<PAGE>
THE TOTAL NUMBER OF PAGES CONTAINED IN THIS DOCUMENT IS _32_
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 2000
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, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82 - _______________
<PAGE>
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, 2000, prepared according to Venezuelan GAAP, which
differ in certain important respects from US GAAP, as filed with the Venezuela
National Commission on Securities on November 2, 2000.
<PAGE>
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 15, 2000
<PAGE>
ENGLISH TRANSLATION
-------------------
Caracas, November 2, 2000
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, 2000.
I will make myself available should you need any clarification or additional
information.
Sincerely yours,
/S/ SCARLETT ALVAREZ
--------------------
Scarlett Alvarez.
Investor Relations Manager
<PAGE>
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA
(CANTV) AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<PAGE>
(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, 2000 AND 1999
------------------------------------------------------------
(Adjusted for inflation and expressed in millions of constant bolivars
as of September 30, 2000, except per share and per ADS amount)
<TABLE>
<CAPTION>
2000 1999
------------- ------------
<S> <C> <C>
OPERATING REVENUES:
Local and domestic long distance usage 456,617 450,683
Basic rent 240,399 273,051
Public telephones 76,913 87,084
------------- ------------
Local and domestic long distance 773,929 810,818
International long distance 75,399 113,381
Net settlements 22,111 22,971
------------- ------------
International long distance 97,510 136,352
Other wireline-related services 99,927 122,501
------------- ------------
Total wireline services 971,366 1,069,671
Wireless services 340,939 321,545
Other 32,782 33,403
------------- ------------
Total operating revenues 1,345,087 1,424,619
------------- ------------
OPERATING EXPENSES:
Operations, maintenance, repairs and administrative 680,109 715,830
Depreciation and amortization 476,641 476,182
Concession and other taxes 102,710 105,353
------------- ------------
Total operating expenses 1,259,460 1,297,365
------------- ------------
Operating income 85,627 127,254
------------- ------------
OTHER (EXPENSE) INCOMES, NET:
Financing cost, net (29,051) (28,507)
Other (expense) incomes, net (5,933) 9
------------- ------------
Total other (expense) incomes, net (34,984) (28,498)
------------- ------------
Income before income tax 50,643 98.756
INCOME TAX 20,389 19,276
------------- ------------
Net income 30,254 79,480
============= ============
EARNINGS PER SHARE 31 79
============= ============
EARNINGS PER ADS (BASED ON 7 SHARES PER ADS) 220 556
============= ============
Average shares outstanding (in millions) 961 1,000
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
(Translation of financial statements originally issued in Spanish)
COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA (CANTV) AND SUBSIDIARIES
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
---------------------------------------------------------------------------
(Adjusted for inflation and expressed in millions of constant bolivars as of
September 30, 2000)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
---------------
Cash and temporary investments 521,141 357,404
Accounts receivable, net 387,995 449,424
Accounts receivable from Venezuelan Government entities 141,349 134,079
Inventories and supplies, net 36,831 48,010
Other current assets 12,122 13,714
------------ ------------
Total current assets 1,099,438 1,002,631
Property, plant and equipment, net 3,182,151 3,447,742
Cellular concession, net 93,712 95,932
Other assets 209,567 248,804
------------ ------------
Total assets 4,584,868 4,795,109
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
--------------------
Short-term debt 64,300 59,206
Accounts payable 286,857 289,085
Employee severance benefits, net 11,748 9,791
Accrued employee benefits 87,968 37,254
Other current liabilities 203,722 206,298
------------ ------------
Total current liabilities 654,595 601,634
LONG-TERM LIABILITIES:
----------------------
Long-term debt 334,595 377,882
Pension and postretirement benefit obligations 381,625 362,100
------------ ------------
Total liabilities 1,370,815 1,341,616
STOCKHOLDERS' EQUITY 3,214,053 3,453,493
-------------------- ------------ ------------
Total liabilities and stockholders' equity 4,584,868 4,795,109
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
(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 MONTHS ENDED SEPTEMBER 30, 2000 AND THE YEAR
---------------------------------------------------------
ENDED DECEMBER 31, 1999
-----------------------
(Adjusted for inflation and expressed in millions of constant
bolivars as of September 30, 2000)
<TABLE>
<CAPTION>
Capital Stock
------------------------------------
Additional
Historical Inflation Paid-in Retained Legal
Cost Adjustment Total Capital Earnings Reserve
--------- ---------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1998 36,902 1,384,708 1,421,610 17,679 2,095,481 142,162
Accumulated postretirement
benefits obligation -- -- -- -- (170,300) --
Net income -- -- -- -- 98,681 --
Dividends declared -- -- -- -- (69,035) --
Extraordinary dividends
declared -- -- -- -- (110,623) --
Repurchased shares -- -- -- -- (1,246) --
Change in cumulative
