THE TOTAL NUMBER OF PAGES CONTAINED IN THIS DOCUMENT IS 32
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FORM 6-K
--------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Report of Foreign Issuer
Pursuant to Rule 13a - 16 or 15d - 16 of the
Securities Exchange Act of 1934
For the month of November 2001
NATIONAL TELEPHONE COMPANY OF VENEZUELA (CANTV)
-----------------------------------------------
(Translation of Registrant's into English)
EDIFICIO CANTV
AVENIDA LIBERTADOR
CARACAS, VENEZUELA
------------------
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F ___
---
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Act of 1934
Yes ___ No X
---
If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82 - _______________
This report consists of an English translation of the original Spanish language
version of a Venezuelan filing of the unaudited financial statements of Compania
Anonima Nacional Telefonos de Venezuela (CANTV) as of and for the period ended
on September 30, 2001, prepared according to Venezuelan GAAP, which differ in
certain important respects from US GAAP, as filed with the Venezuela National
Commission on Securities on October 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMPANIA ANONIMA NACIONAL
TELEFONOS DE VENEZUELA, (CANTV)
By: /s/ ARMANDO YANES
_________________________
Armando Yanes
Chief Financial Officer
Date: November 07, 200l
ENGLISH TRANSLATION
-------------------
Caracas, October 31, 2001
Sirs
Comision Nacional de Valores
Present.-
Attention: Dra. Aida Lamus
President
Dear Dra. Lamus,
In accordance with the requirements of the "Periodic or Occasional Information
Reporting Norms to Be Submitted by Individuals Regulated by the Venezuelan
National Commission on Securities" ("Normas Relativas a la Informacion Periodica
u Ocasional que Deben Suministrar las Personas Sometidas al Control de la
Comision Nacional de Valores"), attached please find the unaudited Financial
Statements as of and for the period ended September 30, 200l.
I will make myself available should you need any clarification or additional
information.
Sincerely yours,
/s/ MARIELA BELMONTE
____________________
Mariela Belmonte.
Secretary
Board of Directors
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA
(CANTV) AND SUBSIDIARIES
Consolidated financial statements
as of September 30, 200l and December 31, 2000 and for the nine
months period ended September 30, 200l and 2000
(Translation of financial statements originally issued in Spanish)
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA (CANTV) AND SUBSIDIARIES
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001 AND 2000
-----------------------------------------------------------
(Adjusted for inflation and expressed in millions of constant bolivars
as of September 30, 2001, except earning per share and per ADS amount)
2001 2000
----------- -----------
OPERATING REVENUES:
Local and domestic long distance usage 539,013 600,448
Basic rent 250,858 259,561
----------- -----------
Local and domestic long distance 789,871 860,009
International long distance 73,120 84,700
Net settlements 15,899 24,830
----------- -----------
International long distance 89,019 109,530
Other wireline-related services 140,815 112,212
----------- -----------
Total wireline services 1,019,705 1,081,751
Wireless services 374,036 383,116
Other 38,870 36,810
----------- -----------
Total operating revenues 1,432,611 1,501,677
OPERATING EXPENSES:
Operations, maintenance, repairs and administrative 669,877 770,067
Depreciation and amortization 549,335 535,239
Concession and other taxes 99,222 115,338
Loss on effects of curtailment of pension and postretirement plans 35,219 --
----------- -----------
Total operating expenses 1,353,653 1,420,644
----------- -----------
Operating income 78,958 81,033
----------- -----------
OTHER EXPENSES, NET:
Financing cost, net (9,526) (32,621)
Other income (expenses), net 1,554 (315)
----------- -----------
Total other expenses, net (7,972) (32,936)
----------- -----------
Income before income tax 70,986 48,097
INCOME TAX 30,308 22,895
----------- -----------
Net income 40,678 25,202
=========== ===========
Earnings per share before loss on effects of curtailment of pension
and postretirement plans 82 26
Loss on effects of curtailment of pension and postretirement plans (38) --
----------- -----------
Earnings per Share 44 26
=========== ===========
Earnings per ADS (based on 7 shares per ADS) 308 184
=========== ===========
Average shares outstanding (in millions) 926 961
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
(Translation of financial statements originally issued in Spanish)
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA (CANTV) AND SUBSIDIARIES
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 200l AND DECEMBER 31, 2000
--------------------------------------------------------------------------
(Adjusted for inflation and expressed in millions of
constant bolivars as of September 30, 2001)
September 30, December 31,
ASSETS 2001 2000
------ ----------- -----------
CURRENT ASSETS:
Cash and temporary investments 893,996 633,708
Accounts receivable, net 414,930 380,555
Accounts receivable from Venezuelan Government entities 97,929 112,553
Inventories and supplies, net 32,928 36,470
Other Current assets 12,319 15,311
----------- -----------
Total current assets 1,452,102 1,178,597
Property Plant and equipment, net 3,129,258 3,563,463
Cellular concession, net 101,888 104,403
Other assets 215,732 237,246
----------- -----------
Total assets 4,898,980 5,083,709
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term debt 131,964 60,769
Accounts payable 280,725 301,652
Employee severance benefits, net 12,264 9,692
Accrued employee benefits 100,226 168,792
Other current liabilities 281,752 313,365
----------- -----------
Total current liabilities 806,931 854,270
LONG-TERM LIABILITIES:
Long-term debt 228,532 373,846
Pension and postretirement benefit obligations 407,150 378,792
----------- -----------
Total liabilities 1,442,613 1,606,908
STOCKHOLDERS' EQUITY 3,456,367 3,476,801
----------- -----------
Total liabilities and stockholders' equity 4,898,980 5,083,709
=========== ===========
The accompanying notes are an integral part of these consolidated statements.
(Translation of financial statements originally issued in Spanish)
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA (CANTV) AND SUBSIDIARIES
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
------------------------------------------------------------
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,2001, AND THE YEAR ENDED
---------------------------------------------------------------------
DECEMBER 31, 2000
-----------------
(Adjusted for inflation and expressed in millions of constant bolivars as of
September 30, 2001)
Capital Stock
---------------------------------- Additional Cumulative Total
Historical Inflation Paid-in Retained Legal Translation Stockholders'
cost Adjustment Total Capital Earnings Reserve Adjustment Equity
---------- ---------- --------- --------- ---------- -------- ---------- -------------
Balance as of December 31, 1999 36,857 1,557,593 1,594,450 19,852 2,069,528 159,642 34,591 3,878,063
Net loss - - - - (98,772) - - (98,772)
Dividends declared - - - - (70,236) - - (70,236)
Repurchased shares (2,684) (113,127) (115,811) - (118,373) - - (234,184)
Change in cumulative translation
adjustment - - - - - - 1,930 1,930
-------- ---------- ---------- ------- ---------- -------- ------- -----------
Balance as of December 31, 2000 34,173 1,444,466 1,478,639 19,852 1,782,147 159,642 36,521 3,476,801
Net income - - - - 40,678 - - 40,678
Dividends declared - - - - (62,525) - - (62,525)
Change in cumulative translation
adjustment - - - - - - 1,413 1,413
-------- ---------- ---------- ------- ---------- -------- ------- -----------
Balance as of September 30, 2001 34,173 1,444,466 1,478,639 19,852 1,760,300 159,642 37,934 39,456,367
======== ========== ========== ======= ========== ======== ======= ===========
The accompanying notes are an integral part of these consolidated statements.
