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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
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FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
November 26, 2002
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Telecom Argentina STET-France Telecom S.A.
(Exact name of registrant as specified in its charter)
Telecom Argentina STET-France Telecom S.A.
(Translation of registrant's name into English)
Alicia Moreau de Justo, No. 50, 1107
Buenos Aires, Argentina
(Address of principal executive office)
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 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): N/A
---
Telecom Argentina STET-France Telecom S.A.
TABLE OF CONTENTS
Sequential
Item Page Number
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1. Telecom Argentina announces consolidated financial statements
at September 30, 2002 and 2001 (Unaudited)................... 3
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.
Telecom Argentina STET-France Telecom S.A.
Date: November 26, 2002 By: /s/ Christian Chauvin
---------------------------------------
Name: Christian Chauvin
Title: Vice-President
ITEM 1
TELECOM ARGENTINA STET-FRANCE TELECOM S.A.
CONSOLIDATED FINANCIAL STATEMENTS AT SEPTEMBER 30, 2002 (Unaudited)
TELECOM ARGENTINA STET-FRANCE TELECOM S.A.
CONSOLIDATED FINANCIAL STATEMENTS AT
SEPTEMBER 30, 2002 AND 2001 (Unaudited)
INDEX
Summary information on the consolidated financial statements
at September 30, 2002
Consolidated Financial Statements
Consolidated balance sheets (Unaudited)
Consolidated statements of income (Unaudited)
Consolidated statements of changes in shareholders' equity (Unaudited)
Consolidated statements of cash flows (Unaudited)
Notes to the Consolidated Financial Statements (Unaudited)
Exhibits A to I
Limited review report
Corporate information
$ : Argentine peso
US$ : U.S. dollar
$3.74 = US$1
SUMMARY INFORMATION ON THE CONSOLIDATED FINANCIAL STATEMENTS AT
SEPTEMBER 30, 2002
(Amounts in millions of Argentine constant pesos or as expressly indicated)
Telecom Argentina reached a consolidated net loss of 4,154 for the nine-month
period of fiscal year 2002, ended September 30, 2002. Comparatively,
consolidated net income for the nine-month period ended September 30, 2001, was
142.
Gross profit (loss), EBITDA, operating profit (loss) and net income (loss) for
the nine-month period of fiscal year 2002 represented 31%, 48%, (6%) and (140%)
of net sales, respectively; compared with 50%, 42%, 15% and 3%, respectively,
for the similar period of fiscal year 2001.
The main factors contributing to the decline in margins were: a) the current
macroeconomic environment in Argentina, including the devaluation and
subsequent volatility in the peso plus the inability of the Company to increase
regulated tariffs after the "pesification" of such tariffs at the rate of
US$1=$1 enforced by the Argentine Government, b) the effects of the inflation
adjustment described below and c) the decrease in traffic in the basic
telephony business (mainly in the domestic and international long distance
services), and the declines in both traffic and average revenue per user in the
cellular business. All of these factors have affected revenues of the Company.
The Company has accounted for the effects of inflation adjustment adopted by
Resolution No. 415/02 of the National Securities Commission ("CNV") for fiscal
years beginning January 1, 2002. The Resolution stated that the figures
corresponding to previous fiscal years should be considered in constant pesos
of December 31, 2001. Therefore, the Company has restated the figures
corresponding to September 30, 2001, presented herein for comparative purposes,
using an adjustment factor of 2.212 which represents the wholesale rate of
inflation during the first nine months of 2002. Accordingly, the figures
corresponding to the nine-month period ended September 30, 2002 include the
effects of the adoption of inflationary accounting.
Moreover, the Company is providing additional information for a better
comprehension of the business including figures that have not been adjusted by
inflation and which were used as the base for the information presented in
constant pesos. This information, that is not required by Argentine GAAP, is
disclosed in Note 18 "Relevant Additional Data" of these consolidated financial
statements.
---------------------------
Nine month periods ended September 30, 2002 2001
---------------------------
Net sales 2,961 5,116
Cost of services provided (2,049) (2,553)
---------------------------
Gross profit 912 2,563
Administrative expenses (231) (429)
Sales expenses (859) (1,356)
---------------------------
Operating profit (loss) (178) 778
Equity losses from related companies (28) (18)
I
Financial and holding results (5,840) (367)
Other expenses, net (115) (110)
Unusual losses - (24)
---------------------------
Net income (loss) before income tax and
minority interest (6,161) 259
Income tax 2,003 (117)
Minority interest 4 -
---------------------------
Net income (loss) (4,154) 142
===========================
Earnings per share (in pesos) (4.22) 0.14
===========================
II
1. Company activities
o Consolidated net revenues
Consolidated net revenues for the nine-month period of fiscal year 2002 totaled
2,961, a decrease of 2,155 or 42%, compared with 5,116 for the same period of
fiscal year 2001 as a result of the inflation adjustment of the figures as of
September 30, 2001 and the rates that were frozen after the "pesification"
enforced by the Government. Non-adjusted by inflation revenues for the period
would have reached 2,209, a decrease of 104 or 4% mainly as a consequence of
the "pesification" and freeze of regulated rates and to lower traffic.
In the basic telephony business, the main component of revenues, measured
service, decreased by 549 or 41% to 789 during the nine-month period of fiscal
year 2002 as compared to the same period of fiscal year 2001. Non-adjusted
figures would have shown a decreased of 30 or 5% reaching 575. The decrease was
evidenced both in local and domestic long distance traffic as the rates were
frozen after the "pesification" enforced by the Government and the
deterioration of the macroeconomic conditions in the country that had a
negative impact on consumption patterns.
Total traffic volume measured in minutes decreased by 7% for the nine-month
period of fiscal year 2002 when compared to the same period of fiscal year
2001. Furthermore, urban traffic measured in minutes decreased by 7% and DLD
traffic decreased by 6% when compared to the same period of fiscal year 2001.
Monthly basic charges decreased by 400 r 43%, to 522 for the nine- months
period of fiscal year 2002 when compared to the same period of fiscal year
2001. Non-adjusted figures would have shown a decrease of 44 or 11% reaching
373 mainly due to the fact that rates were frozen after the "pesification"
enforced by the Government and to a lower average number of lines in service of
approximately 353,000 lines.
Revenues from supplementary services decreased by 94 or 49% to 98 for
nine-month period of fiscal year 2002 when compared to the same period of
fiscal year 2001. Non-adjusted figures would have shown a decrease of 17 or 20%
reaching 70 mainly due to the fact that rates were frozen after the
"pesification" enforced by the Government and to a lower number of subscribers
of these services.
Installation fees paid by new customers decreased by 24 or 60% to 16 for the
nine-month period of fiscal year 2002 as compared to the same period of fiscal
year 2001. Non-adjusted figures would have shown a decrease of 6 or 33%
reaching 12 largely due to a lower number of lines connected (approximately
104,000 lines connected in 2002 as compared to 249,000 lines connected during
the same period in 2001)
III
partially compensated by a higher average installation price ($116 to $67 per
line, denominated in current pesos).
Revenues from public telephony decreased by 139 or 48% to 151, during the
nine-month period of fiscal year 2002 when compared to the same period of
fiscal year 2001. Non-adjusted figures would have shown a decrease of 21 or 16%
reaching 110. The decrease was a consequence of the rates frozen after the
"pesification" enforced by the Government, the lower traffic generated by
public telephony telecommunication centers ("Telecentros") and the lower
revenues received from public payphones and telephone cards.
Revenues generated by fixed interconnection services during the nine-month
period of fiscal year 2002 decreased by 29 or 21% to 108. Non-adjusted figures
would have shown an increase of 18 or 29% reaching 80. Meanwhile, during the
same period revenues generated by interconnection services provided to cellular
operators decreased by 1 or 3% to 34. Non-adjusted figures would have shown an
increase of 9 or 56% reaching 25.
IV
Regarding the international telephony business, during the nine-month period of
fiscal year 2002 revenues decreased by 82 or 41% to 119 when compared to the
same period of fiscal year 2001. Non-adjusted figures would have shown an
increase of 1 or 1% reaching 92 mainly due to the revenues generated by Telecom
USA partially offset by the frozen rates, lower outgoing traffic of
approximately 8% and a negative balance with the international carriers.
The revenues generated by the cellular business during the nine-month period of
fiscal year 2002 ended September 30, 2002, decreased by 584 or 42% to 821 when
compared to the same period of fiscal year 2001. Non-adjusted figures would
have shown an increase of 9 or 1% reaching 644. Non-adjusted revenues of
Telecom Personal in Argentina would have decreased by 97 or 16% to 492 when
compared to the same period of fiscal year 2001. The decrease was due to a
lower number of subscribers (approximately 2% or 42,000 fewer lines), lower
levels of traffic and lower sales of handsets. Furthermore, the average revenue
per user decreased by 11% (to $24 per customer per month as of September 30,
2002, denominated in current pesos). The customer base reached as of September
30, 2002, approximately 819,000, 1,272,000 and 61,000 subscribers for the
Multiple Area of Buenos Aires (AMBA), Northern and Southern regions,
respectively. Total cellular subscribers of Telecom Personal in Argentina
reached approximately 2,152,000.
Nucleo, the subsidiary that provides cellular and PCS services in Paraguay,
generated 152 in revenues during nine-month period of fiscal year 2002 which
are consolidated into the revenues of Telecom Personal. This represented an
increase of 50 or 49%, as compared to the same period of fiscal year 2001.
Non-adjusted figures would have shown an increase of 106 or 230% reaching 152.
The increase can be mainly attributed to exchange differences and the increase
in the customer base. As of September 30, 2002, Nucleo had approximately
546,000 cellular and PCS customers, an increase of approximately 68,000
customers, or 14%, as compared to September 30, 2001.
Revenues generated by the data transmission business totaled 262, representing
a decrease of 145 or 36%. Non-adjusted figures would have shown an increase of
13 or 7% reaching 197, as a consequence of higher revenues generated by the
ground networks and international connectivity. Additionally, monthly charges
and Internet dial-up measured services increased as a consequence of the higher
number of Internet subscribers that use the special prefix 0610 and local
numbers with 4004 numbering or similar. As of September 30, 2002 Internet
minutes represented 31% of total traffic measured in minutes transported over
the fixed-line network.
Internet revenues decreased by 14 or 20% to 57 during the nine-month period of
fiscal year 2002. Non-adjusted figures would have shown an increase of 10 or
31% reaching 42 mainly
V
due to the increase in ADSL fees and Internet traffic. As of September 30,
2002, the number of subscribers to high-speed Internet access services (ADSL)
reached approximately 28,000. Furthermore, Internet dial-up customers reached
approximately 148,000.
In the directories edition business, revenues from the subsidiary Publicom
decreased by 80. Non-adjusted figures would have decreased by 34 or 87%
reaching 5 due to the delay in the publication of directories and lower
revenues from advertising.
VI
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Nine month periods ended September 30, 2002 2001
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National basic telephone service
Local measured service 435 714
DLD measured service 354 624
Monthly basic charges 522 922
Supplementary services (monthly charges) 98 192
Installation fees 16 40
Public telephones 151 290
Interconnection fixed 108 137
Interconnection cellular 34 35
Lease of lines and circuits fixed 15 40
Lease of lines and circuits cellular 19 29
Others 46 104
Turnover tax (59) (104)
----------------------------
Total National basic telephone service 1,739 3,023
----------------------------
International telephone service
Outgoing revenues 124 194
Settlement revenues (net) (5) 7
Turnover tax (2) (6)
----------------------------
Total International telephone service 117 195
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Data transmission
Terrestrial network 75 113
Lease of data circuits 24 60
Monthly charges and Internet traffic 93 135
International connectivity 50 60
Others 20 39
Turnover tax (8) (13)
----------------------------
Total Data transmission 254 394
----------------------------
Internet
Internet monthly fee 44 49
Internet traffic 13 22
Turnover tax (2) (2)
----------------------------
Total Internet 55 69
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Cellular telephony
o Personal
Monthly fee and measured service 240 520
Pre-paid card 108 177
Calling Party Pays 222 409
Others 99 197
Turnover tax (30) (54)
----------------------------
639 1,249
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Nucleo
Monthly fee and measured service 44 29
Pre-paid card 24 15
Calling Party Pays 70 53
Others 14 5
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152 102
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Total cellular telephony 791 1,351
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Total directories edition 5 84
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Total net sales in constant pesos 2,961 5,116
============================
VII
o Operating costs
The cost of services provided, administrative expenses, and selling expenses
for the nine- month period of fiscal year 2002 ended September 30, 2002
decreased by 1,199 or 28% to 3,139 when compared to the same period of fiscal
year 2001 mainly as a result of the adjustment by inflation of figures as of
September 30, 2001.
Salaries and social security contributions decreased by 395 or 45% to 474 for
the nine-month period, ended September 30, 2002. Non-adjusted figures would
have shown a decrease of 42 or 11% to 351 primarily due to the reduction in
salaries of unionized and non-unionized employees, which was part of the cost
reduction plan launched during the previous fiscal year. Additionally, a
reduction in headcount at Telecom Personal and Publicom was registered. These
decreases were partially offset by the increased headcount in the basic
telephony activity reflecting the migration of call centers and 110 information
system workers from Publicom to Telecom Argentina. Additionally, certain
functions were centralized in Telecom Argentina.
VIII
Expenses related to taxes decreased by 28 or 20% to 114 for the nine- month
period of fiscal year 2002. Non-adjusted figures would have increased taxes by
4 or 5% reaching 84 as a result of re-classification of the tax on Bank Debits
and Credits.
Materials and supplies charges decreased by 138 million or 49% to 141 million
for the nine-month period of fiscal year 2002. Non-adjusted figures would have
shown a decrease of 24 or 19% reaching 102 mainly due to lower expenses
associated with fewer new lines installed and to lower maintenance of the basic
telephony network. Furthermore, a recovery in material from third parties was
registered. These effects were partially offset by higher costs for hardware
maintenance and higher provisions made for scrap materials.
Bad debt expenses decreased by 138 or 41% to 198 for the nine- month period of
fiscal year 2002. Non-adjusted figures would have shown a decrease of 19 or 13%
reaching 133. The decrease was evident in the residential segment of the fixed
telephony business, as the level of overdue accounts has decreased compared
with the same period of fiscal year 2001.
Interconnection costs decreased by 46 or 29% to 113 for the nine- month period
of fiscal year 2002. Non-adjusted figures would have shown an increase of 11 or
15% reaching 83 mostly as a result of higher charges paid for local, national
and international long distance accesses and circuits rentals.
Service fees decreased by 71 or 44%, to 90 for the nine-month period of fiscal
year 2002. Non-adjusted figures would have shown a decrease of 4 or 5% reaching
69 principally due to lower fees related to commercial, technical and other
services as part of the cost control actions taken by the Telecom Group since
the beginning of last year. Additionally, fees paid to the data base manager
and agents related to the pre-subscription process also decreased.
Management fees decreased by 184 or 89%, to 22 for the nine-month period of
fiscal year 2002. Non-adjusted figures would have shown a decrease of 80 or 86%
reaching 13 as a result of a temporary decrease in the management fee from 3%
of net revenues to 1.25% for the period comprised between October 1(0), 2001
and March 31, 2002. Furthermore, the Company and the Operators have agreed to
suspend certain provisions of both parties of the management contract, from
April 1, 2002, whereby the payment and the accrued of the management fee has
been suspended.
Costs related to advertising decreased by 111 or 82% to 24 for the nine-month
period of fiscal year 2002. Non-adjusted figures would have shown a decrease of
44 or 72% reaching 17 mainly due to lower expenses related to media advertising
and promotional campaigns resulting from the cost control actions taken by the
Company.
Cost of cellular handsets decreased by 74 or 86% to 12 for the nine- month
period of fiscal year 2002. Non-adjusted figures would have shown a decrease of
30 or 77% reaching 9 mainly due to the lower number of cellular handsets sold.
IX
Commissions paid to cellular vendors decreased by 62 or 76% to 20 for the
nine-month period of fiscal year 2002. Non-adjusted figures would have shown a
decrease of 19 or 51% reaching 18 as consequence of the lower number of new
subscribers incorporated during the period, deductions related to early
disconnections, and to a lower average commission paid per new cellular
customer.
Other expenses decreased by 125 or 32% for the nine- month period of fiscal
year 2002. Non-adjusted figures would have shown an increase of 35 or 21%
reaching 200 manly due to higher expenses related to satellite capacity
rentals. Additionally, expenses related to sales commissions for
pre-subscription and call centers in the basic telephony business decreased as
these tasks are now performed internally by Telecom Argentina.
Fixed asset depreciation increased by 221 or 17%, to 1,488 during the
nine-month period of fiscal year 2002. The increase is related to the
incorporation of new assets into cellular and data transmission activities
during last fiscal year and the effects of capitalized foreign currency
exchange differences originated by debt.
X
Finally, amortization of intangible assets increased by 10 or 9% to 116 for the
nine-month period of fiscal year 2002, due to higher amortization charges at
Nucleo as a consequence of the currency conversion.
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Nine month periods ended September 30, 2002 2001
-------------------------------------------------------------------
Wages and social benefits 474 869
Taxes 79 142
Taxes on bank debits and credits 35 -
Materials and supplies 141 279
Transport and freight 31 69
Bad debts expense 198 336
Interconnection costs 113 159
Lease of circuits 33 53
Fees for debt restructuring process 15 -
Fees and counsel services 13 22
Repayment for services 62 139
Management fees 22 206
Advertising 24 135
Cost of cellular handsets 12 86
Agent commissions 20 82
Other 263 388
------------------------
Subtotal 1,535 2,965
Depreciation of fixed assets 1,488 1,267
Amortization of intangibles assets 116 106
------------------------
Operating costs 3,139 4,338
========================
o Financial and holding results
The loss resulting from financial and holding results increased by 5,473 to
5,840 for the nine-month period of fiscal year 2002 as compared to the loss of
367 in the same period of fiscal year 2001. This increase can be largely
attributed to a loss of 4,487 from currency exchange differences from the Peso
devaluation which affected the Company's net foreign currency monetary position
which was only partially offset by the higher capitalized foreign currency
exchange differences by debt for fixed assets acquisitions of 840. Furthermore,
the interest on foreign currency liabilities increased by 194 due to the
continuing deterioration of the value of the peso. Lastly, a loss of 1,269 was
registered for the inflation effect on monetary assets and liabilities.
o Other expenses, net
Increased by 5 or 5% to 115 for the nine-month period of fiscal year 2002
compared with similar period of fiscal year 2001. The increase was mainly due
to higher reserves for lawsuits and contingencies and the write-off of cellular
handsets leased without charge.
o Statements of cash flow
Cash flow from operating activities for the nine-month period of fiscal year
2002 decreased by 480 when compared to the similar period of fiscal year 2001.
Cash flow used for investing activities for the nine-month period of fiscal
year 2002 decreased by 815 as compared to 2001 as a result of the adjustment by
inflation of the
XI
figures as of September 30, 2001 and lower incorporation of fixed and
intangibles assets.
Cash flow used for financing activities decreased by 194 for the period as a
result of the adjustment by inflation of the figures as of September 30, 2001,
lower debt proceeds and payments, net and dividends.
o Investment plan
Since the start of operations on November 8, 1990, Telecom Group has invested
20,907 in fixed assets, of which 219 (150 without the adjustment by inflation)
corresponds to the nine-month period of fiscal year 2002 and were mainly
generated from commitments undertaken during the previous year.
XII
Of the total amount invested for the period, 165 or 75% corresponds to basic
telephony, data transmission and Internet (outside plant 15%, switching 9%,
transmission 30%, information systems 37%, infrastructure 3% and others 6%), 53
or 24% to cellular telephony and 1 or 1% to directories edition.
o Recent developments
Debt restructuring process
On September 17, Telecom Argentina held the first informative meeting with the
main financial creditors, relating to establishing a framework for the
renegotiation of the financial debt of the Company and its subsidiaries.
The Company intents to continue the conversations with its main financial
creditors and hold, in the country and abroad, other informative meetings.
As a consequence of the debt restructuring process and the decision of the
Company and its subsidiaries in Argentina to suspend principal and interest
payment of its financial debts, the Company maintains unpaid amounts related to
such concepts. In Note 14 to these consolidated financial statements additional
information is included related to this issue.
Resignation of Mr. Juan Carlos Masjoan
On September 20, the Board of Directors accepted the resignation of Mr. Juan
Carlos Masjoan, effective as of November 15, 2002, to the position of Chairman
and Director of the Company and of its subsidiaries and related companies of
the Telecom Group.
According with Section 10 of the Corporate By-Laws and with the resolution
taken by the Board of Directors in its meeting of April, 24, 2002, the
Vice-president, Mr. Franco Bertone, has taken over the position of Chairman of
the Company.
Calling Party Pays for international calls
According to Resolution No. 124/02 issued by the Secretariat of Communications,
as from January 1, 2003 overseas calls terminated in cellular telephones will
pay for Calling Party Pays charges. The Secretariat has determined that a trial
period will take place from October 7 to December 31, 2002.
In order to identify such calls, customers dialing from outside must add the
prefix 9 to the cellular number, after the country code of Argentina (54).
Prior to the effectiveness of this resolution, Telecom Personal clients had to
pay for the international calls they received.
NYSE Notification
Telecom has been notified by the New York Stock Exchange ("NYSE") that it has
fallen below the NYSE's continued listing criteria relating to the minimum
share price. The
XIII
NYSE requires that the average closing price of a security not be less than
$1.00 over a 30-day trading period.
Under NYSE rules, once notified of its failure to meet the minimum share price
criteria, a company must bring its share price and average share price back
above $1.00 within six months of receipt of the notification or if deemed
necessary have until its next shareholders meeting if approval from its
shareholders is necessary to implement a corporate action that will cure the
price deficiency.
After informing its intention to comply with the minimum price criteria for
securities listed in the NYSE and reaffirming its plans to keep the Company's
American Depositary Shares listed on the NYSE, the Board of Directors in its
meeting of October 3, 2002 decided to request shareholder approval for an
increase in the number of the Company's Class B shares represented by its
American Depository Shares (such change the "Ratio Change") and resolved to
include the Ratio Change on the agenda for shareholder approval at the next
annual shareholders' meeting scheduled for April 2003.
XIV
2. Summary comparative consolidated balance sheets
September 30,
---------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------
Current assets 2,300 2,837 4,037 3,440 2,761
Non current assets 11,497 12,142 12,730 12,382 11,067
---------------------------------------------------------
Total assets 13,797 14,979 16,767 15,822 13,828
=========================================================
Current liabilities 12,556 3,826 4,689 3,592 2,736
Non current liabilities 145 5,846 6,508 6,530 5,464
---------------------------------------------------------
Total liabilities 12,701 9,672 11,197 10,122 8,200
---------------------------------------------------------
Minority interest 8 27 29 33 40
Shareholders' equity 1,088 5,280 5,541 5,667 5,588
---------------------------------------------------------
Total liabilities, minority interest
and Shareholders' equity 13,797 14,979 16,767 15,822 13,828
=========================================================
3. Summary comparative consolidated statements of income
For the nine month periods ended September 30,
---------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------
Net sales 2,961 5,116 5,340 5,236 5,284
Operating costs (3,139) (4,338) (4,373) (4,030) (3,959)
---------------------------------------------------------
Operating profit (loss) (178) 778 967 1,206 1,325
Equity losses from related companies (28) (18) (13) (11) (11)
Financial and holding results (5,840) (367) (365) (281) (246)
Other expenses, net (115) (110) (84) (113) (128)
Unusual losses - (24) - - -
---------------------------------------------------------
Net income (loss) before income tax and
minority interest (6,161) 259 505 801 940
Income tax 2,003 (117) (208) (316) (332)
Minority interest 4 - 2 4 4
---------------------------------------------------------
Net income (loss) (4,154) 142 299 489 612
=========================================================
Earnings per share (in pesos) (4.22) 0.14 0.30 0.50 0.62
=========================================================
4. Fixed telephone service statistical data (in physical units)
===========================================================================================================================
September 30, 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------
Accumulated Quarter Accumulated Quarter Accumulated Quarter Accumulated Quarter Accumulated Quarter
-------------------------------------------------------------------------------------------------------
Installed lines 3,802,400 6 3,796,460 13,624 3,680,489 97,650 3,577,807 11,381 3,354,866 83,070
Lines replaced (a) 1,851,232 - 1,851,232 - 1,817,084 - 1,816,935 29,581 1,767,615 30,899
Lines in service 3,610,130 (22,129) 3,892,229 (21,913) 3,744,620 189,682 3,422,596 21,340 3,349,307 61,473
(b)
Customers lines 3,310,342 (20,921) 3,586,679 (28,937) 3,475,518 175,214 3,201,676 6,022 3,158,297 47,200
Public phones
installed 79,497 (182) 82,574 (158) 78,738 727 71,407 7,961 57,932 4,215
Percentage of
lines connected
to digital 100.0 - 100.0 - 100.0 - 100.0 - 100.0 -
exchanges
Lines in service
per 100 19.6 (0.1) 21.3 (0.2) 20.7 1.0 19.1 0.1 18.8 0.2
inhabitants (c)
Lines in service
per employee 326 (1) 379 1 382 13 369 8 331 19
Investment in
Fixed assets in
millions of 20,907 28 20,414 179 19,238 679 17,156 745 15,006 633
pesos (a)
===========================================================================================================================
(a) As from 11.8.90.