translation adjustment -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance as of December 31, 1999 36,902 1,384,708 1,421,610 17,679 1,842,958 142,162
Net income -- -- -- -- 30,254 --
Dividends declared -- -- -- -- (62,548) --
Repurchased shares -- -- -- -- (105,415) --
Capital stock reduction (1,320) (48,931) (50,251) -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance as of September 30, 2000 35,582 1,335,777 1,371,359 17,679 1,705,249 142,162
========== ========== ========== ========== ========== ==========
<CAPTION>
Treasury Cumulative Total
Capital Translation Stockholders'
Stock Adjustment Equity
----------- -------------- ----------------
<S> <C> <C> <C>
Balance as of December 31, 1998 -- 28,423 3,705,355
Accumulated postretirement
benefits obligation -- -- (170,300)
Net income -- -- 98,681
Dividends declared -- -- (69,035)
Extraordinary dividends
declared -- -- (110,623)
Repurchased shares (1,719) -- (2,965)
Change in cumulative
translation adjustment -- 2,380 2,380
---------- ------- ----------
Balance as of December 31, 1999 (1,719) 30,803 3,453,493
Net income -- -- 30,254
Dividends declared -- -- (62,548)
Repurchased shares (103,125) -- (208,540)
Capital stock reduction 50,251 -- --
Change in cumulative
translation adjustment -- 1,394 1,394
---------- ------- ----------
Balance as of September 30, 2000 (54,593) 32,197 3,214,053
========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
(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, 2000 AND 1999
-----------------------------------------------------------
(Adjusted for inflation and expressed in millions of constant bolivars as of
September 30, 2000)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income 30,254 79,480
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) from net monetary position 11,146 (872)
Exchange loss, net 6,492 26,961
Depreciation and amortization 476,641 476,182
Provision for doubtful accounts 54,500 89,563
Changes in current assets and liabilities:
Accounts receivable, net (35,374) (139,088)
Accounts receivable from Venezuelan Government entities (21,085) (41,355)
Inventories and supplies, net 10,322 25,556
Other current assets 1,071 5,216
Accounts payable 39,993 79,256
Employee severance benefits, net 59,565 51,695
Other current liabilities (1,728) 489
---------- ----------
631,797 653,083
Changes in non current assets and liabilities:
Other assets 6,710 (12,689)
Pension and postretirement benefit obligations 19,525 35,676
---------- ----------
Net cash provided by operating activities 658,032 676,070
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures, net of disposals (177,705) (204,380)
---------- ----------
Net cash used in investing activities (177,705) (204,380)
---------- ----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
29,709 -
Payments of debt (47,196) (34,847)
Dividend payments (62,548) (69,035)
Share repurchase (208,540) -
---------- ----------
Net cash used in financing activities (288,575) (103,882)
---------- ----------
Increase in cash and temporary investments before loss in purchasing power of
cash and temporary investments 191,752 367,808
LOSS IN PURCHASING POWER OF CASH AND TEMPORARY
INVESTMENTS: (28,015) (42,698)
---------- ----------
Increase in cash and temporary investments 163,737 325,110
CASH AND TEMPORARY INVESTMENTS:
Beginning of period 357,404 151,514
---------- ----------
End of period 521,141 476,624
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for:
Interest 30,715 34,344
========== ==========
Taxes 107,280 92,723
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
(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, 2000, unless otherwise indicated)
1. EXPLANATION ADDED FOR TRANSLATION INTO ENGLISH:
-----------------------------------------------
The consolidated financial statements were originally issued in Spanish and
translated into English.
2. COMPANY BACKGROUND AND CONCESSION AGREEMENT:
--------------------------------------------
Compania Anonima Nacional Telefonos de Venezuela (CANTV or the Company)
subscribed in 1991, a Concession Agreement (the Concession) with the Government
of Venezuela (the Government) to provide national and international
telecommunications services, including fixed switched telephone services,
private networks, data, public telephone, rural and telex services; for the
purpose of guarantying high quality service, improving the supply, modernizing
and expansion of the local network, introducing progressive rate rebalancing and
establishing a framework for the introduction of competition.
CANTV is the primary provider of telecommunications services in Venezuela and
substantially all of its operating income is derived from Venezuela domiciled
customers and from settlements with foreign carriers for calls completed in
Venezuela.
The Company is the proprietor of the only basic telecommunications network with
nationwide coverage, 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, the Company provides other telecommunications-related services
including wireless communications, internet access and telephone directories.
Significant terms of the Concession are as follows:
---------------------------------------------------
a. The Concession provides that the company is to be the exclusive provider of
the basic services of telecommunications, on an exclusive basis, with
certain exceptions, until November 27, 2000 and after this date compete with
other Companies to provide these services.