(Translation of financial statements originally issued in Spanish)
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA (CANTV) AND SUBSIDIARIES
--------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIOD ENDED
----------------------------------------------------------------------
SEPTEMBER 30, 2001 AND 2000
---------------------------
(Adjusted for inflation and expressed in millions of constant bolivars as of
September 30, 2001)
2001 2000
---------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income 40,678 25,202
Adjustments to reconcile net income to net cash provided by operating
activities:
Monetary loss position 20,999 12,697
Exchange (gain) loss, net (14,338) 7,109
Depreciation and amortization 549,335 535,239
Loss on effects of curtailment of pension and postretirement plans 35,219 --
Provision for doubtful accounts 51,267 61,200
Provision for inventories obsolescence 3,903 --
Changes in current assets and liabilities
Accounts receivable (109,235) (39,723)
Accounts receivable from Venezuelan Government entities 5.083 (23,677)
Inventories and supplies, net 3,294 11,591
Other current assets 2,551 1,203
Accounts payable 35,962 40,413
Accrued employee benefits, net (58,953) 66,889
Other current liabilities (6,998) 6,437
---------- ---------
558,767 704,580
CHANGES IN NON CURRENT ASSETS AND LIABILITIES:
Other assets 5,227 3,136
Pension and postretirement benefit obligations (6,861) 21,925
---------- ---------
Net cash provided by operating activities 557,133 729,641
CASH FLOWS USED IN INVESTING ACTIVITIES:
Intangible (26,326) 4,399
Capital expenditures, net of disposals (78,977) (199,552)
---------- ---------
Net cash used in investing activities (105,303) (195,153)
---------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Increase of Debt -- 33,361
Payments of debt (54,314) (52,998)
Dividend payments (62,525) (70,238)
Repurchased shares -- (234,184)
---------- ---------
Net cash used in financing activities (116,839) (324,059)
---------- ---------
Increase in cash and temporary investments before loss in purchasing
power of cash and temporary investments 334,991 210,429
LOSS IN PURCHASING POWER OF CASH AND TEMPORARY INVESTMENTS (74,703) (22,688)
---------- ---------
Increase in cash and temporary Investments 260,288 187,741
CASH AND TEMPORARY INVESTMENTS:
Beginning of period 633,708 401,343
---------- ---------
End of period 893,996 589,084
========== =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest 29,802 34,491
========== =========
Taxes 244,712 120,469
========== =========
MONETARY POSITION
------------------
Operating activities 20,789 1,192
---------- ---------
Investing activities (1 ,840) (824)
---------- ---------
Temporary investments 34,754 9,622
---------- ---------
The accompanying notes are an integral part of these consolidated statements
(Translation of financial statements originally issued in Spanish)
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA (CANTV)
--------------------------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
(Amounts are adjusted for inflation and expressed in millions of constant
bolivars as of September 30, 2001, unless otherwise indicated)
EXPLANATION ADDED FOR TRANSLATION INTO ENGLISH:
----------------------------------------------
The consolidated financial statements were originally issued in Spanish and
translated into English.
COMPANY BACKGROUND AND CONCESSION AGREEMENT:
-------------------------------------------
Compania Anonima Nacional Telefonos de Venezuela (CANTV or the Company) is one
of the primary providers of telecommunications services in Venezuela, and is the
owner of a nationwide basic telecommunications network through which it provides
not only national and international fixed switched telephone service but also
private networks, data, public telephone, rural and telex services. In addition,
through its subsidiaries, CANTV provides other telecommunications-related
services including wireless communications, Internet access and telephone
directories.
CANTV entered into a Concession Agreement (the Concession) with the Government
of Venezuela (the Government) in 1991 to provide national and international
telecommunications services, for the purpose of guaranteeing high quality
service, modernizing and expanding the local network, introducing progressive
rate rebalancing and establishing a framework for the introduction of
competition. November 2000 marked the opening of the telecommunications market
with the entrance of new competitors (See Note 18 (d) and (e) - Commitments and
contingencies - Concession mandates and Competition).
Significant terms of the Concession are as follows:
The Concession established a special privilege regime of limited
concurrence, through which the Government guarantees CANTV to be the exclusive
provider of fixed switched telephone services, including local, national and
international access until November 27, 2000. Beginning on that date, any party
who obtain the corresponding administrative concession can be provide basic
telecommunication services in the country (See Note 4 - Regulation).
The Concession is for 35 years ending in 2026, and is extendible for an
additional period of 20 years subject to the approval by the Ministry of
Infrastructure, (the Ministry), and satisfactory performance by the Company of
its obligations under the Concession.
Until December 31, 2000, CANTV paid a total of 5.5% of services billed to
the Government for telecommunications tax and concession rights. Beginning in
January 2001, the Company is subject to pay a 4.8% of gross revenues (See Note 4
(a) - Regulation - Organic Law of Telecommunications). Such amount is included
in the accompanying consolidated statements of operations as Concession and
other taxes.
The Concession requires the Company to expand, modernize and improve the
quality of
2
its telephone network, as well as, meet prescribed service quality targets.
Those Concession mandates include national and regional expansion and
modernization targets as well as, annual and cumulative targets (See Note 18 (d)
and (e) - Commitments and contingencies - Concession Mandates and Competition).
The Concession specifies various penalties which may be imposed on CANTV
for negligent or intentional violation of Concession provisions, including a
fine of up to 1% of services billed and/or revocation and termination of the
Concession. Penalties assessed against CANTV through September 30, 2001, have
not been material.
Eight Year Review Agreement
---------------------------
On February 21, 2000, CANTV and the Comision National de Telecomunicaciones
(CONATEL) signed the Eight Year Review Agreement (the Agreement), effective
until December 31, 2000. The Agreement included the review of the concession
regarding quality service, tariffs framework, commercialization of new services
and the elimination of the service expansion mandate and the introduction of a
new 80% digitalization mandate. (See Note 4 - Regulation and Note 18 (d) -
Commitments and contingencies - Concession mandates).
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES:
---------------------------------------------------------
Basis of presentation
---------------------
The consolidated financial statements have been prepared in accordance with
Venezuelan generally accepted accounting principles (Venezuelan GAAP).
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Adjustment for inflation
------------------------
In December 2000, the Venezuelan Federation of Public Accountants issued the new
DPC 10 (revised and comprehensive), which superseded the standard issued in 1991
and its three amendments as well as the technical publications number 14 and 19.
The main changes outlined in this standard pertain to presentation and not
methodology, which are effective for those periods beginning after December 31,
2000.
The Company's consolidated financial statements are expressed on a constant
bolivar basis as of September 30, 2001, in accordance with the Venezuelan
Statement of Accounting Principles Number 10 "Standards for the Preparation of
Financial Statements Adjusted for Inflation" (DPC 10) (revised and
comprehensive).
3
The amounts disclosed in the consolidated financial statements have been
adjusted to reflect the bolivar's purchasing power at September 30, 2001 based
on the Consumer Price Index (CPI) for the metropolitan area of Caracas as
published by the Central Bank of Venezuela (BCV).
The most representative indexes published by the BCV used in the preparation of
the inflation adjusted financial statements are as follows (1997 base):
September 30, December 31, September 30,
2001 2000 2000
------------- ------------ -------------
End of period 225.57372 205.97793 200.87801
Average for period 216.03142 194.97654 191.92056
Each caption in the accompanying consolidated financial statements has been
presented on the basis of the CPI at September 30, 2001, as follows:
Monetary assets and liabilities (cash and temporary investments,
receivables, other assets and most liabilities) as of September 30, 2001,
have not been adjusted for the effect of inflation since they already
represent their inflation adjusted value at that date. The balances as of
December 31, 2000, have been updated based upon the relative change in the
CPI between that date and the CPI at September 30, 2001.
Non-monetary assets (principally inventories and supplies, property, plant
and equipment, the cellular concession and certain other assets) and
stockholders' equity have been updated based upon the relative change in
the CPI between the time the assets and equity were acquired or contributed
and the CPI at September 30, 2001.