(b) Includes Direct Inward Dialing numbers that do not occupy lines installed
capacity.
(c) Corresponding to the northern region of Argentina.
XV
5. Consolidated ratios
===============================================================================
9.30.02 9.30.01 9.30.00 9.30.99 9.30.98
-------------------------------------------------------------------------------
Liquidity (1) 0.18 0.74 0.86 0.96 1.01
-------------------------------------------------------------------------------
Indebtedness (2) 11.59 1.82 2.01 1.78 1.46
===============================================================================
(1) Current assets/Current liabilities.
(2) Total liabilities/Shareholders' equity plus minority interest.
XVI
6. Outlook
The present fiscal year is developed in a social, political and economical
adverse context, characterized by a high level of uncertainty, where the
recession was transformed into a serious depression. Additionally, the economic
changes imposed by the National Government put the telecommunications industry
in general into a critical situation, affected by the "pesification" of the
tariffs at the rate of US$1 =$1, among other matters.
As a consequence of the current macroeconomic environment in Argentina, the
devaluation and volatility of the peso, the above mentioned "pesification" of
the tariffs and the timeframe defined by the Argentine Government for the
discussions related to the adjustment of the regulated tariffs, on April 2,
2002, the Company announced the suspension of principal payments on all Telecom
Group's financial debt obligations. Afterwards, on June 24, 2002 the Board of
Directors also announced the suspension of interest payments on all Telecom
Group's financial debt obligations. In this context, the Company has initiated
conversations with its main financial creditors in order to find a definitive
solution to its debt restructuring process.
In this uncertain and critical context, Telecom works hardly to reduce its cost
structure and adequate it to the new environment. The Company shall continue
operating within the current cost structure, which produce a substantial
reduction of the expenditures. In addition, the sooner resolution of the
tariff's structure renegotiation will be essential in order to revert the lower
profitability shown in the present fiscal year.
However, the Company maintains and reinforces its mission of being the leading
company in foreseeing solutions to high quality telecommunications for all
clients. Telecom works in the construction of the solid position as integrator,
by the unification of the offer channels, the convergence of the operation of
the clients and services and organization synergy.
Telecom is still committed to the country and it is capable of carrying out
with success the challenge to continue growing in an environment of great
complexity.
Christian Chauvin
Director
--------
XVII
Alicia Moreau de Justo 50 - Buenos Aires
FISCAL YEAR No. 14 beginning January 1, 2002 with comparative
information for the nine month period ended September 30, 2001
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CONSOLIDATED FINANCIAL STATEMENTS at September 30, 2002 and 2001 (Unaudited)
-------------------------------------------------------------------------------
Principal Company activity: Telecommunication services and the marketing of
equipment, infrastructure and goods of any type related or complimentary to
telecommunication, and the performance of works and the provision of all types
of services, including consultancy and security, related to telecommunications
and telecomputing.
Dates of registration with the Public Commerce Registry:
By-laws: July 13, 1990
Last amendment to by-laws: May 29, 2002
Expiration of Company charter: July 13, 2089
Information about Company control is in Note 7 a.
1
CAPITAL COMPOSITION
at September 30, 2002
Registered, authorized,
Capital stock issued and outstanding
------------- (Note 9)
Capital stock, $ 1 nominal value and one vote per share -----------------------
502,034,299
Class "A" 436,323,992
Class "B" 46,022,687
Class "C" -----------------------
984,380,978
Total =======================
2
CONSOLIDATED BALANCE SHEETS (Unaudited)
----------------------------------------------------------------------------------------
In millions of Argentine
constant pesos (see Note 4.1.d)
At September 30, 2002 2001
----------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and banks (Note 5.a) 105 60
Investments (Note 5.b) 875 599
Trade accounts receivable (Note 5.c) 639 1,646
Other receivables (Note 5.d) 642 440
Inventories (Note 5.e) 25 77
Other assets (Note 5.f) 14 15
--------------------------------
Total current assets 2,300 2,837
--------------------------------
NON-CURRENT ASSETS
Trade accounts receivable (Note 5.g) 2 4
Other receivables (Note 5.h) 249 113
Investments (Exhibit C) 95 113
Fixed assets (Exhibit A) 10,202 10,848
Intangible assets (Exhibit B) 949 1,064
--------------------------------
Total non-current assets 11,497 12,142
--------------------------------
TOTAL ASSETS 13,797 14,979
================================
LIABILITIES
CURRENT LIABILITIES
Accounts payable (Note 5.i) 472 1,033
Debt (Note 8) 11,879 2,404
Compensation and social benefits payable (Note 5.j) 62 120
Taxes payable (Note 5.k) 113 201
Other liabilities (Note 5.l) 24 51
Reserves (Exhibit E) 6 17
--------------------------------
Total current liabilities 12,556 3,826
--------------------------------
NON-CURRENT LIABILITIES
Accounts payable (Note 5.m) 3 24
Debt (Note 8) - 5,116
Compensation and social benefits payable (Note 5.n) 31 86
Taxes payable (Note 10) - 445
Other liabilities (Note 5.o) 13 29
Reserves (Exhibit E) 98 146
--------------------------------
Total non-current liabilities 145 5,846
--------------------------------
TOTAL LIABILITIES 12,701 9,672
Minority interest 8 27
SHAREHOLDERS' EQUITY (according to Statement of changes) 1,088 5,280
--------------------------------
TOTAL LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS' EQUITY 13,797 14,979
================================
The accompanying notes and Exhibits are an integral part of the consolidated
financial statements.
3
Valerio Cavallo Carlos Felices Christian Chauvin
Controller Chief Executive Officer Director
4
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
----------------------------------------------------------------------------------------------
In millions of Argentine constant
pesos, except per share amounts
(see Note 4.1.d)
Nine month periods ended September 30, 2002 2001
----------------------------------------------------------------------------------------------
Net sales (Notes 5.p and 18) 2,961 5,116
Cost of services provided (Exhibit F) (2,049) (2,553)
-------------------------------
Gross profit 912 2,563
Administrative expenses (Exhibit H) (231) (429)
Sales expenses (Exhibit H) (859) (1,356)
-------------------------------
Operating profit (loss) (178) 778
Equity losses from related companies (Note 5.q) (28) (18)
Financial and holding results (Note 5.r and 18) (5,840) (367)
Other expenses, net (Note 5.s) (115) (110)
Unusual losses (Note 5.t) - (24)
-------------------------------
Net income (loss) before income tax and minority interest (6,161) 259
Income tax (Note 10) 2,003 (117)
Minority interest 4 -
-------------------------------
Net income (loss) (4,154) 142
===============================
Net income (loss) per share (Note 4.1.i) (4.22) 0.14
===============================
The accompanying notes and Exhibits are an integral part of the consolidated
financial statements.
Valerio Cavallo Carlos Felices Christian Chauvin
Controller Chief Executive Officer Director
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine month periods ended September 30, 2002 and 2001 (Unaudited)
(In millions of Argentine constant pesos, except per share amounts -
see Note 4.1.d)
===========================================================================================================================
Shareholders' contributions Earnings
---------------------------------------------------------------------
Adjustment Reserve Unappropriated Total
Concept Capital to capital Legal for retained Shareholder's
stock stock Total reserve future earnings Total equity
dividends
---------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 984 3,068 4,052 301 394 862 1,557 5,609
Board of Directors' Resolution of
January 17, 2001:
- Cash dividends (0.40 per share) - - - - (394) - (394) (394)
As approved by the Shareholders'
Ordinary Meeting held on April 24, 2001:
- Legal reserve - - - (27) - 27 - -
- Cash dividends (0.08 per share) - - - - - (77) (77) (77)
Net income - - - - - 142 142 142
-----------------------------------------------------------------------------------
Balance at September 30, 2001 984 3,068 4,052 274 - 954 1,228 5,280
===========================================================================================================================
===========================================================================================================================
Balance at January 1, 2002 984 3,068 4,052 274 - 916 1,190 5,242
As approved by the Shareholders'
Ordinary Meeting held on April 24, 2002:
- Legal reserve - - - 5 - (5) - -
Net loss - - - - - (4,154) (4,154) (4,154)
-----------------------------------------------------------------------------------
6
Balance at September 30, 2002 984 3,068 4,052 279 - (3,243) (2,964) 1,088
===========================================================================================================================
The accompanying notes and Exhibits are an integral part of the consolidated
financial statements.
Valerio Cavallo Carlos Felices Christian Chauvin
Controller Chief Executive Officer Director
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
--------------------------------------------------------------------------------------------------------------------
In millions of Argentine
constant pesos (see Note
4.1.d)
Nine month periods ended September 30, 2002 2001
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net income (4,154) 142
Adjustments to reconcile net income to net cash provided by operating activities
Bad debts expense and allowances for other receivable 208 336
Depreciation of fixed assets 1,488 1,267
Amortization of intangible assets 116 106
Equity losses from related companies 28 18
Results from translation (72) -
Materials usage 43 53
Fixed and intangible assets disposals 49 4
Reserves 53 33
Interest and other financial expenses 5,215 438
Termination benefits 2 (11)
Minority interest (4) -
Income tax (2,003) (117)
Net decrease (increase) in assets 1,109 (49)
Net decrease in liabilities (842) (504)
-------------------------------
Total cash flows provided by operating activities 1,236 1,716
-------------------------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Fixed asset acquisitions (358) (841)
Intangible asset acquisitions (22) (241)
Other investments not considered as cash or cash equivalents 60 (53)
-------------------------------
Total cash flows used for investing activities (320) (1,135)
-------------------------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Debt proceeds 4 1,385
Repayment of debt (45) (933)
Payment of interest and related expenses (441) (657)
Dividends paid - (471)
-------------------------------
Total cash flows used for financing activities (482) (676)
-------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 434 (95)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 467 699
-------------------------------
CASH AND CASH EQUIVALENTS AT PERIOD END 901 604
===============================
The accompanying notes and Exhibits are an integral part of the consolidated
financial statements.
Notes 6 and 18 provides additional information regarding the Consolidated
statements of cash flows.
8
Valerio Cavallo Carlos Felices Christian Chauvin
Controller Chief Executive Officer Director
9
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (*)
For the nine month periods ended September 30, 2002 and 2001 (Unaudited)
(Amounts in millions of Argentine constant pesos, except per share amounts or
as otherwise indicated - see Note 4.1.d)
INDEX
Note Concept Page
---- ------- ----
Glossary of terms 7
1 Telecom Group operations 8
2 Regulatory framework 8
3 Political, economical and social crisis in Argentina.
Devaluation of the peso and the conversion into pesos of
the tariffs of public services: its impact on the economic
and financial situation of Telecom Group 11
4 Bases of presentation and summary of significant
accounting policies 18
5 Details of principal consolidated financial statement captions 24
6 Supplementary consolidated cash flow information 26
7 Transactions and balances with related companies and parties
and controlling company as defined under Law No. 19550 Section 33 28
8 Debt 30
9 Capital stock 33
10 Income tax: adoption of the deferral method 34
11 Capital leases 35
12 Commitments and contingencies 36
13 Renegotiation of contracts with the public administration 37
14 Suspension of payments of financial debt of the Telecom Group 37
15 Causes of mandatory reduction of capital stock 39
16 Consolidated information by business segment 39
17 Consolidated quarterly information 42
18 Relevant additional information 42
19 Unconsolidated information 44
20 Differences between Argentine and U.S.GAAP 45
21 Restrictions on unappropriated retained earnings 50
22 Events subsequent to September 30, 2002 50
10
(*) Conventionally, the definitions used in these consolidated financial
statements are included in the Glossary of terms.
11
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GLOSSARY OF TERMS
The following definitions are not intended as technical definitions, but to
assist the reader to understand certain terms as used in the Company's
financial statements.
-----------------------------------------------------------------------------------------------------------------------
The Company/Telecom Argentina/Telecom Telecom Argentina Stet-France Telecom S.A.
Telecom Group/Group Economic group formed by the Company and its controlled companies.
ENTel Empresa Nacional de Telecomunicaciones, which had provided public
telecommunication services in Argentina until its privatization.
SC The Argentine Secretary of Communications.
SBT Basic Telephone Services.
CNV The National Securities Commission.
Personal/Nucleo/Cable Insignia/Micro Correspond to the corporations controlled by Telecom or that were
Sistemas/Telecom Internet/Publicom/ controlled or jointly controlled by Telecom as defined under the
Latin American Nautilus/Multibrand/ Argentine Corporation Law or that are related parties.
Nahuelsat/Internacional/Telintar/Soluciones
Telecom Argentina USA/Agroconnection Corresponds to Telecom Argentina USA Inc. and to Agroconnection
Inc., a controlled and related companies of Telecom, respectively,
as defined under the Argentine Corporation Law.
CNC The Argentine National Communications Commission.
The Pliego List of Conditions approved by Decree No. 62/90, related to the
privatization of ENTel.
STM Mobile Telephone Service.
SRMC Mobile Cellular Radiocommunication Service.
AMBA Metropolitan Area Buenos Aires, the area of the Federal District
and greater Buenos Aires.
PCS Personal Communications Service. A wireless communications service
with systems that operate in a manner similar to cellular systems.
Nortel Nortel Inversora S.A. The controlling company of Telecom.
Telecom Italia/FCR/Operators Telecom Italia S.p.A. and France Cables et Radio S.A. (a
controlled company by France Telecom S.A.), jointly referred to as
the Operators.
Telefonica Telefonica de Argentina S.A.
SU Universal Service: the availability of SBT at an affordable price
to all persons within a country or specified area.
IPC Consumer Price Index.
Price Cap The application of annual reductions to the general level of
the Company's rates.
BCRA The Central Bank of the Argentine Republic.
SEC Securities and Exchange Commission of the USA.
CPCECABA Professional Board of Economic Sciences of Ciudad Autonoma de
Buenos Aires.
Constant pesos Currency unit of the financial statements, that is, constant
Argentine pesos as of period-end, according to FACPCE RT 6.
RT/FACPCE/Argentine GAAP Technical Resolutions issued by the Argentine Federation of
Professional Boards of Economic Sciences that is generally accepted
accounting principles of Argentina.
VPP Equity method.
IAS/IASC International Accounting Standards issued by the International
Accounting Standard Committee.
DGI The Argentine Tax Authority.
U.S.GAAP Generally Accepted Accounting Principles in USA.
BCBA/NYSE Buenos Aires and New York Stock Exchanges, respectively.
PPP Share Ownership Program.
EBITDA Earnings before Interest, Taxes, Depreciation and Amortization.
-----------------------------------------------------------------------------------------------------------------------
12
NOTE 1 - TELECOM GROUP OPERATIONS
Telecom Argentina was formed as a result of the privatization of ENTel, which
had provided public telecommunication services in Argentina.
The Company obtained a license to operate in a designated Northern Zone,
beginning operations on November 8, 1990, and provided public telecommunication
services on an exclusive basis for seven years subsequent to this date, having
the right to a three-year extension of this exclusivity period.
The Company filed the appropriate petition with the SC to extend the license
exclusivity period. Acknowledging the Company's filing, the Argentine
government established the standards for an orderly transition towards an
openly competitive telecommunications market by October 10, 1999, the date at
which the exclusivity period ended and the Company remained qualified to
provide SBT nationally.
Likewise, the Company merged various companies under its ownership to provide
the following services: international long distance in the Northern Zone,
national telex, value added services, data transmission and internet. In order
to adapt to the new market demands, the Company expanded its corporate purpose.
This expansion was opportunely approved by the SC and the CNV.
The Company achieves its business objective of providing services through
integration with its subsidiaries. Activities carried out by these entities at
September 30, 2002 are as follows:
---------------------------------------------------------------------------------------------------------------
Ownership by Control is
Telecom in through the Date of
Activity Subsidiary capital stock following incorporation
and votes
---------------------------------------------------------------------------------------------------------------
Cellular telephone Personal 99.99% 07.06.94
service Nucleo 67.50% Personal 02.03.98
Cable Insignia (a) 75.00% Personal 03.18.98
---------------------------------------------------------------------------------------------------------------
Data transmission Micro Sistemas (a) 99.99% 12.01.97
---------------------------------------------------------------------------------------------------------------
International
telephone service Telecom Argentina USA 100.00% 09.12.00
---------------------------------------------------------------------------------------------------------------
Directories edition Publicom 99.99% 06.11.92
---------------------------------------------------------------------------------------------------------------
(a) Companies not operative at September 30, 2002.
NOTE 2 - REGULATORY FRAMEWORK
a) Regulatory bodies and practices
The Company and its telecommunication subsidiaries are regulated by the CNC,
decentralized organism dependent on the SC, which is supervised by the Ministry
of Economy. The SC is responsible for developing of sector policies, approving
and administrating fundamental technical plans, assisting the Ministry of
Economy in rate matters affecting the Company and the development of
telecommunication regulations.
13
Some of the more pertinent regulations are:
- The Privatization Regulations, which regulate the process of
privatization, including the Pliego,
- The Transfer Agreement,
- Telecommunication licenses granted to the Company and to subsidiaries that
provide telecommunication services,
- Rate agreements and related decrees and regulations approved in Decree No.
764/2000.
14
b) Licenses held at September 30, 2002
o Company licenses
The Company holds licenses to provide the following services in Argentina for
an indefinite period:
o Fixed local telephone service,
o Public telephone service,
o Long distance, both national and international,
o Point to point connections, both national and international,
o Telex, both national and international,
o Value added services, data transmission, video conferencing,
broadcast signal transmission and community repeater.
o Internet access.
o Licenses of subsidiaries
Personal is licensed for an indefinite period, on a competitive market basis,
to provide STM in the northern region of Argentina, and data transmission and
value added services nationally. Additionally, Personal holds a license to
provide SRMC in the AMBA, a license without expiration date to provide PCS
service in Argentina and the register for the rendering of national and
international long distance telephone service.
Nucleo, controlled by Personal, is licensed to provide STM service over Band B
nationwide in Paraguay and PCS service in some areas of Paraguay.
c) Causes of revocation of licenses
o SBT license
Some of the causes that could revoke the Company's license are:
(i) the interruption of all or a substantial part of licensed service;
(ii) a change in corporate business purpose (without a previous authorization
of the appropriate regulatory bodies) or a change of corporate domicile
outside of Argentina;
(iii) any sale, encumbrance or transfer of assets that has the effect of
reducing services provided, without the prior approval of the appropriate
regulatory bodies.
(iv) reduction of Nortel (see Note 7) ownership of the Company's capital stock
to less than 51%, or the reduction to less than 51% of the collective
ownership by Nortel shareholders who existed at the date of possession,
without the prior approval of the appropriate regulatory bodies.
(v) the assignment or delegation of the commitments of the Operators without
the prior approval of the appropriate regulatory bodies.
15
If the Company's license is revoked, Nortel must transfer its shares in the
Company to the regulatory bodies, in trust, for subsequent sale at public
auction. Upon the sale of these shares, the regulatory bodies may renew the
Company's license under conditions to be determined.
o STM license
According to the STM Pliego, the following causes could revoke Personal's
license:
(i) repeated interruptions of the services described in the STM Pliego;
(ii) a transference of the license and/or the rights and obligations related to
that license, without previous authorization of the CNC;
(iii) taxes constituted over the license;
(iv) creditors meeting or bankruptcy of Personal;
(v) the liquidation or dissolution of Personal, without previous authorization
of the CNC.
16
d) Decree to deregulate telecommunication services
Decree No. 764/2000 approved, among other items, three new regulations whose
basic provisions are as follows:
o General licensing regulation
Establishes a single license valid throughout Argentina for the provision
of all telecommunication service, fixed or mobile, wired or wireless,
national or international, with or without proprietary infrastructure.
Service providers need not be exclusively devoted to the
telecommunications business. There are no requirements for minimum
investment or coverage. Radio broadcasting entities may apply for
telecommunication licenses. The resale of services is authorized, subject
to a license being received. Foreign companies are not restricted from
entry.
o National interconnection regulation
Establishes a decrease in interconnection index prices of approximately
50%. Increases the number of network components and functions on behalf of
the dominant provider (the Company in the northern zone and Telefonica in
the southern zone), and also details the interconnection obligation down
to the local level, the rate setting process and the separation of the
local loop. Introduces the interconnection method for numeric translation
services known as NTS for the internet, audiotext and collect calls and
the transfer of telephone numbers.
o SU Regulation
Fixes the rate of contribution to the SU Fund at 1% of telecommunication
services income. Establishes an Administrative Counsel to manage the SU
Fund and oversee the specific programs of the SU. Adopts a "play or pay"
mechanism to ensure compliance with SU Fund contributions, but establishes
a contribution exemption mechanism for SBT licensees, which considers both
net losses and the percentage market participation of other local
telephone service providers. The Regulatory Authority has neither
implemented the formation of the Fund nor the official programs to be
subsidized.
The SC repeated during this period the procedure of consulting over the
Administration of the SU Fund and over the regulation of the contribution
to the Fund. The Company replied once more that, beyond the specific
intention of the procedure of consulting, it is highly necessary to
compensate the social benefits programs that are currently being rendered,
retroactively from the end of the exclusivity period.
The Company has filed an administrative appeal to request that certain
provisions of regulations issued under Decree No. 764/2000 is revoked.
17
e) Regulation for the selection by dialing of the providers of long distance
services
On December 28, 2001, the former Ministry of Infrastructure and Housing issued
Resolution No. 613/01 which approved the rules for the selection by dialing of
the providers of long distance services.
The selection by dialing is a system that, applied to long distance services,
allows users to dial in each call the access code 17 (for national long
distance calls) or 18 (for international long distance calls) and the three
digits PQR for the provider's identification, in order to select the long
distance provider which he prefers.
The approved regulation set forth the obligation for the local and long
distance providers to have available their equipment in order to provide the
selection by dialing within an eighty-day period from its publication in the
official gazette, in those places where that method of pre-subscription is
offered. Such eighty-day period was extended for additional ninety days by
Resolution No. 33/2002 of the Ministry of Economy, in order to analyze the
numerous refutations received. Although this period matured in June 2002, the
regulation is still under analysis.
18
f) Rate structure
On November 28, 1991, the Company and Telefonica signed a rate agreement with
the Argentine government, which was ratified by Decree No. 2585/91 and became
effective on December 18, 1991. The principal features of the agreement, which
modified the Transfer Agreement, are as follows:
1) Rates, measured in basic units or "pulsos", are denominated in United
States dollars and will be adjusted twice annually (April and October) to
reflect changes in the overall IPC of the United States of America. Rate
adjustments do not require prior regulatory body approval. Since year 2000,
adjustments were not made as required by the SC.
2) Invoicing to customers will be in local currency, at exchange rates
existing at the close of the billing period.
Law No. 25561, of "Public Emergency law and reform of the exchange rate",
effective January 6, 2002, in Section 8 nullifies contract clauses providing
for adjustments to the value of payments with reference to United States
Dollars or other foreign currencies as well as any indexation clauses based on
price indexes or similar mechanism. As a consequence, from that date on, the
Company's tariffs were set in pesos at a US$1 to $1 exchange rate. Likewise,
Decree No. 293/2002 started a process of renegotiation of contracts with the
public Administration in which the rate structure is involved. Additional
information on the process of renegotiation of tariffs and the SBT contract is
given in Note 13.
o Rate rebalancing
On December 1, 1999, SC Resolution No. 4269/99 ratified the application of
methodology outlined by SC Resolution No. 1801/97. This verified the revenue
differences of SBT licensees at the end of a two year period, which resulted
from rate rebalancing in February 1997. Additionally, the impact of the rate
rebalancing was determined to be an increase in revenues of approximately $9.5
millions. The future refunding of this amount has not so far been ruled upon by
the Regulatory Bodies.
o Price Cap
On December 15, 1999, the "Rate Reduction Agreement between the Argentine
government and Telecommunications Companies" was signed, establishing as of
March 1, 2000, the following:
o the reduction of rates to commercial and government clients by 19.5% and,
o the reduction of rates for measured local service in urban areas and for
"0610" service by approximately 5.5%, for customers requesting various
discount plans.
On April 6, 2000, the Argentine government, Telefonica and
19
the Company signed an agreement which established, for the application of the
year 2000 Price Cap, a 6.75% reduction of revenues of licensees covered by the
rate regulation (6% as set by the SC and 0.75% as determined by licensees) in
the period between November 8, 2000 and November 7, 2001.
NOTE 3 - POLITICAL, ECONOMICAL AND SOCIAL CRISIS IN ARGENTINA. DEVALUATION OF
THE PESO AND THE CONVERSION INTO PESOS OF THE TARIFFS OF PUBLIC
SERVICES: ITS IMPACT ON THE ECONOMIC AND FINANCIAL SITUATION OF
TELECOM GROUP
The operations of the fiscal year ended December 31, 2001 were occurred in a
delicate political, economic and social context: the high level of fiscal
deficit, the increase of the country's public debt and the significant increase
of the country's risk rate and domestic interest rate. Additionally, the
unemployment rate and the fall of the gross domestic product reached its
maximum levels since the beginning of the Convertibility Regime (estimated
between 20% and - 4.7%, respectively).