<PAGE>
2
b. The Concession is for 35 years, from November 27, 1991 through 2026. Such
duration can be extended for an additional period of 20 years subject to the
approval by the Ministry of Infrastructure, formerly the Ministry of
Transportation and Communications (the Ministry), upon notice by CANTV five
years in advance of the agreement termination. This extension is subjected
to the satisfactory performance by the Company of its obligations under the
Concession.
c. Under The Concession, the Company is required to pay a total of 5.5% of
services billed annually to the Government for Telecommunications tax and
concession rights. Such amount is included in the accompanying consolidated
statements of operations as Concession and other taxes.
d. The Concession specifies various penalties which may be imposed on the
Company 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 the Company
through September 30, 2000, have not been material.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES:
----------------------------------------------------------
a. 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 in conformity with
generally accepted accounting principles 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.
b. Adjustment for inflation
------------------------
The Company's consolidated financial statements are expressed on a constant
bolivar basis as of September 30, 2000, in accordance with the Venezuelan
Statement of Accounting Principles Number 10 "Standards for the Preparation of
Financial Statements Adjusted for Inflation" (DPC 10) and its amendments issued
by the Venezuelan Federation of Public Accountants.
The amounts disclosed in the consolidated financial statements have been
adjusted to reflect the bolivar's purchasing power at September 30, 2000, based
on the Consumer Price Index (CPI) for the metropolitan area of Caracas as
published by the Central Bank of Venezuela (BCV). Until December 31, 1999, the
base year utilized to calculate the relative change in the CPI was 1984
effective January 2000, based on international recommendations, the Company
changed the base year to 1997 in order to improve the meaningfulness and quality
of this indicator as a measurement of the changes in the Venezuelan economy.
<PAGE>
3
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,
2000 1999 1999
------------- ------------ -------------
End of period 200.878010 181.588660 173.255250
Average for period 191.920564 167.785966 164.136766
Each caption in the accompanying consolidated financial statements has been
presented on the basis of the CPI at September 30, 2000, as follows:
i. Monetary assets and liabilities (cash and temporary investments,
receivables, other assets and most liabilities) as of September 30, 2000,
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, 1999, have been adjusted based upon the relative change in the
CPI between that date and the CPI at September 30, 2000.
ii. 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, 2000.
iii. The non-monetary liability, pension and other postretirement benefit
obligations and its related expense, are recorded based on actuarial
calculations.
iv. 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, 2000.
v. 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).
vi. The inflation (loss) gain attributable to the Company's net monetary asset
or liability position has been set forth as (loss) gain from net monetary
position as part of the Financing cost, net caption in the accompanying
consolidated statements of operations (See Note 17 - Financing cost, net).
c. 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.
d. 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 statements of cash flows.
<PAGE>
4
e. 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.
f. 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. The costs of other
intangible assets (See Note 10 - Other assets) and the cost of the cellular
concession (See Note 5 - Cellular Concession) are amortized over the expected
periods benefited, not to exceed 20 and 40 years, respectively. Amortization
expense was Bs. 33,347 and Bs. 28,974 for the nine month periods ended September
30, 2000 and 1999, respectively. Accumulated amortization was Bs. 244,670 and
Bs. 211,323 at September 30, 2000 and December 31, 1999, respectively.
g. Computer software
-----------------
The costs of certain purchased computer software and systems for internal use
are capitalized and classified as intangible assets. In 1999, the Company
reviewed and updated its policy to amortize certain computer software and set
useful lives from 3 to 5 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.
h. Revenue recognition
-------------------
Revenues for wireline and wireless services are recognized in the period in
which the services are provided. Unbilled revenues of Bs. 78,352 and Bs. 95,714
are included in accounts receivable as of September 30, 2000 and 1999,
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 Securities Exchange Commission (SEC) issued "Staff Accounting Bulletin (SAB)
101, Revenue Recognition in Financial Statements", in December 1999. The SAB
summarizes the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In June 2000, the SEC
issued SAB 101B, which delays the implementation date of SAB 101 until no later
than the fourth fiscal quarter of the fiscal year beginning after December 15,
1999. The Company is evaluating the impact that SAB 101 will have on its
financial statements.
<PAGE>
5
i. 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 fiscal adjustment for inflation, are permitted to be carried forward
for 3 years.
j. 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.
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.
k. 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
15 - Retirement benefits).
In 1999, the Company recorded postretirement health care costs based on
actuarial estimates as required by International Accounting Standard 19 (IAS
19). The accumulated postretirement benefit obligation, as of December 31, 1998,
was recognized on an immediate basis affecting retained earnings. This adoption
did not have a material impact on 1999 results.
l. 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. 689.75 and Bs. 649.25 per
US dollar as of September 30, 2000 and December 31, 1999, 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 17 - Financing cost, net).