The non-monetary liability for pension and other postretirement benefit
obligations and its related expense, are recorded based on actuarial
calculations (See Note 14 - Retirement Benefits).
Monetary revenues and expenses have been updated based upon the change in
the CPI from the month in which the transaction was recorded and the CPI at
September 30, 2001.
Non-monetary expenses (primarily depreciation and amortization) are based
upon the values of the corresponding assets (primarily property, plant and
equipment) in the accompanying consolidated balance sheets (See (ii)
above).
The monetary (loss) gain is attributable to the Company's net monetary
asset or liability position in an inflationary period and has been set
forth as monetary (loss) gain position as part of the Financing cost, net
caption in the accompanying consolidated statements of operations (See Note
16 - Financing cost, net).
Consolidation principles
------------------------
The consolidated financial statements include CANTV and all of its
majority-owned subsidiaries. All significant intercompany balances and
transactions among the companies have been eliminated.
4
Cash and temporary investments
------------------------------
Cash and temporary investments include short-term, highly liquid investments,
which have original maturities of three months or less. The loss in the
purchasing power of cash and temporary investments due to inflation is reflected
as a separate caption in the consolidated statements of cash flows.
Inventories and supplies, net
-----------------------------
Inventories and supplies are presented at cost, net of reserves. Certain
inventories and supplies whose original cost per unit does not exceed the
equivalent in bolivars of US$500 are expensed when purchased.
Depreciation and amortization
-----------------------------
Depreciation and amortization are calculated using the straight-line method
based on the estimated useful lives of the fixed assets and based on the
amortization period assigned to the intangible assets. (See Note 5 - Cellular
Concession and Note 10 - Other assets). Amortization expense was Bs. 40,055 and
Bs. 37,447 for the nine months period ended September 30, 2001 and 2000,
respectively. Accumulated amortization was Bs. 288,387 and Bs. 248,332 at
September 30, 2001 and December 31, 2000, respectively.
In November 2000, the Company reviewed and updated the depreciable lives of
certain assets, including civil works and buildings, towers and shelters related
to wireless operations, and changed the useful lives from 7 to 20 years. This
change in the useful lives did not have a significant impact in the Company's
consolidated financial statements.
Computer software
-----------------
The costs of certain purchased computer software and systems for internal use
are capitalized and classified as intangible assets. The estimated useful lives
of these intangible assets is between 3 and 7 years. Internal-use software is
defined as software which is acquired, internally developed, or modified solely
to meet the internal needs of the Company; and for which, during the software's
development or modification, no substantive plan exists or is being developed by
the Company to market the software externally. Regular maintenance and
modifications to existing software are expensed when incurred.
Impairment in Long-lived assets
-------------------------------
The Company evaluates the impairment of long-lived assets, including intangible
assets, based on the projection of undiscounted cash flows whenever events or
changes in circumstances indicate that the carrying amounts of such assets may
not be recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded value of the assets, the assets are written
down to their estimated fair values. Under current circumstances, no adjustment
for impairment in the carrying value of the long-lived assets has been recorded.
5
Revenue recognition
-------------------
Revenues for wireline and wireless services are recognized in the period in
which the services are provided. Unbilled revenues of Bs. 54,342 and Bs. 87,984
are included in accounts receivable as of September 30, 2001 and 2000,
respectively. Revenues from settlement of traffic with international
telecommunications carriers are recognized on a net basis and are based on
estimates of traffic volume and rates. Advertising revenues and related
telephone directory printing costs are recognized upon publication of the
directories. The Company presents as deferred income, included in the other
current liabilities caption, those amounts of billed services, which have not
been rendered yet, such as submarine cable usage, basic rent for
telecommunications services and telephone directories (see Note 13 - Other
current liabilities).
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
101 (SAB 101), "Revenue Recognition in Financial Statements", in December 1999.
SAB 101 summarizes the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in the financial statements, and
establishes the criteria and attributes to recognize revenues. The Company
believes that its revenue recognition policies are in accordance with SAB 101.
During 2000, the Company reviewed its revenue recognition polices for prepaid
services and subscriber right fees and changed the way it was accounting for
these services. Subscriber right fees, which are upfront fees paid by consumers
when the service is activated, are classified as liabilities on the Company's
balance sheet. The Company believes that the opening of the telecommunications
market where consumers have a choice of carrier changes the way in which
subscriber right fees should be accounted for on the Company's books. In line
with industry practices and improved monitoring systems, prepaid card sales are
recognized as revenue when the customer utilizes the service.
The changes in the way the above revenues are recognized does not materially
impact the Company's results of operations.
Income tax
----------
The income tax is calculated based upon taxable income which is different from
the income before tax. Venezuelan tax legislation does not permit consolidation
of results of subsidiaries for tax purposes. Investment tax credits for plant
and equipment reduce the income tax during the year in which such assets are
placed in service. Investment tax credits as well as fiscal losses except those
from the tax inflation adjustment, are permitted to be carried forward for 3
years. Venezuelan tax regulations also provide for a corporate asset alternative
minimum tax based on inflation adjusted net assets.
Employee severance benefits and other benefits
----------------------------------------------
Employee severance benefits are calculated and recorded in accordance with the
Venezuelan labor law and the Company's current collective bargaining agreement.
6
Under the current labor law, employees earn a severance indemnity equal to 5
days salary per month, up to a total of 60 days per year of service. Labor
indemnities are earned once an employee has completed 3 months of continuous
service. Beginning with the second year of service, the employees earn an
additional 2 days salary for each year of service (or fraction of a year greater
than six months), cumulative up to a maximum of 30 days salary. Severance
benefits must be funded and deposited monthly in either an individual trust or a
severance fund, or accrued in an employer's accounting records, as specified in
writing by each employee.
In the case of unjustified or involuntary termination, employees have the right
to an additional indemnification payment of one month salary per year of service
up to a maximum of 150 days' current salary. Furthermore, in the case of
involuntary termination the law established the payment of an additional
severance benefit of up to a maximum of 90 days' current salary based on length
of employment.
Additionally, the Venezuelan labor law requires a mandatory annual profit
sharing distribution to all employees. CANTV made distributions equal to 120
days salary at December 31, 2000 totaling, Bs. 50,093.
Pension plan and other postretirement benefits
----------------------------------------------
The noncontributory pension plan benefits are accrued based on actuarial
estimates. The real discount rate and real rate of compensation increase used to
develop the projected benefit obligation were 7% and 2%, respectively (See Note
14 - Retirement benefits).
Postretirement benefits relating to health care expenses are recorded based on
actuarial estimates (See Note 14 - Retirement benefits).
Foreign currency denominated transactions
-----------------------------------------
Foreign currency denominated transactions are recorded at the bolivar exchange
rate as of the transaction date. The outstanding balances of foreign currency
denominated assets and liabilities are translated into bolivars using the
exchange rate at the balance sheet date, which was Bs. 743 and Bs. 700 per US
dollar as of September 30, 2001 and December 31, 2000, respectively (See Note 6
- Balances in foreign currency). Any exchange gain or loss from the translation
of these balances and transactions is reflected as exchange loss, net in the
Financing cost, net caption in the accompanying consolidated statements of
operations (See Note 16 - Financing cost, net).
Legal reserve
-------------
The Company and each of its subsidiaries are required under the Venezuelan
Commercial Code and their Corporate By-laws to transfer at least 5% of each
year's net income to a legal reserve until such reserve equals at least 10% of
capital stock.
Earnings per share
------------------
Earnings per share are based on 926,037,385 and 960,602,246 of average common
shares outstanding at September 30, 2001 and 2000, respectively.
