FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of December 2003
Commission File Number: 333-13580
Telefonos de Mexico, S.A.de C.V.
(Exact Name of the Registrant as Specified in the Charter)
Telephones of Mexico
(Translation of Registrant's Name into English)
Parque Via 190
Colonia Cuauhtemoc
06599, Mexico, D.F., Mexico
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F...X... Form 40-F......
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1):
----
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7):
----
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ..... No..X..
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-
--------------------
TELEFONOS DE MEXICO, S.A. DE C.V.
INDEX TO UNAUDITED CONDENSED
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Page
Unaudited Condensed Consolidated Interim Financial Statements of
Telefonos de Mexico, S.A. de C.V.
Unaudited Condensed Consolidated Statements of Income for
the nine months ended September 30, 2003 and 2002..........................F-1
Condensed Consolidated Balance Sheets of
September 30, 2003 (Unaudited) and December 31, 2002.......................F-2
Unaudited Condensed Consolidated Statements of Changes in Financial
Position for the nine months ended September 30, 2003 and 2002.............F-3
Unaudited Condensed Consolidated Statements of Changes in
Stockholders' Equity for the nine months ended September 30, 2003.........F-4
Notes to Unaudited Condensed Consolidated Financial Statements...............F-5
This report contains forward-looking statements. Forward-looking statements
involve inherent risks and uncertainties. We caution you that a number of
important factors could cause actual results to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements. For information on factors that could cause our
actual results to differ from expectations reflected in forward-looking
statements, see "Risk Factors" in our SEC reports.
TELEFONOS DE MEXICO, S.A. DE C.V. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of Constant Pesos as of September 30, 2003
except earnings per share data)
Nine months ended September 30,
-------------------------------------------------
Millions
of U.S.
dollars,
except for
earnings
per share
2003 2002 2003
-------------- ------------- -----------
Operating revenues:
Local service............................... P. 39,884,789 P. 40,677,176 $ 3,650
Domestic long-distance service.............. 22,519,730 21,940,998 2,061
International long-distance service......... 6,399,543 7,577,708 585
Interconnection service..................... 12,977,970 11,719,219 1,188
Other....................................... 3,484,790 3,385,935 319
-------------- ------------- -----------
85,266,822 85,301,036 7,803
-------------- ------------- -----------
Operating costs and expenses:
Cost of sales and services.................. 19,844,813 19,461,268 1,816
Commercial, administrative and general...... 12,802,578 12,193,716 1,172
Interconnection............................. 9,103,259 8,684,998 833
Depreciation and amortization (includes
P.14,132,035 in 2003 and P.14,720,224 in
2002, not included in cost of sales
and services)............................... 14,968,885 15,474,013 1,370
-------------- ------------- -----------
56,719,535 55,813,995 5,191
-------------- ------------- -----------
Operating income................................ 28,547,287 29,487,041 2,612
-------------- ------------- -----------
Comprehensive financing cost :
Interest income............................. (2,577,822) (816,289) (236)
Interest expense............................ 4,309,958 4,842,906 394
Exchange loss, net.......................... 2,127,762 3,903,301 195
Monetary gain, net.......................... (1,061,652) (2,163,495) (97)
-------------- ------------- -----------
2,798,246 5,766,423 256
--------------- ---------------- ------------
Income before income tax and employee
profit sharing.................................. 25,749,041 23,720,618 2,356
--------------- ---------------- ------------
Provisions for :
Income tax (Note 11)........................ 7,243,671 6,654,224 663
Employee profit sharing..................... 1,774,831 2,303,957 162
--------------- ---------------- ------------
9,018,502 8,958,181 825
--------------- ---------------- ------------
Income before equity interest in results
of affiliates................................... 16,730,539 14,762,437 1,531
Equity in results of affiliates................. (137,531) (149,550) (13)
--------------- ---------------- ------------
Net income...................................... P. 16,593,008 P. 14,612,887 $ 1,518
=============== ================ ============
Weighted average common shares outstanding
(in millions) (Note 10) :
Basic....................................... 12,538 13,046 12,538
=============== ================ ============
Diluted..................................... 13,190 13,722 13,190
=============== ================ ============
Net income per share:
Basic....................................... P. 1.323 P. 1.120 $ 0.121
=============== ================ ============
Diluted..................................... P. 1.290 P. 1.112 $ 0.118
=============== ================ ============
Cash dividends paid per share (nominal amounts). P. 0.450 P. 0.405 $ 0.042
=============== ================ ============
See accompanying notes.
TELEFONOS DE MEXICO, S.A. DE C.V. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of Constant Pesos as of September 30, 2003)
Millions of U.S.