<PAGE>
6
m. 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.
n. Earnings per share
-------------------
Earnings per share are based on 960,602,246 average common shares outstanding
and 1,000,000,000 common shares outstanding at September 30, 2000 and 1999,
respectively.
4. REGULATION:
-----------
The Organic Telecommunications Law, recently revised and updated (June12, 2000)
along with the accompanying Telecommunications 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.
CANTV's tariffs and services are regulated by the Concession agreement, the
Concession agreement amendment from February, 2000, and the Organic
Telecommunications Law of 2000.
CONATEL is a regulatory body under the direction of the Ministry, created by
presidential decree in September 1991 (The "CONATEL Decree"). This decree
provides that the entity has the authority to supervise telecommunications
services in Venezuela and recommend the granting of concessions, licenses and
administrative authorizations. Also, it shall promote investments in
telecommunications and technological innovation in Venezuela and free
competition.
Prior to February 21, 2000, when 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 Central Bank of Venezuela, which permitted
the Company, with the approval of the Ministry, to raise tariffs on a quarterly
basis to keep pace with wholesale price index. 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.
CANTV's third and fourth quarter 1999 tariff increases were not approved by
CONATEL. According to statements given to the press by CONATEL, the Company was
<PAGE>
7
noncompliant with the Concession with regards to service quality targets. These
statements did not have legal bases.
On July 12, 1999, CANTV filed a legal document with the Ministry to initiate a
preliminary administrative proceeding, a step prior to filing a lawsuit, in
order to solve the tariff increase issue. This procedure allowed the Government
to resolve the situation before formal judicial proceedings took place.
CANTV decided not to introduce the case to the courts because on October 27,
1999 CANTV and CONATEL signed a preliminary letter of understanding that sought
a global agreement to review the eighth year as established in the Concession.
The review began with the designation of two independent international
telecommunications experts whose objective was to evaluate and recommend
appropriate tariff and quality standards and methodologies for Venezuela after
comparison with similar information in ten other countries. On November 15,
1999, the experts presented their recommendations in a sole report to CANTV and
CONATEL.
On February 21, 2000, CANTV and CONATEL signed an agreement to review the eighth
year of the Concession. This agreement will be in place until December 31, 2000,
to deal with tariff-related matters, and new services. From December 31, 2000
forward tariffs will be regulated through the standard set by the Government as
a result of the opening in competition in fixed switch telecommunication
services. (See Note 22 - Organic Telecommunications Law).
The tariff regime established in the agreement of the eighth year review, called
for two tariff adjustments, which went into effect on March 23, 2000 and June 6,
2000.
The tariff framework to be applied after December 31, 2000 is currently being
defined, some details have been disclosed in the sector's opening rules recently
sent to public consultation.
5. CELLULAR CONCESSION:
--------------------
On May 19, 1992, the Company purchased one of two cellular concessions from the
Government for Bs. 120,198 (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.
The cellular concession has an initial term of 20 years and may be extended
under certain circumstances for an additional 20 years. The cellular concession
requires the payment of an annual concession fee of 10% of services billed. For
the nine month period ended September 30, 2000 and 1999, the expense relative to
this concept were Bs. 85,813 and Bs. 86,769, respectively. The cellular
concession requires that Movilnet expand the cellular network, improve the
quality of cellular services when technically feasible, and provide certain
rural, public and emergency services. Management believes Movilnet is in
compliance with these requirements as of September 30, 2000.
<PAGE>
8
6. 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,
2000 1999
------------- ------------
Cash and temporary investments 628 509
Accounts receivable, net 29 26
Other assets and advances to suppliers 35 35
Accounts payable (117) (128)
Short and long-term debt (522) (578)
------------- ------------
Net asset (liability) position in foreign currency 53 (136)
============= ============
7. ACCOUNTS RECEIVABLE:
--------------------
September 30, December 31,
2000 1999
------------- ------------
Subscribers 412,869 494,763
Net settlements 15,374 13,956
Other 28,058 26,789
------------- ------------
456,301 535,508
Less-Allowance for doubtful accounts (68,306) (86,084)
------------- ------------
387,995 449,424
============= ============
8. 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 9% and 8% of the Company's revenues during the six
months ended September 30, 2000, and 1999, respectively.
The following table sets forth the aging of the accounts receivable from
Government entities:
September 30, December 31,
2000 1999
------------- ------------
Year of Service
---------------
2000 54,564 -
1999 31,976 67,265
1998 and prior 54,809 66,814
------------- ------------
141,349 134,079
============= ============
<PAGE>
9
The changes in accounts receivable from Government entities are as follows:
September 30, December 31,
2000 1999
------------- ------------
Balance at beginning of year 134,079 111,288
Billings 127,002 162,302
Collections (105,917) (117,538)
Loss from exposure to inflation (13,815) (21,973)
------------- ------------
Balance at end of period 141,349 134,079
============= =============
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.