7
Recently issued accounting pronouncements
-----------------------------------------
In November 2000, the International Accounting Standards Committee issued
International Accounting Standard No 39 (IAS 39). "Financial Instruments:
Recognition and Measurement". This standard establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. It also
addresses all financial instruments and covers topics such as classification of
financial assets, measurement of non-derivative financial instruments,
recognition and derecognition, and impairment.
As of September 30, 2001, the adoption of this standard did not have an impact
on the Company's results or financial position.
REGULATION:
----------
CANTV's services and tariffs are regulated by the rules established in the
Concession agreement, the Organic Telecommunications Law of 2000 and its
Regulations, as well as the Agreement (see Note 2 - Company background and
concession agreement).
The Organic Telecommunications Law along with the Regulations, provide the
general legal framework for the regulation of telecommunications services in
Venezuela. Under the Organic Telecommunications Law, suppliers of public
telecommunications services, such as the Company, must operate under concessions
granted by the Government, which acts through the Ministry.
CONATEL is a independent regulatory body under the direction of the Ministry,
created by presidential decree in September 1991, which has the authority to
manage, regulate and control the use of limited resources in the
telecommunications services in Venezuela, and recommend the granting of
concessions, licenses and administrative authorizations as well as the approval
of tariffs and collection taxes. Also, it shall promote and protect free
competition, together with the Superintendent of Promotion and Protection of
Free Competition (Pro-Competencia).
Organic Telecommunications Law
------------------------------
On June 12, 2000, the Venezuelan Government issued the Organic
Telecommunications Law, which provides the guidelines for the opening of the
telecommunications sector for existing and new operators after November 2000.
This Law replaces the 1940 Organic Telecommunications Law and it is the result
of several years of consultation between the private and public sector. Some of
the most important aspects of the Telecommunications Law are as follows:
Provides the legal framework to establish specific regulations related to
interconnection, universal service, spectrum, administrative concessions,
networks, taxes, penalties, consumer rights and operator's responsibilities.
Defines telecommunications as an activity of general interest rather than
as a public service, as provided by the former law.
Operator's freedom to set rates is specified, establishing controls only in
cases where dominant 1control is evidenced and in cases of insufficient
competition. In this case it also anticipated the possibility of establishing
isometric regulations to guarantee competition.
8
Adopts a new tax regime applicable to all telecommunications service
providers on the basis of annual earnings. The new taxes replace the
former annual tax and concession fee of 5.5% for wireline and 10.0% for
wireless services. The new tax rates are: 2.3% activity tax, 0.5% tax to
cover CONATEL's activities, 0.5% tax for spectrum allocation, 1% tax to
create the Universal Service Fund, 0.5% tax for the Telecommunications
Training and Development Fund and charges for administrative procedures.
In addition, cellular providers are subject to a supplemental tax
starting at 4.5% of annual earnings in the year 2000 and decreasing by
1% per annum until 2005 after which time the supplemental tax will be
eliminated.
Telecommunications regulations
------------------------------
On November 24, 2000, the Regulations for Basic Telephony Services,
Interconnection and Administrative Concessions were issued and represent the
legal framework for the market opening of telecommunication services in
Venezuela.
The most significant aspects of these Regulations include the rules for granting
concessions, which provide administrative capabilities and include specific
attributes to specific services granted by CONATEL. The concessions will be
granted shortly after a request has been made, since they are not subject to
open bidding processes and only entail collection of established requirements.
The concessions that do not require spectrum, such as subscription to cable
television or fiber optic telephony, are free of duties.
Additionally, spectrum concession will be granted through public offering
procedures and in certain causes, direct adjudication will be granted. Value
added services, except for Internet services, does not require authorization,
only notification specifying the networks, links or systems to support the
service.
The regulations provide for mandatory interconnection with charges based on
costs, changing the previous structure of interconnection charges based on
tariffs. It also requires the submission of quarterly information by separate
accounts and before the fourth quarter of 2001, carriers must establish
accounting systems indicating costs generated by interconnection and the
allocation criteria. At June 30 2001, CANTV has signed seven interconnection
contracts with different operators. (See Note 18 (e) - Commitments and
contingencies - Competition).
Tariffs
-------
Before CANTV entered into the Agreement with CONATEL, CANTV's rates were
regulated under the Concession, through a "price-cap" and a "rate rebalancing"
mechanism that promoted operating efficiency and allowed for progressive tariff
adjustments. The price-cap varied directly with the Wholesale Price Index (WPI)
published by the BCV, which permitted the Company, with the approval of the
Ministry, to raise tariffs on a quarterly basis to keep pace with WPI. Generally
a three to six month delay existed between the date the WPI was published for a
particular quarter and its actual effect on new tariffs.
The Agreement signed in February 2000 (See Note - 2 Company Background and
Concession agreement) established two tariffs adjustments which went into effect
on March 23 and June 16, 2000.
9
On February 19, 2001, pursuant to the New Telecommunications Law, CONATEL
established the maximum tariffs that are applicable effective March 10, 2001
during 2001 and a new price-cap system that replaced the tariff adjustment
mechanism provided under the Agreement.
CELLULAR CONCESSION:
-------------------
On May 19, 1992, the Company purchased one of two cellular concessions from the
Government for Bs. 134,975 (Bs. 5,388 on an historical cost basis) and
established Telecomunicaciones Movilnet, C.A. (Movilnet). The amount paid for
the cellular concession is being amortized over 40 years.
Until December 2000, the annual payment of cellular concession fee based on
services billed was 10%. Beginning in 2001, the tax regime applicable to
cellular services providers is 9.3% of gross revenues. (See Note 4 (a) -
Regulation - Organic Telecommunications Law).
For the nine months period ended September 30, 2001 and 2000, the concession tax
expense included in the consolidated statements of operations were Bs. 82,324
and Bs. 96,363, respectively.
BALANCES IN FOREIGN CURRENCY:
----------------------------
The Company has assets and liabilities denominated in US dollars and Japanese
yen as follows (in millions of US dollars).
September 30, December 31,
2001 2000
------------- ------------
Cash and temporary investments 1,065 743
Accounts receivable, net 49 28
Other assets and advances to suppliers 32 36
Accounts payable (91) (165)
Short and long-term debt (469) (512)
------------- ------------
Net asset position in foreign currency 586 130
============= ============
ACCOUNTS RECEIVABLE, NET:
------------------------
The Company's accounts receivable balances (other than Venezuelan Government
entities) are as follows:
September 30, December 31,
2001 2000
------------- ------------
Subscribers 387,310 415,684
Net settlements 30,763 17,929
Other 48,833 17,182
466,906 450,795
Less: Allowance for doubtful accounts (51,976) (70,240)
------------- ------------
414,930 380,555
============= ============
10
ACCOUNTS RECEIVABLE FROM VENEZUELAN GOVERNMENT ENTITIES:
--------------------------------------------------------
The Company's largest customer is the Venezuelan public sector, including the
Government, its agencies and enterprises, and the Venezuelan states and
municipalities (collectively, Government entities). Government entities
generated approximately 7% and 9%, respectively of the Company's revenues during
the nine months period ended September 30, 2001 and 2000, respectively.
The following table sets forth the aging of accounts receivable from Government
entities:
September 30, December 31,
2001 2000
------------- ------------
Year of Service
---------------
2001 34,461 -
2000 28,091 60,374
1999 and prior 35,377 52,179
------------- ------------
97,929 112,553
============= ============
The changes in accounts receivable from Government entities are as follows:
September 30, December 31,
2001 2000
------------- ------------
Balance at beginning of year 112,553 150,563
Billings 97,638 184,064
Collections (102,484) (205,385)
Monetary loss (9,778) (16,689)
------------- ------------
Balance at end of period 97,929 112,553
============= ============
The amounts that Government entities can pay for telecommunications services are
established in annual budgets, which are not based upon actual usage during such
year. As a result of these budgeting processes and for other macroeconomic
reasons, a number of Government entities have not paid the Company in full for
telecommunications services received. In addition, as a result of inflation and
devaluation, the value of these balances has decreased.
