysis and on the information available
to date, management and their legal counsel believe that it is improbable that
the income and equity of the Company will be significantly affected by loss
contingencies that could possibly represent significant additional liabilities
not already recorded in the financial statements.
|
|
c)
|
Financial
restrictions:
|
In order
to be able to develop its investment plans, the Company has obtained financing
both in the local and foreign market (note18), which establish, among other
things, clauses on the maximum indebtedness that the Company can
incur. The maximum debt to equity ratio established is
1.60.
Non-compliance
with this clause implies that all obligations assumed in these financing
contracts are considered to have expired.
As of
December 31, 2008 the Company complied with the financial
restriction.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
29.
|
Contingencies
and restrictions, continued:
|
|
|
d)
|
Guarantee
deposits:
|
The
detail of guarantee deposits is as follows:
|
Debtor
|
Type
of
|
Current
guarantee deposits
|
Liberated
guarantees
|
||||||||||||||
|
Name
|
Relationship
|
guarantee
|
ThCh$
|
2009
ThCh$
|
2010
ThCh$
|
2011
& thereon ThCh$
|
|||||||||||
|
Emp.
De los Ferrocarriles del Estado.
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
3,218 | 3,218 | - | - | ||||||||||
|
Subsecretaria
de Telecomunicaciones
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
1,598,563 | - | 34,647 | 1,563,916 | ||||||||||
|
Director
Reg de Vialidad V Región
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
4,396 | 4,396 | - | - | ||||||||||
|
Serviu
Región Metropolitana
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
75,704 | 70,915 | 4,789 | - | ||||||||||
|
Serviu
V Región
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
2,465 | 2,465 | - | - | ||||||||||
|
Director
Regional de Vialidad de Tarapacá
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
2,918 | 2,918 | - | - | ||||||||||
|
SCL
Terminal Aéreo de Santiago
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
32,179 | - | - | 32,179 | ||||||||||
|
Rentas
e Inversiones Los Andes Ltda.
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
4,991 | 4,991 | - | - | ||||||||||
|
Rentas
e Inversiones Viña del Mar Ltda.
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
6,064 | 6,064 | - | - | ||||||||||
|
Metro
S.A.
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
182,073 | 180,142 | - | 1,931 | ||||||||||
|
S.A.
Inmobiliaria Land y Establecimientos
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
4,658 | - | 2,294 | 2,364 | ||||||||||
|
Servio
Región de Atacama
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
1,137 | 1,137 | - | - | ||||||||||
|
Serviu
Región del Bío Bío
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
2,878 | 42 | 2,114 | 722 | ||||||||||
|
Telefónica
Móviles de Chile
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
10,726 | 10,726 | - | - | ||||||||||
|
Rentas
e Inversiones Las Rejas Ltda..
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
4,409 | - | 4,409 | - | ||||||||||
|
Félix
Aparicio Hortal
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
2,038 | 2,038 | - | - | ||||||||||
|
Distribuidora
y Servicios D&S S.A.
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
2,685 | - | 2,685 | - | ||||||||||
|
Constructora
San Francisco
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
19,046 | 19,046 | - | - | ||||||||||
|
Otras
garantías
|
Telefónica
Chile S.A.
|
Parent
company
|
Deposit
|
3,653 | 2,662 | 191 | 800 | ||||||||||
|
Cámara
de Diputados de Chile
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
17,000 | 17,000 | - | - | ||||||||||
|
Servicio
Nacional de Pesca
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
405 | 405 | - | - | ||||||||||
|
Ministerio
de Bienes Nacionales
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
3,540 | 3,540 | - | - | ||||||||||
|
Dirección
de Compras y Contratación Pública
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
5,000 | 5,000 | - | - | ||||||||||
|
Dirección
Regional de Vialidad XII Región
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
118,590 | 118,590 | - | - | ||||||||||
|
Comité
de Empresas Sep
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
73 | - | 73 | - | ||||||||||
|
Consejo
de Defensa del Estado
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
1,285 | - | - | 1,285 | ||||||||||
|
SCL
Terminal Aéreo de Santiago S.A.