September 30, December 31, dollars
2003 2002 September 30,
Unaudited (Note 1) 2003
------------- ------------ ----------------
ASSETS
Current assets:
Cash and short-term investments (Note 2)............................. P. 10,358,104 P. 14,672,051 $ 948
Accounts receivable, net (Note 3).................................... 21,763,484 19,608,616 1,992
Inventories for sale............................................... 600,309 1,150,553 55
Prepaid expenses................................................... 2,050,086 1,577,980 187
-------------- ------------- -------
Total current assets................................................... 34,771,983 37,009,200 3,182
Plant, property and equipment, net (Note 4)........................... 118,658,889 125,783,673 10,859
Inventories, for operation of the telephone plant...................... 1,423,512 1,094,300 130
Other assets........................................................... 7,936,521 8,786,857 727
------------- ------------- -------
Total assets........................................................... P.162,790,905 P.172,674,030 $14,898
============= ============= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-tem debt and current portion of long-term (Note 6)............. P. 18,778,087 P. 11,313,962 $ 1,718
Accounts payable and accrued liabilities............................. 12,763,158 16,052,919 1,168
Taxes payable........................................................ 1,820,125 4,098,309 166
Deferred credits .................................................... 2,477,688 1,152,376 227
------------- ------------- -------
Total current liabilities.............................................. 35,839,058 32,617,566 3,279
Long-term debt (Note 6)................................................ 40,774,903 56,340,770 3,732
Employee pensions and seniority premiums............................... 4,053,566 7,867,254 371
Deferred taxes (Note 11)............................................... 14,347,870 13,277,794 1,313
------------- ------------- -------
Total liabilities...................................................... 95,015,397 110,103,384 8,695
------------- ------------- -------
Stockholders' equity (Note 10):
Capital stock........................................................ 27,533,617 28,326,509 2,520
Premium on sale of shares............................................ 11,226,914 11,226,914 1,028
Retained earnings :
Unappropriated earnings of prior years............................ 83,242,542 76,101,047 7,618
Net income........................................................ 16,593,008 20,017,977 1,518
------------- ------------- -------
99,835,550 96,119,024 9,136
Accumulated other comprehensive income.items...................... (70,820,573) (73,101,801) (6,481)
------------- ------------- -------
Total stockholders' equity............................................. 67,775,508 62,570,646 6,203
------------- ------------- -------
Total liabilities and stockholders' equity............................. P.162,790,905 P.172,674,030 $14,898
============= ============= =======
See accompanying notes.
TELEFONOS DE MEXICO, S.A. DE C.V. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Amounts in thousands of Constant Pesos as of September 30, 2003)
Nine months ended September 30,
------------------------------------------------
Millions
of
U.S.
dollars
2003 2002 2003
---- ---- ----
Operating activities:
Net income........................................... P. 16,593,008 P. 14,612,887 $ 1,518
Add (deduct) items not requiring the use of resources:
Depreciation and amortization...................... 14,968,885 15,474,013 1,370
Deferred taxes..................................... (344,046) (1,660,313) (31)
Equity in results of affiliates.................... 137,531 149,550 12
Adjustment to value of equity investments............ - 114,532 -
Changes in operating assets and liabilities.......... (9,229,558) (1,576,506) (842)
--------------- -------------- --------
Resources provided by operating activities of
continuing operations.................................... 22,125,820 27,114,163 2,027
--------------- -------------- --------
Financing activities:
New loans............................................ 21,148,570 7,869,014 1,935
Repayment of loans................................... (30,809,020) (13,144,209) (2,819)
Effect of exchange rate differences
and inflation on debt................................ 1,558,708 4,174,543 143
Decrease in capital stock and retained
earnings due to purchase of Company's own shares.... (8,021,776) (5,147,947) (734)
Cash dividends paid.................................. (5,647,598) (5,545,294) (517)
--------------- -------------- --------
Resources used in financing activities of
continuing operations.................................... (21,771,116) (11,793,893) (1,992)
--------------- -------------- --------
Investing activities:
Investment in plant, property and equipment.......... (4,226,881) (4,116,637) (387)
Investment in inventories............................ (440,701) 71,822 (40)
Other long term investments.......................... (1,069) (81,132) -
--------------- -------------- --------
Resources used in investing activities................... (4,668,651) (4,125,947) (427)
--------------- -------------- --------
Net (decrease) increase in cash and
short-term investments................................... (4,313,947) 11,194,323 (392)
Cash and short-term investments at beginning of year..... 14,672,051 10,232,828 1,340
--------------- -------------- --------
Cash and short-term investments at end of year........... P. 10,358,104 P. 21,427,151 $ 948
=============== ============== ========
See accompanying notes.
TELEFONOS DE MEXICO, S.A. DE C.V. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Amounts in thousands of Constant Pesos as of September 30, 2003)
Premium Retained earnings
Capital on sale of Legal Unappropriated Total
stock shares reserve
----- ------ -------
Balances at January 1, 2003............. P.28,326,509 P.11,226,914 P.15,647,827 P.80,471,197 P.96,119,024
Appropriation of earnings approved at
stockholders' meeting held in April, 2003:
Cash dividends paid................... (5,647,598) (5,647,598)
Increase in legal reserve............... 75,430 (75,430)
Cash purchase of Company's own shares... (792,892) (7,228,884) (7,228,884)
Comprehensive income:
Net income of the period............. 16,593,008 16,593,008
Other comprehensive income items:
Surplus from holding nonmonetary
assets, net of deferred taxes...........