Although the Company has, in the case of certain Government entities, reduced
the number of lines available, there can be no assurance that Government
entities will not continue to use telecommunications services in excess of the
amounts that can be paid, that the Company will not continue to experience
significant delays in collecting receivables from Government entities or that
inflation and devaluation will not continue to decrease the value of these
receivables to the Company. Failure by Government entities to pay the amounts
owed to the Company or the amounts to be billed in the future, has had, and will
continue to have, an adverse effect on the profitability of the Company.
11
On November 3, 1999 the Congress approved a law authorizing the issuance of
bonds to refinance external and internal debts, as well as other past - due
obligations. The amount of bonds set aside for payment of debts owed CANTV as of
December 31, 1998, under such legislation amounted to Bs. 65,361. During 2000,
the government assigned Bs. 37,000 to CANTV. In December 2000, CANTV received a
cash payment of Bs. 34,089 related to the bond issuance.
On March 6, 2001, Congress approved a decree authorizing the issuance of bonds
of up to Bs. 77,676 for the payment of debt related to basic services. The
Company expects to collect Bs. 43,300 covering debts from the period 1996-2000.
At September 30, 2001 the Company has received cash payments of Bs. 6,633
according to this bonds.
CANTV's Management believes all amounts from Government entities will be
collected either in cash and/or through Government bonds.
PROPERTY, PLANT AND EQUIPMENT, NET:
-----------------------------------
Property, plant and equipment, is comprised as follows:
September 30, December 31,
2001 2000
------------- ------------
Plant 8,986,446 8,933,665
Buildings and facilities 1,126,760 1,122,166
Furniture and equipment 791,620 758,720
Vehicles 71,466 77,280
Land 42,119 42,086
------------- ------------
11,018,411 10,933,917
Less: Accumulated depreciation (7,938,332) (7,438,762)
------------- ------------
3,080,079 3,495,155
Construction work in progress 49,179 68,308
------------- ------------
3,129,258 3,563,463
============= ============
The average useful lives for the different classes of property, plant and
equipment are as follows:
Average useful
lives (in years)
---------------
Plant 3 to 32
Buildings and facilities 5 to 25
Furniture and equipment 3 to 7
Vehicles 3 to 5
Property, plant and equipment includes capitalized direct labor and allocated
overhead costs, as well as materials used in connection with construction work
in progress. Capitalized direct labor and allocated overhead costs totaled, Bs.
12,034 and Bs. 57,480 for the nine months period ended September 30, 2001 and
2000, respectively. Maintenance and repair costs are expensed when incurred
while major improvements and renovations are capitalized.
12
OTHER ASSETS:
-------------
Other assets, are comprised as follows:
September 30, December 31,
2000 2000
------------- ------------
Software and other intangible assets, net 131,564 152,547
Prepaid taxes 12,783 15,702
Investment in INTELSAT 23,692 27,499
Class C stock and other 47,693 41,498
------------- ------------
215,732 237,246
============= ============
Software and other intangible assets include the cost of computer software and
systems for internal use, net of accumulated amortization (See Note 3 (g) -
Summary of significant accounting principles and policies - Computer software)
and the cost of usage rights of satellites which are amortized over periods
ranging from 3 to 7 years based upon the terms of contracts granting usage
rights.
Prepaid taxes include taxes assessed on the inflation adjusted value of fixed
assets. In 1991, the Venezuelan Income Tax Law was revised to incorporate new
provisions. Under this new law, companies were required to pay an initial tax
equal to 3% of the inflation adjusted value of fixed assets. This initial tax
was paid prior to 1996 and has been deferred and is being amortized over the
estimated useful lives of the related assets.
The investment in INTELSAT represents the Company's participation in the
International Satellite Telecommunications Organization. The Company accounts
for this investment using the equity method. The functional currency of INTELSAT
is the US dollar.
In 1993, the Company purchased 1% of its capital stock, for Bs. 55,815. The
stock is being distributed to employees as part of an incentive plan. All the
employees of the Company are eligible. The Company charges the related cost to
expense in the year employees earn the award and the stock is issued to
employees the following year. At September 30, 2001 and December 31, 2000,
9,372,520 and 9,228,583 shares were available for distribution to employees
under this plan.
LONG-TERM DEBT:
---------------
Long-term debt, is comprised of the following:
September 30, December 31,
2001 2000
------------- ------------
Notes in US dollars at interest rates of 8.88% and
9.25% maturing in 2002 and 2004, respectively. 148,528 153,203
Notes in US dollars at interest rates of six-month
LIBOR plus a margin between 1.35% and
1.75% (averaging 5.56% and 8.19% at
September 30, 2001 and December 31, 2000,
respectively), maturing through 2003. 53,868 82,409
13
September 30, December 31,
2001 2000
------------- ------------
Bank loans in Japanese yen at a fixed interest rate
of 5.80%, and in US dollars at interest rates of
six-month LIBOR plus a margin between 0.25%
and 0.75% (averaging 5.87% and 5.93% at
September 30, 200l and December 31, 2000,
respectively), maturing through 2009. 54,168 67,794
IFC loans in US dollars at variable interest rates:
At six-month LIBOR plus a margin of
1.75%, (averaging 5.57% and 8.87% at
September 30, 2001 and December 31,
2000, respectively), maturing through 2005. 29,720 38,330
At six-month LIBOR plus a margin of
2.00%, (averaging 5.82% and 8.22% at
September 30, 2001 and December 31,
2000, respectively), maturing through 2007. 19,504 23,478
At six-month LIBOR plus a margin between
3.00% and 6.00% (averaging 7.89% and
12.36% at September 30, 2001 and
December 31, 2000, respectively), maturing
through 2005. 18,575 19,164
Supplier loans in US dollars at interest rates of six-
month LIBOR plus a margin of 0.25% to 0.50%
(averaglng 4.61% and 6.75% at September 30,
2001 and December 31, 2000, respectively),
maturing through 2002. 2,443 5,619
Notes payable to suppliers in US dollars at fixed
interest rates (averaging 6.75% and 7.00% at
September 30, 2001 and December 31, 2000,
respectively), maturing through 2002. 1,145 2,574
Banks loan in bolivars bearing interest at the
average lending rate of the four major banks in
Venezuela (25.76% and 27.84% at September
30, 2001 and December 31, 2000,
respectively), maturing through 2003. 2,147 4,126
Bank loans in bolivars at a fixed interest rate of
23.52% and 22.81% at September 30, 2001
and December 31, 2000, respectively maturing
through 2010. 30,398 32,716
------------- ------------
360,496 429,413
Less: Current maturities (131,964) (55,567)
------------- ------------
228,532 373,846
============= ============
14
On June 7, 1996, the Company entered into an agreement with the International
Finance Corporation (IFC Facility). Pursuant to the IFC Facility, the Company
obtained loan commitments aggregating up to US$261 million, of which US$175
million was disbursed. Of the amount disbursed, US$75 million was used in the
Company's modernization and expansion program as mandated by the Concession and
for certain other capital expenditures. The remaining US$l00 million represents
the conversion of certain debt outstanding under a Bank Refinancing Agreement
into longer term debt. In March 1998, the Company paid US$l50 million of the
debt outstanding under the IFC Facility with the proceeds from the sale of
variable interest rate notes issued by CANTV Finance Ltd., a wholly-owned
subsidiary of the Company, which are unconditionally and irrevocably guaranteed
as to payment of principal and interest by CANTV. The principal on the remaining
loan is payable as a single payment of US25 million in 2005. The interest rate
on this loan is based on LIBOR plus a margin and an additional amount of up to
3% based on the Company's annual net income equivalent in US dollars.