Management is making its best efforts to collect a significant amount from
Government entities either in cash and/or through Government bonds. CANTV
management currently believes it is inappropriate to record a provision for
these amounts.
On November 3, 1999 Congress passed 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 under such
legislation totaled Bs. 63,218.
<PAGE>
10
9. PROPERTY, PLANT AND EQUIPMENT, NET:
----------------------------------
Property, plant and equipment, net is as follows:
September 30, December 31,
2000 1999
------------- ------------
Plant 8,156,215 8,194,379
Buildings and facilities 999,806 963,963
Furniture and equipment 701,517 661,146
Vehicles 70,298 77,029
Land 38,002 37,514
------------- ------------
9,965,838 9,934,031
Less- Accumulated depreciation (6,925,275) (6,584,257)
------------- ------------
3,040,563 3,349,774
Construction work in progress 141,588 97,968
------------- ------------
3,182,151 3,447,742
============= ============
The average useful lives for the different classes of property, plant and
equipment are as follows:
Average
useful lives
(in years)
------------
Plant 3 to 33
Buildings and facilities 5 to 25
Furniture and equipment 3 to 7
Vehicles 3
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.
51,187 and Bs. 61,780 for the six months ended September 30, 2000 and 1999,
respectively. Maintenance and repair costs are expensed when incurred while
major improvements and renovations are capitalized.
<PAGE>
11
10. OTHER ASSETS:
-------------
Other assets are as follows:
September 30, December 31,
2000 1999
------------- -----------
Software and other intangible assets 132,680 167,722
Prepaid taxes 14,831 17,377
Investment in INTELSAT 24,123 24,901
Class C stock and other 37,933 38,804
------------- ------------
209,567 248,804
============= ============
Software and other intangible assets include the cost of computer software and
systems for internal use (See Note 3 (g) - Summary of significant accounting
principles and policies - Computer software) and the cost of usage rights of
satellites and submarine cables which are amortized over periods ranging from 7
to 16 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. 48,474. 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, 2000, 9,178,091 shares and 8,723,339 shares at December 31,
1999 were available for distribution to employees under this plan.
<PAGE>
12
11. LONG-TERM DEBT:
---------------
<TABLE>
<CAPTION>
Long-term debt is comprised of the following:
September December
30, 31,
2000 1999
------------- ------------
<S> <C> <C>
Notes in US dollars at interest rates of 8.88% and
9.25% at September 30, 2000 and December 31, 1999,
maturing in 2002 and 2004, respectively 137,832 143,481
Notes in US dollars at interest rates of six-month
LIBOR plus a margin between 1.35% and 1.75%,
(averaging 8.19% and 7.50% at September 30, 2000 and
December 31, 1999 respectively), maturing through 2003 74,148 98,755
Bank loans in Japanese yen at fixed interest rates
(averaging 5.92% at September 30, 2000 and 5.88% at
December 31, 1999), and in US dollars at interest
rates of six-month LIBOR plus a margin between 0.25%
and 2.00%, maturing through 2009 65,964 81,225
IFC loans in US dollars at variable interest rates:
a. At six-month LIBOR plus a margin of 1.75%,
(averaging 7.97% and 6.79% at September 30, 2000 and
December 31, 1999 respectively), maturing through 2005 34,488 43,093
b. At six-month LIBOR plus a margin of 2.00%,
(averaging 8.22% and 7.04% at September 30, 2000 and
December 31, 1999 respectively), maturing through 2007 21,124 25,138
c. At six-month LIBOR plus a margin between 3.00% and
6.00% (averaging 12.36% at September 30, 2000 and
11.06% at December 31, 1999), maturing through 2005 17,244 17,955
Bank loans in bolivars at various interest rates
(averaging 23.21% at September 30, 2000 and 10.47% at
December 31, 1999), maturing through 2005 29,709 231
Supplier loans in US dollars at interest rates of
six-month LIBOR plus a margin of 0.25% to 0.50%
(averaging 7.07% at September 30, 2000 and 6.35% at
December 31, 1999), maturing through 2002 6,327 9,352
Notes payable to suppliers in US dollars at variable
interest rates (averaging 7.31% at September 30, 2000
and 7.45% at December 31, 1999), maturing through 2002 2,747 5,631
Bank loan in bolivars bearing interest at the average
lending rate of the six major banks in Venezuela
(28.64% at September 30, 2000 and 30.95% at December
31, 1999), maturing through 2003 4,562 6,973
------------------ ------------------
394,145 431,834
Less: Current maturities (See Note 12 - Short term debt) (59,550) (53,952)
------------------ ------------------
334,595 377,882
================== ==================
</TABLE>
<PAGE>
13
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$ 100 million represents
the conversion of certain debt outstanding under a Bank Refinancing Agreement
into longer term debt. In March 1998, the Company paid US$ 150 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 US$ 25 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,
2000.