|
Telefónica
Larga Distancia
|
Filial
|
Deposit
|
32,179 | - | - | 32,179 | ||||||||||
|
Dirección
Nacional de Logística de Carabineros Chile
|
Telefónica
Empresas
|
Filial
|
Deposit
|
409,829 | - | - | 409,829 | ||||||||||
|
Ministerio
del Interior
|
Telefónica
Empresas
|
Filial
|
Deposit
|
302,022 | 302,022 | - | - | ||||||||||
|
Tesorería
del Ejercito
|
Telefónica
Empresas
|
Filial
|
Deposit
|
112,000 | 112,000 | - | - | ||||||||||
|
Servicio
de Salud Metropolitano Oriente
|
Telefónica
Empresas
|
Filial
|
Deposit
|
111,992 | 111,992 | - | - | ||||||||||
|
Subsecretaria
de Redes Asistenciales
|
Telefónica
Empresas
|
Filial
|
Deposit
|
90,048 | 90,048 | - | - | ||||||||||
|
Dirección
Nacional de Gendarmería de Chile
|
Telefónica
Empresas
|
Filial
|
Deposit
|
88,577 | - | 88,577 | - | ||||||||||
|
Pontificia
Universidad Católica Valparaíso
|
Telefónica
Empresas
|
Filial
|
Deposit
|
80,000 | 80,000 | - | - | ||||||||||
|
Subsecretaria
de Educación
|
Telefónica
Empresas
|
Filial
|
Deposit
|
80,000 | - | 80,000 | - | ||||||||||
|
Servicio
de Salud Metropolitano Occidental
|
Telefónica
Empresas
|
Filial
|
Deposit
|
79,066 | 79,066 | - | - | ||||||||||
|
Servicio
de Salud Viña del Mar Quillota
|
Telefónica
Empresas
|
Filial
|
Deposit
|
68,711 | 68,711 | - | - | ||||||||||
|
Servicio
de Salud Metropolitano Central
|
Telefónica
Empresas
|
Filial
|
Deposit
|
68,541 | 68,541 | - | - | ||||||||||
|
Servicio
de Salud Metropolitano Sur
|
Telefónica
Empresas
|
Filial
|
Deposit
|
43,827 | 43,827 | - | - | ||||||||||
|
Servicio
de Salud de Concepción
|
Telefónica
Empresas
|
Filial
|
Deposit
|
42,637 | 42,637 | - | - | ||||||||||
|
Policía
de Investigaciones deChile
|
Telefónica
Empresas
|
Filial
|
Deposit
|
40,522 | 40,522 | - | - | ||||||||||
|
Policía
de Investigaciones de Chile
|
Telefónica
Empresas
|
Filial
|
Deposit
|
40,000 | 40,000 | - | - | ||||||||||
|
Servicio
de Salud Valparaíso San Antonio
|
Telefónica
Empresas
|
Filial
|
Deposit
|
39,550 | 39,550 | - | - | ||||||||||
|
Servicio
de Salud del Maule
|
Telefónica
Empresas
|
Filial
|
Deposit
|
36,689 | 36,689 | - | - | ||||||||||
|
Servicio
de Salud de Ñuble
|
Telefónica
Empresas
|
Filial
|
Deposit
|
34,442 | 34,442 | - | - | ||||||||||
|
Servicio
de Salud de Bío Bío
|
Telefónica
Empresas
|
Filial
|
Deposit
|
34,370 | 34,370 | - | - | ||||||||||
|
Servicio
de Salud de Llanquihue Chile
|
Telefónica
Empresas
|
Filial
|
Deposit
|
33,899 | 33,899 | - | - | ||||||||||
|
Otras
Garantías
|
Telefónica
Empresas
|
Filial
|
Deposit
|
2,133,167 | 1,330,181 | 295,477 | 507,509 | ||||||||||
|
Subsecretaría
de Transporte
|
Telefónica
Gestión Ss.Compartidos
|
Filial
|
Deposit
|
91 | - | 91 | - | ||||||||||
|
Subsecretaría
de Transporte
|
Telefónica
Gestión Ss.Compartidos
|
Filial
|
Deposit
|
91 | - | 91 | - | ||||||||||
|
Subsecretaría
de Transporte
|
Telefónica
Gestión Ss.Compartidos
|
Filial
|
Deposit
|
91 | - | 91 | - | ||||||||||
|
Subsecretaría
de Transporte
|
Telefónica
Gestión Ss.Compartidos
|
Filial
|
Deposit
|
91 | - | 91 | - | ||||||||||
|
Atento
Chile S.A.