Minimum pension and seniority premium liability
adjustment, net of deferred taxes.......
Comprehensive Income....................
------------- ------------ ------------ ------------ ------------
Balances at September 30, 2003.......... P.27,533,617 P.11,226,914 P.15,723,257 P.84,112,293 P.99,835,550
============= ============ ============ ============ ============
Accumulated
other Total
comprehensive Comprehensive stockholders'
income income equity
------ ------ ------
Balances at January 1, 2003............. P.(73,101,801) P.62,570,646
Appropriation of earnings approved at
stockholders' meeting held in April, 2003:
Cash dividends paid................... (5,647,598)
Increase in legal reserve...............
Cash purchase of Company's own shares... (8,021,776)
Comprehensive income:
Net income of the period............. P.16,593,008 16,593,008
Other comprehensive income items:
Surplus from holding nonmonetary
assets, net of deferred taxes........... 2,648,065 2,648,065 2,648,065
Minimum pension and seniority premium liability
adjustment, net of deferred taxes....... (366,837) (366,837) (366,837)
-------------
Comprehensive Income.................... P.18,874,236
=============
------------- ------------
Balances at September 30, 2003.......... P.(70,820,573) P.67,775,508
============== ============
See accompanying notes.
TELEFONOS DE MEXICO, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Constant Pesos as of September 30, 2003)
1. Significant Accounting Policies
a) Basis of presentation:
The accompanying unaudited condensed consolidated financial statements
are presented on the same basis of accounting as described in the audited
financial statements of Telefonos de Mexico, S.A. de C.V. and its subsidiaries
(collectively "the Company" or "TELMEX") as of December 31, 2002 and for each of
the three years in the period ended December 31, 2002 (the audited financial
statements), and have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial information have been included.
The condensed consolidated balance sheet as of December 31, 2002 has
been derived from the financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
b) Recognition of the effects of inflation on financial information:
The unaudited condensed consolidated financial statements were
prepared in accordance with Bulletin B-10 ("Accounting Recognition of the
Effects of Inflation on Financial Information") as described in the audited
annual consolidated financial statements; consequently, all financial statements
presented herewith were restated to constant pesos as of September 30, 2003. The
September 30, 2003 restatement factor applied to the financial statements at
December 31, 2002 and September 30, 2002 was 1.0230 and 1.0393, which represent
the rate of inflation from December 31, 2002 and September 30, 2002 up to
September 30, 2003, respectively, based on the Mexican National Consumer Price
Index (NCPI) published by Banco de Mexico (the Central Bank).
The condensed consolidated balance sheet as of December 31, 2002 has
been derived from the audited financial statements at that date, which were
initially presented in constant pesos as of December 31, 2002. The December 31,
2002 financial statements included in this report are presented in constant
pesos as of September 30, 2003, because they are included with the unaudited
condensed consolidated financial statements as of September 30, 2003 expressed
in constant pesos as of September 30, 2003.
c) Convenience translation:
United States dollar amounts as of September 30, 2003 shown in the
unaudited condensed consolidated financial statements have been included solely
for the convenience of the reader and are translated from Mexican pesos with
purchasing power as of September 30, 2003, as a matter of mathematical
computation only, at an exchange rate of P. 10.9272 to U.S.$1.00, the September
30, 2003 exchange rate. Such translations should not be construed as a
representation that the peso amounts have been or could be converted into U.S.
dollar at this or any other rate.
2. Cash and Short-term Investments
The Company has invested in equity securities and several series of
bonds issued by MCI, Inc. (formerly known as WorldCom, Inc.), a U.S.-based
telecommunications company that is in Chapter 11 proceedings under the U.S.
bankruptcy code. As of September 30, 2003, TELMEX held approximately U.S.$1,759
million in face amount of the bonds, with a market value of approximately
U.S.$580 million at such date. On October 31, 2003, the bankruptcy court
approved a plan of reorganization for MCI. Under the plan, the Company expects
to receive common stock of MCI in exchange for the bonds. The amount of stock to
be received will depend on a number of factors, including the amount of other
valid claims and the elections made by other creditors. Based on TELMEX's
current holdings, and assuming that the plan of reorganization does not change,
the Company estimates that if the reorganization were implemented today, it
would receive an amount of common stock equal to approximately 7% of the total
common stock of MCI.
At September 30, 2003, this caption includes equity securities and
corporate bonds for trading in the amount of P.6,907,033 (P.1,621,518 at
December 31, 2002), of which approximately U.S.$580 million and U.S.$1 million
are MCI, Inc. bonds and shares, respectively (U.S.$117 million and U.S.$5
million at December 31, 2002). The Company included in the comprehensive
financing cost for the nine-month period ended September 30, 2003, an unrealized
gain of P. 1,882,106 for the increase in the market value of equity securities
(including P.1,696,565 on MCI bonds). In the nine-month period ended September
30, 2002, the caption included an unrealized loss of P.1,246,912 (including
P.669,965 on MCI shares). The net realized loss on the sale of equity securities
in 2003 was P. 13,270 (net realized loss of P.76,072 in 2002).