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 denominated in
bolivars with a maturity of 5 years. Those promissory notes for Bs. 28,000 were
placed at 44% discount and with annual interest rate of 24,50%. The discount is
amortized using the effective rate method. At September 30, 2000 the balance of
this notes, presented net of the unamortized discount, is of Bs. 15.680.
At the same date, 2 loans agreements were signed with local banks for Bs. 7,000
each one, with maturities between 1 and 5 years.
Estimated payments of long-term debt are: Bs. 12,333 in 2000, Bs. 48,713 in
2001, Bs. 122,326 in 2002, Bs. 37,097 in 2003, and Bs. 173,676 thereafter,
translated into bolivars at the exchange rate at September 30, 2000.
<PAGE>
14
12. SHORT-TERM DEBT:
----------------
Short-term debt is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Bank loans in bolivars at various interest rates
(averaging 14.98% at September 30, 2000 and 20.22% at
December 31, 1999) 4,750 5,254
Current maturities of long-term debt 59,550 53,952
-------------------- --------------------
64,300 59,206
==================== ====================
</TABLE>
13. ACCOUNTS PAYABLE:
-----------------
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Interconnection 68,992 69,490
Commercial 217,143 219,473
Other 722 122
-------------------- --------------------
286,857 289,085
==================== ====================
</TABLE>
14. OTHER CURRENT LIABILITIES:
--------------------------
Other current liabilities are comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- --------------------
<S> <C> <C>
Income value added and other taxes 27,901 12,661
Accrued liabilities 24,284 17,696
Legal claims 9,046 10,058
Concession tax 77,035 96,131
Deferred income 32,725 39,191
Technical and administrative services due to affiliates of 6,133 7,531
VenWorld stockholders
Interest payable 7,248 11,129
Other 19,350 11,901
-------------------- --------------------
203,722 206,298
==================== ====================
</TABLE>
<PAGE>
15
15. 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, 2000 and December 31, 1999 the
Company has funded Bs. 64,588 and Bs. 70,309, respectively, in a trust for this
purpose.
Assumptions used to develop the projected benefit obligation are as follows:
<TABLE>
<S> <C>
Discount rate 7%
Expected return on assets 5%
Rate of compensation increase 2%
</TABLE>
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.
The amount of pension expense was Bs. 20,322 and Bs. 35,969 at September 30,
2000 and 1999, respectively.
Postretirement Benefits Other than Pensions
-------------------------------------------
In 1999, the Company recorded postretirement benefit obligations based on
actuarial estimates. Benefit payments are based on the average medical claims
per retiree for 1998.
Assumptions used to develop the accumulated postretirement benefit obligation
are as follows:
<TABLE>
<S> <C>
Discount rate 7%
Medical cost trend rate 2%
</TABLE>
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.
The amount of postretirement benefits expense was Bs. 13,366 and Bs. 10,568 at
September 30, 2000 and 1999, respectively.
<PAGE>
16
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, 2000, the
Company has funded Bs. 9,017 for this Plan. The Company is not required to
increase the funding of this Plan.
16. STOCKHOLDERS' EQUITY:
---------------------
Dividends
---------
The Venezuelan Commercial Code, Capital Markets Law and some regulations issued
by the Comision Nacional 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, assessed on a non-
consolidated basis and without reflecting its share in the net income of its
subsidiaries. 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. Until 1996, net income for this purpose was computed as
the lesser of (i) net income according to historical figures or (ii) net income
according to inflation adjusted figures. However, in May 1997, the CNV modified
its regulations and provided that inflation adjusted net income would be the
sole basis for the calculation of dividend payments. The requirements of the
Capital Markets Law are subject to the provisions of the Commercial Code, that
is, dividends shall always be paid out of "liquid and collected earnings."
In October 1998, a new Capital Markets Law was passed. One of the principal
changes is 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 30, 1999, the Company's shareholders approved the incorporation of the
Capital Markets Law into the Company's By-laws.
On March 31, 2000, an ordinary shareholders' assembly declared a cash dividend
of Bs. 60.00 per share and Bs. 420.00 per ADS, to stockholders of record as of
April 11, 2000. This dividend was paid on April 28, 2000.