20
In July 2001 the National Government, due to the impossibility of financing its
deficit with debt in the international markets, enforced a severe adjustment in
the public accounts with the implementation of a policy known as "deficit
cero". By that policy, the level of public expenses and the transfers of
resources to the provinces could not exceed the fiscal monthly proceeds. The
implementation of this policy suffered from serious political, economic and
social difficulties, which ended in the Congressional electoral defeat of the
official political party in October 2001.
The economic recession and the impossibility of implementing policies to
overcome it, produced a lack of confidence in the economic agents and in
particular in the depositors who started to gradually withdraw their deposits
from the Argentine financial system. The situation deteriorated, reaching its
highest level by the end of November. In order to avoid the failure of the
financial system the National Government on December 3, 2001 issued measures,
which increase the use of banking operations in the economy, restricted the
free disposition and circulation of cash ("corralito") and the transfer of
funds abroad. All working days from December 21, 2001 to January 11, 2002 were
declared non-working days for exchange transactions.
After a serious institutional crisis and social pressures, on December 21, 2001
the former president Dr. Fernando de la Rua presented his resignation to the
National Congress, which after complying with the formalities foreseen by the
National Constitution, appointed Dr. Rodriguez Saa as new president. The new
president -who had to call for a national election within ninety days -
ratified the enforcement of the Convertibility Law of the peso with the dollar
at a rate of $1 = US$1 and decided to restructure the national and provincial
public debt ("default of the public sector") by suspending the payment of
principal and interest of the internal and external debt.
By the end of December 2001, the seriousness of the crisis produced a new
change in the government and, on January 1, 2002, the National Congress
appointed to Dr. Eduardo Duhalde as the president in order to complete the
period which was left incomplete by Dr. Fernando de la Rua.
With the purpose of overcoming the crisis, the new administration of Dr.
Duhalde decided to abandon the Convertibility Law and to cause a significant
change in the economic rules in our country.
-------------------------------------------------------------------------------
o Principal measures adopted by the National Government
-------------------------------------------------------------------------------
On January 6, 2002, the National Congress issued Law No. 25561 of "Public
Emergency and Foreign Exchange System Reform Act" which produced a profound
change in the economic model and a modification of the Convertibility Law
applicable until that moment. Later on, Decrees Nos. 214/02, 905/02 and 992/02
of "Rearrangement of the
21
financial system" and Decree No. 260/02 of "Foreign Exchange System Reform Act"
were issued, which substantially modified some of the measures adopted by Law
No. 25561.
The following are some of the measures adopted by the National Government,
which are applicable at the date of issuance of these consolidated financial
statements:
1. Transactions due in foreign currency
On January 6, 2002 a new exchange regime was enforced by the creation of
an official and a free exchange market. The existence of both exchange
markets was provisory, as the government subsequently decided for the free
and single exchange market. In general terms, in the official market all
assets for export and import transactions and certain financial activities
should be carried out, subject to a previous restructuring that postpones
their original maturity dates. The rest of the transactions related to the
payment and transfer of foreign currency abroad should be carried out in
the free market. The initial exchange rate in the official market was
$1.40 to US$1.
The deposits in US dollars and other foreign currencies in financial
entities were converted into pesos at an exchange rate of $1.40 to US$1 or
its equivalent in other foreign currencies. The debts in US dollars or
other foreign currency within the Argentine financial system in existence
at January 6, 2002 were converted into pesos at an exchange rate of $1 to
US$1 or its equivalent in other foreign currency. These deposits and debts
will be adjusted as from February 3, 2002 by a Stabilization Reference
Coefficient ("CER") and interest rate with a cap stated by the BCRA.
The payable obligations denominated in US dollars or other foreign
currency that existed up to January 6, 2002 in Argentina, non related to
the financial system, of any origin or nature, were converted into pesos
at an exchange rate of $1 to US$1 or its equivalent in other foreign
currency. These balances will be adjusted as from February 3, 2002 by the
CER. If as a consequence of this provision, the resulting value of the
assets or the services is superior or inferior at the payment time, any of
the parties may request an equitable readjustment of the price. If an
agreement is not reached, the courts shall issue a decision over the case.
In order to keep a fair adjustment of the price, it must be considered the
market value of goods or services with imported components.
The payable obligations denominated in US dollars or other foreign
currency that existed up to January 6, 2002 in foreign countries must be
paid at the free market exchange rate.
Since February 3, 2002, many payable obligations denominated in US dollars
or other foreign currency were
22
converted into pesos at an exchange rate of $1 to US$1, including futures
contracts and options in foreign currency, agreed under the Argentine law
applicable before January 5, 2002, in which one of the parties was a
financial entity.
2. Contracts with the public administration
US dollars or foreign currency adjustments clauses and indexation clauses
based on foreign price indexes, as well as any other indexing mechanism
adopted under public contracts executed by the National Government,
including works and public services, have been suspended. The applicable
prices and tariffs to that date have been converted into pesos at the
exchange rate of $1 to US$1. Additional information is given in Note 13.
3. Deferred deduction of the exchange rate difference in income tax
Net losses originated in the devaluation of the peso over the assets and
liabilities in foreign currency in existence up to January 6, 2002, will
be deductible for income tax purpose only at a rate of 20% per year
starting in fiscal year 2002.
4. Restriction of transfers of funds abroad
According to Communication "A" 3688 of the BCRA the transfers to foreign
countries for financial loans, earnings and dividends executed until
February 8, 2003, inclusive, shall require a previous consent of the BCRA
regardless of the manner of payment.
Subsequently, Communication "A" 3709 of the BCRA excluded payment of
principal and interest services of financial obligations abroad from the
previous consent requirement, provided that:
o financial debt has been restructured and judicially approved
according to the provisions of the Law of Bankruptcy and
Reorganization Proceedings;
o the agreement attained with creditors pursuant to the majorities
provided by said law implies refinancing of matured and outstanding
debt at average terms pursuant to the agreement that shall not be
shorter than four years, providing a grace period not shorter than
two years for the payment of principal services;
o interest services are paid quarterly or at longer terms and the
annual interest rate agreed for the refinanced debt is not superior -
effectively on an annual basis - to the equivalent of six month LIBO
plus 3%;
o the above mentioned agreement provides for releases, discharges,
capitalization or other similar measures that consider a reduction of
the outstanding principal at the agreement execution date of, at
least, 40% of its nominal value or 60% of said value in the case of
capitalization;
23
o the Foreign and Exchange Office has issued an acknowledgement of
receipt of the information on the refinanced obligations.
24
-------------------------------------------------------------------------------
o Principal effects of the measures adopted by the National Government over
the business of the Telecom Group
-------------------------------------------------------------------------------
1. Renegotiation of the Company's tariffs
Section 8 of Law No. 25561, which converted into pesos at an exchange relation
of $1 to US$1 the tariffs of public services, shall have a significant impact
over the economic-financial equation of the Company and the Telecom Group.
The magnitude of the devaluation of the Argentine peso with respect to the US
dollar, that at the date of issuance of these consolidated financial statements
is approximately 270%, affects the "natural hedge" mentioned in Note 4.1.e.
This is so because the currency of the most significant revenues of the Company
will be the peso, while the currency in which the Company was financed from the
enactment of the Convertibility Law was the US dollar.
This alteration between the revenue currency and the sources of financing
currency has produced a double impact, that is:
a) an initial impact, represented by the net debts in foreign currency at
December 31, 2001 in foreign countries. At September 30, 2002 these debts
represented US$2,919 millions approximately, for the Telecom Group; and
b) an impact over the transactions during the renegotiation period of the
tariffs, in which the economic equation of the business of the Company is
being affected by the increase of the costs of certain imports of
materials necessary for operations.
The management of the Company, based on the framework stated in section 9 of
Law No. 25561 for the renegotiation of the SBT tariffs, has considered in its
cash flows projections, the modification of its tariffs in order to recompose
the economic-financial equation of Telecom Argentina. This should decrease the
impact above mentioned and allow the Company to continue with its ordinary
course of business, in a competitive and non-regulated market, with reasonable
profitability levels to remunerate its shareholders and the financial
creditors.
2. Devaluation of the peso
The devaluation of the Argentine peso had serious consequences on the economic
and financial situation of Telecom Group, as follows:
|X| a reduction of 80% of the Shareholders' equity of Telecom existing at the
beginning of the fiscal year during the nine month period ended September
30, 2002, considering the exchange relation at September 30, 2002 of US$1
= $3.74 and the basis for accounting described in point 4 below;
|X| a financial impact that derived in the declaration of the Board of
Directors of the suspension of principal and interest payments of the
financial debt (Note 14). The
25
market value of the Company's corporate bonds is approximately 30% over
their book value at September 30, 2002, while this ratio was approximately
88% at September 30, 2001;
|X| a decrease in Telecom's market capitalization of approximately 91% (US$161
and US$1,711 at September 30, 2002 and 2001, respectively) when compared
with the ADR evolution at September 30, 2002 and at September 30, 2001
(US$0.82 and US$8.69, respectively).
From the beginning of the operations - November 8, 1990 - until December 31,
2001, the Company had accumulated net income of $5,576 millions. The net loss
for devaluation recorded at September 30, 2002 reached the amount of $3,508
millions, absorbing 63% of the accumulated net income in the period 1990 -
2001.
The Shareholders' equity of Telecom at September 30, 2002, is $1,088 millions
and includes assets, net of depreciation, of $1,669 millions generated by
capitalized foreign currency exchange differences and higher capitalized
interests ($799 millions) and by deferred tax credits ($870 millions), whose
recoverability has been evaluated as described in point 4 below.
A summary of the effects of the peso devaluation in the consolidated statement
of income of the Telecom Group is given as follows:
26
Estimated
results Estimated Statement Statement Variation
without effect of of income of income 2002
devaluation devaluation at at vs.2001
effects (2) (**) 9.30.02 9.30.01 (1) - (4)
(1) (*) (3) = (1) (4)
+ (2)
--------------------------------------------------------------
Net sales 2,949 12 2,961 5,116 (2,167)
Operating costs (1,486) (49) (1,535) (2,965) 1,479
--------------------------------------------------------------
EBITDA 1,463 (37) 1,426 2,151 (688)
--------------------------------------------------------------
Amortization without capitalization (1,503) - (1,503) (1,373) (130)
Amortization of capitalized foreign currency - (101) (101) - -
exchange differences
--------------------------------------------------------------
Operating profit (loss) (40) (138) (178) 778 (818)
--------------------------------------------------------------
Equity losses from related companies (28) - (28) (18) (10)
Financial and holding results generated by assets (1,270) (267) (1,537) 106 (1,376)
Financial and holding results generated by
liabilities 665 (5,892) (5,227) (557) 1,222
Interests/Capitalized foreign currency exchange
differences 24 900 924 84 (60)
Other expenses, net (115) - (115) (110) (5)
Unusual losses - - - (24) 24
--------------------------------------------------------------
Net income (loss) before income tax and minority
interest (764) (5,397) (6,161) 259 (1,023)
--------------------------------------------------------------
Income tax by results without capitalization 114 - 114 (117) 231
Income tax by devaluation - 1,889 1,889 - -
Minority interest 4 - 4 - 4
--------------------------------------------------------------
Net income (loss) (646) (3,508) (4,154) 142 (788)
--------------------------------------------------------------
(*) Corresponds to the operations realized by the Company in local and foreign
currency (converted into pesos at the exchange rate of $1 = U$S1), restated in
constant pesos of September 30, 2002.
(**) Corresponds to the higher estimated sales and costs in foreign currency,
to the investments in foreign companies and to the foreign currency exchange
differences and other financial results generated by foreign currency assets
and liabilities, net of the effect of inflation and the tax effect, as a
consequence of the devaluation of the Argentine peso.
3. Impact of the crisis on the economic and financial situation of the Group
During the first half of the year, the Argentine economy gradually recovered
certain very basic macroeconomic balances. The exchange rate started to slowly
stabilize and, consequently, the rate of inflation decreased (retail inflation
was 18.9% in 2Q'02 and 7.1 in 3Q'02; wholesale inflation was 48.1% in 2Q'02 and
13.1% in 3Q'02).
Stability in the exchange and inflation rate reported in these months is mainly
due to a series of measures on the financial sector that evidence a still very
irregular behavior. In fact, there are controls for operations with foreign
currency abroad, a great part of bank deposits are still tied up, most of the
public debt services payments are in default and, at last, the BCRA has an
active involvement in the foreign currency market. Thus, economic authorities
have achieved a valuable short term macroeconomic stability controlling both
the potential offer and demand of foreign currency. The local financial system
will necessarily recover its ordinary functioning for which these restrictions
should gradually be done away with. This constitutes the main uncertainty
factor in the short and medium term.
In relation to the levels of activity, between the second and third quarters
the long recession reached a floor after which some production sectors started
reporting a certain recovery. This dynamism is presently limited to determined
sectors, especially producers of goods for exports (industrial and
agricultural) as well as import substitutes.
On the other hand, the services, commerce and construction sectors are still
seriously depressed given the weakness of
27
the domestic demand and the fall in consumers' actual income. Likewise, these
sectors are the ones that have and intense labor demand.
The balance of payments evolution clearly reflects the dramatic ongoing
macroeconomic adjustment process. The net capital inflow during the first
semester of 2001 (US$1,400 million) was replaced by a net outflow of US$8,600
million, mostly private funds to purchase foreign assets or cancel foreign
private debt. This capital outflow was financed through the loss of
international reserves and especially through a current account surplus pushed
by an imports contraction.
The importance of the reversion of these capital flows is the main explanation
of the economy's recession in the last year (-14.9% pursuant to first semester
data). The Peso's actual depreciation is the mechanism that enables this
process, which will only be reverted by the stabilization of capital inflows
and outflows. In order that capital flows recover their balance it is necessary
a deep institutional reconstruction that includes the restructuring of the
financial system and public debt.
28
This process will most surely be long and arduous and highly conditioned by
political factors. In the meantime, the actual exchange rate will remain
devaluated when compared to Convertibility values. This, in turn, brings about
negative consequences for the people's standard of living since the prices of
basic consumption goods grow.
The described crisis has negatively impacted in the Group's business during
fiscal year 2002, notwithstanding the efforts made by the management to reduce
the operative costs, the investments and the level of financial indebtedness.
The principal consequences for the Group were:
|X| reduction of 42.1% of the consolidated sales compared with fiscal year
2001, generated by a lower number of clients in fixed and cellular
telephone service, the prohibition of adjustment of the fixed telephone
service rates, the fall of the average consumption of the post and pre
payment cellular clients and the marketing decision to postpone the
directories edition by the significant reduction of the advertisement as a
consequence of the already mentioned economic situation.
|X| the 41.1% decrease in the charges for doubtful accounts receivable
compared with fiscal year 2001, principally in the fixed telephone
service. However, the allowance for doubtful accounts over net sales
represented approximately 6.6% for the nine month periods ended September
30, 2002 and 2001. In addition, in October 2001 the Company started to
receive from its clients provincial bonds and LECOP. The collection in
public bonds represented approximately 19% of the total collection of the
Company for the period January'02 - September'02.
|X| the costs of the Group were affected by the creation of new taxes (levied
on bank debits and credits) by $35 millions and the increase of the
employer's social security contributions by $10 millions.
|X| as a summary of all the foregoing, the operating profit was reduced by
$956 millions compared with the nine month period ended September 30,
2001, becoming a loss of $178 millions.
4. Effects on the significant accounting estimations at September 30, 2002
The above mentioned facts have been taken into account by the management of the
Company in order to perform the significant accounting estimations included in
the present consolidated financial statements. The future actual results may
differ from those estimations.
The management of the Company has considered the following accounting criteria
for the valuation of the assets and liabilities at September 30, 2002 and the
quantification of certain significant estimations:
[ ] Criteria for the recognition of the devaluation effects of the peso:
Argentine GAAP states that the financial
29
results must be recognized in the period in which they are generated,
except for the case in which they integrate the costs of the assets that,
by virtue of their nature, require an extensive period of undisposable
capital. Notwithstanding the foregoing, the magnitude of the devaluation
and the general impact in all sectors of the economy caused the issuance
of CPCECABA Resolution No. 3/02, adopted by CNV Resolution No. 398/02,
that requires the capitalization of foreign currency exchange differences
in some circumstances. The Company has applied the methodology stated in
this resolution to calculate the capitalization (Note 4.2.a).
[ ] Accounting for inflation of the financial statements: Decree No. 1269/02
of the National Government reestablished the mechanism of accounting for
inflation. The Company has applied the methodology stated in RT 6 and in
CPCECABA Resolution No. 3/02 to calculate the restatement for inflation in
the consolidated financial statements.
[ ] Valuation of the provincial public bonds: as part of the credit collection
from the public sector, the Company has received bonds to cancel the
credits for services rendered to the different provincial government. The
Company's intention has been to maintain them until their maturity date
for which, following the Argentine GAAP and having financial capacity to
retain them, the Company has valued them at their cost plus amortized
discount earned using the market rate of return. Notwithstanding the
foregoing, because of the economic crisis affecting the national and
provincial public sector, the fall of the price of such bonds has been
very significant and it is not expected to suffer any changes in the short
term. Consequently, despite the intention to maintain the provincial bonds
until their maturity date, the management of the Company decided to value
since December 31, 2001, the holding of these bonds at their estimated
sale price.
Likewise, those public bonds received as part of the collection of the
particular clients, have been valued as follows:
a) at its nominal value -without accruing any interests-: for the
holding of bonds that the Company applies for their value and in the
short term in order to cancel its tax and commercial liabilities. At
September 30, 2002 the Group holds $6 millions of bonds with these
characteristics, which were included in Cash and Banks.
b) at its estimated sale price: for the holding of bonds that cannot be
applied in the short term in order to cancel tax and commercial
liabilities. At September 30, 2002 the Group holds $25 millions of
bonds with these characteristics, which were included in Cash and
Banks. The results from holding these kind of bonds were a loss of
$70 millions, that are included in Financial
30
and holding results in the Consolidated statement of income.
[ ] Recoverability of trade accounts receivable with the public sector: the
Company has considered that the default of the public sector will only
produce a delay in the collection. In order to reduce the effect of this
delay, the Company has optimized the compensation actions of the
obligations -specially in tax matters- with the public sector. The
financial loss that this delay produces has been considered in the
Company's estimations.
[ ] Recoverability of trade accounts receivable with the private sector: the
serious economic situation existent in our country during the last year,
added to the restrictive banking measures over the access and circulation
of cash, set forth by the National Government at the beginning of this
fiscal year, have produced a significant increase in the payment delay.
Consequently, the Company has increased the charges for doubtful accounts
receivable, originating deviations with respect to the average payment
delays and uncollectable amounts of the last years. However, this trend
has been reduced in 2Q'02 and 3Q'02 as a consequence of the depuration of
the customer's base realized in the first quarter of fiscal year 2002.
[ ] Obligations originated in private contracts, non related to the Argentine
financial system: although Decree No. 214 stated the conversion into pesos
at an exchange rate of $1 to US$1, the involved parties are entitled to
request for a readjustment of the price based on equity principles and in
case an agreement is not reached, the courts shall issue a decision over
the case. The adequate valuation of this type of credits and debts in our
country shall depend on the renegotiation of each of these contracts. The
management of the Company fit its estimations according to the advances of
the negotiation process and the possible results.
[ ] Recoverability of fixed and intangible assets value: at September 30, 2002
the Telecom Group owns fixed and intangible assets (together "fixed
assets") for a total of $11,151 millions, equivalent to 81% of the total
consolidated assets. As indicated in Note 4.2.f and 4.2.g, these assets
are depreciated based on their useful life, estimated for each class of
fixed assets and the reasonability of the applicable rates must be
considered in the context of the de-regulation and the increase of the
competition which has characterized the Argentine telecommunication market
from October 1999.
The recoverable value of the fixed assets depends on the capacity to
generate the net cash flows income sufficient to absorb their depreciation
during the periods it is estimated these assets will be useful for the
Group.
31
The management of the Company periodically evaluates the recoverable value
of such fixed assets by the preparation of economic-financial projections
considering alternative scenarios based on macroeconomic, financial and
telecommunications market hypothesis, which are considered probable or
conservative.
32
Notwithstanding the foregoing, the devaluation of the Argentine peso and
the "pesificacion" of the public services tariffs and the contracts
between private parties executed before January 6, 2002, set forth a
significant change in the rules for all of the economic factors of the
country. At the date of issuance of these consolidated financial
statements the economic and political situation has not stabilized, which
generates different and probable scenarios. In particular, the results of
the renegotiations of the Company's tariffs under the terms foreseen by
Law No. 25561 and Decree No. 293/02 shall have a significant impact on the
economic-financial equation of Telecom.
Despite the already mentioned difficulties and considering section 9 of
mentioned law which states that the National Government shall consider the
profitability of the public services companies in order to assess the
recoverable value of the fixed assets, the management of the Company have
adopted for their projection of incoming cash flows the modification of
its tariffs which allows it to recompose the economic-financial equation
of the Company in a non-regulated and competitive market, with reasonable
levels of profitability to pay its shareholders and financial creditors.
Additionally, the economic - financial projections include the
satisfactory results of the Group's financial debt restructuring described
in Note 14.
Based upon the described methodology regarding the recoverable value of
the assets and the satisfactory processes of renegotiations of the
Company's tariffs and the financial debt of the Group, the management of
Telecom considers that fixed asset and intangible assets, taken as a
whole, are not valued in excess of recoverable value.
[ ] Recoverability of tax credits generated by the devaluation of the peso: in
accordance with Argentine GAAP related to income taxes accounted for by
the deferral method, the tax credit carryforwards against future incomes
must be recognized and requires a careful analysis of their
recoverability. The amount of the fiscal credit generated by the
devaluation at September 30, 2002 is approximately $2,962 millions and its
recoverability shall depend essentially on the results of the processes of
renegotiation of the Company's tariffs and restructuring of the financial
debt of the Telecom Group (Notes 13 and 14, respectively). Likewise, the
management of the Company has considered the capitalized foreign currency
exchange differences and the effect of the accounting for inflation of the
fixed assets as a temporary difference and has recorded a deferred tax
liability of $2,092 millions, so the net tax credit recorded at September
30, 2002 is approximately $870 millions.
33
As a consequence of the existence of taxable losses detailed above,
Telecom Group recorded a tax credit on minimum presumed income of $73
millions, which recoverability will be effective as also detailed above.
[ ] Classification of debt: as some creditors have exercised their rights on
accelerate the maturity of their debts as expressed in Note 14, the
management of the Company has decided to disclose all its debt as current
liabilities.
NOTE 4 - BASES OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------------
4.1. Bases of presentation
-------------------------------------------------------------------------------
The Company's consolidated financial statements have been prepared in
accordance with Argentine GAAP, established by the FACPCE, considering
practices of the CNV. The consolidated financial statements include certain
reclassifications and disclosures to conform more closely to the form and
content required by the SEC.
Where investments in subsidiaries are accounted for by the equity method,
Argentine GAAP requires companies with a controlling financial interest in
other companies to present both parent company and consolidated financial
statements as primary and supplementary information, respectively. Because of
the special purpose of these consolidated financial statements, the parent
company's summarized financial information is included in Note 19. This
approach has been adopted for the convenience of the reader of the financial
statements.
In accordance with procedures defined in FACPCE RT 4, financial statements at
September 30, 2002 and 2001 have been consolidated on a line by line basis for
majority-owned subsidiaries, as follows:
------------------------------------------------------------------------
September 30,
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
Publicom Publicom
Personal Personal
Micro Sistemas Micro Sistemas
Telecom Argentina USA Telecom Argentina USA
Telecom Internet (*)
------------------------------------------------------------------------
(*) Merged into the Company on November 30, 2001.
The preparation of these consolidated financial statements requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates. Additionally, certain reclassifications to the
comparative figures were included in order to reach a better comparison between
those figures and the ones for September 30, 2002.
These consolidated financial statements are unaudited but, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary to present the financial position and results of
operations on a basis consistent with the audited fiscal year financial
statements.
34
a) Financial statements used for consolidation
Financial statements at September 30, 2002 and 2001 and for the nine month
periods ended September 30, 2002 and 2001 have been used for the consolidation.
Consequently, these periods coincide with those of the Company.
b) Foreign currency translation
The Group follows FACPCE RT 13 to translate the foreign corporations financial
statements (Nucleo, Telecom Argentina USA, Latin American Nautilus and Intelsat
Ltd.) into Argentine pesos for purposes of consolidation.
According to this RT investments in foreign companies are translated into pesos
at the period-end exchange rate.
Net gains or losses resulting from the translation of those financial
statements are included in the Company's consolidated results of operations in
the period in which they arise.
c) Modification of Argentine GAAP
On December 8, 2000 the CPCECABA approved RT 16, 17, 18 and 19 of the FACPCE
which establish new accounting and disclosure principles. These new RT fit in
the project of harmonization of Argentine GAAP with IAS issued by the IASC.