3. Accounts Receivable
Accounts receivable consist of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Customers............................. P. 21,444,629 P. 19,517,996
Net settlement receivables............ 623,193 429,413
Related parties....................... 246,092 219,880
Other................................. 1,748,665 1,337,204
------------------ -----------------
24,062,579 21,504,493
Less:
Allowance for doubtful accounts..... 2,299,095 1,895,877
Total................................. P. 21,763,484 P. 19,608,616
================== =================
4. Plant, Property and Equipment
a) Plant, property and equipment consist of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
Telephone plant and equipment......... P.234,046,815 P.220,459,142
Land and buildings.................... 28,037,149 27,882,537
Computer equipment and other assets... 28,070,138 24,743,085
------------------ -----------------
290,154,102 273,084,764
Less:
Accumulated depreciation.............. 173,621,974 153,462,464
------------------ -----------------
Net................................... 116,532,128 119,622,300
Construction in progress and advances
TO equipment suppliers.............. 2,126,761 6,161,373
------------------ -----------------
Total................................. P.118,658,889 P.125,783,673
================== =================
5. Investments
TELMEX has agreed to purchase substantially all of the assets of AT&T
Latin America Corp., which is a provider of telecommunications services to
corporate customers in Argentina, Brazil, Chile, Colombia and Peru. AT&T Latin
America is in reorganization under Chapter 11 of the U.S. Bankruptcy Code, and
the bankruptcy court approved the sale on November 3, 2003. Subject to certain
contractual adjustments, the purchase price is U.S.$171 million in cash, and the
Company will assume U.S.$36 million of indebtedness. The transaction is subject
to satisfaction of conditions precedent and receipt of regulatory approvals, and
is expected to close during the first quarter of 2004.
6. Long-term Debt
Long-term debt consists of the following:
Weighted average
interest rates at Maturities Balance at
Sep. 30, Dec.31, from 2003 September 30, December 31,
2003 2002 through 2003 2002
-----------------------------------------------------------------------------
Debt denominated in
foreign currency:
Convertible senior debentures (1)..... 4.2% 4.2% 2004 P. 8,851,032 P. 10,549,687
Senior notes.......................... 8.2% 8.2% 2006 16,390,800 15,824,531
Banks................................. 2.1% 2.5% 2013 20,241,791 27,126,116
Suppliers credits..................... 2.1% 2.7% 2022 1,166,940 1,963,833
Financial leases...................... 2.1% 2.3% 2006 2,261,202 2,919,670
Mexican Government.................... 2.0% 2.2% 2006 112,310 143,389
-------------------------------------
Total................................... 49,024,075 58,527,226
-------------------------------------
Debt denominated in Mexican
pesos:
Commercial paper...................... 5.2% 8.3% 2003 1,777,529 171,707
Domestic senior notes
("Certificados Busatiles").......... 7.6% 9.2% 2012 7,450,000 7,621,350
Banks................................. 5.5% 8.6% 2004 1,300,000 1,329,900
Financial leases...................... 5.2% 8.7% 2004 1,386 4,549
-------------------------------------
10,528,915 9,127,506
-------------------------------------
59,552,990 67,654,732
Total debt..............................
Less short-term debt and current portion
of long-term debt.................... 18,778,087 11,313,962
-------------------------------------
Long-term debt.......................... P. 40,774,903 P. 56,340,770
=====================================
The above-mentioned rates are subject to changes in international and
local rates and do not include the effect of the Company's agreement with
certain lenders to gross-up Mexican taxes withheld. The Company's weighted
average cost of borrowed funds at September 30, 2003 (including interest, fees
and gross-up for Mexican taxes withheld) was approximately 5.81% (5.77% at
December 31, 2002).
Short-term debt as of September 30, 2003 amounted to P.3,799,061
(P.812,961 at December 31, 2002), comprised of P.1,777,529 of commercial paper
(P.171,707 at December 31, 2002) and P.2,021,532 of banks (P.641,254 at December
31, 2002), with a weighted average interest rate of 3.2% (3.5% at December 31,
2002).
(1) On June 11, 1999, the Company issued U.S.$1,000 million of convertible
senior debentures. The debentures are convertible to common stock at the
option of the holders, at any time prior to their maturity into American
Depositary Shares (ADSs), each representing 20 TELMEX "L" shares. The
conversion price is U.S.$29.5762 per ADS, equal to a conversion ratio of
33.8110 "L" share ADSs per U.S.$1,000 principal amount of the convertible
debentures, subject to adjustment under certain circumstances.
Should any person or group (other than the present controlling
stockholders) acquire 50% or more of the issuer's voting shares, the
holders of the convertible debentures may ask TELMEX to repurchase the
convertible debentures, for 100% of the principal amount plus unpaid
accrued interest through the repurchase date. The maturity date of the
convertible debentures is June 15, 2004. The debentures bear 4.25% annual
interest, payable semiannually.
