annual report 2006 - Bad Request

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annual report 2006
teléfonos de méxico
I
Corporate Profile
TELMEX is the leading
telecommunications company
in Mexico. TELMEX and its
subsidiaries provide a wide range
of telecommunications services,
data and video transmission
and Internet access, as well as
integrated telecommunications
solutions to its corporate
customers. Additionally, it
offers telecommunications
services through its international
subsidiaries in Argentina, Brazil,
Chile, Colombia and Peru. More
information about TELMEX can
be accessed on the Internet at
www.telmex.com.
Index
Consolidated highlights
Letter to our shareholders
Chief Executive Officer’s report
Commercial initiatives
TELMEX’s telecommunications network security
Social telephony
Fundación TELMEX: commitment with society
Comments on the consolidated financial statements
Corporate Governance
Audit Committee report
Corporate Practices Committee report
Finance and Planning Committee report
Consolidated financial statements
Proposal to the Shareholders’ Meeting
Significant results of accounting separation
Board of Directors
Advisory Board
Directory
II
annual report 2006
01
02
07
07
17
19
21
22
27
28
30
31
32
66
67
68
70
72
consolidated highlights
Figures in millions of Mexican pesos, unless otherwise indicated, with purchasing power at December 31, 2006
2006
2005
2004
2003
2002
175,006
173,505
154,052
137,311
137,345
Cost of sales and services
35,799
36,064
34,598
33,268
32,431
Commercial, administrative and general expenses
35,035
29,174
24,685
20,024
19,913
Transport and interconnection
31,318
30,421
21,909
14,374
13,814
Depreciation and amortization
24,563
25,999
25,248
23,949
23,548
126,715
121,658
106,440
91,615
89,706
Operating income (EBIT)
48,291
51,847
47,612
45,696
47,639
EBITDA (1)
72,854
77,846
72,860
69,645
71,187
Majority net income
28,534
30,006
30,253
25,982
23,549
Total assets
264,030
266,203
278,363
214,994
203,129
Total debt
100,743
96,853
99,069
79,486
79,587
Stockholders’ equity
105,956
118,563
118,002
91,163
73,606
Basic
1.36
1.31
1.27
1.04
0.91
Diluted
1.36
1.31
1.26
1.02
0.89
0.403
0.370
0.333
0.303
0.273
20,203
22,045
23,665
24,218
25,554
• Financial
Total revenues
Total cost and expenses
• Data per share
(2)
(pesos)
Majority net income:
Nominal dividend paid
Outstanding shares at year end of each year (millions)
1
2
Operating cash flow or EBITDA defined as operating income plus depreciation and amortization.
For comparable purposes, outstanding shares include the two-for-one stock split that consist of providing two new shares per each outstanding share, approved on April 28, 2005, effective
since May 25, 2005.
01
letter to our shareholders
Dear Shareholders,
Since privatization, two core principles have guided TELMEX’s mission. We aim not only
to be a world-class telecommunications company but also a fundamental pillar in Mexico’s
development by providing most of the infrastructure necessary to communicate in every
corner in the country with state-of-the-art products and services. Our focus on achieving
our mission and continuing to be an industry leader is why we have invested and worked
hard, along with all TELMEX personnel, to update and modernize operations, become
more efficient, and deliver excellent customer service.
This constant updating at TELMEX in all areas
and at all levels has required investments in
Mexico of approximately 28 billion dollars
(1990-2006) to strengthen and modernize our
infrastructure. Complementing that investment,
we have applied significant resources to preparing and training employees. Their effort and
dedication have led TELMEX to be one of the
most efficient and competitive telecommunications companies in the world.
TELMEX is the only telecommunications
company in Mexico that invests an important
amount of resources to serve low-income segments of the population nationwide. Through
the social and rural telephony programs, we
provide voice and Internet services in more
than 22 thousand 800 communities. We
are the only private company in Mexico that
embraces a public service duty in addition to
providing service to the public.
Today, TELMEX has more than 1 million rural
lines that benefit more than 21 million inhabitants, and we offer Internet access in more than
4 thousand 800 Community Digital Centers.