These accounting principles have been approved by the CPCECABA with some
amendments including the postponement of its effective date. At the date of
issuance of these consolidated financial statements, the approval of the CNV is
pending with respect to these standards.
On April 5, 2002 the FACPCE approved RT 20, which modified RT 9, 17 and 18,
which establishes accounting and disclosure principles for derivatives
instruments and hedging activities. At the date of issuance of these
consolidated financial statements, RT 20 had not been adopted by any
professional council.
If these new standards were adopted by the CNV, they would take effect as from
the Telecom Group's fiscal year beginning January 1, 2003.
The management of the Company is assessing the impact of these new standards on
its financial condition and the results of operations. However, based on a
preliminary analysis, it is anticipated that the impact will not be material.
35
d) Accounting for inflation
The consolidated financial statements have been prepared in millions of
Argentine pesos of constant currency, recognizing the inflation effects. In
order to prepare the accounting for inflation, the mechanism established by RT
6 was used.
From September 1995, in accordance with the Argentine GAAP and CNV Resolution
No. 272/95 with provisions of National Government Decree No. 316/95, inflation
adjustments of financial statements had been discontinued.
However, the end of the stability context, which characterized the period in
which the Convertibility Law was applicable and had justified the
discontinuation of the accounting for inflation, forced the CPCECABA to issue
Resolution No. 3/02 which reestablished the mechanism of restatement of the
financial statement according to RT 6, amended by RT 19, using the Wholesale
Internal Prices Index, from January 1, 2002.
In July 2002, National Government Decree No. 1269/02 repealed Decree No.
316/95, reestablishing the accounting for inflation of the financial
statements. The CNV, through Resolution No. 415/02, adopted this procedure.
Consequently, present financial statements are restated in constant pesos since
January 1, 2002, fulfilling the accounting and legal standards.
Changes in price indices for the nine month periods ended September 30, 2002
and 2001 have been as follows:
-------------------------------------------------------------------------------
Wholesale Internal Consumer
Periods Prices Index Prices Index
-------------------------------------------------------------------------------
January'01 - September'01 (2.33%) (0.68%)
January'02 - September'02 121.20% 39.66%
-------------------------------------------------------------------------------
Implicit financing costs have been segregated in the disclosure of assets and
liabilities, where significant.
e) Financial instruments to hedge financial risk or reduce financing costs
During the period in which the Convertibility Law that fixed the exchange rate
between Argentine peso and the dollar at $ 1 = US$ 1 was in force, as part of
its risk management strategy, Telecom Group had decided to convert a
significant portion of its debt obligations denominated in foreign currencies
other than the U.S. dollar to the U.S. dollar in order to reach a "natural
hedge" with its income fixed in dollars as described in Note 2.f. Occasionally,
the Group had also swapped the interest on debt in order to balance its
financial payments between fixed and floating interest on debt.
However, due to the change in current macroeconomic conditions described in
Note 3, Telecom Group terminated all of its foreign currency and interest rate
swap agreements during the second quarter of the year 2002 (see Note 8).
36
The Company and its subsidiaries do not invest in speculative derivative
financial instruments.
f) Concentration of credit risk
The Company and some of its subsidiaries provide telecommunication services to
residential, commercial and governmental clients, granting credit in accordance
with regulations governing such services, generally without security. The fixed
customer lines (pre-paid lines were not included) were 3,310,342 and 3,586,679
at September 30, 2002 and 2001, respectively, and the cellular customer lines
(pre-paid lines were not included) were 509,910 and 783,981 at these dates,
respectively, and represents a diverse customer base.
The risk of collectibility varies among customers largely due to the individual
financial situation of the customer. The Group evaluates the risk of
uncollectable accounts and provides an allowance for doubtful accounts
receivable.
g) Cash and cash equivalents
In the Consolidated statements of cash flows, the Company includes as cash and
cash equivalents all highly liquid investments purchased with an original
maturity of three months or less.
37
h) Revenue recognition
Revenue is recognized as services are provided to customers. Revenue recognized
may result in receivables not yet billed to customers.
However, in the case of revenues for installation fees, the Company recognizes
them in the period in which the installation service is completed, jointly with
the related costs. Considering that the installation costs are higher than the
related revenues, it is considered that this criterion corresponds with
U.S.GAAP (see Note 20), because U.S.GAAP requires the deferral of the
installation fees and the related costs considering the estimated average
useful life of customers. However costs in excess of the related revenues
cannot be deferred.
For services paid for by the customers but not yet provided to them, the
Company records a liability.
Both services provided for but not billed and services paid for but not
rendered, are estimated using technical measurement information systems.
i) Net income (losses) and dividends per share
The Company calculates net income (losses) and dividends per share on the basis
of 984,380,978 common shares outstanding with a $1 nominal value and one vote
per share.
-------------------------------------------------------------------------------
4.2. Principal valuation criteria
-------------------------------------------------------------------------------
a) Balances in foreign currency: at exchange rates existing at each
period-end. Exhibit G shows details of foreign currency balances. Foreign
exchange gains or losses expressed in constant pesos, net of the effect of
the inflation, were credited to or charged against net income of each
period, as appropriate.
As the devaluation of the peso has been significant, the CPCECABA issued
Resolution No. 3/02, subsequently adopted by CNV Resolution No. 398, that
requires for the capitalization of foreign currency exchange differences
by debt, originated in the devaluation of the Argentine peso as from
January 6, 2002.
These resolutions establish that capitalized foreign currency exchange
differences are in advance for the accounting for inflation and are
included in the future restatement of the financial statements in constant
pesos. Meanwhile, the excess over these constant figures will be recorded
in the financial statements. The Company calculated the capitalization
following the methodology described in these resolutions. The financial
results capitalized are detailed in Note 5.r and Exhibit A.
Considering that in the second quarter of fiscal year 2002, the
restatement in constant pesos was reestablished and, considering the
volatility of the economical and operating variables that affect the
Group's business, the management of Telecom considers reasonable not to
38
capitalize foreign currency exchange differences on fixed assets from
April 1, 2002.
b) Cash and banks, trade accounts and other receivables and liabilities
(except for retirement benefits): at nominal value plus accrued interest
at each period-end, where applicable.
c) Investments:
o Short term investments: at nominal value plus accrued interest.
o Public bonds to be held to maturity: at cost plus amortized discount
earned using the market rate of return at date of purchase (see the
additional information in Note 3).
o Other public bonds: at market value less estimated sales costs.
o Equity investments:
- subsidiaries in the unconsolidated financial statements: at VPP
based upon subsidiaries financial statements and using comparable
accounting criteria as are used for the Company's consolidated
financial statements.
- related companies: at VPP based upon related companies financial
statements and using comparable accounting criteria as are used for
the Company's consolidated financial statements. In those companies
where their financial statements closing date is different than that
of the Company, financial statements with a closing date of no more
than three months are used for consolidation purposes.
The management of the Company is not aware of any event that modifies
its financial position or the results of its operations or
significantly affects the valuation of its investments in
subsidiaries or related companies and the corresponding results at
September 30, 2002, since the approval date of their financial
statements.
o Investment in Intelsat Ltd.: at acquisition cost or VPP, the least.
o Capital contributions: at nominal value restated as detailed in Note
4.1.d.
Investments in foreign companies were valued at exchange rates existing at
each period-end. Foreign exchange gains or losses are credited to or
charged against net income of each period, as appropriate within Financial
and holding results - Generated by assets - in the Consolidated statement
of income. Investments are detailed in Exhibit C and D.
d) Inventories: at each period-end replacement cost. Inventories have been
recorded at amounts, which do not exceed their net realizable value.
The sales prices of cellular handsets are influenced by a marketing
strategy to achieve higher market penetration by reducing customer access
costs, without losing sight of the overall cellular business
profitability. As a
39
result, on occasion, the management of the Company decides to sell
handsets at prices lower than replacement cost. As these sales price
policies are the result of decisions of the management of the Company,
promotional prices are not used to calculate the net realizable value of
such inventories.
e) Other assets:
o Deferred printing costs: at cost restated as detailed in Note 4.1.d,
which is expensed as directories are issued.
o Raw materials: at replacement cost.
f) Fixed assets:
o Transferred from ENTel: at the transfer price, restated as detailed
in Note 4.1.d less accumulated depreciation at period-end. At
September 30, 2002, title transfer of 4% of these assets remains to
be completed; the Company is in full possession of these assets and
they are integrated into the economic activity of the Company.
o Acquired subsequent to November 8, 1990: at acquisition cost,
restated as detailed in Note 4.1.d less accumulated depreciation.
The cost of fixed assets whose construction over a prolonged period of
time is financed includes capitalized interest on associated third party
financing. These costs are detailed in Note 5.r and Exhibit A.
Fixed asset acquisitions financed by leases are recorded at the estimated
price which would have been paid on a cash basis, with the amount of
unpaid installments and purchase price options, net of unearned interest,
recorded as a liability.
Fixed assets, whose operating condition warrants replacement earlier than
the end of the useful life, are depreciated based on the remaining useful
life assigned in accordance with the Company's investment plan.
Fixed assets are depreciated using the straight-line method over the
estimated useful lives of each asset class.
Fixed assets, net of accumulated depreciation, taken as a whole, are not
valued in excess of recoverable value (see the additional information in
Note 3). Fixed assets activity is detailed in Exhibit A.
g) Intangible assets: at acquisition cost, restated as detailed in Note 4.1.d
less accumulated amortization at period-end.
The cost of intangible assets developed over a prolonged period of time
includes capitalized interest on associated third party financing. These
costs are detailed in Note 5.r.
Intangible assets are depreciated using the straight-line method over the
estimated useful lives of each asset class, as follows:
40
System development costs 60 months
Debt issue costs Initial debt term
PCS licenses 180 months
Usage rights 180 months
Exclusivity rights Contract term
Websites 24 months
Trademarks and patents 180 months
Goodwill on investments acquired 60 months
Intangible assets activity is detailed in Exhibit B.
h) Dismissal indemnities and termination payments are charged to Other
expenses when a termination decision is made.
i) Debt: corporate bonds, together with any premium or discount at issuance,
are valued at nominal value plus accrued interest at period-end. Premiums
or discounts are amortized on a straight-line basis over the debt period.
Legal fees, commissions and other bond issuance costs corresponding to
debt issuance are capitalized as Intangible assets and amortized over the
term of the corresponding debt. Amortization is classified within
Financial and holding results in the Consolidated statement of income.
The costs of foreign currency and interest rate swap contracts were
amortized on a straight-line basis over the term of the corresponding debt
and classified within Interest on debt and Foreign currency exchange
losses within Financial and holding results in the Consolidated statement
of income. Results from swaps cancellation described in Note 8 are
included within Financial and holding results in the Consolidated
statement of income.
j) Taxes payable:
o Income Tax: income tax is calculated on estimated taxable income at
the statutory tax rate in effect at period end (35%). The resulting
amount was charged to Income tax in the Consolidated statement of
income. It also includes the effects of the adoption of the deferral
method (see Note 10).
o Tax on minimum presumed income: the Telecom Group has estimated tax
loss carryforward by the end of fiscal year 2002. Consequently, for
the nine month period ended September 30, 2002, a credit for tax on
minimum presumed income was recorded and has been included in Other
receivables, because it was estimated that the payments for this tax
will be recoverable within the legal term of prescription.
o Tax on corporate indebtedness: Argentina imposed a tax on certain
types of interest and other financial costs paid by the Company for
loans obtained from domestic financial institutions and for the
issuance of corporate bonds.
o Turnover Tax: for the nine months periods ended September 30, 2002
and 2001, turnover taxes as an overall percent of applicable revenues
were 3.33% and 3.42%, respectively.
41
k) Other liabilities:
o Retirement benefits: represent obligations for accrued and unpaid
benefits stipulated in collective bargaining agreements. Accruals are
actuarially determined based upon existing information at each
period-end.
l) Reserves:
o Asset reserves: have been provided for doubtful accounts receivable,
other receivables and for inventories whose realization is not
assured based upon period-end analyses. Additional information is
given in Note 3.
o Liability reserves: have been provided for contingencies based upon
management estimates and the opinion of legal counsel.
Activity in these reserves is detailed in Exhibit E.
42
m) Shareholders' equity accounts: they are restated as described in Note
4.1.d, except Capital stock, at nominal value. The restatement is included
in Adjustment to capital stock.
n) Statement of income accounts: they are restated as follows:
o charges by consumption and non monetary assets depreciation (fixed
and intangible assets) were recorded considering the restated
amounts;
o financial results in constant pesos are disclosed net of the effect
of the inflation generated by the corresponding assets and
liabilities;
o other results at cost restated as described in Note 4.1.d.
o) Unusual losses: represent losses that perform only one of the necessary
requirements to be classified as extraordinary (atypical and exceptional
issue) and that must be shown as a separate caption in the ordinary
results.
They corresponded to a part of the "Tax on credits and debits in bank
accounts and other operations" that impacts directly in the costs of the
Group, because, until February 18, 2002, only one portion of this tax
could be deducted from the determinative income tax and VAT. The new tax
is in force since April 3, 2001 to December 31, 2002. Its collection will
be affected to the creation of a Fund of Public Emergency and the
Government had expressed its intention to consider the total tax as
payment in advance of VAT and income tax at the moment that it would cease
the economic emergency.
As a consequence of the serious economic crisis and the importance of this
tax measured in terms of tax collection, the management of the Company
estimates that this tax will be in force after December 31, 2002. So that,
in the second quarter of fiscal year 2002, $35 millions of unusual losses
have been reclassified to Operating costs.
NOTE 5 - DETAILS OF PRINCIPAL CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
The composition of principal financial statement captions is as follows:
-------------------------------------------------------------------------------
Consolidated balance sheets at September 30, 2002 2001
-------------------------------------------------------------------------------
CURRENT ASSETS
a) Cash and banks
Cash 4 8
Banks 70 52
National and provincial Public bonds (*) 31 -
-----------------------
(*) With settlement power in their respective
jurisdictions and used by the Company to pay
taxes there. 105 60
=======================
b) Investments
Short term investments (Exhibit D) 827 544
Public bonds (Exhibit C) 48 55
-----------------------
875 599
=======================
43
c) Trade accounts receivable
Basic national and international telephone
service, data transmission and Internet 549 1,294
Cellular telephone service in the Argentine
Republic 270 565
Cellular telephone service abroad 92 71
Directories edition 32 133
-----------------------
Subtotal of trade accounts receivable 943 2,063
Allowance for doubtful accounts receivable
(Exhibit E) (304) (417)
-----------------------
639 1,646
=======================
d) Other receivables
Deferred tax assets (Note 10) 565 102
Tax credits 18 42
Prepaid expenses 14 46
Accounts receivable from employees 7 24
Accounts receivable from unions 1 2
Swap agreements collateral - 148
Various 37 76
-----------------------
642 440
=======================
e) Inventories
Cellular handsets and equipment (Exhibit F) 27 88
Allowance for obsolescence of inventories
(Exhibit E) (2) (11)
-----------------------
25 77
=======================
44
--------------------------------------------------------------------------------
Consolidated balance sheets at September 30, 2002 2001
--------------------------------------------------------------------------------
f) Other assets
Deferred printing costs 9 11
Raw materials 5 4
-----------------------
14 15
========================
NON CURRENT ASSETS
g) Trade accounts receivable
Basic national telephone service 1 4
Directories edition 1 -
-----------------------
2 4
=======================
h) Other receivables
Deferred tax assets (Note 10) 136 -
Credit on tax on minimum presumed income 73 49
Other tax credits 2 14
Certificates of tax credit 29 24
Prepaid expenses 8 13
Receivables from sale of Sky Argentina S.C.A. 5 11
Various 1 2
-----------------------
Subtotal 254 113
Allowance for other receivables (5) -
-----------------------
249 113
=======================
CURRENT LIABILITIES
i) Accounts payable
Vendors 424 824
Advances from customers (Note 4.1.h) 18 19
Capital leases (Note 11) 17 77
Companies Law No. 19550 Sect. 33 and
related parties (Note 7.d) 13 113
-----------------------
472 1,033
=======================
j) Compensation and social benefits payable
Vacation, awards and social benefits 44 91
Termination benefits 14 20
Compensation fund 4 9
-----------------------
62 120
=======================
k) Taxes payable
Tax on minimum presumed income 37 1
Income tax (net of payments) - 23
VAT (net of payments) 32 75
Turnover tax 24 49
Tax on corporate indebtedness - 4
Other taxes 20 49
-----------------------
113 201
=======================
l) Other liabilities
Contributions to social programs for
Internet access and others 13 29
Repair funds 6 15
Various 5 7
-----------------------
24 51
=======================
NON CURRENT LIABILITIES
m) Accounts payable
Vendors - 2
Capital leases (Note 11) 3 22
-----------------------
3 24
=======================
45
n) Compensation and social benefits payable
Termination benefits 20 55
Compensation fund 11 31
-----------------------
31 86
=======================
o) Other liabilities
Retirement benefits 8 15
Various 5 14
-----------------------
13 29
=======================
46
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME Income (expense)
------------------------
Periods ended September 30, 2002 2001
--------------------------------------------------------------------------------
p) Net sales
National and international telephone service 1,917 3,328
Cellular telephone service 821 1,405
Data transmission and Internet 319 478
Directories edition 6 86
----------------------
Gross sales 3,063 5,297
Turnover tax (102) (181)
-----------------------
2,961 5,116
=======================
q) Equity losses from related companies
Amortization of goodwill of Soluciones,
Micro Sistemas and Cable Insignia (10) (13)
Multibrand/ Latin American Nautilus/
Agroconnection/ Nahuelsat (18) (5)
-----------------------
(28) (18)
=======================
r) Financial and holding results
Generated by assets
Interest earned on short term investments (23) 33
Interest earned on trade accounts receivable 58 69
Foreign currency exchange gains 634 4
Results from translation 72 -
Results on holding of national and
provincial public bonds by collection (70) -
Losses on exposure to inflation (2,225) -
Other financial results 14 -
-----------------------
Total generated by assets (1,540) 106
-----------------------
Generated by liabilities
Interest on debt (*) (705) (511)
Capitalized interest and foreign currency
exchange differences by debt on work in 129 84
progress and intangible assets
Capitalized foreign currency exchange
differences by debt 795 -
Results from swaps cancellation (286) -
Tax on corporate indebtedness (4) (13)
Foreign currency exchange losses (5,131) (14)
Gains on exposure to inflation 956 -
Other financial results (54) (19)
-----------------------
Total generated by liabilities (4,300) (473)
-----------------------
Total financial and holding results (5,840) (367)
=======================
(*) Includes (7) and (7), respectively, corresponding to the amortization of
debt issue costs.
s) Other expenses, net
Dismissal indemnities and termination benefits (27) (64)
Reserves for contingencies (53) (33)
Disposal of inventories leased without charge (22) -
Net income from sale of fixed assets and
other income (expense), net (13) (13)
-----------------------
(115) (110)
=======================
t) Unusual losses
Tax on bank debits and credits - (24)
=======================
47
NOTE 6 - SUPPLEMENTARY CONSOLIDATED CASH FLOW INFORMATION
The Group uses the indirect method of reconciling net income to cash flows
provided by operating activities.
Funds in excess of daily cash needs are invested in short term investments with
maturities of less than three months and, as a result, such investments are not
presented in the Consolidated statements of cash flows.
The composition of cash and cash equivalents is as follows:
----------------------------------------------------- ---------------------------------------------------
At September 30, 2002 2001 At December 31, 2001 2000
----------------------------------------------------- ---------------------------------------------------
Cash and banks 74 60 Cash and banks 129 53
Short term investments 827 544 Short term investments 338 646
----------------- -----------------
Total of cash and cash equivalents 901 604 Total of cash and cash equivalents 467 699
================= ===================================================
Income tax payments are as follows:
-----------------------------------------------------------------------------------------------------------
Periods ended September 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
Income tax paid - 234
=================
48
Changes in assets and liabilities by financial statements caption are as
follows:
--------------------------------------------------------------------------------
Periods ended September 30, 2002 2001
--------------------------------------------------------------------------------
Decrease (increase) in assets
Investments not considered as cash or cash equivalents 58 -
Trade accounts receivable 8 (80)
Other receivables 1,077 (55)
Inventories (33) 84
Other assets (1) 2
-----------------------
1,109 (49)
=======================
Increase (decrease) in liabilities
Accounts payable (392) (537)
Compensation and social benefits payable (128) (11)
Taxes payable (181) 100
Other liabilities (46) (38)
Reserves (95) (18)
-----------------------
(842) (504)
=======================
o Principal non-cash transactions
The principal non-cash transactions, which are not
reflected in the Consolidated statements of cash
flows, are as follows:
Fixed asset acquisitions financed by debt and
accounts payable 11 227
Fixed asset acquisitions financed by capital leases 1 4
Intangible asset acquisitions financed by
accounts payable - 2
Capitalized interest on work in progress and
intangible assets 66 84
Inventories leased without charge 11 27
Transactions with national and provincial
public bonds
Trade accounts receivable collections 672 -
Income tax payments (40) -
Other taxes payments (296) -
Accounts payable payments (178) -
-----------------------
247 344
=======================
o Principal investing activities
Fixed asset acquisitions include the following:
Debt repayment on fixed assets acquired in prior periods (224) (418)
=======================
Intangible asset acquisitions include the following:
System development costs (18) (42)
Usage rights (1) -
Exclusivity rights (3) (13)
PCS license - (186)
-----------------------
(22) (241)
=======================
Funds used and generated by Investments not
considered as cash or cash equivalents are as follows:
Public bonds 59 (55)
Proceeds from sales of fixed assets 1 2
-----------------------
60 (53)
=======================
o Principal financing activities
The principal components of financing activities are:
Corporate bonds - 361
Bank loans 4 1,024
-----------------------
Debt proceeds 4 1,385
=======================
49
Corporate bonds - (221)
Bank loans (45) (712)
------------------------
Repayment of debt (45) (933)
========================
Corporate bonds (192) (221)
Swap contracts collateral (68) (148)
Bank loans (80) (111)
Fixed asset and inventory acquisitions (99) (155)
Tax on corporate indebtedness (2) (20)
Debt issue cost (intangible assets) - (2)
------------------------
Payment of interest and related expenses (441) (657)
========================
50
NOTE 7 - TRANSACTIONS AND BALANCES WITH RELATED COMPANIES AND PARTIES AND
CONTROLLING COMPANY AS DEFINED UNDER LAW No. 19550 SECTION 33
a) Controlling company
Nortel, headquartered at Alicia Moreau de Justo 50, 11th floor, Ciudad Autonoma
de Buenos Aires, holds 51% of the Company's Class "A" shares and 8.47% of the
Company's Class "B" shares (representing 3.74168% of the Company's shares),
which places it in control of the Company under Law No. 19550, Section 33.
Ownership of Nortel is equally divided between the Operators.
b) Related parties
Related parties are those legal entities or individuals other than the
controlling company or related companies defined under Law No. 19550, Section
33, and which are related to the Operators.
c) Management Contract
In accordance with point 3.1.3 of the Pliego, the Company entered into a
management agreement with the Operators, approved by Decree No. 2332/90 as
appendix of the Transfer Agreement. The Management Contract ("the Contract")
would be automatically renewed as long as the Company continued to provide
services during the exclusivity period.
Under this contract, the Operators committed to provide the Company with their
experience, technology and operating skills in the area of public
telecommunications services including, between other provisions, the selection
and hiring of qualified management personnel.
In August 1999, the Board of Directors ratified a new five year Management
Contract (effective since the expiration date of the previous contract) with
terms and conditions substantially equivalent to the original contract,
renewable for a subsequent five year period upon agreement by the parties.
In October 2001, considering the Argentine economic recession, the Operators
granted the Company a temporary decrease of the fee set forth in Point 2.7 of
the Contract ("Management Fee"), from 3% to 1.25%, without affecting neither
the services to be provided by the Operators nor the clauses of the Contract.
This decrease was effective during the period extending from October 1, 2001 to
March 31, 2002.
Considering the seriousness and extension of the economical crisis of
Argentina, the Board of Directors asked the Operators to suspend the accrual
and payment of the Management Fee. This suspension will be effective from April
1, 2002 through the effectiveness of the public emergency set forth by Law No.
25561.
The reply of the Operators was received on May 31, 2002, expressing their will
of not being unaware of the Company's situation and their conformity to the
provisional
51
suspension - except for the provisions of the section referred to
as "Management and Know - how" on highly qualified personnel to assist in the
management - of the rights and obligations of the parties provided for in such
section, which includes the suspension of the accrual and collection of the
Management Fee from April 1, 2002 to December 31, 2002. The latter
notwithstanding the special services required by the Company pursuant to what
is specifically provided in the Contract.
France Cables et Radio S.A. and Telecom Italia SpA. (as the Operators -
pursuant to Decree No 62/90, as amended and supplemented -) state that, given
this complex and extremely serious situation, confirm their intention to
provide Telecom with all the reasonable support and cooperation in order to
help the Company overcome its present difficulties, exclusively recovering
travelling and hotel expenses related to their involvement in these matters.