During the third quarter of 2003, TELMEX repurchased a total of
U.S.$190 million (nominal value) of convertible debentures in the open
market and in privately negotiated transactions. The Company charged
U.S.$20.5 million to the comprehensive financing cost, corresponding to the
difference between purchase price and nominal value of debentures.
On October 9, 2003, TELMEX commenced a cash tender offer to purchase
up to U.S.$500 million of its outstanding convertible senior debentures.
The offer was made upon the terms and subject to the conditions set forth
in the Offer to Purchase. The offer expired on November 6, 2003 and the
Company purchased U.S.$1.2 million (nominal value) of convertible
debentures. The cash price for each U.S.$1,000 principal amount of the
debentures was U.S.$1,117.50 plus accrued and unpaid interest to (but
excluding) the date of purchase. All debentures purchased pursuant to the
offer, together with all the debentures previously repurchased by TELMEX
will be cancelled.
An analysis of the foreign currency denominated debt at September 30,
2003 is as follows:
Exchange rate at
Foreign September 30, 2003
currency (in units) Mexican peso
(in thousands) Equivalent
--------------------------------------------------------
U.S. dollar........................ 4,459,470 P. 10.9272 P. 48,729,521
Euros.............................. 23,178 12.7083 294,554
--------------
Total.............................. P. 49,024,075
==============
At September 30, 2003, the Company has long-term lines of credit with
certain foreign finance institutions. The unused portion of committed lines of
credit at September 30, 2003 totaled approximately P.5,830,910, at a floating
interest rate of approximately LIBOR plus 89 basis points at the time of use.
Long-term debt maturities at September 30, 2003 are as follows:
Year Amount
---- ------------
2004............................. P. 6,677,111
2005............................. 4,899,824
2006............................. 19,482,960
2007............................. 7,656,938
2008 and beyond.............. 2,058,070
------------
Total............................ P.40,774,903
============
Some of the above-mentioned loans are subject to certain restrictive
covenants with respect to maintaining certain financial ratios and selling off a
substantial portion of group assets, among others. At September 30, 2003, the
Company has met all of these requirements.
From May through September 2003, the Company prepaid part of its
outstanding debt with several financial institutions for U.S.$727 million,
approximately.
Hedges
As part of its currency hedging strategy, the Company uses derivatives
to minimize the impact of exchange rate fluctuations on U.S. dollar denominated
transactions. During 2002, the Company entered into short-term exchange hedges,
which, at September 30, 2003, cover liabilities of U.S.$880 million (U.S.$418
million at December 31, 2002). In the nine-month period ended September 30,
2003, the Company recognized a credit to results of operations under these
hedges of P. 549,870 (credit of P. 1,611,324 in 2002) corresponding to the
fluctuation of the exchange rate.
To hedge its exposure to financial risks, the Company entered into
interest-rate swaps for the exchange of cash flows for the amount determined by
applying agreed interest rates to the base amount. Under these contracts, the
Company agreed to receive the "TIIE" interbank rate and to pay a fixed rate.
These swaps were recorded in results of operations of the year at the
related market interest rates. At September 30, 2003 the Company had
peso-denominated interest-rate swaps for a total base amount of P. 12,390
million and U.S.-denominated interest-rate swaps for a total base amount of
U.S.$ 1,200 million (P.12,941 of peso-denominated interest-rate swaps at
December 31, 2002). In the nine-month period ended September 30, 2003 the
Company recognized a charge under these contracts of P.292,711 to the
comprehensive financing cost (P.216,124 in 2002). Additionally, in 2003 the
Company replaced peso-denominated interest-rate swaps and recognized a charge of
P.946,779.
7. Foreign Currency Position
At September 30, 2003, TELMEX and its Mexican subsidiaries have a net
foreign currency short position of U.S.$4,586 million (net foreign currency
short position of U.S.$5,565 million at December 31, 2002). The prevailing
exchange rate at September 30, 2003 was P.10.9272 per U.S. dollar (P.10.3125 per
U.S. dollar at December 31, 2002).
8. Commitments and Contingencies
At September 30, 2003, commitments and contingencies described in the
audited financial statements as of December 31, 2002 have not significantly
changed.
9. Related Parties
In the nine-month periods ended September 30, 2003 and 2002, the
Company had the following significant transactions with related parties:
2003 2002
---- ----
Purchase of materials, inventories and fixed assets......... P. 2,171,464 P. 1,952,818
Payment of insurance premiums, fees for administrative
and operating services, security trading and others....... 2,397,905 2,001,792
Payment of CPP interconnection fees......................... 6,670,717 6,935,616
Sale of materials and other services........................ 370,556 326,441
Sale of long distance and other telecommunications
services.................................................. 2,537,582 2,765,742
10. Stockholders' Equity
a) At September 30, 2003, capital stock is represented by 12,288 million
shares issued and outstanding with no par value, representing the Company's
fixed capital (12,777 million at December 31, 2002).
b) Earnings per share are obtained by dividing net income for the year by
the average weighted number of shares issued and outstanding during the period.