Additionally, we obtained the license to use the
450 MHz frequency with CDMA technology
in more than 12 thousand rural communities.
That will allow us to modernize our telecommunications platform in these areas in a way
that optimizes the required investment and
reduces operating costs.
At TELMEX, our objective is to make sure that
our customers have immediate and reliable
access to telecommunications when and where
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annual report 2006
they need the services. During 2006, our strategies were focused on matching products and
services to specific market segments. Our short
and medium-term objective is to continue
solidifying our presence in the markets that we
serve to satisfy the needs of our customers,
supported by our world-class platform.
Our industry has entered a new era that is
mainly characterized by the convergence of
networks to transport voice, data and video
through broadband with more reach and
efficiency than we have seen up to now. This
environment expands options to develop,
distribute and access products, content and
services through a variety of technological
platforms.
Convergence motivates individual and collective
creativity across the board. The capacity to
create is seen every day in this new era that is
just starting in Mexico and in other countries has
been present for more than two years.
This is the new stage in the evolution of
telecommunications. Worldwide, convergence
is clearly one of the main contributors to the
development of societies. It provides benefits
across economic sectors as it multiplies growth,
opens up new possibilities, and, of course,
raises the level of competition.
TELMEX realizes the importance of convergence in the development of our country, and
we will compete to promote its rapid penetration by offering our infrastructure as a service
distribution channel for content producers, with
the aim of benefiting the end customer.
In October 2006, the Secretaría
de Comunicaciones y Transportes
(Communications and Transportations Ministry)
took the first step to approve the “Acuerdo de
Convergencia” (Convergence Agreement),
which establishes that TELMEX will be able
to provide video services once its Title of
Concession is modified and meets three conditions: provide number portability for customers,
allow seamless interconnection and support
network interoperability among all participants
in this economic sector.
committed to providing telecommunications
services to all segments of the Mexican market.
TELMEX is accustomed to competing in
Mexico and abroad. We embrace competition
in the marketplace but also trust that it will be
fair for all participants, allowing them to deploy
their creativity and innovation to foster growth
in the telecommunications sector, which
generates a multiplying effect in the country’s
economy and, above all, benefits customers.
In Mexico, TELMEX has a world-class
network that provides broadband services to
our customers in urban areas. This infrastructure and our marketing initiatives allowed
us to add 789 thousand accounts, bringing
the total at the end of the year to 1.8 million
broadband Internet access accounts, an
increase of 76.4% compared with 2005.
During 2006, we enhanced the Infinitum
offering by doubling the speed and integrating new multi-service packages at preferred
prices. That is the case of Paquetes TELMEX
(TELMEX Packages) that provide access to
broadband service with different offerings of
voice service which are an accesible means
for the integration of voice and data services.
Mexico: Commitment to
develop telecommunications.
In Mexico there are more than five hundred
concessions and/or licenses to provide various
telecommunications services. At December
31, TELMEX had less than 24% of a market
with more than 76.9 million fixed and mobile
services nationwide. Given the strong growth
of mobile telephony and the participation of
cable companies in telecommunications, this
market share could decrease even more in the
near future, which will obligate us to continue making use of our material and human
resources more efficiently, even more strictly
controlling costs and expenses, and maintaining
the highest-quality standards in our products
and services.
In 2006, TELMEX’s business model in Mexico
was redefined to improve our competitive
position in markets with higher purchasing
power, where several of our competitors have
carved out their presence. Even as we pursue
these higher-return opportunities, we remain
During 2006, we disconnected 864 thousand
prepaid lines that had payment problems or
lack of usage. This strategy has allowed us to
reduce operating and maintenance costs as
well as redeploy the existing infrastructure,
which in turn decreases the investment
required to provide new services.
Internet access and data transmission
expansion.
To facilitate Internet access, TELMEX has
eased customers’ acquisition of computer
equipment since 1999 by providing financing for up to 3 years. Between May 1999
and March 2007, the program facilitated
purchases of 1 million 134 thousand computers. Growth of Internet access services
has been supported by this policy.
Increase the value of lines.