52
d) Balances with Law No. 19550, Sect. 33 related companies and parties:
-------------------------------------------------------------------------------
Consolidated balance sheets at September 30, 2002 2001
-------------------------------------------------------------------------------
NON CURRENT ASSETS
Investments
Multibrand (Exhibit C) 1 2
-----------------------
Total with related companies 1 2
=======================
CURRENT LIABILITIES
Accounts payable
Multibrand 1 4
Latin American Nautilus 1 -
Nahuelsat 2 -
-----------------------
Total with related companies 4 4
-----------------------
Telecom Italia S.p.A. Argentina branch - 35
Telesoft S.p.A. Argentina branch - 13
Saritel S.A. - 4
Pirelli Cables S.A. - 2
Teco Soft Argentina S.A. 3 -
France Cables et Radio Argentina branch 5 42
Tel 3 S.A. - 4
Sofrecom Argentina S.A. 1 9
-----------------------
Total with related parties 9 109
-----------------------
Total 13 113
=======================
e) Transactions with Law No. 19550, Sect. 33 related companies and parties:
Cost of
o Services received services provided
----------------- ------------------------
Multibrand (2) (4)
Latin American Nautilus (10) (2)
Nahuelsat (5) (9)
Intelsat Ltd. (5) (6)
-----------------------
Subtotal related companies (22) (21)
-----------------------
Telecom Italia S.p.A. Argentina branch (12) (104)
Telesoft S.p.A. Argentina branch (9) (31)
Teco Soft Argentina S.A. (10) -
Olivetti Argentina S.A. (2) (4)
France Cables et Radio Argentina branch (14) (108)
Sofrecom Argentina S.A. (8) (15)
Tel 3 S.A. (1) (4)
-----------------------
Subtotal related parties (56) (266)
-----------------------
Total cost of services provided (78) (287)
=======================
Fixed assets and
o Goods purchased intangible assets
--------------- ------------------------
Telesoft S.p.A. Argentina branch 6 44
Teco Soft Argentina S.A. 3 -
53
Pirelli Cables S.A. 1 -
Sofrecom Argentina S.A. 12 24
Tel3 S.A. 5 15
Olivetti Argentina S.A. - 4
Saritel S.A. - 4
-----------------------
Total goods purchased to related parties 27 91
=======================
f) Information on companies of the Telecom Group
o Merger with Internacional
Telintar, a company dissolved and then merged with Internacional, that
was then merged into the Company as from October 1, 1999, presented to
the DGI in April 1995 a claim for the refund of income and asset taxes of
approximately $6 millions. As the DGI has yet to rule on the company's
claim, the corresponding requested refund has not been recorded.
o Merger with Telecom Internet
On November 6, 2001, the Boards of Directors of the Company and Telecom
Internet entered into a Preliminary Agreement by which Telecom Internet
(which would be dissolved without liquidation) will be merged into the
Company as from December 1, 2001, subject to the granting of the
authorization of the Regulatory Authorities and the approval of the
Shareholders' Meetings of both companies.
On November 28, 2001, the SC authorized Telecom Internet to transfer its
register for rendering of Internet Access Service in favor of the
Company. Consequently, according to the Preliminary Agreement mentioned
above, the activities of both companies were integrated as from December
1, 2001.
The Board of Directors and the Shareholders' Meetings of both companies
approved the merger that was registered at the Justice Department's
Inspector General ("IGJ") on July 25, 2002.
o Sale of shares of Agroconnection
On April 24, 2002, the Board of Directors approved the transfer of its
interest in Agroconnection (21,428 Class "A" preferred shares) to the
remaining shareholders of that company. The transfer price was agreed in
$150,000, of which $1,000 were paid in cash and the balance will be
cancelled by way of a credit to advertise in the Agro Connection S.A.
site. This operation was fulfilled on June 28, 2002.
o Sale of interest in Intelsat Ltd.
On June 6, 2002, the Board of Directors approved the transfer of its
interest in Intelsat Ltd. in the Initial Public Offering ("IPO") of its
ordinary shares that this company intends to conduct at the NYSE and that
must be completed by no later than December 31, 2002. It
54
should only be transferred 200,432 ordinary shares of the whole interest
of the Company (260,432 ordinary shares)
NOTE 8 - DEBT
Debt consists of the following:
--------------------------------------------------------------------------------
Consolidated balance sheets at September 30, 2002 2001
--------------------------------------------------------------------------------
Current
Corporate bonds 5,964 701
Bank loans and others 2,547 1,017
Fixed asset acquisitions 2,789 533
Inventory acquisitions 579 133
-----------------------
11,879 2,404
-----------------------
Non-current (*)
Corporate bonds - 2,851
Bank loans and others - 754
Fixed asset acquisitions - 1,254
Inventory acquisitions - 257
-----------------------
- 5,116
-----------------------
Total debt 11,879 7,520
=======================
(*) The increase in current debt is originated in the reclassification of 5,689
as a result of the event of default described in Note 14.
-----------------------------------------------------------------------------------------------------------------
Corporate bonds of the Company
-----------------------------------------------------------------------------------------------------------------
The Company issued various debt instruments under Corporate Bonds Law No. 23576. The following is a summary
of the major characteristics of each outstanding issue:
-----------------------------------------------------------------------------------------------------------------
Annual Book value Market value
Global Date of Nominal value Term, Maturity interest at September at September
program issue (in million) in years date rate as a % 30, 2002 (a) 30, 2002
-----------------------------------------------------------------------------------------------------------------
B
-----------------------------------------------------------------------------------------------------------------
Series C 11.15.95 US$ 200 7 11.15.02 12.0000 472 (e) 142
Series E 5.5.97 US$ 100 8 5.5.05 (b) 5.2450 374 112
Series F 5.30.97 (d) Euro 207 10 5.30.07 8.8750 763 267
Series H 3.18.98 (d) Euro 207 10 3.18.08 (c)4.97938 763 267
Series I 4.8.99 Euro 200 5 4.8.04 8.3750 738 259
Series K 7.1.99 Euro 250 3 7.1.02 7.2500 923 207
--------------------------------------------------------------------------------------------------------------
55
D
--------------------------------------------------------------------------------------------------------------
Series 1 4.7.00 Euro 250 3 4.7.03 7.6250 923 330
Series 2 7.2.01 Euro 190 3 7.2.04 9.5000 701 147
--------------------------------------------------------------------------------------------------------------
Itl. = Italian Lira Capital plus premiums 5,657 1,724
=========
Accrued payable
interest 307
---------
5,964
=========
(a) Tax on corporate indebtedness is not included.
(b) The series was issued at LIBOR plus 3.125%.
(c) 6 month LIBOR for Itl plus 1.5%.
(d) They were originally issued in Itl.
(e) Last available quotation.
56
o Use of financing proceeds
Series C was applied to restructure liabilities and working capital in
Argentina. As a result of the repurchase of obligations in 1997 (US$72
millions) and retirement of obligations on November 15, 1999 (US$1,873,000),
the principal balance outstanding is US$126,127,000.
Series E was applied to restructure liabilities.
Series F, H, I, K, 1 & 2 were used to restructure liabilities and for working
capital in Argentina.
o Global debt programs
[ ] Global program B
The period for debt instruments permitted to be issued under this program ended
August 10, 1999. At September 30, 2002 the Company has six series of bonds
outstanding under this program.
[ ] Global programs C and D
The Company has two programs for the issue and re-issue of corporate bonds not
convertible into shares: one for short-term debt up to US$200 million ("C") and
one for medium term debt up to US$1,500 million ("D"). At September 30, 2002
the Company has two series of bonds outstanding under program D.
o Characteristics of corporate bonds
Shareholders granted the Board of Directors the authority to set the terms of
debt instruments within each program: amount, interest rate, series price and
currency denomination.
Debt instruments corresponding to corporate bonds and indebtedness programs
have been assessed by two businesses which rate risk within Argentina.
Terms and conditions of corporate bonds establish certain commitments by the
Company, in case that:
a) The Company permits certain liens on assets or revenues in order to offer
security for certain debt obligations without offering equal coverage to
corporate bonds outstanding.
b) The Company and its subsidiaries may merge or consolidate with any
outside party, selling or otherwise disposing of assets which may be
considered integral to the provision of telecommunication services.
57
---------------------------------------------------------------------------------------------------------------------
Banks loans
---------------------------------------------------------------------------------------------------------------------
o Syndicated loans to Telecom
---------------------------------------------------------------------------------------------------------------------
Net book
Lead Nominal value Term, Maturity Annual interest Debt value at
bank (in million) in years date rate as a % amortization 9.30.02 (a)
---------------------------------------------------------------------------------------------------------------------
Banc of America US$ 135 3 9.28.03 LIBOR plus 1.625% (year 1) At maturity. 518
LIBOR plus 1.875% (year 2) Pre-payment
LIBOR plus 2.125% (year 3) permitted.
---------------------------------------------------------------------------------------------------------------------
(a) Includes capital and interest 518
==========
At September 30, 2002 LIBOR was 1.71%.
o Titan financial trust
As a consequence of the issuance of Decree No. 992/02 ("Rearrangement of the
financial system"), Personal expressed its will of suspending the signature of
the documents corresponding to the rescheduling of negotiations intended to
amend the terms and conditions of the TITAN Financial Trust - Telecom Personal
2000 Class I, the trustee thereof being Bank of America N.A., Buenos Aires
branch, for two promissory notes in the amount of US$30 millions each. This
situation generated controversies and differences between the parties resulting
in the execution of an arbitration agreement, whose decision shall be
unappealable by the parties. If such arbitration does not compel Personal to
fulfill the proposal, the notes will be considered as payable on demand.
58
o Other bank loans
In addition, the Group is indebted under bank loans for 1,826 (capital,
interest and exchange rate differences), bearing an average annual rate of
5.39%, of which 1,071 belong to the Company.
--------------------------------------------------------------------------------
Fixed asset acquisitions
--------------------------------------------------------------------------------
Loans received from banks and other financial institutions for varying amounts
and maturity dates bear an average annual interest rate of 4.89%. Some of the
more pertinent are:
o Ceded by ENTel to Telecom
L'Instituto Centrale Per Il Credito a Medio Termine ("Mediocredito Centrale")
granted the Argentine government a loan credit of approximately Euro 103
millions to finance a project for the digitalization of the Argentine telephone
network.
The Argentine government ceded to the Company rights to this loan credit for
approximately Euro 50 millions. Reimbursement of the capital used will be made
in thirty semi-annual, equal installments bearing an annual interest rate of
1.75%. The Argentine government continues to be the debtor obligated to repay
the Mediocredito Centrale. The Company is obligated to comply with the loan
credit's terms and, should it fail to make defined loan installment payments,
has authorized the Argentine government to settle such debts with amounts owed
the Company for telecommunication services rendered to the government after the
date of non-compliance. At September 30, 2002 the balance owed is 144, which
approximates Euro 39 millions.
o Japan Bank loan to Telecom
On June 29, 1998, the Company signed a loan agreement with Japan Bank for
International Cooperation under which it borrowed Yen 11,652 millions on
September 9, 1998 with repayment due on June 15, 2010. At September 30, 2002
the balance owed is 361.
--------------------------------------------------------------------------------
Inventory acquisitions
--------------------------------------------------------------------------------
Loans received from banks and other financial institutions for varying amounts
and maturity dates bear an average annual interest rate of 4.84%.
--------------------------------------------------------------------------------
Derivative financial instruments
--------------------------------------------------------------------------------
Under Argentine GAAP, there are no particular accounting and reporting
standards for derivative financial instruments. Therefore, the Group records
these instruments in accordance with the conditions that arise from the related
agreements, recognizing their effects in earnings in accordance with Note
4.2.i. The valuation criterion adopted by the Company was consistent with that
accepted under U.S.GAAP until September 30, 2000.
59
However, SFAS 133 and 138 "Accounting for derivative instruments and hedging
activities" were effective for fiscal years beginning after June 15, 2000 in
the United States of America. In accordance with these statements the
derivative financial instruments should be designated as:
1. Cash flow hedges: if the hedged risk corresponds to the fluctuations in
cash flows.
2. Fair Value Hedges: if the hedged risk corresponds to the fluctuations in
fair value of an associated asset or liability.
As described in Note 4.1.e, Telecom Group had entered into foreign currency
swap and interest rate swaps to hedge the different risks exposed in relation
to its debts. However, in connection with its decision to suspend the payments
on its financial debts described in Note 14, Telecom Argentina initiated
discussions with its counterparts to mutually unwind and terminate its interest
rate and currency swap obligations, as payments under such hedges were not
consistent with the decision to suspend the payments on its financial debt
obligations. In addition, as the Argentine peso is no longer pegged to the U.S.
dollar, such hedges no longer served their intended purpose.
60
As a consequence, during the second quarter of fiscal year 2002, Telecom Group
mutually agreed with its swap counterparts to unwind all interest rate and
currency swap agreements. The unwinding of these swap arrangements was carried
out at its fair value and generated losses of approximately $286 millions
before income tax which were recognized in Results from swaps cancellation
within Financial and holdings results in the Consolidated statements of income
and an increase of Telecom Group's financial debt position by approximately
US$75 millions. No cash payments were made to the swap counterparts in
connection with the termination of the swap agreements.
NOTE 9 - CAPITAL STOCK
The Company's shares are publicly quoted and traded on the BCBA and the NYSE.
Only Class "B" shares are effectively traded, as Nortel owns all Class "A"
shares and Class "C" shares are dedicated to the PPP.
Class "B" shares began trading on the BCBA on March 30, 1992 and on the NYSE,
under the symbol TEO, on December 9, 1994 in the form of American Depositary
Receipts ("ADR" or "ADS") upon SEC approval of the Exchange Offer. Under
provisions of the Exchange Offer, holders of the Company's ADRs which are
restricted under Rule 144-A and holders of Global Depositary Receipts issued
under Regulation S were permitted to exchange them for unrestricted ADR,
equivalent to 5 Class "B" shares. As from July 15, 1997 Class "B" shares are
traded through the International Quotation System of the Mexican Stock
Exchange.
Month end market quotations on the BCBA have been as follows:
Month 1998 1999 2000 2001 2002
----- ---- ---- ---- ---- ----
-------------------------------------------------------------
Price per share (in Argentine pesos as of each date)
-------------------------------------------------------------
January 6.28 4.80 7.41 4.48 2.68
February 7.35 5.39 8.37 3.25 2.34
March 7.18 5.44 6.94 3.13 1.79
April 7.20 6.85 5.55 3.15 1.15
May 6.20 5.69 4.94 3.14 0.74
June 5.90 5.50 5.52 3.09 0.60
July 6.82 5.39 5.12 1.97 0.68
August 4.50 5.63 4.70 1.97 0.74
September 5.92 5.42 4.35 1.71 0.70
October 6.50 5.50 3.54 1.25 0.99
November 6.05 5.85 2.96 1.26
December 5.62 6.88 3.04 1.81
o Share ownership program
The PPP, established by the Argentine government, included 10% of the Company's
shares, representing the Class "C" shares transferred to the former employees
of ENTel by the government in December 1992. These shares were pledged to
guarantee the balance of the sales price owed by the Company's shareholders to
the Argentine government. Prepayment of the balance owed was approved by Decree
61
No. 1623/99 and made by the PPP in March 2000, thereby releasing the pledge.
Shares held by the Guaranty and Repurchase Fund (the "Fund") of the PPP were
restricted from sale until an injunction is released. Once the injunction is
lifted, the Fund may sell an amount of shares necessary to cancel the debt owed
to former employees participating in the PPP. Shares then remaining in the Fund
will be distributed in accordance with the decision of the majority of
employees at a special meeting convened in accordance with Decree No. 584/93
Section 15.
The Shareholders' Meeting of March 14, 2000 approved the conversion of
52,505,360 Class "C" shares affected to the PPP into Class "B" shares to
facilitate their sale. In May 2000 participating PPP shareholders sold
50,663,377 shares nationally and internationally as approved by the CNV and as
registered with the SEC. As of September 30, 2002, 52,415,411 Class "C" shares
have been converted into Class "B" shares.
62
On September 17, 2002, the Judicial Inspector of the PPP required Telecom to
take the necessary steps to convert 15,000,000 Class "C" shares held by the
Fund into Class "B" shares since the precautionary measures that affected them
had been raised. Telecom replied that a conversion requires a Shareholders'
Meeting and further proposed to obtain judicial authorization so that said
Meeting should consider the conversion of all Class "C" shares into Class "B"
shares in order to avoid holding successive Meetings every time shares held by
the Fund were released from precautionary measures to be converted. At the date
of issuance of these consolidated financial statements, the PPP Inspector has
not replied to the proposal.
o Suspension of the listing of securities
Section 42 incise d) of the Rules to List in the BCBA provides that the Stock
Exchange shall suspend the listing of securities in the case the financial
statements show negative retained earnings amounting to the total shareholders'
equity. However, the BCBA, considering that this situation has been generalized
as a result of the Argentine crisis, issued the Administrative Resolution No.
4/2002, approved by CNV Resolution No. 14328, suspending the application of
incise d) of mentioned section 42, until December 10, 2003. The securities of
the companies under this condition, will be traded in a reduced trading panel.
o Transfer of Telecom's listed shares and Corporate bonds to a reduced
trading panel
As a consequence of the negative retained earnings shown in the Consolidated
financial statements as of March 31, 2002, because of the serious economic
situation described in Note 3, the BCBA resolved to trade Telecom's listed
shares in a reduced trading panel, according to the provisions of Section 38
incises b) and c) of the Rules to List in the BCBA. It has also been
transferred to a reduced trading panel the trading of the Company's Corporate
bonds, according to the provisions of Section 39 incises a) and c) of the above
mentioned Rules.
o ADRs listing in NYSE
Under NYSE rules, the ADRs average closing price of a security cannot be less
than US$1.00 over a 30-day trading period. Consequently, on July 29, 2002,
Telecom was notified by the NYSE in order to meet the minimum share price
criteria, by bringing its share price and average share price back above $1.00
within six months of receipt of the notification; if not, the ADRs would be
delisted. The Company replied to the NYSE informing that the necessary actions
will be taken in the corresponding terms, in order to meet the NYSE standards.
However, the NYSE requested Telecom to inform if the measures to correct the
minimum average share price would be adopted by the Board of Directors
63
within
six month of receipt of the notification or if the issue would be discussed in
the next Shareholders' Meeting.
After informing its intention to comply with the minimum price criteria for
securities listed in the NYSE and reaffirming its plans to keep the Company's
ADS listed on the NYSE, the Board of Directors in its meeting of October 3,
2002 decided to request shareholder approval for an increase in the number of
the Company's Class B shares represented by its ADS (such change the "Ratio
Change") and resolved to include the Ratio Change on the agenda for shareholder
approval at the next Annual Shareholders' Meeting scheduled for April 2003.
NOTE 10 - INCOME TAX: ADOPTION OF THE DEFERRAL METHOD
o Income tax
The composition of the income tax recorded in the consolidated statement of
income is the following:
--------------------------------------------------------------------------
Periods ended September 30, 2002 2001
--------------------------------------------------------------------------
Current tax (expense) benefit - (90)
Deferred income tax benefit 2,228 37
Restatement in constant pesos 1,164 (64)
Deferred income tax (expense) related to the
restatement in constant pesos of fixed assets,
intangible assets and other assets (1,389) -
------------------------
Total 2,003 (117)
========================
64
o Deferred income tax
As from October 1, 2000, the Company and its subsidiaries have accounted for
income taxes under the deferral method according to the FACPCE RT 10.
Deferred income tax provision at each period-end has been determined based upon
the temporary differences between the financial and tax bases of assets and
liabilities. Deferred tax assets arise largely from asset realization
allowances not deductible for tax purposes, from tax loss carryforwards and
from tax basis of foreign currency exchange differences generated by debts in
foreign currency. Deferred tax liabilities principally arise from differences
in fixed and intangible assets valuation as compared to the tax basis of such
assets, substantially due to differences in depreciation and the tax treatment
of capitalized interest and the accounting for inflation in those captions.
Under U.S.GAAP, SFAS 109 uses the liability method of accounting. Under this
method, deferred income taxes are established for all temporary differences,
recognizing their variations in Income tax in the consolidated statement of
income. In these aspects, SFAS 109 is substantially consistent with FACPCE RT
10 and with IAS 12.
The following summarizes the composition of the deferred income taxes:
--------------------------------------------------------------------------------
Consolidated balance sheets at September 30, 2002 2001
--------------------------------------------------------------------------------
Net current deferred tax assets (liabilities)
Allowance for doubtful accounts receivable 99 126
Capital leases 2 29
Reserves 2 7
Income tax loss carryforward, net of allowance 546 -
Fixed assets (21) (38)
Intangible assets (35) (13)
Capitalized financial results on fixed and
intangible assets, net of depreciation (42) (20)
Others 14 11
-----------------------
Total net current deferred tax assets 565 102
=======================
Net non current deferred tax assets (liabilities)
Capital leases - 7
Reserves 34 51
Retirement benefits 3 4
Income tax loss carryforward, net of allowance 3 62
Fixed assets (1,515) (374)
Intangible assets (43) (31)
Capitalized financial results on fixed and
intangible assets, net of depreciation (600) (184)
Foreign currency exchange differences originated
in the devaluation of the peso 2,245 -
Others 9 20
-----------------------
Total net non current deferred tax assets (liabilities) 136 (445)
-----------------------
Total net deferred tax assets (liabilities) 701 (343)
=======================
66
The detail and the expiration date of tax credit carryforwards and the
corresponding valuation allowance at September 30, 2002 is as follows:
Expiration date The Company Publicom Personal Nucleo Consolidated
--------------- ----------- -------- -------- ------ ------------
2002 - - 1 10 11
2004 - - - 8 8
2005 - - 2 - 2
2006 - - 20 - 20
2007 387 3 139 - 529
----------------------------------------------------------
Subtotal 387 3 162 18 570
Valuation allowance - - (3) (18) (21)
----------------------------------------------------------
Total 387 3 159 - 549
==========================================================
NOTE 11 - CAPITAL LEASES
At September 30, 2002 the Group holds capital leases in the amount of 20, of
which 19 belongs to the Company. A summary by major class of fixed assets
covered by capital leases at September 30, 2002 is as follows:
66
Book value Lease terms Amortization period
---------- ----------- --------------------
Computer equipment 218 2 to 4 years 3, 5, 6 and 10 years
Vehicles 17 3 years 5 years
----------
Original value 235
Accumulated depreciation (145)
----------
Net value 90
==========
At September 30, 2002 lease obligations mature annually as follow:
Current Non current
At September 30, 2003 18 At September 30, 2004 3
-----------
Unearned interest (1) 3
---------- -----------
17
----------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
o Purchase commitments
At September 30, 2002, the Group had entered into purchase contracts with
domestic and foreign vendors totaling 24 for: switching and PCS network
transmission equipment, construction of network, the repair and/or installation
of public telephones, infrastructure works and other services. In general, the
contracts have been or are expected to be financed, directly or indirectly, by
domestic and foreign vendors.
o Contingencies
In the normal course of operations, the Company is involved in various legal,
fiscal and regulatory proceedings. Such operations are influenced by the
development of the legal and regulatory framework of the Argentine
telecommunications market.
Some of these proceedings relate to claims of former employees of ENTel, who
claim the Company together with ENTel are jointly responsible for various labor
claims arising prior to the Company's assumption of operations. In the Transfer
Agreement, ENTel and the Argentine government have expressly assumed the
obligation to compensate the Company regarding any costs it might experience as
a result of such labor claims. Under the Debt Consolidation Law, ENTel and the
Argentine government may discharge their above-described obligations to the
Company by the issuance of bonds to the Company. At September 30, 2002 pending
amounts claimed in legal proceedings total 16.
In November 1995 the Company, Telefonica, Telintar and the Argentine government
were served notice of a complaint by a consumer group, "Consumidores Libres
Cooperativa Limitada de Provision de Servicios Communitarios". The suit,
entered before the National Court of Federal Administrative Disputes No 7,
seeks to declare null and void all regulations and rate agreements since the
Transfer Agreement, in order to reduce SBT rates charged by licensees, so that
licensees realize a rate of return of not more than 16% annually on fixed
assets as described in Point 12.3.2 of the List of Conditions. Additionally,
the claim requested return of amounts earned in excess of this rate of return.
The Court of Appeals rejected some claims and deferred decisions on others
until a formal decision is made, being in an evidentiary phase currently.
67
Court Room No. 4 of the Court of Appeals, has issued a preliminary injunction
ordering the Government and the joint defendant companies, in which Telecom is
included, not to carry out the tariffs changes established by section 2 of the
agreements approved by Decree No. 2585/91 until a final resolution is issued in
the case. This preliminary injunction affects the current tariff regime in
Argentina because it suspends the abilities of the telecom companies to
increase the tariffs charged based upon the IPC in the USA, one of the terms of
the Price Cap formula included in the section 2 of the above mentioned
agreement. On October 15, 2001, the Company was served notice about this
preliminary injunction and has filed an extraordinary motion before the
Argentine Supreme Court of Justice.