Pursuant to the IFC Facility, the Company may pay dividends only if it is
current with respect to its semi-annual payments. In addition, the Company is
required to meet certain financial ratios, including a long-term debt-to-equity
ratio, a current ratio and a fixed charge coverage ratio, each as defined by the
agreement. The Company has complied with these covenants as of September 30,
2001.
In 1997, Movilnet signed an agreement with the IFC for two loans totaling US$95
million, which were disbursed during 1998. The proceeds of these loans were used
for expansion and modernization of the cellular network.
In September 2000, the Company issued discount promissory notes of Bs. 28,000
million denominated in bolivars with a maturity of 5 years. The promissory notes
were placed at a 44% discount and an annual fixed interest rate of 23.5%. The
discount is amortized using the effective rate method. At September 30, 2001,
the balance of these notes, presented net of the unamortized discount, was Bs.
16,506 million. Additionally, two loan agreements were signed with local banks
for Bs. 7,000 million each one, with maturities between 1 and 10 years.
Estimated payments of long-term debt are: Bs. 23,747 in 2001, Bs. 119,945 in
2002, Bs. 39,494 in 2003, Bs. 92,438 in 2004, and Bs. 84,934 thereafter,
translated into bolivars at the exchange rate at September 30, 2001.
SHORT-TERM DEBT:
---------------
Short-term debt is as follows:
September 30, December 31,
2001 2000
------------- ------------
Bank loans in bolivars at various interest rates
averaging 11.04% - 5,202
Current maturities of long-term debt 131,964 55,567
------------- ------------
131,964 60,769
============= ============
15
OTHER CURRENT LIABILITIES:
-------------------------
Other current liabilities, are comprised of the following:
September 30, December 31,
2001 2000
------------- ------------
Concession tax 42,030 110,867
Subscriber rights 56,985 59,715
Deferred income 69,904 57,071
Accrued liabilities 19,110 24,994
Income, value added and other taxes 48,091 17,629
Interest payable 4,582 12,355
Legal claims 18,798 11,513
Technical and administrative services due to affiliates of
VenWorld stockholders 8,749 7,139
Other 11,921 12,082
------------- ------------
280,170 313,365
============= ============
RETIREMENT BENEFITS:
-------------------
Pension plan
------------
The Company sponsors a noncontributory pension plan for its employees. The
benefits to be paid under the plan are based on years of service rendered and
the employee's final salary. At September 30, 2001, the Company has funded Bs.
106,549, in a trust for this purpose.
Assumptions used to develop the projected benefit obligation are as follows:
Discount rate 7%
Expected return on assets 5%
Rate of compensation increase 2%
These assumptions represent estimates of real interest rates and compensation
increases rather than nominal rates. The unrecognized transition obligation is
being amortized over 20 years.
During 2000, CANTV reviewed the assumption for the rate of inflation, which
reduced pension expense by Bs. 25,536.
The pension plan expense for the period ended September 30, 2001 amounted to
Bs. 12,753.
Postretirement benefits other than pensions
-------------------------------------------
The Company records postretirement benefit obligations based on actuarial
estimates.
Assumptions used to develop the accumulated postretirement benefit obligation
are as follows:
Discount rate 7%
Medical cost trend rate 2%
16
These assumptions represent estimates of real interest rates and medical cost
trend rate increases rather than nominal rates. The unrecognized transition
obligation is being amortized over 11 years.
At September 30, 2001, postretirement benefits other than pension expense
amounted to Bs. 19,966.
Defined contribution plan
-------------------------
The Company has a defined contribution plan (Special Economic Protection Plan
for Eligible Retirees) to supplement the current pension benefits of retirees as
of August 15, 1995. Contributions are allocated to retirees based upon their
age, pension income and other existing benefits. At September 30, 2001, the
Company has funded Bs. 15,274 for this Plan. The Company is not required to
increase the funding of this Plan.
STOCKHOLDERS' EQUITY:
--------------------
Dividends
---------
The Venezuelan Commercial Code, Capital Markets Law and the Standards issued by
the Comision National de Valores (CNV), regulate the ability of the Company to
pay dividends. In addition, some of the Company's debt agreements provide for
certain restrictions which limit the ability of the Company to pay cash
dividends (See Note 11- Long-term debt). The Commercial Code establishes that
dividends shall be paid solely out of "liquid and collected earnings," and the
Capital Markets Law mandates that the Company distribute every year among its
shareholders not less than 50% of its net annual income, after income tax
provision and having deducted the legal reserves. Likewise, the Capital Markets
Law provides that at least 25% of such 50% shall be paid to the shareholders in
cash dividends. However, should the Company have accumulated losses, any net
income shall initially be applied to offset such deficit.
According to the CNV Standards, the net income adjusted for inflation is the
base for dividends distribution, excluding the equity participation of
subsidiaries.
The Capital markets Law provides that dividends must be declared in a
shareholders' assembly during which the shareholders determine the amount, form
and frequency of the dividend payment and that dividend policies must be stated
in the Company's By-laws. The CNV cannot exempt a company with publicly traded
securities from paying the minimum dividends required by the Capital Markets
Law.
On March 31, 2000, an ordinary shareholders' assembly declared a cash dividend
of Bs. 60 per share to shareholders of record as of April 11, 2000. This
dividend was paid on April 28, 2000.
On March 27, 2001, an ordinary shareholders' assembly declared a cash dividend
of Bs. 63 per share to shareholders of record as of April 6, 2000. This dividend
was paid on April 24, 2001.
On October 24, 2001, an extraordinary shareholders' assembly declared an
extraordinary cash dividend of Bs. 520 per share and Bs. 3,640 per ADS to be
paid in two portions, one of Bs. 284 per share on December 10, 2001 to
shareholders of record as of December 3, 2001 and the other one of Bs. 236 per
share on March 18, 2002 to shareholders of record on a date to be determined in
March 2002.
17
Capital stock
-------------
Capital stock is represented by 926,037,385 shares at September 30, 2001 and
December 31, 2000, as follows:
Number of
Participation shares
Stockholder Class % (in thousands)
--------------------------------------- ----- ------------- --------------
VenWorld Telecom C.A. (VenWorld) A 33.29 308,271
Inversiones Inextel, C.A. A 6.91 64,000
Banco de Desarrollo (formerly Fondo de
Inversiones de Venezuela) B 5.60 51,900
Employee Trusts and Employees C 10.50 97,278
Public Shareholders D 43.70 404,588
------------- --------------
100.00 926,037
============= ==============
VenWorld is a private consortium of companies led by Verizon Communications Inc.
(formerly GTE Corporation), and originally included T.I. Telefonica
Internacional de Espana, S.A.; C.A. La Electricidad de Caracas, S.A.C.A.;
Consorcio Inversionista Mercantil (CIMA), C.A. S.A.C.A. and AT&T International
Inc. (AT&T) (Participants in the Consortium)
On June 30, 2000 GTE Corporation and Bell Atlantic Corporation completed their
merger, and the combined company began doing business as Verizon Communications
Inc. (Verizon).
During 2000, VenWorld could have transferred or encumbered the Class A shares if
it continued to own directly, and free from all encumbrances, at least 20% of
the capital stock of the Company. After January 1, 2001 any Class A shares
transferred to any person other than VenWorld or its wholly-owned subsidiaries
and affiliates controlled by any of the partners of the Participants in the
Consortium, will be automatically converted into an equal number of Class D
shares. VenWorld had the right to elect the CANTV President and four members of
the Board of Directors of the Company until January 1, 2001. No Class A shares
were transferred during 2000.