To determine the average weighted number of shares issued and outstanding in the
nine-month periods ended September 2003 and 2002, the shares held by the Company
have been excluded from the computation.
The diluted earnings per share in the nine-month periods ended
September 30, 2003 and 2002, were determined considering the effect of the
shares that may be delivered (potentially dilutive shares) as a result of the
convertible senior debentures described in Note 6. The computation was made by
adjusting net income for the period, by the applicable comprehensive financing
cost (including interest expense, exchange gain difference and monetary gain),
net of income tax and employee profit sharing, attributable to the convertible
debentures. The adjusted income was divided by the average weighted number of
shares issued and outstanding, taking into account the number of convertible
shares.
An analysis is as follows:
Nine months ended
September 30,
----------------------------------------
2003 2002
----------------- --------------------
Income per basic share:
Net income..................................... P. 16,593,008 P. 14,612,887
----------------- --------------------
Weighted average number of shares issued and
outstanding (millions)....................... 12,538 13,046
----------------- --------------------
Income per basic share (in pesos)................ P. 1.323 P. 1.120
================= ====================
Earnings per diluted share:
Net income..................................... P. 16,593,008 P. 14,612,887
Comprehensive financing cost (income), net of
income tax and employee profit sharing....... 423,142 642,679
----------------- --------------------
Adjusted income................................ P. 17,016,150 P. 15,255,566
================= ====================
Weighted average number of shares issued and
Outstanding (millions)......................... 12,538 13,046
Add:
Potentially dilutive shares.................... 652 676
----------------- --------------------
Weighted average number of diluted shares
issued and outstanding (millions).............. 13,190 13,722
----------------- --------------------
Income per diluted share (in pesos).............. P. 1.290 P. 1.112
================= ====================
c) At September 30, 2003, accumulated other comprehensive income items
include the net of deferred taxes effects of minimum pension and seniority
premium liability adjustment and of deficit from restatement of stockholders'
equity of P.11,049,180 and P.59,771,393, respectively (P.10,682,343 and
P.62,419,458 at December 31, 2002).
An analysis of comprehensive income (net of deferred taxes) for the
nine-month periods ended September 30, 2003 and 2002 is as follows:
2003 2002
----------------- --------------------
Net income of the period......................... P. 16,593,008 P. 14,612,887
Other comprehensive income items:
Surplus from holding nonmonetary assets........ 2,648,065 6,596,835
Minimum pension and seniority premium
liability adjustment........................... (366,837) (833,217)
----------------- --------------------
Other comprehensive income....................... 2,281,228 5,763,618
----------------- --------------------
Comprehensive income............................. P. 18,874,236 P. 20,376,505
================= ====================
11. Income Tax
An analysis of income tax provisions for the nine-month periods ended
September 30, 2003 and 2002 is as follows:
2003 2002
----------------- --------------------
Current period................................... P. 7,587,717 P. 8,314,537
Deferred tax, net of related monetary
gain of P.462,442 (P.816,180 in 2002) (344,046) (1,660,313)
----------------- --------------------
Total............................................ P. 7,243,671 P. 6,654,224
================= ====================
The temporary differences on which the Company recognized deferred
taxes consist of the following:
September 30, December 31,
2003 2002
----------------- --------------------
Deferred tax asset :
Allowance for doubtful accounts and slow-
moving inventories........................... P. 822,091 P. 645,937
Tax loss carry forwards........................ 6,431 9,690
Deferred income................................ 700,459 324,172
Liability reserves............................. 378,943 99,787
Pensions and seniority premiums................ - 209,433
----------------- --------------------
1,907,924 1,289,019
----------------- --------------------
Deferred tax liability:
Fixed assets................................... (14,576,635) (13,983,828)
Inventories.................................... (340,741) (433,291)
Licenses....................................... (146,829) (149,694)
Pensions and seniority premiums................ (1,191,589) -
----------------- --------------------
(16,255,794) (14,566,813)
----------------- --------------------
Net deferred tax (liability) P. (14,347,870) P. (13,277,794)
================= ====================
12. Segments
TELMEX operates primarily in two segments: local and long-distance
telephone services. Local telephone service corresponds to fixed local wired
service. The long-distance service includes both domestic and international
services, exclusive of the long-distance calls originated in public and rural
telephones and data transmission services included in the others, adjustments
and eliminations column. Additional information related to the Company's
operations is provided in Note 1 of the audited financials statements. The
following summary shows the most important segment information, which has been
prepared on a basis consistent whith the audited financial statements included
in the Company's annual report on Form 20-F:
(Amounts in millions of Constant Pesos at September 30, 2003)
--------------------------------------------------------------------
Others,
Local Long adjustments and Total
service distance eliminations consolidated
At September 30, 2003
Revenues:
External revenues P. 55,340 P. 18,111 P. 11,816 P. 85,267
Intersegment revenues 7,432 (7,432)
Depreciation and amortization 10,095 2,123 2,751 14,969
Operating income 19,147 5,343 4,057 28,547
Segment assets 212,286 46,082 35,336 293,704
At September 30, 2002
Revenues:
External revenues P. 54,586 P. 18,979 P. 11,736 P. 85,301
Intersegment revenues 7,637 (7,637)
Depreciation and amortization 10,424 2,158 2,892 15,474
Operating income 19,065 6,140 4,282 29,487
Segment assets 191,995 41,867 36,669 270,531
Additionally, the column others, adjustments and eliminations includes
the yellow and white pages directories and other services. Intersegmental
transactions are reported at fair value. Comprehensive financing cost and
provisions for income tax and employee profit sharing are not assigned to the
segments; they are handled at the corporate level.