In addition, the recent enactment of Law No. 25561 has adopted an analogous
decision by suspending US dollars or foreign currency adjustments clauses
adopted under public contracts executed by the National Government, including
works and public services.
Although the outcome of the above mentioned contingencies may not be predicted
with certainty, the management of the Company and its legal counsel believe
that the resolution of such matters will not have a material adverse impact on
either Company operations or financial position.
68
NOTE 13 - RENEGOTIATION OF CONTRACTS WITH THE PUBLIC ADMINISTRATION
From the enactment of Law No. 25561, US dollars or foreign currency adjustments
clauses and indexation clauses based on foreign price indexes, as well as any
other indexing mechanism adopted under public contracts executed by the
National Government, including works and public services, have been suspended.
The applicable prices and tariffs to that date have been converted into pesos
at the exchange rate of $1 to US$1.
Moreover, the National Government is entitled to renegotiate such contracts
under the following criteria:
|X| the impact of the tariffs upon the competitiveness of the economy and the
income distribution;
|X| the quality of the services and plans of investments, if they are
contractually foreseen;
|X| the client's interests and the possibility to access of the services;
|X| the security of the systems;
|X| the profitability of the business.
Decree No. 293/2002 entitled the Ministry of Economy and Infrastructure to
renegotiate all these contracts and created the Contracts Renegotiation
Commission to give the Ministry the proper counsel. The mentioned decree stated
that the public services contracts subject to the renegotiations include the
telecommunication area of basic telephone, which is the service rendered by
Telecom Argentina.
Then, Decree No. 370/2002 set forth the constitution of such Commission and
Resolution No. 20/2002 of the Ministry of Economy approved the Rules for the
Renegotiation of Works and Public Services Contracts, including the list of the
contracts affected by these rules. The proposals of renegotiations should be
filed with the National Government within a term of 120 days from March 1,
2002.
In order to comply with said renegotiation procedure, the Company duly filed
with the Contracts Renegotiation Committee information on the impact caused by
the economic emergency on its financial position, more specifically on income
and the pre-existing mechanisms to adjust tariffs, on operating costs, on
indebtedness, on payment commitments with the National Government and on future
and on going investments. In addition, Telecom filed economic-financial
information for the last three fiscal years and projected information for the
years 2002 and 2003.
Resolution No. 38/2002 of the Ministry of Economy establishes that the Public
Administration Bodies should not modify, directly or indirectly, the prices and
tariffs of the public services in the meantime of the renegotiation.
69
NOTE 14 - SUSPENSION OF PAYMENTS OF FINANCIAL DEBT OF THE TELECOM GROUP
As a consequence of the devaluation and the volatility of the Argentine peso,
the conversion into pesos of the Company's tariffs and the macroeconomic and
regulatory uncertainties explained in Note 3, the Board of Directors, on their
meetings held on March 27, 2002 and June 24, 2002, resolved the suspension of
principal and interest payments of all its financial debt and its controlled
companies' financial debt in Argentina. Notwithstanding this, the Company will
continue meeting its obligations related to commercial activity in the ordinary
course of business.
As a result of these decisions, as of September 30, 2002, the Telecom Group had
principal debt due for US$394 millions, Euro 252 millions, Yen 685 millions and
$175 millions, and interest debt due for US$17 millions, Euro 41 millions, Yen
32 millions and $7 millions. At the date of issuance of these consolidated
financial statements, the Telecom Group has principal debt due for US$433
millions, Euro 252 millions, Yen 685 millions and $175 millions and interest
debt due for US$22 millions, Euro 41 millions, Yen 32 millions and $7 millions.
70
The executed loan agreements and the agreements related to the issuance of
Corporate bonds include clauses providing for various causes of unfulfillment,
among others:
>> Failure to pay principal or interest of the pertinent loan at maturity;
>> Failure to pay principal or interest of any other debt contracted either
by Telecom or any of its material subsidiaries that equals or exceeds an
aggregate of US$20 millions ("cross default" clauses);
>> Telecom's written admission of its inability to meet the commitments at
maturity;
>> Any final judgement providing for the payment of an aggregate equal or
exceeding US$20 millions;
>> Telecom or any of its material subsidiaries filing petition for
bankruptcy relief or reorganization proceedings, or request for approval
of an out of court agreement with creditors.
Under the terms of most loan agreements and the agreements related to the
issuance of Corporate bonds executed, the occurrence of any of the above
mentioned events entitles grantors (whether banks or holders), their agents or
trustees, to consider as due and payable the total principal disbursed and
interest accrued pending at the date of such event. The parties, their agents
or trustees, may elect to exercise this right.
In the case of any event of default, most of the agreements also provide for
economic penalties payable through interest additional to the ordinary loan
interest. The additional interest varies between an annual average of 2 and 5
%.
At the date of issuance of these consolidated financial statements, some
creditors with debts exceeding an aggregate of US$20 millions have exercised
their rights to accelerate their maturity.
The Board of Directors has taken and will continue to take the pertinent
measures to preserve the Company's value and maximize the cash flow. Telecom is
working with its financial advisors to develop a comprehensive restructuring
plan of all its financial debt to propose in due time to its creditors.
On September 17, 2002, the first informative meeting with the main creditors of
the Group was held. Likewise, the Company intends to continue discussing with
its main financial creditors and to celebrate in Argentina and in foreign
countries another informative meetings, which places and dates will be
determined.
Valuation and disclosure of debt as of September 30, 2002
Argentine GAAP does not provide for specific rules on disclosure of current and
non current liabilities for the above described situation.
In valuation matters, the Company has not accrued additional costs for economic
penalties as of September 30,
71
2002, waiting for the results of the debt restructuring process, based on the
opinion of its legal counsels, who believe that the Company would have a remote
probability of accruing any additional cost at the end of this process.
In disclosure matters, the Company disclosed its debt at March 31, 2002,
considering the original maturities because it had been announced the above
mentioned debt restructuring process and no creditor had exercised his right of
acceleration of maturities.
As some creditors have exercised these rights at the date of issuance of the
consolidated financial statements at June 30, 2002, the management of the
Company decided, as from that date, to disclose debt with an original non
current maturity as current debt. This was done considering the enforceability
of liabilities by creditors notwithstanding the fact that they have not been
realized. As of September 30, 2002, this reclassification is approximately
$5,722 millions. In this way, there are no disclosure differences between the
Company's accounting policies and U.S.GAAP (SFAS 78).
72
NOTE 15 - CAUSES OF MANDATORY REDUCTION OF CAPITAL STOCK
Due to the economic-financial situation described in Note 3, the Company have
significantly reduced its shareholders' equity at period-end as a consequence
of the losses reported in the nine month period, that have absorbed the
totality of reserves and more than fifty per cent of the adjusted capital
stock.
The future evolution of the Company's shareholders' equity depends to a great
extent on the development of the economic-financial crisis described in Note 3
and, in particular,: (a) on the fluctuation of the U.S. dollar exchange rate
given its impact in the Group's liabilities valuation (93% of the consolidated
liabilities as of September 30, 2002 is in foreign currency), (b) on the
results of the renegotiation of contracts process described in Note 13 due to
the effect generated by the devaluation and the "pesification" of Telecom's
tariffs on the Group's operating results and Telecom's capacity to generate
enough cash flows to face its financial obligations in the current maturity
dates and (c) the results on the Group's debt restructuring process.
If the condition described in the first paragraph should continue at the date
of issuance of the annual financial statements for the 14th fiscal year, the
Company would have to adopt the provisions of section 206, last paragraph of
the Argentine Corporation Law referring to the mandatory reduction of capital
stock.
However, the National Government through Decree No. 1269/02, has suspended the
application of sections 206 and 94, incise 5 of the Argentine Corporation Law
until December 10, 2003. Section 94 incise 5 sets forth as a cause of
dissolution of a company the loss of capital stock. This situation arises when
the Company reports a negative shareholders' equity.
NOTE 16 - CONSOLIDATED INFORMATION BY BUSINESS SEGMENT
Telecommunications services are provided through the distribution of operating
activities among various Telecom Group companies. For a better understanding of
the distinct activities performed by Telecom Group companies, the management of
the Company provides consolidated information by business segment.
In presenting segment information, the Company takes into consideration income
and expenses of the individual entities, prior to elimination of intercompany
transactions.
As a consequence of the corporate reorganizations performed by Telecom, voice
and data transmission services and Internet are currently rendered by the
Company. The allocation of income and direct costs to fixed national basic
telephone service, international telephone service, data transmission service
and Internet is made using the internal information systems of the Company to
calculate
73
its results. Based on these systems, the indirect costs of international
telephone service, data transmission service and Internet have been allocated
to fixed national basic telephone service.
As referred to in Note 10, the Company and its subsidiaries have adopted the
deferral method to account for the income tax as from October 1, 2000.
Consequently they adopted the provisions of SFAS 109.
Financial expenses related to the acquisition of shares in subsidiaries and
subsequent capital contributions have been allocated to fixed national basic
telephone service.
74
Consolidated statement of income by business segment for the nine month period
ended September 30, 2002
------------------------------------------------------------------------------------------------------------------------------------
Voice and data services
---------------------------------------------
National
basic Int'l Cellular Total by
telephone telephone Data telephone Directories business
service service transmission Subtotal Internet service edition segment
------------------------------------------------------------------------------------------------------------------------------------
Net sales 1,739 117 254 2,110 55 791 5 2,961
Wages and social benefits (325) (16) (37) (378) (6) (75) (15) (474)
Materials and supplies (103) (4) (5) (112) (2) (26) (1) (141)
Bad debts expense (119) (8) (1) (128) (2) (62) (6) (198)
Interconnection costs (113) - - (113) - - - (113)
Lease of circuits - (5) (12) (17) (2) (14) - (33)
Fees for debt restructuring process (12) - - (12) - (3) - (15)
Fees and counsel services (10) - - (10) - (3) - (13)
Repayment for services (44) (4) (6) (54) (1) (5) (2) (62)
Management fees (22) - - (22) - - - (22)
Advertising (11) - - (11) (2) (11) - (24)
Cost of cellular handsets - - - - - (12) - (12)
Agent commissions (2) - - (2) (1) (17) - (20)
Others (203) (14) (11) (228) (4) (173) (3) (408)
-------------------------------------------------------------------------------------------------
EBITDA 775 66 182 1,023 35 390 (22) 1,426
Depreciation of fixed assets (1,066) (25) (75) (1,166) (3) (315) (4) (1,488)
Amortization of intangible assets (47) - (1) (48) (1) (67) - (116)
-------------------------------------------------------------------------------------------------
Operating profit (loss) (338) 41 106 (191) 31 8 (26) (178)
Equity losses from related
companies (10) - (10) (20) - - (8) (28)
Financial and holding results (4,638) - (1) (4,639) - (1,171) (30) (5,840)
Other expenses, net (59) - - (59) - (43) (13) (115)
-------------------------------------------------------------------------------------------------
Net income (loss) before income
tax and minority interest (5,045) 41 95 (4,909) 31 (1,206) (77) (6,161)
Income tax 1,643 (8) (36) 1,599 (11) 401 14 2,003
Minority interest - - - - - 4 - 4
-------------------------------------------------------------------------------------------------
Net income (loss) (3,402) 33 59 (3,310) 20 (801) (63) (4,154)
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Amounts under U.S.GAAP
EBITDA 720 66 182 968 35 370 (27) 1,346
Operating profit (loss) (393) 41 106 (246) 31 (12) (31) (258)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Profitability margins (%)
EBITDA 44.6 56.4 71.7 48.5 63.6 49.3 (440.0) 48.2
Operating margin (19.4) 35.0 41.7 (9.1) 56.4 1.0 (520.0) (6.0)
Pretax profit (loss)/Net sales (290.1) 35.0 37.4 (232.7) 56.4 (152.5) (1.540.0) (208.1)
Net income (loss)/Net sales (195.6) 28.2 23.2 (156.9) 36.4 (101.3) (1.260.0) (140.3)
EBITDA margin under U.S.GAAP 41.4 56.4 71.7 45.9 63.6 46.8 (540.0) 45.5
Operating margin under U.S.GAAP (22.6) 35.0 41.7 (11.7) 56.4 (1.5) (620.0) (8.7)
ROA (Operating profit (loss)/
total assets at beginning of
fiscal year) (on an annual
basis) (9.8) 32.3 50.3 (5.1) 196.8 0.7 (48.8) (3.6)
ROE (Net income (loss)/
Shareholders' equity less
net income (loss)) (on an
annual basis) - - - - - - - (106.1)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Net balance of fixed assets
(Exhibit A) 7,517 269 488 8,274 25 1,893 10 10,202
Net balance of intangible assets
(Exhibit B) 166 27 2 195 2 747 5 949
Investment in fixed assets
(Exhibit A) 162 2 - 164 1 53 1 219
Investment in intangible assets
(Exhibit B) - 1 - 1 - 23 - 24
Fixed assets depreciation
(Exhibit A) (1,066) (25) (75) (1,166) (3) (322) (4) (1,495)
Intangible assets amortization
(Exhibit B) (52) - (11) (63) (1) (72) - (136)
------------------------------------------------------------------------------------------------------------------------------------
75
Consolidated statement of income by business segment for the nine month period
ended September 30, 2001
------------------------------------------------------------------------------------------------------------------------------------
Voice and data services
---------------------------------------------
National
basic Int'l Cellular Total by
telephone telephone Data telephone Directories business
service service transmission Subtotal Internet service edition segment
------------------------------------------------------------------------------------------------------------------------------------
Net sales 3,023 195 394 3,612 69 1,351 84 5,116
Wages and social benefits (551) (24) (58) (633) (20) (139) (77) (869)
Materials and supplies (188) (9) (20) (217) (2) (36) (24) (279)
Bad debts expense (222) (15) (4) (241) (2) (89) (4) (336)
Interconnection costs (157) (2) - (159) - - - (159)
Lease of circuits - - (27) (27) (2) (24) - (53)
Fees and counsel services (22) - - (22) - - - (22)
Repayment for services (91) (7) (7) (105) - (16) (18) (139)
Management fees (206) - - (206) - - - (206)
Advertising (73) (2) (4) (79) (22) (32) (2) (135)
Cost of cellular handsets - - - - - (86) - (86)
Agent commissions (18) - - (18) (7) (57) - (82)
Others (246) (30) (28) (304) (9) (282) (4) (599)
-------------------------------------------------------------------------------------------------
EBITDA 1,249 106 246 1,601 5 590 (45) 2,151
Depreciation of fixed assets (880) (29) (55) (964) (2) (299) (2) (1,267)
Amortization of intangible assets (51) (2) (2) (55) - (49) (2) (106)
-------------------------------------------------------------------------------------------------
Operating profit (loss) 318 75 189 582 3 242 (49) 778
Equity losses from related
companies (5) - (13) (18) - - - (18)
Financial and holding results (252) - - (252) - (115) - (367)
Other expenses, net (72) - (2) (74) (2) (27) (7) (110)
Unusual losses (20) - - (20) - (4) - (24)
-------------------------------------------------------------------------------------------------
Net income (loss) before income
tax and minority interest (31) 75 174 218 1 96 (56) 259
Income tax 22 (49) (66) (93) - (44) 20 (117)
-------------------------------------------------------------------------------------------------
Net income (loss) (9) 26 108 125 1 52 (36) 142
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Amounts under U.S.GAAP
EBITDA 1,178 106 246 1,530 2 571 (49) 2,054
Operating profit (loss) 247 75 189 511 - 223 (53) 681
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Profitability margins (%)
EBITDA 41.3 54.4 62.4 44.3 7.2 43.7 (53.6) 42.0
Operating margin 10.5 38.5 48.0 16.1 4.3 17.9 (58.3) 15.2
Pretax profit (loss)/Net sales (1.0) 38.5 44.2 6.0 1.4 7.1 (66.7) 5.1
Net income (loss)/Net sales (0.3) 13.3 27.4 3.5 1.4 3.8 (42.9) 2.8
EBITDA margin under U.S.GAAP 39.0 54.4 62.4 42.4 2.9 42.3 (58.3) 40.1
Operating margin under U.S.GAAP 8.2 38.5 48.0 14.1 - 16.5 (63.1) 13.3
ROA (Operating profit (loss)/
total assets at beginning of
fiscal year) (on an annual
basis) 3.8 22.8 54.0 6.4 11.4 9.1 (45.4) 6.6
ROE (Net income (loss)/
Shareholders' equity
less net income (loss))
(on an annual basis) - - - - - - - 3.7
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Net balance of fixed assets
(Exhibit A) 8,080 303 542 8,925 24 1,886 13 10,848
Net balance of intangible assets
(Exhibit B) 243 27 11 281 2 777 4 1,064
Investment in fixed assets
(Exhibit A) 491 7 4 502 7 249 7 765
Investment in intangible assets
(Exhibit B) 11 - - 11 2 38 - 51
Fixed assets depreciation
(Exhibit A) (880) (29) (55) (964) (2) (299) (2) (1,267)
Intangible assets amortization
(Exhibit B) (55) (2) (15) (72) - (52) (2) (126)
-----------------------------------------------------------------------------------------------------------------------------------
76
Consolidated statements of cash flows by business segment
--------------------------------------------------------------------------------------------------------------------
Voice Cellular Total by
Nine month period ended September 30, 2002 and data telephone Directories business
services Internet service edition segment
--------------------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities 939 12 286 (1) 1,236
--------------------------------------------------------------------------------------------------------------------
Investing activities
Fixed assets and intangible assets acquisitions (233) (1) (145) (1) (380)
Other investments not considered as cash or cash equivalents 68 - (8) - 60
--------------------------------------------------------------------------------------------------------------------
Total cash flows used for investing activities (165) (1) (153) (1) (320)
--------------------------------------------------------------------------------------------------------------------
Financing activities
Proceeds and repayments of debt, net (4) - (37) - (41)
Payment of interest and related expenses (359) - (82) - (441)
Cash and cash equivalents transfer between business segments (74) (11) 85 - -
--------------------------------------------------------------------------------------------------------------------
Total cash flows provided by (used for) financing activities (437) (11) (34) - (482)
--------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 337 - 99 (2) 434
Cash and cash equivalents at the beginning of year 388 - 76 3 467
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at period end 725 - 175 1 901
--------------------------------------------------------------------------------------------------------------------
77
--------------------------------------------------------------------------------------------------------------------
Voice Cellular Total by
and data telephone Directories business
Nine month period ended September 30, 2001 services Internet service edition segment
--------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used for) operating activities 1,458 (7) 263 2 1,716
--------------------------------------------------------------------------------------------------------------------
Investing activities
Fixed asset and intangible asset acquisitions (599) (9) (467) (7) (1,082)
Other investments not considered as cash or cash equivalents (53) - - - (53)
--------------------------------------------------------------------------------------------------------------------
Total cash flows used for investing activities (652) (9) (467) (7) (1,135)
--------------------------------------------------------------------------------------------------------------------
Financing activities
Proceeds and repayments of debt, net 215 - 230 7 452
Payment of interest and related expenses (535) - (122) - (657)
Dividends paid (471) - - - (471)
Cash and cash equivalents transfer between business segments (259) 38 221 - -
--------------------------------------------------------------------------------------------------------------------
Total cash flows provided by (used for) financing activities (1,050) 38 329 7 (676)
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (244) 22 125 2 (95)
Cash and cash equivalents at the beginning of year 692 - 7 - 699
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at period end 448 22 132 2 604
--------------------------------------------------------------------------------------------------------------------
78
NOTE 17 - CONSOLIDATED QUARTERLY INFORMATION
---------------------------------------------------------------------------------------------------------------
Net financial and
Operating holding results - Net
Quarter ended Net sales EBITDA profit income (loss) income (loss)
---------------------------------------------------------------------------------------------------------------
Year 2002:
March 31, 1,297 629 79 (5,344) (3,687)
June 30, 867 398 (123) (1,555) (947)
September 30, 797 399 (134) 1,059 480
----------------------------------------------------------------------------
2,961 1,426 (178) (5,840) (4,154)
Year 2001:
March 31, 1,717 699 252 (124) 69
June 30, 1,665 701 238 (121) 21
September 30, 1,734 751 288 (122) 52
December 31, 1,628 595 133 (140) (38)
----------------------------------------------------------------------------
6,744 2,746 911 (507) 104
---------------------------------------------------------------------------------------------------------------
NOTE 18 - RELEVANT ADDITIONAL INFORMATION
The information described in this note is not required by Argentine GAAP, so
that it is additional information.
The management of the Company considers useful this information in order to
facilitate the analysis and understanding of the main business variables and,
particularly, the way in which the restatement in constant pesos process has
impacted in sales, operating costs, EBITDA, financial and holding results and
the different captions of the consolidated statement of cash flows.
So that, the historical amounts, which have been used to determine the figures
in constant pesos at September 30, 2002 and 2001, are as follows:
79
CONSOLIDATED NET SALES
-------------------------------------------------------------------------------------------------------
Nine month periods ended September 30, 2002 2001
-------------------------------------------------------------------------------------------------------
National basic telephone service
Local measured service 315 323
DLD measured service 260 282
Monthly basic charges 373 417
Supplementary services (monthly charges) 70 87
Installation fees 12 18
Public telephones 110 131
Interconnection fixed 80 62
Interconnection cellular 25 16
Lease of lines and circuits fixed 10 18
Lease of lines and circuits cellular 13 13
Others 37 47
Turnover tax (42) (47)
----------------------------
Total National basic telephone service 1,263 1,367
----------------------------
International telephone service
Outgoing revenues 97 88
Settlement revenues (net) (5) 3
Turnover tax (3) (3)
----------------------------
Total International telephone service 89 88
----------------------------
Data transmission
Terrestrial network 57 45
Lease of data circuits 18 27
Monthly charges and Internet traffic 69 61
International connectivity 38 27
Others 15 24
Turnover tax (6) (6)
----------------------------
Total Data transmission 191 178
----------------------------
Internet
Internet monthly fee 32 22
Internet traffic 10 10
Turnover tax (2) (1)
----------------------------
Total Internet 40 31
----------------------------
Cellular telephony
Personal
Monthly fee and measured service 174 235
Pre-paid card 83 80
Calling Party Pays 163 185
Others 72 89
Turnover tax (23) (24)
----------------------------
469 565
----------------------------
Nucleo
Monthly fee and measured service 44 13
Pre-paid card 24 7
Calling Party Pays 70 24
Others 14 2
----------------------------
152 46
----------------------------
Total cellular telephony 621 611
----------------------------
----------------------------
Total directories edition 5 38
----------------------------
Total historical net sales 2,209 2,313
Restatement in constant pesos 752 2,803
----------------------------
Total net sales in constant pesos 2,961 5,116
============================
CONSOLIDATED OPERATING COSTS
----------------------------
Wages and social benefits (351) (393)
Taxes (59) (64)
Taxes on bank debits and credits (*) (25) -
Materials and supplies (102) (126)
Transport and freight (23) (31)
Bad debt expense (133) (152)
Interconnection costs (83) (72)
Lease of circuits (33) (24)
Fees for debt restructuring process (14) -
Fees and counsel services (10) (10)
Repayment for services (45) (63)
Management fees (13) (93)
Advertising (17) (61)
Cost of terminals (9) (39)
Agent commissions (18) (37)
Various (200) (175)
----------------------------
Total historical operating costs (1,135) (1,340)
Restatement in constant pesos (400) (1,625)
----------------------------
Total operating costs in constant pesos (1,535) (2,965)
============================
(*) At September'01 were disclosed in unusual losses.