|
Telefónica
Gestión Ss.Compartidos
|
Filial
|
Deposit
|
57,922 | 57,922 | - | - | ||||||||||
|
Centro
Español Intermediario de Capacitación
|
Instituto
Telefónica
|
Filial
|
Deposit
|
15,718 | 15,718 | - | - | ||||||||||
|
Total
|
6,185,766 | 3,117,432 | 515,620 | 2,552,714 | |||||||||||||
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements,
continued
|
30.
|
Environment:
|
In the
opinion of management and its legal counsel and since the nature of the
operations of the Company does not directly or indirectly affect the
environment, as of the closing date of these financial statements, the Company
has not committed resources or made payments derived from non-compliance with
municipal ordinances or those of other supervising organizations.
The
Company reviewed its real estate lease agreements with private entities and
government agencies involving locations where certain of the Company’s assets
are installed, such as digital switchboards, radio stations, antennas and other
equipment regarding potential obligations at the end of the term or expiry of
the lease contract considering the term of the contracts and renewal
conditions. No significant obligations were identified on the basis
of these contracts since:
|
|
-
|
The
Telecommunications Law in Chile states that the Company, as a public
service supplier, has a right to maintain its assets on third party
property and cannot be forced to remove then without its
consent.
|
|
|
-
|
On
the basis of historical evidence, most of the lease agreements are
renewed. For the leases that were not renewed significant
withdrawal costs were incurred.
|
|
31.
|
Financial risk
management
|
|
|
a)
|
Competence
|
Telefónica
Chile faces strong competition in all its business areas and believes that this
high level of competitiveness will be maintained. In order to
confront this situation, the Company permanently adapts its business strategies
and products, seeking to satisfy the demands of its current and potential
customers, innovating and developing excellence in its attention.
|
|
b)
|
New
Tariff Decree
|
Approximately
19% of the Company’s income for 2008 is subject to tariff
regulation. Tariff setting for the new 5 year period, beginning in
May 2009, could affect its income and level of market
competitiveness.
The
effect of a change in the tariff decree could affect the portion of the
Company’s operating income and costs that are regulated.
|
|
c)
|
Technological
changes
|
The
telecommunications industry is a sector that is subject to quick and important
technological progress and the introduction of new products and
services. It is not possible to assure what will be the effect of
such technological changes on the market or on Telefónica Chile, or that the
disbursement of significant financial resources will not be required to develop
or implement new and competitive technologies, nor can the Company anticipate
whether those technologies or services will be substitutive or complementary to
the products and services it currently offers. Telefónica Chile is constantly
evaluating the incorporation of new technologies to the business, taking into
consideration both the costs and benefits.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
31.
|
Financial
risk management, continued
|
|
|
d)
|
Level
of Chilean economic activity
|
Since the
Company’s operations are located in Chile, these are sensitive to and dependent
on the country’s level of economic activity. In periods of low
economic growth, high unemployment rates and reduced internal demand, there has
been a negative impact on the local and long distance telephone traffic, as well
as on the level of customer default.