Segment assets include plant property and equipment (on a gross basis)
construction in progress, advances to equipment suppliers and inventories for
operation of the telephone plant.
13. Differences between Mexican and U.S. GAAP
The Company's unaudited condensed consolidated financial statements
are prepared in accordance with Mexican GAAP, which differ in certain
significant respects from generally accepted accounting principles in the United
States ("U.S. GAAP").
The following reconciliation to U.S. GAAP does not include the
reversal of the adjustments to the financial statements for the effects of
inflation required under Mexican GAAP (Bulletin B-10), because the application
of Bulletin B-10 represents a comprehensive measure of the effects of price
level changes in the Mexican economy and, as such, is considered a more
meaningful presentation than historical cost-based financial reporting for both
Mexican and U.S. accounting purposes. The principal differences between Mexican
GAAP and U.S. GAAP, as they relate to the Company, are described in Note 18 to
the audited financial statements.
Cash Flow Information:
Under Mexican GAAP, the Company presents consolidated statements of
changes in financial position, as described in Note 1 to the audited financial
statements. The changes in the consolidated financial statement balances
included in this statement constitute resources provided by and used in
operating, financing and investing activities stated in constant pesos
(including monetary and foreign exchange gains and losses). For Mexican GAAP
purposes, trading securities have been presented in cash and short term
investments, therefore the changes in these securities are presented as part of
the net increase (decrease) in cash and short term investments; under U.S. GAAP
the cash flows from these type of securities should be disclosed as cash
provided by (used in) operating activities.
Statement of Financial Accounting Standards No.95 ("SFAS No. 95"),
"Statement of Cash Flows," does not provide guidance with respect to inflation
adjusted financial statements. In accordance with Mexican GAAP, the changes in
current and long-term debt due to restatement in constant pesos, including the
effect of exchange differences, is presented in the statement of changes in
financial position in the financing activities section. The Company has adopted
the guidance issued by the AICPA SEC Regulations Committee's International
Practices Task Force in its meeting held on November 24, 1998, encouraging
foreign registrants that file price level adjusted financial statements to
provide cash flow statements that show separately the effects of inflation on
cash flows. If the changes in trading securities, the monetary gain and the
exchange gain or loss related to the debt, were treated as components of
operating activities, summarized unaudited condensed consolidated interim
statements of cash flows derived from information prepared in accordance with
U.S. GAAP would be as follows:
Nine months ended
September 30,
--------------------------------------
2003 Unaudited 2002 Unaudited
----------------- -------------------
Operating activities:
Net income................................................... P. 15,990,425 P. 13,113,393
Depreciation................................................ 16,732,867 17,785,774
Amortization................................................ 144,583 159,310
Deferred taxes.............................................. (798,150) (1,928,104)
Monetary gain............................................... (1,554,798) (2,770,962)
Equity in results of affiliates............................. 137,531 149,550
Effect of exchange rate differences on debt................. 3,809,527 7,070,013
Investment in marketable securities......................... (5,371,465) 331,686
Adjustment to value of equity investments................... - 114,532
Change in operating assets and liabilities.................. (10,404,173) (1,583,172)
--------------- ---------------
Resources provided by operating activities...................... 18,686,347 32,442,020
--------------- ---------------
Financing activities:
New loans................................................... 21,148,570 7,869,014
Repayment loans............................................. (30,809,020) (13,144,209)
Purchase of Company's own shares and cash dividends paid.... (13,669,374) (10,693,241)
--------------- ---------------
Resources used in financing activities.......................... (23,329,824) (15,968,436)
--------------- ---------------
Investing activities:
Investment in plant, property and equipment and inventories.. (4,748,049) (4,273,192)
Other investments............................................ (1,069) (81,132)
--------------- ---------------
Resources used in investing activities.......................... (4,749,118) (4,354,324)
--------------- ---------------
Effect of inflation accounting.................................. (206,867) (569,334)
--------------- ---------------
Net (decrease) increase in cash and short-term investments...... (9,599,462) 11,549,926
Cash and short-term investments at beginning of year............ 13,050,533 9,474,916
--------------- ---------------
Cash and short-term investments at end of year.................. P. 3,451,071 P. 21,024,842
=============== ===============
Cash flows from purchases of trading securities during the nine-month
period ended September 30, 2003 were P. 3,424,554 (P.1,157,796 in 2002) and cash
flows from sales of trading securities during the nine-month period ended
September 30, 2003 were P. 20,185 (P. 265,980 in 2002).