On June 12 and 13, 2001. AT&T Communications Services International Inc and
Inversiones Inextel, C.A received 20,000 and 64,000 Class A CANTV's shares,
respectively, in exchange of VenWorld shares according to CANTV's By-Laws
established.
On August 31, 2001, AT&T Communications Services International Inc, converted
its Class A shares into Class D shares (ADR'S).
Class B shares may only be owned by Venezuelan Government entities. The transfer
of Class B shares to any non-public sector individual or entity will cause the
shares to be automatically converted to Class D shares, except if the shares are
transferred to a CANTV employee or retiree, in which case the shares will be
converted to Class C shares. Class B stockholders had the right to elect two
members of the Board of Directors of the Company until January 1, 2001.
Thereafter, they may elect only one member. A majority of holders of Class A and
B shares is required to approve a number of corporate actions, including certain
amendments to the Bylaws.
18
Class C shares may be owned only by employees, retirees, former employees and
heirs and spouses of employees or retirees of CANTV and its subsidiaries. Any
Class C shares transferred to any other individual or entity will be
automatically converted to Class D shares. Holders of Class C shares have the
right, voting as a separate class, to elect two members of the Board of
Directors provided such Class C shares represent at least 8% of the capital
stock of CANTV and the right to elect one member provided that such shares
represent at least 3% of the capital stock of CANTV.
Class D shares are comprised of the conversion of Class A, B and C shares as
described above or capital increases. There are no restrictions on the ownership
or transfer of Class D shares. Holders of Class D shares will have the right to
elect, in conjunction with the other stockholders, any members of the Board of
Directors, at the time the Class A, B and C stockholders loose the right to
designate them according to CANTV's By-laws.
In November 1996, the Government sold 348.1 million shares representing 34.8% of
CANTV's capital stock in a global public offering. The Company's Class D shares
are traded on the Caracas Stock Exchange. They are also traded on the New York
Stock Exchange in the form of American Depository Shares (ADS), each
representing 7 Class D shares.
Repurchase program
------------------
On November 16, 1999 an extraordinary shareholder's assembly authorized a share
repurchase program for up to 50,000,000 of shares. As required under Venezuelan
Law, the program specifies a maximum repurchase price of Bs. 3,696 per share or
up to US$40 per ADS. As of December 31, 1999, CANTV had acquired 1,229,900
shares at an average price of Bs. 2.472 per share, equivalent US$23.50 per ADS.
On March 31, 2000, an ordinary shareholders' assembly approved a new share
repurchase program that authorized the Company to repurchase up to 50,000,000 of
shares. As required under Venezuelan Law, the program specified a maximum
repurchase price of Bs. 4,871 per share or up to US$50 per ADS.
During 2000, CANTV acquired 72,732,716 shares related to both repurchase
programs at an average price of Bs. 2,940 per share, equivalent US$28.39 per
ADS.
On October 24, an extraordinary shareholders' assembly approved a new share
repurchase program to acquire up to 138,905,608 shares or 15% of the capital
stock at a price of US$30 per ADS or US$4.29 per share. The program began on
October 25 and will end on November 23, 2001.
FINANCING COST, NET:
-------------------
Financing cost, net for the years ended September 30 is as follows:
2001 2000
-------- --------
Interest income 26,698 21,456
Interest expense (29,563) (34,271)
Exchange gain (loss), net 14,338 (7,109)
Monetary loss monetary position (20,999) (12,697)
-------- --------
(9,526) (32,621)
======== ========
19
The net exchange loss reflects the loss resulting from adjusting the Company's
net liabilities denominated in foreign currencies (principally US dollars and
Japanese yen) into bolivars at the exchange rates as of September 30, 2001 and
2000 (See Note 6 - Balances in foreign currency). The Central Bank of Venezuela
has the explicit policy to intervene to maintain the exchange rate within 7.5%
(above or below) of the reference rate, which has been set by the Central Bank
of Venezuela and is adjusted to account for projected inflation on a monthly
basis. The devaluation of the bolivar against the U.S. dollar was 6.14% and
6.24% for the nine months period ended September 30, 2001 and 2000,
respectively.
The monetary loss position reflects the gain or loss from holding net monetary
assets or liabilities in a period of inflation, which was 9.51%, and 10.62% for
the nine months period ended September 30, 2001 and 2000, respectively.
TRANSACTIONS WITH RELATED PARTIES:
---------------------------------
Transactions with related parties are subject to conditions similar to
transactions with independent third parties. In the normal course of business
and as limited by applicable debt agreements, the Company enters into
transactions with certain of its stockholders and their respective affiliates.
In addition, the Government has significant influence over the Company's
tariffs, regulation, labor contracts and other matters. The Government is also
the major customer of the Company (See Note 8 - Accounts receivable from
Venezuelan Government entities).
Inventories, supplies, plant and equipment of Bs. 34,600 and Bs. 19,538 for the
period ended September 30, 2001 and 2000, respectively, were purchased from
affiliates of VenWorld's stockholders. These same affiliates provided technical
and administrative services to the Company at a total cost of Bs. 11,869 and Bs.
20,514 for the nine months period ended September 30, 2001, and 2000,
respectively. Net operating revenues of Bs. 7,201 and Bs. 10.161 were recognized
for the nine months period ended September 30, 2001 and 2000, respectively, with
respect to the settlement of international telephone traffic with affiliates. At
September 30, 2001, the Company has recorded payables to Verizon and AT&T
affiliates for all such transactions of Bs. 58,229 and Bs. 9,542, respectively,
and at December 31, 2000, Bs. 22,999 and Bs. 876 respectively.
COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company has the following commitments and contingencies:
Capital expenditures
--------------------
CANTV's capital expenditures for 2001 are currently estimated at Bs. 384,874
(US$518 million). The funding for these capital expenditures is expected to be
generated by internal cash flows.
Operatinq leases
----------------
The Company leases buildings under operating leases for periods of one year or
less. Lease agreements generally include automatic extension clauses for equal
terms, unless written termination notification is provided.
20
Litiqation
----------
The Company is involved in numerous administrative and judicial proceedings.
Based on the opinion of its external legal counsel handling these proceedings,
management considers that the majority of these actions will be resolved in the
Company's favor. Nevertheless, management believes that the Company has recorded
adequate reserves as of September 30, 2001 for all such matters.
In May 2000, the Supreme Court of Justice issued a sentence against CANTV
charging that the Company had changed the criteria on the presubscription term
and the option for special retirement. The Company is presently exercising
pertinent legal actions, and evaluating the impact of this sentence on the
financial statements of the Company if such sentence prevails.
On July 7, 2000, CANTV was notified of a Bs. 1.8 billion (US$2.7 million) fine
imposed by Pro-Competencia. Pro-Competencia claims that CANTV has abused its
dominant position in the market to favor its subsidiary CANTV.NET (formerly
CANTV Servicios). In August 2000, CANTV filed an action of nullity in the First
Court of Appeals in Administrative Matters.
Concession mandates
-------------------
The Agreement (See Note 2 - Company background and concession agreement)
included the reduction in the expansion targets and considers an accelerated
modernization program to meet an annual target of 80% digitalization by the end
of year 2000. The network expansion and modernization targets established in
Annex "A" of the concession agreement were effective until December 31, 1999.
Quality service and digitalization mandates agreed in the Agreement were
effective until December 31, 2000. The agreement, substantially modify the high
quality service and eliminates of the mandatory requirement of expanding the
plant, instead of it, included the obligation of 80% digitalization at December
31, 2000. After year 2000, the specific expansion requirements, modernization or
digitalization are not mandatory.