The
effect on the financial cost of a possible increase in the country risk could be
softened because the Company is part of a consolidated group at a worldwide
level.
|
|
e)
|
Financial
risk management objectives and
polices
|
The
Company’s main financial liabilities, in addition to derivatives, comprise bank
loans and bond obligations, accounts payable and other accounts
payable. The main purpose of those financial liabilities is to obtain
financing for the Company’s operations. The Company has trade
accounts receivable, cash and short-term deposits, which arise directly from its
operations. The Company also has derivative
transactions.
The
Company is exposed to market risk, credit risk and liquidity risk.
The
Company’s Management supervises that financial risks are identified, measured
and managed in accordance with defined policies. All activities
derived from risk management are carried out by specialist teams with adequate
skills, experience and supervision. It is the Company’s policy that
there is no commercialization of derivatives for speculative
purposes.
The
policies for managing such risks, which are reviewed and ratified by the Board
of Directors, are summarized below:
Market
Risk
Market
risk is the risk of fluctuation in the fair value of future cash flows of a
financial instrument due to changes in market prices. Market prices
comprise three types of risks: interest rate risk, exchange rate risk
and other price risks, such as equity risk. Financial instruments
affected by market risk include loans, deposits, investments held for sale and
derivative financial instruments.
Interest
rate risk
Interest
rate risk is the risk of fluctuation in the fair value of future cash flows of a
financial derivative due to changes in market interest rates. The
Company’s exposure to the risk of changes in market interest rates is mainly
related to the Company’s long-term debt obligations with variable interest
rates.
The
policy for hedging interest rates seeks long-term efficiency in financial
expenses. This considers fixing interest rates to the extent that
these are low and allowing floating rates when the levels are high.
As of
December 31, 2008 the Company ended with an exposure of 86% local floating
interest rate exposure.
The
Company manages its interest rate risk maintaining a balanced portfolio of loans
and debts at variable and fixed interest rates. The Company has
interest rate swaps in which it agrees to interchange, at certain intervals, the
difference between the amounts of fixed and variable interest rates, calculated
in reference to a notional agreed upon capital amount. These swaps
are designated to hedge underlying debt obligations.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements,
continued
|
31.
|
Financial
risk management, continued
|
|
|
a)
|
Financial risk management
objectives and polices,
continued
|
Interest rate risk,
continued
Market
expectations are that these rates will tend to decrease in 2009, which could
mean lower financial costs for the Company.
Foreign
currency risk
Foreign
currency risk is the risk that the future fair values or cash flows of a
financial instrument may fluctuate due to exchange rate. The
Company’s exposure to exchange variation risks is related mainly to its
operating activities (when income or expenses are denominated in a currency
other than the Company’s functional currency). The Company’s main
risk lies in its obligations and these are 100% hedged.
It is the
Company’s policy to negotiate the terms of hedge derivatives to match the terms
of the hedged items in order to maximize the effectiveness of the
hedge.
Credit
risk
Credit
risk is the risk that a counterpart may not fulfill its obligations under a
financial instrument or customer contract, which leads to a financial
loss. The Company is exposed to credit risk from its operating
activities (mainly due to accounts receivable and credit notes) and from its
financial activities, including bank deposits, transactions in foreign currency
and other financial instruments.
Credit
risks related to customer loans is managed in accordance with the policies,
procedures and controls established by the Company to manage customer credit
risk. Customer credit quality is evaluated in an ongoing
manner. Outstanding customer charges are supervised. The
maximum exposure to credit risk as of the report presentation date is the value
of each class of financial asset.
Credit
risk related to balances with banks, financial instruments and negotiable values
is managed by the Finance Management Department in conformity with the Company’s
policies. Surplus funds are only invested with an approved
counterpart and within the credit limits assigned to each
entity. Counterpart limits are reviewed annually, and can be updated
during the year. The limits are established to reduce counterpart
risk concentration to a minimum.
Liquidity
risk
The
Company manages its commitments so that beginning cash plus the generation of
cash for the next twelve months must be capable of covering its financial
obligations during the same term.