80
CONSOLIDATED EBITDA
------------------------------------------------------------------------------------------------------------
Nine month periods ended September 30, 2002 2001
------------------------------------------------------------------------------------------------------------
Historical net sales 2,209 2,313
Historical operating costs (1,135) (1,340)
--------------------------
Historical EBITDA 1,074 973
Restatement in constant pesos 352 1,178
--------------------------
EBITDA in constant pesos 1,426 2,151
==========================
CONSOLIDATED FINANCIAL AND HOLDING RESULTS
Interest earned on short term investments and trade accounts receivable 79 46
Foreign currency exchange gains 827 2
Other financial results 18 -
--------------------------
Historical financial results generated by assets 924 48
Restatement in constant pesos (2,464) 58
--------------------------
Financial and holding results in constant pesos generated by assets (1,540) 106
--------------------------
Interest on debt (568) (231)
Foreign currency exchange losses (8,828) (6)
Results from swap cancellation (247) -
Other financial results (21) (15)
--------------------------
Historical financial results generated by liabilities (9,664) (252)
Restatement in constant pesos 4,440 (305)
--------------------------
Financial and holding results in constant pesos generated by liabilities (5,224) (557)
--------------------------
Capitalized interest and foreign currency exchange differences by debt
on work in progress and intangible assets in constant pesos 129 84
Capitalized foreign currency exchange differences by debt for fixed assets 795 -
acquisition in constant pesos
--------------------------
Total financial and holding results in constant pesos (5,840) (367)
==========================
CONSOLIDATED STATEMENT OF CASH FLOWS
CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES
Net income (loss) in constant pesos (4,154) 142
Depreciation of fixed assets and amortization of intangible assets 1,604 1,373
Other results and a decrease or increase in assets and liabilities 3,742 (739)
--------------------------
Total historical cash flows provided by operating activities 1,192 776
Restatement in constant pesos 44 940
--------------------------
Total cash flows provided by operating activities in constant pesos 1,236 1,716
--------------------------
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Fixed asset and intangible asset acquisition (250) (489)
Investments not considered as cash or cash equivalents 74 (24)
--------------------------
Total historical cash flows used for investing activities (176) (513)
Restatements in constant pesos (144) (622)
--------------------------
Total cash flows used for investing activities in constant pesos (320) (1,135)
--------------------------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Proceeds and repayments of debt, net (37) 204
Payment of interest and related expenses (288) (297)
Dividends paid - (213)
--------------------------
Total historical cash flows used for financing activities (325) (306)
Restatement in constant pesos (157) (370)
--------------------------
Total cash flows used for financing activities in constant pesos (482) (676)
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS IN CONSTANT PESOS 434 (95)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR IN CONSTANT PESOS 467 699
--------------------------
CASH AND CASH EQUIVALENTS AT PERIOD END IN CONSTANT PESOS 901 604
==========================
NOTE 19 - UNCONSOLIDATED INFORMATION
The following is a summary of financial unconsolidated information of the
Company:
o Balance sheets
------------------------------------------------------------------------------------------------------------------
At September 30, 2002 2001
------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and banks 49 45
Investments 821 531
Trade accounts receivable 408 1,093
Other receivables 501 402
------------------------------------
Total current assets 1,779 2,071
------------------------------------
NON-CURRENT ASSETS
Trade accounts receivable 1 4
Other receivables 67 24
Investments 645 1,489
Fixed assets 8,297 8,925
Intangible assets 197 281
------------------------------------
Total non-current assets 9,207 10,723
------------------------------------
Total assets 10,986 12,794
====================================
81
------------------------------------------------------------------------------------------------------------------
At September 30, 2002 2001
------------------------------------------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable 329 845
Debt 9,288 1,491
Compensation and social benefits payable 55 89
Taxes payable 84 141
Other liabilities 23 51
Reserves 4 11
------------------------------------
Total current liabilities 9,783 2,628
------------------------------------
NON-CURRENT LIABILITIES
Accounts payable 3 9
Debt - 4,222
Compensation and social benefits payable 31 86
Taxes payable - 436
Other liabilities 13 29
Reserves 68 104
------------------------------------
Total non-current liabilities 115 4,886
------------------------------------
Total liabilities 9,898 7,514
SHAREHOLDERS' EQUITY 1,088 5,280
------------------------------------
Total liabilities and Shareholders' equity 10,986 12,794
====================================
o Statements of income
------------------------------------------------------------------------------------------------------------------
Periods ended September 30, 2002 2001
------------------------------------------------------------------------------------------------------------------
Net sales 2,256 3,820
Cost of services provided (1,611) (1,944)
------------------------------------
Gross profit 645 1,876
Administrative expenses (128) (248)
Sales expenses (596) (925)
------------------------------------
Operating profit (79) 703
Equity losses from related companies (962) (82)
Financial and holding results (4,601) (248)
Other expense, net (59) (74)
Unusual losses - (20)
------------------------------------
Net income (loss) before income tax (5,701) 279
Income tax 1,547 (137)
------------------------------------
Net income (loss) (4,154) 142
====================================
o Statements of cash flows
------------------------------------------------------------------------------------------------------------------
Periods ended September 30, 2002 2001
------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 948 1,531
CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES
Non current investments and related intangible assets acquisitions - (259)
Fixed asset acquisitions (228) (584)
Intangible asset acquisitions (3) (15)
Other investments not considered as cash or cash equivalents (17) (53)
------------------------------------
Total cash flows used for investing activities (248) (911)
------------------------------------
82
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES
Debt proceeds - 522
Repayment of debt (4) (307)
Payment of interest and related expenses (359) (535)
Dividends paid - (471)
------------------------------------
Total cash flows used for financing activities (363) (791)
------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337 (171)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF YEAR 388 692
------------------------------------
CASH AND CASH EQUIVALENTS AT PERIOD END 725 521
====================================
NOTE 20 - DIFFERENCES BETWEEN ARGENTINE AND U.S.GAAP
To facilitate the use of financial information by both local and foreign
investors, the Company has included in these consolidated financial statements,
as additional information, a summary of the principal differences between
Argentine and U.S.GAAP. In addition, in recent years and to the extent
permitted by GAAP, the Company has attempted to reduce the differences of
criteria in order to facilitate the analysis of its financial results by both
local and foreign investors.
However, the remaining differences between Argentine and U.S.GAAP are grouped
as follows:
83
1. Differences related to measurement unit
o Restatement of Financial Statements for Wholesale Price Index changes
As described in Note 4.1.d, the accompanying financial statements have been
prepared in millions of Argentine pesos of constant currency, recognizing the
inflation effects. However, in general, U.S.GAAP does not allow for the
restatement of financial statements in units of constant currency.
Under U.S.GAAP, account balances and transactions are stated in units of
currency of the period in which the transactions were originated. This
accounting criterion is known as the historical-cost-based method. U.S.GAAP
only allows for the restatement of financial statements in countries with
highly inflationary economies as defined by U.S.GAAP.
Due to the Argentine economy has experienced periods of significant inflation
and currently, is considered as inflationary economy, the reconciliation of
Argentine GAAP to U.S.GAAP of net income and shareholders' equity does not take
into account the revaluation to pesos of constant currency as a reconciling
item.
2. Differences related to the disclosure criteria
o Other expenses, net in the Consolidated statements of income
Under U.S.GAAP the following items included in the financial statement caption
"Other expenses, net" would have been reclassified as a deduction from
Operating profit:
==========================================================
Periods ended September 30, 2002 2001
-------------------------
Income (expense)
Termination benefits (27) (64)
Reserves for contingencies (53) (33)
-------------------------
Total (80) (97)
==========================================================
o Reclassification of Deferred tax assets and liabilities in the
Consolidated balance sheets
The Company has classified its deferred tax balances as current or non current,
considering the moment that the temporary differences will be realized and the
expected moment that deferred tax assets related to carryforwards will be used.
However, under U.S.GAAP, deferred tax assets and liabilities shall be
classified as current or non current based on the classification of the related
asset or liabilities for financial reporting, while deferred tax assets related
to carryforwards shall be classified according to their expected reversal date.
The effects of classification of deferred tax assets and liabilities as
required under U.S.GAAP, before considering the tax effects originated by the
differences mentioned in point 3, are as follows:
84
==========================================================================================================
Net deferred tax assets (liabilities)
----------------------------------------------------------------------------------------------------------
Current Non current Total
----------------------------------------------------------------------------------------------------------
Amounts per consolidated balance sheets at September 30, 2002 565 136 701
Reclassification of deferred tax assets and liabilities 98 (98) -
----------------------------------------
Revised amounts under per U.S.GAAP at September 30, 2002 (*) 663 38 701
========================================
Revised amounts under per U.S.GAAP at September 30, 2001 173 (516) (343)
==========================================================================================================
(*) Under U.S.GAAP, a valuation allowance for the total amount of this tax
credit has been recorded (see "Recoverability of tax credits" described in 3
below).
3. Differences related to valuation criteria
o Valuation of assets and liabilities in foreign currency as of December 31,
2001
As a result of the Argentine economic situation mentioned in Note 3, from
December 21, 2001 the Argentine foreign currency exchange market was suspended
until January 10, 2002.
In that respect, Argentine GAAP required that the companies recognized their
assets and liabilities denominated in U.S. dollar using the exchange rate $1 to
US$1 as of December 31, 2001. However, U.S.GAAP required that companies use the
first subsequent exchange rate after the balance sheet date to adjust the
valuation of its assets and liabilities in foreign currency at such date,
according to the American Institute of Certified Public Accountants'
International Task Force, based on SFAS 52 and the Emerging Issues Task Force
D-12 (the "Israeli case").
During the nine month period ended September 30, 2002, this foreign currency
exchange loss recognized under U.S.GAAP at the end of fiscal year 2001, was
also recorded in net income (loss) for Argentine GAAP purposes; so at September
30, 2002 there is no difference between Argentine GAAP and U.S.GAAP for the
valuation of assets and liabilities in foreign currency.
The summary of principal adjustments to U.S.GAAP corresponding to the
nine-month period ended September 30, 2002 includes a reconciling item for the
difference in the timing of the recording of such losses.
85
o Accounting for Derivative Instruments and hedging activities
As described in Note 8, the Group records derivative financial instruments as
either assets or liabilities in accordance with the conditions that arise from
the related contracts. Under U.S.GAAP, SFAS 133 and 138 establish that
derivative financial instruments should be recognized at their fair value as
either assets or liabilities in the consolidated financial statements.
In case of a cash flow hedge, the change in the fair value of derivative
financial instruments is recognized in Other comprehensive income in
shareholders' equity, which is reclassified into earnings in the same period in
which the hedged assets or liabilities affect earnings. On the other hand, in
the case of a fair value hedge, the change in the fair value of derivative
financial instruments is recognized currently in earnings, which are totally or
partially offset by the measurement at fair value of the hedged items.
In both cases, the ineffective portion of derivative financial instruments is
directly reported in earnings as soon as such condition is known.
o Capitalization of foreign currency exchange differences by debt for fixed
assets acquisitions
As described in Note 4.2.a, the cost of those assets which acquisition is
carried out with loans existing as of January 6, 2002, includes financial
interest generated by such loans, admitting the capitalization of the foreign
currency exchange differences originated by the devaluation of the Argentine
peso as of such date. Under U.S.GAAP, this capitalization is not permitted.
o Capitalization of interests in work in progress
Under Argentine GAAP, the capitalization of interests on associated third party
financing, including foreign currency exchange differences, is permitted for
those assets which are constructed over a prolonged period of time. U.S.GAAP
only permits capitalization of the interest for work in progress.
o Valuation of inventories and raw materials
As described in Note 4.2.d and 4.2.e, inventories and raw materials included in
Other assets, have been valued at their replacement cost at each period-end.
Under U.S.GAAP, these assets should be valued at the lower of cost or net
realizable value.
o Foreign currency translation
Under Argentine GAAP and as indicated in Note 4.1.b., the equity investments of
the Company in foreign companies have been translated into Argentine pesos at
the exchange rate at each period end, in accordance with RT 13 of the FACPCE.
Likewise, and according to that RT, the results generated by the mentioned
translation has been recognized in the caption Financial and holding results in
these consolidated financial statements.
86
Notwithstanding, SFAS 52 requires the functional currency definition
corresponding to equity investments in foreign companies and, if corresponds,
the measurement of these investments in functional currency, before the
translation of the assets and liabilities of the foreign companies into
exchange rate at period end.
87
This measurement is required if the functional currency is different from the
currency of the country in which a parent company has the investment and
generates exchange rate differences that are recognized as income/expense.
Likewise, SFAS 52 states that the results from translation from functional
currency to reporting currency, the Argentine peso for the Company, have to be
recognized in a Reserve of shareholders' equity.
o Revenue recognition
As described in Note 4.1.h, the Company recognizes its revenues as services are
provided to customers. Therefore, revenues for installation fees are recognized
in the period that the installation service is completed, jointly with the
related costs.
Nevertheless, the Staff Accounting Bulletin (SAB) 101, "Revenue recognition" of
the SEC requires the deferring of the installation fees and the related costs
considering the estimated average useful life of customers, except when the
cost is higher than the revenue, in which case the excess cannot be deferred.
Since the Company's installation costs exceed the related revenues, the Company
believes such difference of criterion has no impact on the reconciliation of
net income and shareholders' equity to U.S.GAAP. Additionally, the effect for
U.S.GAAP purposes of recording the related deferred asset and liability is not
significant for the periods presented.
o Recoverability of tax credits
The recoverable value of tax credits depends on the existence of sufficient
taxable income within the carryforward period available under the tax law. In
that respect, the management of the Company, as required by Argentine GAAP,
considers that all tax credits are not valued in excess of recoverable value
under its economic-financial projections, based on alternative scenarios of
macro-economic and financial telecommunication cases which are considered
probable and conservative and are related to the result of the renegotiation of
the Company's tariffs and the Group's financial debt restructuring processes.
However, SFAS 109 states more specific and strict rules to evaluate tax
credits, referred to income tax recoverability. Under this pronouncement, an
enterprise must use judgment in considering the relative impact of negative and
positive evidence to determine if a total or partial valuation allowance is
needed or not. For example, negative evidence includes: a) losses expected in
early future years by a presently profitable entity; b) unsettled circumstances
that, if unfavorably resolved, would adversely affect future operations and
profit levels on a continuing basis in future years; and c) a carryforward
period that is so brief that it would limit realization of tax benefits if a
significant deductible temporary difference is expected to reverse in single
year.
88
Nevertheless, the economical-financial projections before mentioned as evidence
of the probable tax credits recoverability, considering the complex
macroeconomic context and the uncertainties that affect the Group business,
under U.S.GAAP, they would not be considered sufficient positive evidence for
the recoverability of these assets. Likewise, following the provisions of SFAS
109 and adopting a prudent position, the management of the Company, in the
reconciliation to U.S.GAAP, has considered a valuation allowance for the total
amount of tax credits related to income tax.
o Reconciliation of net income and shareholders' equity to U.S.GAAP
The following table summarizes the principal adjustments to net income and
shareholders' equity had U.S.GAAP been applied rather than Argentine GAAP:
89
===================================================================================================================================
Nine month periods ended September 30,
---------------------------------------------------------------------------
2002 2001
---------------------------------------------------------------------------
Accumulated Accumulated
Net Other Shareholders' Net Other Shareholders'
income comprehensive equity income comprehensive equity
income (loss) income (loss)
---------------------------------------------------------------------------
Amounts per consolidated financial statements (4,154) - 1,088 142 - 5,280
U.S.GAAP adjustments
Increase (decrease) as a result of:
Valuation of assets and liabilities in foreign
currency as of December 31,2001 3,574 - - - - -
Derivative financial instruments 115 - - - (a) (217) (217)
Foreign currency exchange differences capitalized
in fixed assets (694) - (694) - - -
Capitalization of interests in work in progress (63) - (63) - - -
Valuation of inventories and raw materials (9) - (9) - - -
Foreign currency translation (3) 73 70 - - -
Tax effects on U.S.GAAP adjustments (1,024) - 268 - 75 75
Valuation allowance for tax credits 531 - (774) - - -
---------------------------------------------------------------------------
Amounts per consolidated financial
statements per U.S.GAAP (1,727) 73 (114) 142 (142) 5,138
===================================================================================================================================
(a) The derivative financial instruments have been effective during the nine
month period ended September 30, 2001. Therefore, there are no charges to
earnings due to the ineffectiveness of such contracts during this period.
SFAS 130, effective in the United States of America, established standards for
reporting and display of Comprehensive income, which comprises of Net income
and Other comprehensive income. This statement requires that an enterprise
classify items of other comprehensive income by their nature and display the
accumulated balance of other comprehensive income separately from the other
concepts in the equity section of a statement of financial position.
The change in the accumulated other comprehensive income (loss) for the nine
month periods ended September 30, 2002 and 2001 is presented below, net of
income tax effects:
=======================================================================
Nine month periods
ended September 30,
-------------------------
2002 2001
-------------------------
Balances at the beginning of period (137) (31)
Derivative financial instruments
Change on derivative financial instruments (140) (244)
Reclassification into earnings 351 75
Foreign currency translation 73 -
Tax effect (74) 58
-------------------------
Balances at period end 73 (142)
=======================================================================
Net income (loss) per share amounts in pesos, for the nine month periods ended
September 30, 2002 and 2001 are as follows:
========================================================================
Consolidated financial statements
---------------------------------
Net income (loss) per share (4.22) 0.14
Net income (loss) per ADS (21.09) 0.72
Consolidated financial statements under U.S.GAAP
------------------------------------------------
Net income (loss) per share (1.75) 0.14
Net income (loss) per ADS (8.77) 0.72
========================================================================
-------------------------------------------------------------------------------
o Newly issued accounting pronouncements under U.S.GAAP
-------------------------------------------------------------------------------
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". This standard requires an entity to recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and capitalize that amount as a part of the book value of the
long-lived asset. That cost is then depreciated over the remaining life of the
underlying long-lived asset. This statement will be effective for the Company
in the first quarter of 2003.
90
The management of the Company is assessing the impact of these new statements
on its financial condition and the results of operations under U.S.GAAP.
However, based on a preliminary analysis, it is anticipated that the impact
will not be material to the reconciliation of net income and shareholders'
equity under U.S.GAAP.
91
NOTE 21 - RESTRICTIONS ON UNAPPROPRIATED RETAINED EARNINGS
Under Law No. 19550, the Company's by-laws and CNV regulations, 5% of the
Company's net income for the year, plus or minus any prior year adjustments and
subject to coverage of accumulated losses, if any, must be allocated to a legal
reserve until such reserve reaches 20% of capital stock plus adjustment to
capital stock.
NOTE 22 - EVENTS SUBSEQUENT TO SEPTEMBER 30, 2002
o Reimbursement of municipal taxes to customers
On October 30, 2002, the CNC, through Resolution No. 1144/02, required the
Company not to invoice the municipal taxes increase to its customers and to
reimburse them the amounts billed for that concept. At the date of issuance of
these consolidated financial statements, the management of the Company and its
legal counsels are evaluating the legal basis of the requirement and the
measures to adopt.
Valerio Cavallo Carlos Felices Christian Chauvin
Controller Chief Executive Officer Director
92
Exhibit A
Consolidated balance sheets at September 30, 2002 and 2001
FIXED ASSETS ACTIVITY
(In millions of Argentine constant pesos, see Note 4.1.d)
============================================================================================================
Capitalized
Amounts foreign
at Additions currency Results Amounts
Main account beginning from exchange from Transfe- Retire- at period
of year purchases differences translation rences ments end
(Note
4.2.a)
------------------------------------------------------------------------------------------------------------
Land 120 - - - 1 - 121
Buildings 1,613 - 38 - 30 (8) 1,673
Transmission equipment 4,652 14 298 8 124 (3) 5,093
Switching equipment 3,556 2 192 5 94 - 3,849
Power equipment 502 1 13 5 10 (2) 529
External wiring 5,652 - 156 - 156 - 5,964
Telephony equipment, instruments
and systems for improvement in 762 6 35 5 51 (1) 858
services
Cellular handsets leased without 368 11 - 3 3 (60) 325
charge
Vehicles 111 - - - - - 111
Furniture 106 1 - - 1 (1) 107
Installations 503 1 - 1 1 (1) 505
Computer equipment 2,100 13 63 4 209 (4) 2,385
Work in progress 712 153 63 - (674) (4) 250
Materials 89 17 - - (6) (43) 57
-------------------------------------------------------------------------
Total 2002 20,846 219 858 31 - (127) 21,827
============================================================================================================
============================================================================================================
Total 2001 20,805 765 - - - (970) 20,600
============================================================================================================
===================================================================================================== ========
Depreciation
-----------------------------------------------------
For the
period Net Net
Accumulated ---------------- book book
Main account at beginning Annual Retire- Accumulated value value
of year rate Amount ments at period 2002 2001
(%) end
---------------------------------------------------------------------------------------------------------------
Land - - - - - 121 119
Buildings (535) 4 - 9 (57) - (592) 1,081 1,081
Transmission equipment (2,167) 10 - 11 (393) - (2,560) 2,533 2,461
Switching equipment (1,910) 10 (313) - (2,223) 1,626 1,650
Power equipment (214) 10 - 20 (43) - (257) 272 290
External wiring (2,941) 7 (251) - (3,192) 2,772 2,705
Telephony equipment, instruments
and systems for improvement in
services (547) 13 - 18 (55) - (602) 256 206
Cellular handsets leased without
charge (270) 100 (65) 38 (297) 28 122
Vehicles (78) 20 - 40 (9) - (87) 24 35
Furniture (60) 10 - 20 (7) - (67) 40 46
Installations (260) 9 - 33 (44) - (304) 201 253
Computer equipment (1,186) 18 - 33 (258) - (1,444) 941 816
Work in progress - - - - - 250 947
Materials - - - - - 57 117
-------------- ---------------------------------------- ----------
Total 2002 (10,168) (a) 38 (11,625) 10,202
(1,495)
===================================================================================================
======================================================================================================
Total 2001 (9,394) (1,267) 909 (9,752) 10,848
===============================================================================================================
(a) Includes (101) corresponding to the depreciation of capitalized foreign
currency exchange differences by debt and (7) corresponding to Results from
translation.
93
Exhibit B
Consolidated balance sheets at September 30, 2002 and 2001
INTANGIBLE ASSETS ACTIVITY
(In millions of Argentine constant pesos, see Note 4.1.d)
=========================================================================================================================== =======
Amortization
Original Results Original -------------------------------
value from Retire- value Accumulated For Accumulated Net Net
Account at Additions trans- ments at at the at period balance balance
beginning lation period beginning period end 2002 2001
of year end of year
--------------------------------------------------------------------------------------------------------------------------- -------
System development costs 402 22 2 (1) 425 (130) (a) (196) 229 259
(66)
Debt issue costs 78 - - - 78 (57) (b) (64) 14 26
(7)
PCS license 662 - - - 662 (71) (c) (104) 558 601
(33)
Band B of Paraguay license 100 - 4 - 104 (39) (c) (48) 56 62
(9)
Usage rights 52 1 - - 53 (22) (d) (24) 29 29
(2)
Exclusivity rights 102 1 - (2) 101 (35) (e) (44) 57 69
(9)
Websites 2 - - - 2 (2) - (2) - -
Trademarks and patents 9 - - - 9 (3) - (3) 6 7
Goodwill on the acquisition of 72 - - - 72 (62) (f) (72) - 11
Soluciones (10)
Goodwill on the acquisition of 5 - - - 5 (5) - (5) - -
Micro Sistemas
Goodwill on the acquisition of 1 - - - 1 (1) - (1) - -
Cable Insignia
------------------------------------------------------------------------------------------ -------
Total 2002 1,485 24 6 (3) 1,512 (427) (136) (563) 949
===========================================================================================================================
=============================================================================================================================
Total 2001 1,404 51 - - 1,455 (265) (g) (391) 1,064
(126)
====================================================================================================================================
a) Included 22 in Cost of services provided, 3 in Administrative expenses, 39
in Sales expenses and 2 in Financial and holding results (Results from
translation).
b) Included in Financial and holding results.
c) Included 41 in Cost of services provided and 1 in Financial and holding
results (Results from translation).
d) Included in Administration expenses.
e) Included in Sales expenses.
f) Included in Equity losses from related companies.
g) Included 42 in Cost of services provided, 4 in Administrative expenses, 60
in Sales expenses, 7 in Financial and holding results and 13 in Equity
losses from related companies.
94
Exhibit C
Consolidated balance sheets at September 30, 2002 and 2001
INVESTMENTS IN OTHER COMPANIES AND PUBLIC SECURITIES
(In millions of Argentine constant pesos, except
par value - see Note 4.1.d)
==============================================================================================================================
Characteristic of the 2002 2001
securities
---------------------------------------------------------------------------
Denomination and type Class of Par Net Restated Book Book
shares value Amount realizable cost value value
value value
------------------------------------------------------------------------------------------------------------------------------
CURRENT INVESTMENTS
Public bonds
Province of Corrientes Bond (a) $ 1 757,454 - 1 - 2
Cecacor Bond (a) $ 1 - - - - 7
Argentina 2004 Bond (b) US$ 1 12,000,000 n/a 12 48 -
Other bonds US$ 1 - - - - 46
---------------------------------------
Total current investments - 13 48 55
=======================================
NON- CURRENT INVESTMENTS
Public bonds
Argentina 2004 Bond (b) US$ 1 18,000,000 n/a 18 66 67
"Dorado" Bond (a) (c) $ 1 12,481,003 n/a 12 5 -
Province of Formosa Bond (a) US$ 1 - - - 2
Province of Corrientes Bond (a) $ 1 5,069,115 2 5 2 13
---------------------------------------
Total public bonds 2 35 73 82
---------------------------------------
Related companies Law No. 19550 Sect.33
Multibrand (d) Ordinary $ 1 3,000 1 - -
Latin American Nautilus Ordinary US$ 2 3,000,000 6 5 11
Agroconnection - - 2
Related parties
Nahuelsat Ordinary $ 1,000 5,750 6 - (h) 9
----------------------------
Total related companies Law No. 19550 Sect.33 and 13 5 22
related parties
----------------------------
Investment in Intelsat Ltd. Ordinary US$ 3 260,432 3 12 7
Advances for the acquisition of shares of Latin 1 5 2
American Nautilus
----------------------------
Total non-current investments 52 95 113
==============================================================================================================================
=========================================================================================================================
Related companies - Law No. 19550 - Sect. 33 Related parties
---------------------------------------------------------------------------
Information on the issuer Multibrand Latin American Nahuelsat
Nautilus (f)
-------------------------------------------------------------------------------------------------------------------------
Main activity Administration and Telecommunication Obtaining, installing
management of a multibrand services and operating
fidelity program satellite
communications
systems and trading
of its services
Percentage participation in capital stock 25% 10% 5.75%
Financial statements closing date December 31 December 31 December 31
Financial statements used to determine the
equity value:
- Date 9.30.02 6.30.02 12.31.01
- Duration of the year/period 9 months 6 months 12 months
- Board of Directors' approval date 10.18.02 - 5.23.02
- Report on review 10.18.02 - 5.17.02
- Audit scope Limited review - Full audit
- Type of report of the independent With observations - With observations (g)
Accountants
- Capital stock (par value) (e) - 224 100
- Income (loss) for the year/period (6) (55) (2)
- Shareholders' equity (3) 36 57
=========================================================================================================================
(a) The Company received these bonds in order to cancel trade accounts
receivable with some province government.