Opening Regulations establish that Basic Service Telecomunication Operator's,
are required to install and maintain public telephone equipment equivalent to 3%
of this subscriber base.
The guidelines for the market opening in Venezuela (see Note 4 - Regulation)
include certain quality and service standards with minimum and maximum targets,
which are the base for the preparation of the quality service regulations that
will be effective for all basic services operators.
Competition
-----------
Pursuant to the Concession, prior to November 27, 2000, the Company was the sole
provider of switched, fixed local, domestic, and international long distance
services throughout Venezuela, except in population centers with 5,000 or fewer
habitants if CANTV was not providing basic telephone services in such areas and
did not contemplate doing so within two years.
In December 1996, the Ministry exercised its authority under this provision to
grant a rural concession to lnfonet Redes de Information C.A. (Infonet) to
provide multi-services, except national and international long distance
services, on population centers with 5,000 or fewer inhabitants in eight western
states of Venezuela. Additionally, multi-service concessions were granted in
January 1998 to Corporation Digitel, C.A. (Digitel) and Consorcio ELCA, C.A.
(Today Digicel) for the central and eastern regions of Venezuela, respectively.
Actually Infonet, Digitel and Digicel are operating.
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With the recently issued new Telecommunications Law, CONATEL established the
basic regulatory framework. The new regulations issued on November 24, 2000 (See
Note 4 (a) - Regulation - Organic telecommunications law) have the objective of
creating an appropriate environment for new entrants and allow for effective
competition and regulate the sector's opening rules, basic telephony and
interconnection.
In November 2000, CONATEL formally started the auction of frequencies for
Wireless Local Loop (WLL) services. Thirteen qualified bidders have been
announced by CONATEL. Five regions were defined and three permits in each region
were auctioned. Telcel BellSouth, C.A. (Telcel BellSouth) and Genesis Telecom,
C.A. (Genesis) are two of the companies granted with a concession.
As of September 30, 2001, the Venezuelan Telecommunications market is composed
of one integrated service provider, namely CANTV; wireless service providers,
such as Movilnet, Telcel BellSouth, Digitel, lnfonet and Digicel; wireless fixed
service providers, such as Telcel BellSouth, Genesis, Entel Chile, Millicom
International Cellular, S.A., Digitel and Digicel; data transmission service
providers, such as Telecomunicaciones ImpSat, Compsat, Bantel, NetUno, Viptel,
BellCanada International and Texcom; Internet Service provider's, such as
CANTV.NET, T-Net, Etheron, AOL, UOL and Eldish; paging operators, such as
Skytel, Telemensajes Metropolitanos, Radio Contacto and TeleKontacto; trunking
service providers, such as Americatel, Radio Movil Digital and Comunicaciones
Moviles EDC,C.A., and Cable TV operators, such as SuperCable, Cabletel and
Intercable, including DirectTV via satellite transmission. These
telecommunications services providers and other market entrants may establish
customer relationships, as well as other capabilities and resources to expand
their current service offerings. The Company believes that its competitors will
target large clients, top tier commercial customers and high-income residential
customers.
The Company during the second quarter, 2001, completed the update of five
interconnection agreements with telecommunication's operators and subscribed the
first two interconnection agreement to the basic telecommunication service with
companies authorized by CONATEL. These agreements will permit the free traffic
from CANTV's basic network systems to the local services and long distance
national and international of these companies. Current operators maintaining
interconnection agreements with the Company are: Convergence Communications de
Venezulela, Telcel, Digicel, Infonet, Digitel, Veninfotel y Movilnet.
MARKET RISK:
------------
The carrying amounts of cash and short-term investments, trade receivables and
payables, and short-term and long-term debt approximate their fair values. The
fair value was determined by quoted market prices.
The Company is exposed to market risk, including changes in interest rates and
foreign currency exchange rates.
The Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with the highest quality United
States of America (US) issuers and, by policy, limits the amount of credit
exposure to any one issuer. The Company is averse to principal loss and ensures
the safety and preservation of its invested funds by limiting default
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risk, market risk, and reinvestment by investing with US issuers that are
guaranteed by wholly-owned foreign companies with the safest and highest credit
quality securities.
The Company mitigates default risk by investing in highly liquid US dollar
short-term investments, primarily certificates of deposit and investment grade
commercial paper, which have maturities of three months or less. The Company
does not expect any material loss with respect to its investment portfolio.
The majority of the Company's indebtedness is denominated in foreign currencies,
primarily in US dollars and Japanese yen, which exposes the Company to market
risk associated with changes in exchange and interest rates. The Company's
policy is to manage interest rate risk through the use of a combination of
fixed and variable rate debt. Presently the Company does not hedge against
foreign currency exposures, but keeps cash reserves in US dollars and Japanese
yens to meet financing obligations.
WORK FORCE REDUCTION PROGRAM:
-----------------------------
On December 29, 2000, the Company announced its intention to consolidate,
centralize and eliminate certain operating and administrative positions during
the first quarter of 2001, through a formal program. This program established an
expected reduction of approximately 4,000 employees. The Company recorded during
the last quarter of 2000 a provision of Bs. 120,892 included as current accrued
employee benefits. As a result of this program, in January 2001, 3,572 employees
were separated from the Company.
The Company recorded a Bs. 35,219 curtailment loss resulting from the employee
reduction program announced December 29, 2000. The program reduced the Company's
Telco headcount by approximately 30%. Under the terms of the program, affected
employees with 14 years of service or more were made eligible for retirement and
received special pension benefits as well as postretirement medical benefits on
the same basis as current retirees.
Since there is no vesting prior to retirement eligibility under the Company's
pension plan, the interpretation and applicability of SFAS 88 "Employer's
Accounting for Settlement and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits" required a special focus by our actuaries.
PUBLIC OFFERING OF SHARES:
--------------------------
On August 29, 2001 AES Corporation (AES) announced a public offering of shares
to acquire 43.2% of the shares of CANTV at a price of Bs. 2,547 (US$24 per ADS).
This public offering was approved by the CNV. On October 1, 2001, the Board of
Directors of CANTV rejected the tender offer proposed by AES and recommended
shareholders not to sell.
On October 7 the Board of Directors approved a dividend decree and a Third Share
Repurchase Program, calling for an Extraordinary shareholders meeting for the
approval on October 24, 2001. In addition, the increase of the "Excellence
Award" program was approved to be executed through the internal purchase of
Class C shares of up to 2% of the capital stock as of December 2, 1991. The
Board of Directors also approved the creation of a new benefit plan named "Value
Fund" to acquire Class C shares up to 5.5% of the capital stock. The purpose is
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to purchase the shares at the same price of the Repurchase Program.
On October 19, 2001, the CNV authorized the proposed Repurchase Program and
extended the periods for the offers of CANTV and AES until November 23, 2001.
The creation of the Value Fund and the increase of the Excellence Award fund
were approved to be executed once the tender offer ends.
The extraordinary dividend and the Third Share Repurchase Program were approved
by the Extraordinary Shareholders Assembly held on October 24, 2001. The
extraordinary dividend of Bs. 520 per share and Bs. 3,640 per ADS will be paid
in two portions, one on December 10, 2001 for Bs. 284 and the remaining portion
of Bs. 236 will be paid on March 18, 2002.
The share repurchase program was approved to acquire Class D shares in an amount
up to 138,905,608 shares which represent 15% of the Company's capital stock at a
price of US$4.2857143 per share or $30 per ADS. The period to repurchase the
shares is between October 25 and November 23, 2001.
CONSOLIDATED FINANCIAL STATEMENT RECLASSIFICATIONS:
---------------------------------------------------
Certain amounts from the December 31, 2000 and September 30, 2000 consolidated
financial statements have been reclassified for comparison purposes.
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