<PAGE>
17
Capital Stock
-------------
At December 31, 1999, the capital stock of the Company was represented by
1,000,000,000 shares. On June 12, 2000, proceeds to cancel 35,775,957 shares
acquired in the first repurchased program (1999-2000 Program). In consequence,
at September 30, 2000 the capital stock outstanding is represented by
964,224,043 shares with a par value of Bs. 36.9018 per share, of which
38,186,658 shares are in treasury as result of the second repurchase program
(2000 Program). The shares are separated into four categories, as follows:
<TABLE>
<CAPTION>
Participation Number of
Stockholder Class % shares (in
thousands)
----------------------------------------- ----------- --------------- ------------------
<S> <C> <C> <C>
VenWorld Telecom C.A. (VenWorld) A 41.48 400,000
Fondo de Inversiones de Venezuela (FIV) B 5.38 51,900
Employee Trusts and Employees C 10.73 103,391
Public Shareholders D 38.45 370,746
Treasury Capital stock C y D 3.96 38,187
--------------- ------------------
100.00 964,224
=============== ==================
</TABLE>
VenWorld is a private consortium of companies led by Verizon (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).
At September 30, 2000 GTE Corporation and Bell Atlantic Corporation completed
their merger, and incorporated Verizon Communications (Verizon).
During 2000, VenWorld may transfer or encumber the Class A shares if it
continues 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 has the right to elect the CANTV President and four members of
the Board of Directors of the Company until January 1, 2001.
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 have 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 By-laws.
<PAGE>
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 lose 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 March 31, 2000, the shareholders' assembly approved a new share repurchase
program (2000 program) that authorized the Company to repurchase up to
50,000,000 CANTV's outstanding class C share and class D share during the period
of April 1, 2000 to September 18, 2000. As required under Venezuelan Law, the
2000 program specifies a maximum repurchase price of Bs. 4,871 per share or up
to US$ 50 per ADS.
As of September 30, 2000, CANTV has registered the acquisition of 38,186,658
outstanding shares (5,455,237 ADS) relative to program 2000 at a weighted
average price of Bs. 2,709.38 per share, equivalent to US$ 27.50 per ADS.
17. FINANCING COST, NET:
-------------------
Financing cost, net for the six months ended September 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
------------------- ------------------
<S> <C> <C>
Interest income 19,107 17,580
Interest expense (30,520) (32,265)
Exchange loss, net (6,492) (26,961)
(Loss) gain from net monetary position (11,146) 872
Gain from indexation of tax units - 12,267
------------------- ------------------
(29,051) (28,507)
=================== ==================
</TABLE>
<PAGE>
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, 2000 and
December 31, 1999 (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
6.24% and 11.06% for the nine months ended September 30, 2000 and 1999,
respectively.
The (loss) gain from net monetary position reflects the gain or loss from
holding net monetary assets or liabilities in a period of inflation, which was
10.62% and 14.52% for the six months ended September 30, 2000 and 1999,
respectively.
18. 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 a
major customer of the Company (See Note 8 - Accounts receivable from Venezuelan
Government entities).
Inventories, supplies and plant and equipment of Bs. 17,399 and Bs. 17,155 for
the six months ended September 30, 2000 and 1999, 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.
18,268 and Bs. 7,637 for the six months ended September 30, 2000 and 1999,
respectively. Net operating revenues of Bs. 9,049 and Bs. 13,039 were recognized
for the nine months ended September 30, 2000, and 1999, respectively, with
respect to the settlement of international telephone traffic with affiliates. At
September 30, 2000, the Company has recorded payables to VERIZON and AT&T
affiliates for all such transactions of Bs. 20,928 and Bs. 4,015, respectively,
and at December 31, 1999, Bs. 17,279 and Bs. 1,842, respectively.
19. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company has the following commitments and contingencies:
a. Capital expenditures
--------------------
CANTV's capital expenditures for 2000 are currently estimated at Bs. 325,562
(US$ 472 million). The funding for these capital expenditures is expected to be
generated by internal cash flows.
<PAGE>
20
b. Operating 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.
c. Litigation
----------
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, 2000 for all such matters.
However, in May, 2000 the Supreme Court of Justice issued a sentence against
CANTV charging that the Company had changed the criteria on the rescission term
and the option for special retirement. The Company is presently exercising the
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 the Superintendence of Promotion and Protection of Free Competition
(Pro-Competencia). Pro-Competencia claims that CANTV has abused its dominant
position in the market to favor CANTV.Servicios. In August 2000, CANTV
interposed action of nullity on the First Court of Appeals in Administrative
Matters.
d. Concession mandates
-------------------
The Concession requires the Company to carry out a plan of network expansion and
modernization based on the construction of a specified minimum number of new
digital lines, the modernization of analog lines and the installation of public
telephones for each year until the year 2000. In addition, the Company is
required to meet certain quality and service targets.
In September 1996, the Ministry reduced the Company's expansion mandates for
1996 through 2000, and entered into an agreement with the Company which provided
for review of the mandates in the first quarter of 1998. Depending on Company's
compliance, the mandates were to be increased or decreased in order to reflect
economic conditions. The mandates were reviewed based on economic estimates
available in the first quarter of 1998. Access demand was slightly lower than
1996 estimate. Therefore, it was not necessary to modify the mandates and the
Company will review them in case of macroeconomic changes which affect in major
proportions the access demand. On December 16, 1998, the Company presented to
CONATEL a proposal to reduce the projected access demand due to changes in the
macroeconomic conditions.