(b) The Company intends to hold these bonds to their maturity date.
(c) This bond was converted into pesos according to Decree No. 214/02.
(d) Net of a loan granted to Multibrand of 1 and 2 at September'02 and
September'01, respectively.
(e) Expressed in millions of $.
(f) The audited information originally provided by the company was adapted to
the Company's accounting policies.
95
(g) Corresponds to the impact of the new economic plans described in Note 3
that would take effect on the results of the company's operations,
considering the high level of indebtedness in foreign currency and the
lack of the consolidated information.
(h) As from June 2002, the Company has recorded to zero its participation in
Nahuelsat, because it has been estimated that the impact in the Peso
devaluation, based on the last financial statements issued by Nahuelsat,
would generate a significative decrease in its shareholder's equity, and
remote possibilities in the recoverability of this investment.
96
Exhibit D
Consolidated balance sheets at September 30, 2002 and 2001
OTHER INVESTMENTS
(In millions of Argentine constant pesos, see Note 4.1.d)
================================================================================================
Denomination and type Book value at
Cost at --------------------------
2002 2002 2001
------------------------------------------------------------------------------------------------
CURRENT INVESTMENTS
Short-term investments
In foreign currency 593 593 350
In Argentine pesos 234 234 24
Investment trusts
In foreign currency - - 168
In Argentine pesos - - 2
----------------------------------------------
Total current investments 827 827 544
================================================================================================
97
Exhibit E
Consolidated balance sheets at September 30, 2002 and 2001
ALLOWANCES AND RESERVES ACTIVITY
(In millions of Argentine constant pesos, see Note 4.1.d)
=====================================================================================================
Balance at Balance
Accounts the Increase Transferences Decrease at
beginning of 2002
the year
-----------------------------------------------------------------------------------------------------
Deducted from current assets
For doubtful accounts receivable 520 (a) 200 - (416) 304
For obsolete inventories 4 - - (2) 2
Deducted from non-current assets
For other receivable - (b) 8 - (3) 5
-----------------------------------------------------------
Total deducted from assets 524 208 - (d) (421) 311
=====================================================================================================
=====================================================================================================
Included in current liabilities
For contingencies 13 - 5 (12) 6
Included in non-current liabilities
For contingencies 133 53 (5) (83) 98
-----------------------------------------------------------
Total included in liabilities 146 (b) 53 - (e) (95) 104
=====================================================================================================
98
=====================================================================================================
Balance at Balance
Accounts the Increase Transferences Decrease at
beginning of 2001
the year
-----------------------------------------------------------------------------------------------------
Deducted from current assets
For doubtful accounts receivable 283 (c) 336 2 (204) 417
For obsolete inventories 2 (b) 9 - - 11
Deducted from non-current assets
For doubtful accounts receivable 2 - (2) - -
-----------------------------------------------------------
Total deducted from assets 287 345 - (204) 428
=====================================================================================================
=====================================================================================================
Included in current liabilities
For contingencies 22 - 13 (18) 17
Included in non-current liabilities
For contingencies 126 33 (13) - 146
-----------------------------------------------------------
Total included in liabilities 148 (b) 33 - (18) 163
=====================================================================================================
(a) Includes 198 in Sales expenses and 2 in Financial and holding results.
(b) Charged to Other expenses, net.
(c) Charged to Sales expenses.
(d) Includes (327) corresponding to results on exposure to inflation.
(e) Includes (89) corresponding to results on exposure to inflation.
99
Exhibit F
Consolidated statements of income for the nine
month periods ended September 30, 2002 and 2001
COST OF SERVICES PROVIDED
(In millions of Argentine constant pesos, see Note 4.1.d)
================================================================================
Periods ended September 30, 2002 2001
-----------------
Balance of inventories at beginning of year 52 192
Plus:
Purchases of cellular handsets 3 33
Net financial results 1 -
Inventories leased without charge (11) (27)
Retirements not included in cost of cellular handsets (1) (6) (24)
Cost of services provided (Exhibit H) 2,037 2,467
Minus:
Balance of inventories at period end (27) (88)
-----------------
COST OF SERVICES PROVIDED 2,049 2,553
================================================================================
--------------------------------------------------------------------------------
Periods ended September 30, 2002 2001
--------------------------------------------------------------------------------
(1) Charged to Other receivables (3) (6)
Charged to Cost of services provided (3) (9)
Charged to Other expenses, net - (9)
------------------------
(6) (24)
========================
100
Exhibit G
Consolidated balance sheets at September 30, 2002 and 2001
ASSETS AND LIABILITIES IN FOREIGN CURRENCY
=======================================================================================================
2002 2001
------------------------------------------------
ASSETS Amounts in millions of foreign currency units
------------------------------------------------
CURRENT ASSETS
Cash and banks
Cash US$ 1 -
Bank deposits US$ 8 3
G 2 -
Investments
Short-term investments US$ 78 149
EURO 82 10
Public bonds US$ 13 21
Investment trusts US$ - 76
Trade accounts receivable
Ordinary US$ 13 126
SDR 1 2
GFD 2 1
G 140 -
Other receivables
Swap contracts collateral US$ - 67
Tax credits G 1 -
Prepaid expenses G 2 -
Various US$ 1 2
G 11 -
NON-CURRENT ASSETS
Other receivables
Selling of Sky US$ - 5
Investments
Public bonds US$ 18 31
Latin American Nautilus US$ 1 1
Multibrand US$ - 1
Fixed assets
Advanced payments to suppliers US$ - 2
LIABILITIES
CURRENT LIABILITIES
Accounts payable
Vendors US$ 20 77
G 9 -
GFD - 1
SDR 8 7
Capital leases US$ 4 33
Related companies US$ - 50
Debt
Corporate bonds US$ 235 317
EURO 1,378 -
Banks loans and others US$ 578 459
(Y) 6,593 -
Fixed asset acquisitions US$ 611 238
EURO 39 3
(Y) 11,737 -
Inventory acquisitions US$ 155 69
Compensation and social benefits payable
Social benefits and other G 2 -
Other liabilities
Various G 1 -
NON-CURRENT LIABILITIES
Accounts payable
Capital leases US$ 1 10
Debt
Corporate bonds US$ - 1,289
Banks loans and others US$ - 341
Fixed asset acquisitions US$ - 528
EURO - 36
Inventory acquisitions US$ - 116
==============================================================================================
US$ = United States Dollars; GFD = Golden Franc; SDR =Special drawing rights;
G = Paraguayan guaranies; (Y) = Yen.
101
Exhibit H
Consolidated statements of income for the nine
month periods ended September 30, 2002 and 2001
EXPENSES INCURRED
(In millions of Argentine constant pesos, see Note 4.1.d)
---------------------------------------------------------------------------------
Cost of Fixed assets
services Administrative Sales - Work in Total
provided expenses expenses progress 2002
---------------------------------------------------------------------------------
Wages and social benefits 218 88 168 5 479
Depreciation of fixed assets 1,216 58 214 - 1,488
Amortization of intangible assets 63 5 48 - 116
Taxes 68 1 10 - 79
Taxes on bank debits and credits 35 - - - 35
Materials and supplies 117 4 20 - 141
Transport and freight 15 5 11 - 31
Energy, water and others 25 5 8 - 38
Bad debts expense - - 198 - 198
Interconnection costs 113 - - - 113
Lease of circuits 33 - - - 33
Rents 34 10 21 - 65
Fees for debt restructuring - 15 - - 15
process
Fees and counsel services 2 9 2 - 13
Repayment for services 22 9 31 - 62
Management fees 20 2 - - 22
Advertising - - 24 - 24
Agent commissions - - 20 - 20
Commissions on collecting - - 50 - 50
Various 56 20 34 - 110
---------------------------------------------------------------------------------
Total 2,037 231 859 5 3,132
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Cost of Fixed assets
services Administrative Sales - Work in Total
provided expenses expenses progress 2001
---------------------------------------------------------------------------------
Wages and social benefits 425 165 279 15 884
Depreciation of fixed assets 1,004 62 201 - 1,267
Amortization of intangible assets 42 4 60 - 106
Taxes 118 4 20 - 142
Materials and supplies 230 22 27 - 279
Transport and freight 25 20 24 - 69
Energy, water and others 44 9 20 - 73
Bad debts expense - - 336 - 336
Interconnection costs 159 - - - 159
Lease of circuits 53 - - - 53
Rents 55 18 18 - 91
Fees and counsel services 2 18 2 - 22
Repayment for services 53 51 35 - 139
Management fees 188 18 - - 206
Advertising - - 135 - 135
Agent commissions - - 82 - 82
Commissions on collecting - - 93 - 93
Various 69 38 24 - 131
---------------------------------------------------------------------------------
Total 2,467 429 1,356 15 4,267
---------------------------------------------------------------------------------
102
Exhibit I
Consolidated balance sheets at September 30, 2002 and 2001
AGING BREAKDOWN OF CONSOLIDATED BALANCE SHEETS CAPTIONS
(In millions of Argentine constant pesos, see Note 4.1.d)
================================================================================================================================
Trade Compensation
Due date accounts Other Accounts and social Taxes Other
Investments receivable receivables payable Debt benefits payable liabilities
payable
--------------------------------------------------------------------------------------------------------------------------------
Total due - 194 - - (a) 2,948 - - -
--------------------------------------------------------------------------------------------------------------------------------
Not due
Payable - - - - (a) 8,931 - - -
10.2002 to 12.2002 827 425 90 465 - 31 79 23
1.2003 to 3.2003 - 18 39 2 - 12 - 1
4.2003 to 6.2003 24 2 41 2 - 11 34 -
7.2003 to 9.2003 24 - 472 3 - 8 - -
10.2003 to 9.2004 67 2 128 3 - 10 - 6
10.2004 to 9.2005 - - 13 - - 9 - -
10.2005 to 9.2006 - - 49 - - 8 - -
10.2006 to 9.2007 5 - 57 - - 2 - -
10.2007 to 9.2008 - - 1 - - 1 - -
10.2008 and subsequent 2 - 1 - - 1 - 7
--------------------------------------------------------------------------------------------------------------------------------
Total not due 949 447 891 475 8,931 93 113 37
--------------------------------------------------------------------------------------------------------------------------------
Total 2002 949 641 891 (b) 475 11,879 93 113 37
================================================================================================================================
================================================================================================================================
Balances with indexation - - 29 33 - - - -
clauses
Balances bearing interest 949 232 - 20 11,879 - - -
Balances not bearing interest - 409 862 422 - 93 113 37
--------------------------------------------------------------------------------------------------------------------------------
Total 949 641 891 475 11,879 93 113 37
================================================================================================================================
================================================================================================================================
Average annual interest rate 8.03 (c) - 8.50 (d) - - -
(%)
================================================================================================================================
(a) Includes 133 corresponding to Nucleo (See Note 14).
(b) There are payables in kind that amounted to 1
(c) 154 bear 50% over Banco Nacion Argentina notes payable discount rate and
78 bear 9.25%.
(d) See note 8.
================================================================================================================================
Trade Compensation
Due date accounts Other Accounts and social Taxes Other
Investments receivable receivables payable Debt benefits payable liabilities
payable
--------------------------------------------------------------------------------------------------------------------------------
Total due - 586 - - - - - -
--------------------------------------------------------------------------------------------------------------------------------
Not due
10.2001 to 12.2001 599 933 307 958 995 41 179 47
1.2002 to 3.2002 - 49 18 24 210 31 - 2
4.2002 to 6.2002 - 49 18 24 416 33 22 2
7.2002 to 9.2002 - 29 97 27 783 15 - -
10.2002 to 9.2003 4 4 89 15 2,119 25 29 2
10.2003 to 9.2004 70 - 9 9 1,383 20 106 2
10.2004 to 9.2005 2 - 9 - 212 18 64 2
10.2005 to 9.2006 2 - 4 - 137 15 55 2
10.2006 to 9.2007 2 - 2 - 608 4 64 2
10.2007 and subsequent 4 - - - 657 4 127 19
--------------------------------------------------------------------------------------------------------------------------------
Total not due 683 1,064 553 1,057 7,520 206 646 80
--------------------------------------------------------------------------------------------------------------------------------
Total 2001 683 1,650 553 (e) 1,057 7,520 206 646 80
================================================================================================================================
================================================================================================================================
Balances bearing interest 683 699 148 100 7,520 - - -
Balances not bearing interest - 951 405 957 - 206 646 80
--------------------------------------------------------------------------------------------------------------------------------
Total 683 1,650 553 1,057 7,520 206 646 80
================================================================================================================================
================================================================================================================================
Average annual interest rate 10.33 (f) 3.00 7.36 - - - -
(%)
================================================================================================================================
(e) There are payables in kind that amounted to 2
(f) 529 bear 50% over Banco Nacion Argentina notes payable discount rate and
170 bear 19.4%.
104
LIMITED REVIEW REPORT
To the Directors and Shareholders of
Telecom Argentina STET-France Telecom S.A.
1. We have performed a limited review of the accompanying consolidated
balance sheet of Telecom Argentina STET-France Telecom S.A. ("Telecom") as
of September 30, 2002 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the nine-month period
then ended, and the related notes 1 to 17 and 19 to 22 and exhibits
A,B,C,D,E,F,G,H and I, presented as additional information. The financial
statements mentioned in this paragraph and the consolidated financial
statements of Telecom as of September 30, 2001 are the responsibility of
the Board of Directors of Telecom.
2. We conducted our limited review in accordance with auditing standards in
force in Argentina for such purpose, established in Technical Resolution
No. 7 ("TR 7") of the Argentine Federation of Professional Councils of
Economic Sciences and, therefore, does not include all of the procedures
necessary for performing a full audit of said financial statements. A
limited review of interim financial statements consists principally in
applying analytical review procedures and making inquiries of executives
and officers responsible for the Company's accounting matters. It is
substantially less in scope than an audit conducted in accordance with
auditing standards in force, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
3. We have previously performed a limited review of the consolidated
financial statements of Telecom and its subsidiaries as of September 30,
2001, as required by TR 7 in the case of financial statements for interim
periods. Based on our work and the other auditors' report on the financial
statements of the subsidiaries as of September 30, 2001, we issued our
unqualified limited review report on the financial statements mentioned in
this paragraph, dated November 6, 2001.
4. The financial statements of the subsidiaries Telecom Personal S.A. and
Publicom S.A. ("the subsidiaries") as of September 30, 2002 have been
reviewed by other external auditors, who issued their limited review
reports on November 7, 2002, which included the comments stated in the
fifth paragraph of this report. The total assets and net sales of those
subsidiaries represent approximately 25% and 27% of the total consolidated
assets of Telecom as of September 30, 2002 and the total consolidated
sales of Telecom for the nine-month period ended September 30, 2002,
respectively.
5. The auditor's report on the financial statements of Telecom Personal S.A.
as of September 30, 2002 includes observations stating that: a) the
financial statements of Telecom Personal S.A. as of September 30, 2002
have been prepared considering the continuity of the normal course of
business, therefore, excluding the potential adjustments and/or
reclassifications, if any, that might be required if the final outcome of
the uncertainties described in the auditor's report become known; b) the
recoverability of fixed assets and intangible assets and the use of tax
credits rely on the effectiveness of the premises used for the preparation
of the economic-financial projections, developed on the basis of the
available information to date. Accordingly, the financial statements of
Telecom Personal S.A. as of September 30, 2002 may not include all of the
adjustments and/or reclassifications that might result from the conditions
mentioned in the auditors report, and c) as of November 7, 2002, Telecom
Personal S.A. has not complied with the payment of the loan principal and
interest for US$ 208 million and $ 115 million and, if Telecom Personal
S.A. does not reverse this situation, the creditors might require the
acceleration of all of the maturity dates established and formally request
the early repayment of the debt.
The auditor's report on the financial statements of Publicom S.A. as of
September 30, 2002 includes certain comments indicating that: i) the
financial statements of Publicom S.A. as of September 30, 2002 have been
prepared considering the continuity of the normal course of business,
therefore, excluding the potential adjustments and/or reclassifications,
if any, that might be required in the event of becoming aware of the final
outcome of the uncertainties described in the auditor's report, ii) the
recoverability of fixed assets and intangible assets and the use of tax
credits rely on the effectiveness of the premises used for the preparation
of the economic-financial projections, developed on the basis of the
available information to date. Accordingly, the financial statements of
Publicom S.A. as of September 30, 2002 may not include all of the
adjustments and/or reclassifications that might result from the conditions
mentioned in the auditors report, and iii) as of November 7, 2002,
Publicom S.A. has not complied with the payment of loan principal for US$
4 million and, if Publicom S.A. did not reverse this situation, the
creditors might require the acceleration of all of the maturity dates
established and formally request the early repayment of the debt, which
has not occurred to date.
6. As explained in Note 3 to the accompanying consolidated financial
statements, the National Government has introduced significant changes to
the economic policy and it resolved to change the exchange regime
established by the Convertibility Law in force since 1991. Also, the
referred note describes other measures known to date, some of which are
still in the process of being drafted and regulated. Also, the referred
note describes the effects on the Company's situation and the accompanying
financial statements, according to the assessments and estimates made by
the Company's Management, based on the available information as of the
date of preparation of those financial statements. The overall context and
regulations in force are subject to future changes as a result of the
evolution of events. The future actual results may significantly differ
from the assessments and estimates made as of the date of preparation of
the financial statements. Accordingly, the Company's financial statements
must be read considering the circumstances depicted above.
7. As explained in the note mentioned in the preceding paragraph, the Public
Emergency and Exchange Regime Reform Law voided the adjustment clauses in
dollars or in other foreign currencies or other indexation methods
included in the agreements entered into with the Public Administration,
under public law rules, including, among others, public works and
utilities. Thus, the Company's rates remained in pesos at the exchange
rate of US$ 1 = $ 1, subject to the renegotiation under the regulations
issued in this regard. At the same time, the exchange regime established
on February 8, 2002 created a free exchange market, where the foreign
currency operations are traded. Consequently, the Company's operating
conditions were changed, adversely affecting its economic-financial
equation, which is evidenced by the losses and reduction of the
shareholders' equity of Telecom, recorded in the nine-month period ended
September 30, 2002.
8. Additionally, on April 2, 2002, Telecom announced that, as a result of the
current macroeconomic situation prevailing in Argentina, the peso
devaluation and volatility, the pesification of the Company's rates and
the schedule defined by the Argentine Government for the discussion
related to the adjustment to regulated rates, the Company's Board of
Directors has resolved to suspend the principal payments of the entire
financial debt service and that of its Argentine subsidiaries and on June
24, 2002, the Company's Board of Directors has resolved to suspend the
interest of such financial debt. As of the date of this report, Telecom
and its subsidiaries did not comply with bank and financial debt payments
in the amount of US$ 433 million; Euros 252 million, Yens 685 million and
$ 175 million, and interest payments in the amount of US$ 22 million,
Euros 41 million, Yens 32 million and $ 7 million, as mentioned in Note 14
to the accompanying consolidated financial statements. Additionally, as
explained in Note 14 to the accompanying consolidated financial
statements, certain creditors of Telecom required the acceleration of
their loans. Therefore, Telecom's Board of Directors classified the bank
and financial debt as current in the consolidated financial statements as
of September 30, 2002. On the other hand, no economic penalties that might
eventually derive from the suspension of the mentioned payments have been
recorded. The result of this situation depends on the conclusion of the
negotiation of the Company's debts.
9. The accompanying consolidated financial statements of Telecom as of
September 30, 2002 have been prepared considering the continuity of the
Company's normal course of business and that of its subsidiaries, using
valuation and classification criteria of assets and liabilities applicable
to a going concern and, therefore, do not contemplate the potential
adjustments related to the recoverability and classification of assets
and/or the adequacy and classification of liabilities that may be required
if the uncertainties described above are not favorably solved.
10. Based on our review and the other auditors' reports on the financial
statements mentioned in the fourth paragraph of this report, we inform
that we are not aware of any material modifications that should be made to
the consolidated financial statements of Telecom as of September 30, 2002
for them to be in conformity with generally accepted accounting principles
in Argentina applicable to consolidated financial statements. This
statement must be read considering the uncertainties mentioned in the
paragraphs fifth to ninth of this report, which conclusion can not be
determined as of the date of this report.
11. The information contained in Note 20 to the accompanying consolidated
financial statements of Telecom is not required by generally accepted
accounting principles in Argentina. Telecom's Management presents in the
referred note the main differences between generally accepted accounting
principles applied by Telecom in the preparation of its consolidated
financial statements and generally accepted accounting principles in the
United States of America.
12. The figures presented by the Company in Note 18 of the accompanying
consolidated financial statements of Telecom are in addition to the
information required by the generally accepted accounting principles in
Argentina. Said note presents: a) certain figures used for the preparation
of the constant currency information; b) the amounts, globally stated,
corresponding to the internal Wholesale Price Index variation from January
1, 2002 to September 30, 2002 and; c) the total amounts in constant
currency, which are in accordance with the financial statement mentioned
in the first paragraph of this report.
Additional information:
a) The auditing standards and the generally accepted accounting principles
prevailing in Argentina, mentioned in the preceding paragraphs, are those
applicable in the City of Buenos Aires.
b) The stand-alone financial statements of Telecom as of September 30, 2002
are in accordance with the statutory accounting records and are
transcribed in the "Inventory and Balance Sheet" book, which is kept
formally as per legal regulations.
c) Based on the review performed and on the other auditors' reports on the
financial statements mentioned in the fourth paragraph of this report, we
inform that the financial statements of Telecom as of September 30, 2002
meet the provisions of the Companies Law and appropriate resolutions of
the National Securities Commission.
d) As part of our limited review, we have read the additional information to
the notes to the financial statements required by section 68 of the
regulations of the Buenos Aires Stock Exchange and the Summary
Information, prepared by Telecom's Management, on which, as regards our
area of responsibility, we have no observations to make.
e) As of September 30, 2002, the accrued liability of Telecom for retirement
and pension contributions owed to the National Social Security
Administration according to the accounting records amounted to $
5,497,697.83. This amount was not past due as of that date.
Buenos Aires
November 8, 2002
HENRY MARTIN, LISDERO Y ASOCIADOS
C.P.C.E.C.A.B.A. - R.A.P.U. Vol. I Fo. 7
Aldo Oscar Carugati (Partner)
Public Accountant (U.B.)
C.P.C.E.C.A.B.A. Vol. 114 Fo. 178
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CORPORATE INFORMATION
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>> INDEPENDENT AUDITORS Henry Martin, Lisdero y Asociados (member of Ernst &
Young International).
>> STOCK MARKET INFORMATION (Source: Bloomberg)
BCBA
----------------------------------------------------------------------------------------------
Market quotation ($/share)
------------------------------------------ Volume of shares
Quarter High Low traded (in millions)
----------------------------------------------------------------------------------------------
September'01 3.16 1.52 44.2
December'01 1.95 1.19 39.7
March'02 2.10 1.79 30.5
June'02 1.40 0.58 28.4
September'02 0.80 0.56 36.5
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NYSE
----------------------------------------------------------------------------------------------
Market quotation (US$/ADR*)
------------------------------------------ Volume of ADRs
Quarter High Low traded (in millions)
----------------------------------------------------------------------------------------------
September'01 15.80 7.60 30.2
December'01 8.34 5.79 27.5
March'02 6.68 2.64 25.3
June'02 2.88 0.60 23.1
September'02 1.13 0.66 8.1
----------------------------------------------------------------------------------------------
* Calculated at 1 ADR = 5 shares
>> INVESTOR RELATIONS for information about Telecom Argentina STET-France
Telecom S.A., please contact:
------------------------------------------------------------
In Argentina
------------------------------------------------------------
Telecom Argentina STET France Telecom S.A.
Investor Relations Departments
Alicia Moreau de Justo 50, 10th Floor
(1107) Ciudad Autonoma de Buenos Aires
Tel.: 54-11-4968-4000
Argentina
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Outside Argentina
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Golin Harris International Morgan Guaranty Trust Co.
The Chrysler Building ADR Department
405 Lexington Ave., 16th floor 60 Wall Street
New York, New York 10017 New York, New York 10260-0060
USA USA
Tel.: 1-212-697-9191 Tel.: 1-212-648-9935
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>> INTERNET http://www.telecom.com.ar
>> DEPOSIT AND TRANSFER AGENT FOR ADRs
------------------------------------------------------------
Morgan Guaranty Trust Co.
60 Wall Street
New York, New York 10260-0060
USA
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