Summary
Net income, operating income and total stockholders' equity, adjusted
to take into account the material differences between Mexican GAAP and U.S.
GAAP, are as follows:
Nine-months ended
September 30,
--------------------------------------
2003 2002
Unaudited Unaudited
--------------------------------------
Net income as reported under Mexican GAAP....................... P. 16,593,008 P. 14,612,887
U.S. GAAP adjustments:
Capitalized interest or net financing cost...................... 80,466 228,373
Depreciation of capitalized interest............................ (394,346) (366,990)
Accrued vacation pay............................................ (287,214) (217,761)
Deferred income tax on U.S. GAAP adjustments included in this
reconciliation.................................................. (19,136) (184,683)
Deferred employee profit sharing on U.S. GAAP adjustments
included in this reconciliation............................... 15,582 (132,608)
Deferred employee profit sharing................................ 457,658 585,082
Pension and seniority premium plan cost......................... 670,424 504,282
Difference between the restatement of depreciation expense based
on specific indexation factors and on the basis of the NCPI... (1,514,219) (2,104,081)
Effect of derivative instruments................................ (111,500) (397,566)
Other........................................................... 6,556 (21,009)
Effects of inflation accounting on U.S. GAAP adjustments........ 493,146 607,467
--------------- ---------------
Total U.S. GAAP adjustments..................................... (602,583) (1,499,494)
--------------- ---------------
Net income under U.S. GAAP...................................... P. 15,990,425 P. 13,113,393
=============== ===============
Weighted average common shares outstanding (in millions):
Basic......................................................... 12,538 13,046
=============== ===============
Diluted....................................................... 13,190 13,722
=============== ===============
Net income per share under U.S. GAAP (in pesos)
Basic......................................................... P. 1.275 P. 1.005
=============== ===============
Diluted....................................................... P. 1.244 P. 1.002
=============== ===============
After giving effect to the foregoing adjustments for pension plan
costs, accrued vacation pay, depreciation of capitalized interest, the
difference between the restatement of depreciation expense based on specific
indexation factors and on the basis of the NCPI and other; as well as to the
reclassification of the employee profit sharing expense and the deferred
employee profit sharing expense, operating income under U.S. GAAP totaled
P.25,726,897 and P. 25,429,999 in the first nine months of 2003 and 2002,
respectively.
September 30, December 31,
2003 2002
------------------- ---------------
Total stockholders' equity under Mexican GAAP................... P. 67,775,508 P. 62,570,646
U.S. GAAP adjustments, net of effects of inflation on monetary
items:
Capitalized interest or net financing cost...................... 10,683,542 10,603,076
Accumulated depreciation of capitalized interest or net
financing cost.................................................. (7,700,181) (7,305,835)
Accrued vacation pay............................................ (1,320,080) (1,059,329)
Deferred income tax on U.S. GAAP adjustments included in this
reconciliation.................................................. 455,189 518,827
Deferred employee profit sharing on U.S. GAAP adjustments
included in this reconciliation................................. 153,906 162,130
Deferred employee profit sharing................................ (6,415,885) (7,047,798)
Deferred taxes on the difference between the indexed cost and
specific indexation factor valuation of fixed assets and
inventories, and on minimum pension and seniority premium
liability adjustment............................................ 459,375 (1,341,436)
Pension and seniority premium plan cost......................... (4,187,105) (5,172,640)
Minimum pension and seniority premium liability adjustment...... 162,399 (175,725)
Difference between the restatement of fixed assets and
inventories based on specific indexation factors and on the
basis of the NCPI............................................. 2,512,327 7,763,562
Effect of derivative instruments................................ (366,606) (260,973)
Other........................................................... (106,937) (124,847)
--------------- ---------------
Total U.S. GAAP adjustments, net................................ (5,670,056) (3,440,988)
--------------- ---------------
Total stockholders' equity...................................... P. 62,105,452 P. 59,129,658
=============== ===============
Comprehensive income under U.S. GAAP is comprised as follows:
Nine-months ended
September 30,
--------------------------------------
2003 2002
--------------------------------------
Net income under U.S. GAAP...................................... P. 15,990,425 P. 13,113,393
Other comprehensive income:
Deferred taxes allocated to equity, net of effect
of inflation.................................................. 791,653 413,147
Minimum pension and seniority premium liability
adjustment.................................................... (136,912) (200,934)
--------------- ---------------
Other comprehensive income...................................... 654,741 212,213
--------------- ---------------
Comprehensive income under U.S. GAAP............................ P. 16,645,166 P. 13,325,606
=============== ===============
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.
TELEFONOS DE MEXICO, S.A. DE C.V.
Date: December 9, 2003 By: /s/ Adolfo Cerezo Perez
-----------------------
Name: Adolfo Cerezo Perez
Title: Chief Financial Officer