The
Company monitors its risk of lack of funds using a recurrent liquidity planning
tool. The Company’s objective is to maintain a short-term investment profile
that minimizes the need to obtain external short-term financing.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
31.
|
Financial
risk management, continued
|
|
|
d)
|
Financial risk management
objectives and polices,
continued
|
Capital
management
Capital
includes shares and equity attributable to the parent company less unrealized
net income reserves.
The
Company’s main objective in respect to capital management is to ensure that it
has a strong credit rating and prosperous capital ratios to support its business
and maximize shareholder value.
The
Company manages its capital structure and makes adjustments to it, in response
to changes in economic conditions.
There
were no changes in the objectives, policies or processes during the years ended
as of December 31, 2008 and 2007.
|
32.
|
Disclosure regarding
the fair value of financial instruments and derivative financial
instruments
|
The fair
value of financial assets and liabilities is included in the amount for which
the instrument can be exchanged in an actual transaction between willing parties
that is not a forced sale or liquidation. The following methods and
hypotheses are used to estimate fair value.
Cash and
short-term deposits, trade accounts receivable, accounts payable and other
current assets approximate their amounts largely due to the short-term expiry of
these instruments.
The fixed
and variable rate of long-term loans are evaluated by the Company on the basis
of parameters such as interest rates, specific country risk factors, the
individual solvency of customers and the risk characteristics of the project’s
financing. Based on this evaluation, subsidies are taken into account
for expected loan losses. As of December 31, 2008, the amounts of
those loans, net of issuance rights, approximate their fair values.
The fair
value of the mentioned notes and bonds is based on their trading price as of the
balance sheet date. The fair value of instruments that are not
traded, bank loans and other financial debt, obligations in a financial lease
regime and other non-current financial liabilities are estimated discounted by
future cash flows using currently available rates for the debt or similar terms
and remaining expiry terms.
The fair
value of financial assets held for sale is derived from market prices traded on
active markets, if available. In certain cases fair value is
estimated using a valuation technique.
The
Company enters into financial derivative instruments with various counterparty
entities, mainly financial institutions with qualification of degree of credit
investments. The calculation of fair value for derivative financial
instruments depends on the types of instruments: interest rates derived from
contracts – fair value of interest rates derived from contracts (for example,
swap interest rates) are estimated by discounting expected future cash flows
using current market interest rates and a performance curve during the remaining
term of the instrument; foreign currency agreement derivative – the fair value
of foreign currency forward contracts is based on the forward exchange
rates.
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
32.
|
Disclosure
regarding the fair value of financial instruments and derivative financial
instruments, continued
|
The
estimated fair values of the Company’s financial instruments compared to the
carrying values are as follows:
|
As
of December 31,
|
||||||||||||||||
|
2007
|
2008
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
ThCh$
|
ThCh$
|
ThCh$
|
ThCh$
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
73,084,451 | 73,084,451 | 71,555,375 | 71,555,375 | ||||||||||||
|
Financial
assets at fair value with changes in income
|
13,273,715 | 13,273,715 | 13,228,981 | 13,228,981 | ||||||||||||
|
Trade
and other accounts receivable, net
|
192,537,092 | 192,537,092 | 172,159,162 | 172,159,162 | ||||||||||||
|
Other
current assets
|
50,255,976 | 50,255,976 | 72,288,718 | 72,288,718 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Interest
bearing loans
|
77,916,022 | 77,915,967 | 130,058,223 | 130,058,169 | ||||||||||||
|
Accounts
payable and accrued liabilities
|
59,743,299 | 59,743,299 | 62,078,539 | 62,078,539 | ||||||||||||
|
Interest
bearing loans (long term)
|
310,968,960 | 310,956,960 | 339,944,454 | 339,934,508 | ||||||||||||
|
Derivatives
|
68,838,505 | 68,838,505 | 6,723,830 | 6,723,830 | ||||||||||||
|
33.