<PAGE>
21
Clause 22, of the Concession, calls for the review and possible update of the
concession mandates during the eighth year of the Concession. During the second
half of 1999, CANTV and CONATEL held several meetings to address issues such as
the regulatory climate and the existing mandates in order to ready the
telecommunications market for open competition in Venezuela. On October 27,
1999, CANTV and CONATEL signed a preliminary letter of understanding to initiate
this review.
Based on the recommendations presented by the international experts on November
15, 1999, on February 21, 2000 CANTV and CONATEL signed an agreement to review
the eight year of the Concession which includes the update of the concession
mandates (See Note 4 - Regulation). This agreement includes the reduction in the
expansion targets and considers an accelerated modernization program to meet an
annual target of eighty percent digitalization by the end of year 2000. No
target has been set related to the expansion of new digital lines. The expansion
goals and digitalization mandates will be effective until December 2000.
e. Competition
-----------
Pursuant to the Concession, until November 27, 2000, the Company is currently
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 is not providing basic telephone services in such
areas and does not contemplate doing so within two years. In addition, the
Ministry may grant concessions for basic telephone services to serve population
centers with more than 5,000 habitants if CANTV has not installed an automatic
center within a specified plan or the Ministry determines that CANTV has
materially failed to meet for 2 consecutive years the terms of the Concession
with respect to network expansion and modernization or service quality and the
Ministry determines that such action would markedly improve the existing
situation.
In December 1996, the Ministry exercised its authority under this provision to
grant a rural concession to Infonet Redes de Informacion 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 Corporacion Digitel, C.A. (Digitel) and Consorcio ELCA, C.A. for
the central and eastern regions of Venezuela, respectively. Both Infonet and
Digitel have started operations.
CONATEL has been very active defining the regulatory framework for which
operators must abide once CANTV's exclusivity period for the basic telephony
services ends. With the recently issued new Organic Telecommunications Law,
CONATEL established the basic regulatory framework. The new regulations are
expected to create an appropriate environment for new entrants and allow for
effective competition. Currently, Government and existent operators are working
on the legal instruments that will regulate the sector's opening rules, basic
telephony and the interconnection.
CANTV is actively pursuing a regulatory framework that is totally open to
competition. In addition CANTV is lobbying for equitable and fair regulation, in
order to avoid the establishment of asymmetrical regulation, which might
restrict the company's participation as provider of new telecommunications
services. CANTV is committed to satisfying the communication needs of the
Venezuelan market.
<PAGE>
22
20. MARKET RISK:
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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 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 U.S. dollars and Japanese yens to
meet financing obligations.
21. WORK FORCE REDUCTION PROGRAM:
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The Company has implemented a work force reduction program, granting employees
an incentive to voluntarily retire prior to their anticipated retirement date,
in order to improve the efficiency of the operation and administration of the
Company. This expense amounted to Bs. 33,256 and Bs. 48,063 for the nine months
ended September 30, 2000 and 1999, respectively, and is included in operating
expenses in the accompanying consolidated statements of operations.
22. ORGANIC TELECOMMUNICATIONS LAW:
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On June 12, 2000, the Venezuelan Government issued the Organic
Telecommunications Law, which provides the guidelines of the total opening of
the telecommunications sector for existing and new operators after November
2000. This Law replaces the 1940 Organic Telecommunications Law and it's 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:
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a. It establishes specific regulations related to interconnection, universal
service, spectrum, administrative concessions, networks, taxes, penalties,
consumer rights and operator's responsabilities.
b. It defines telecommunications as an activity of "general interest" rather
than as a public service, as provided by the former law.
c. The operator's freedom to set rates is specified, establishing controls
only in cases where dominant control is evidenced and in cases of
insufficient competition. In this case is also anticipated the possibility
of establishing isometrics regulations to guarantee competition.
CONATEL submitted the regulation to public consultation. The new guidelines and
terms include the division of the country into five geographical areas, the
obligation to fulfill minimum requirements of coverage and quality, and no
limits as to the number of operators. The guidelines defines interconnection as
a right and obligates the operators to "unbundled" network switching elements.
The Cabinet must approve this regulation by the second semester of 2000.
CONATEL also subjected to consultation its regulation project on
interconnection. It establishes the mechanisms to solve controversies, and
obligates the operators to provide detailed billing by network elements. The
regulator has made public that it will not make this mandatory.
23. CONSOLIDATED FINANCIAL STATEMENT RECLASSIFICATIONS:
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Certain amounts from the December 31, 1999 and September 30, 1999 consolidated
financial statements have been reclassified for comparison purposes.