|
Subsequent
events
|
|
|
a)
|
Result
of second takeover bid
|
On
January 9, 2009, Inversiones Telefónica Internacional Holding Limitada,
communicated the results of the Takeover Bid made on December 1, 2008 and
completed on December 16, 2008, which achieved direct and indirect ownership
through its controller Telefónica Internacional Chile S.A., of approximately
97.86% of the shares issued by Telefónica Chile.
|
|
b)
|
Closing
of the ADR program
|
On
January 29, 2009, the Company’s Board of Directors agreed to begin the process
of closing the ADR Program currently in the United States of America (Code CTC),
by delisting CTC from the New York Stock Exchange (NYSE), delisting CTC with the
Securities and Exchange Commission (SEC) and terminating the convention signed
between Telefónica Chile, Banco Central de Chile and Banco Depositario, under
Chapter XXVI of the Compendium of International Exchange Standards.
The
process contemplates a period of four months to obtain the corresponding
authorizations.
|
|
c)
|
Registration
of lines of local bonds
|
On
January 29, 2009, the Board of Directors agreed to the following:
|
|
-
|
Issue
two lines of bonds: one with a 10-year term and another with a
30-year term. Each line will be for 8 million unidades de
fomento.
|
|
|
-
|
Limit
the amount of the first placement with a charge to each line of bonds to a
maximum of 8 million unidades de fomento,
altogether.
|
COMPAÑIA
DE TELECOMUNICACIONES DE CHILE S.A. AND SUBSIDIARIES
Notes to
the consolidated financial statements, continued
|
33.
|
Subsequent
events,
continued
|
|
|
c)
|
Registration of lines of local
bonds,
continued
|
Likewise,
the Board of Directors empowered the General Manager, Mr. Oliver Flogel and the
Finance Manager, Ms. Isabel Margarita Bravo Collao, in order for either of them,
indistinctly to establish the conditions, terms and timeliness of the issuance,
as well as sign the contracts and undertake all processes and acts necessary for
the issuance and sale of the bonds.
On April
15, 2009 Telefónica Chile carried out a placement of Series N, 5-year bullet
bonds on the Santiago Stock Exchange in the amount of UF 5 million (equivalent
to Ch$ 106,000 million). The debt titles were auctioned at a rate of
UF + 3.23% annually.
Likewise,
on April 22, 2009 there was a placement of Series M, 5-year Bullet Bonds in the
amount of ThCh$ 20,500,000 on the same stock exchange, at a rate of 5.99%
annually.
The
rating for both series is “AA-” and “AA” by Fitch Ratings and ICR
respectively. Both operations were led by BBVA.
With
these placements Telefónica Chile refinances the main obligations for 2009,
keeping its current debt level constant.
|
|
d)
|
Extraordinary
Shareholders’ Meeting
|
At Board
meeting held on March 31, 2009, the Board of Directors of Compañía de
Telecomunicaciones de Chile S.A. agreed to call an Extraordinary Shareholders’
Meeting for Thursday, April 23, 2009, following the Ordinary Shareholders’
Meeting, in order to inform the following matters and submit them to the
decision of the shareholders:
|
|
-
|
Reform
the first article of the bylaws, in the sense of changing the name of
Compañía de Telecomunicaciones de Chile S.A. to TELEFONICA CHILE S.A., and
modify its fantasy names;
|
|
|
-
|
Decrease
stock capital in the approximate and estimated amount of ThCh$ 326,862,636
due to capitalization of the accumulated loss reserve account recognized
in the process of adoption of IFRS. The duly audited final
amount will be informed at the
Meeting;
|
|
|
-
|
Reform
article five of the company bylaws in reference to capital and incorporate
the applicable adjustments, corrections and modifications;
and
|
|
|
-
|
Adopt
the rest of the agreements necessary to implement the previously mentioned
modifications and bylaws reforms.
|
In the
period from January 1 to April 23, 2009, there have been no other significant
subsequent events that affect these financial statements.
F - 66