Service packages make it easier for customers to take advantage of preferred pricing
and allow them to better manage their
consumption of telecommunications. At the
same time the packages increase the value
of our lines. Packages encourage variable
revenues to evolve to fixed revenues at the
same time that they foster customer retention. In 2007, we will continue to introduce
packages to benefit our customers.
Another development affecting the role that
our lines play in TELMEX’s performance
as well as the nation’s telecommunications
position was the November 4, 2006, implementation of domestic and international
calling party pays. In the last two months of
the year, the impact of the new system was
to increase interconnection traffic by 221
million minutes and decrease domestic long
distance traffic 1.2%. We expect this traffic
substitution to continue in 2007.
The company’s productivity benefits
customers.
In 2006, for the sixth consecutive year,
we decided not to increase our prices to
continue to improve our value proposal for
our customers. TELMEX´s Concession Title
over the last four years would have permitted the price of the basic basket of services
to increase up to 4.1%. Instead, the price
decreased 5.8%, equivalent to a reduction of 24.4% in real terms in the period.
That is a significant decline, especially when
compared with the nominal tariff behavior of
other utilities like natural gas and electricity,
which increased 48% and 28%, respectively.
Moreover, in the period from 2003 to March
2007, the broadband Internet access price
has decreased substantially. The price per
equivalent unit of 100 Kbps now is 26 pesos
plus 3.90 pesos of Value Added Tax for a
total of 29.90 pesos. Technological advances
will allow the price to continue to decline.
In 2007, we will continue anticipating the
needs of our customers with the objectives
of further improving our value proposition
and maintaining competitive prices. The
price of our basic basket of services will
continue to decrease in real terms and will
remain in line with price structures applied
by our main commercial partners.
03
Evolution and modernization of
the technological platform and
improvements in operating efficiencies.
During 2006, we continued to invest in the
modernization of our data network. We
added 4,196 kilometers of fiber optics,
bringing the total to 93,829 kilometers, one
of the largest and most secure networks on
the continent. Total investments in Mexico
were 1.166 billion dollars, of which 74.9%
was used for growth and modernization
projects for the voice, data and transport
platform.
The distribution network’s capacity
increased with the installation of DWDM
(Dense Wavelength Division Multiplexing)
technologies and the migration of TDM
(Time Division Multiplexing) technologies to
IP technologies in Ethernet protocol. These
steps reinforce our ability to continue offering services that meet the highest reliability
and quality standards.
At TELMEX –in Mexico as well as in Latin
America– we will continue to make the
investments necessary to have a technological platform that allows us to guarantee
the security and quality of the products
and services that we offer.
Security infrastructure of the network
in Mexico and in Latin America.
The security of the telecommunications
networks in Mexico and in our Latin
American affiliates is the number one
priority for TELMEX. Therefore, the company carries out significant investments
every year that guarantee our customers
the highest degree of security for their operations, 24 hours a day, 7 days a week.
TELMEX permanently maintains stateof-the-art technology that can supervise
in real time any event that may harm the
security of the equipment and services
supported by our network. In the same
way, we bring to the customer relation-
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annual report 2006
ship one of the industry’s most advanced
organizations in the prevention of service
loss as well as the ability to continue to
operate during crisis situations like those
caused by natural disasters.
Latin America: Enhancing
our operations.
In Latin America, carrying out our strategy of developing telecommunications
markets in other, high-growth countries
since 2004 has put us in the position
of competing with dominant telephony
companies that have been in operation
for many years and already have reached
the digital convergence stage offering
voice, data and video services. Even so,
we are competing successfully. Particularly
in Brazil, Colombia, and Peru, our acquisitions of cable companies are providing
a market advantage in that by starting
with video it is technologically easier to
integrate the other two services of voice
and data and achieve the ability to offer
the combination of services that has come
to be known as triple play.
Brazil.
To consolidate our position and more
fully realize the potential of the operations in Brazil, we carried out a tender
offer for shares of Embratel Participações
(“Embratel”). As a result of this process
TELMEX held 97.46% of Embratel’s total
common and preferred shares at March
31, 2007. Additionally, last October Net
Serviços and Vivax engaged in a share
exchange resulting in Embratel owning
39.9% of Net Serviços. The transaction
effectively positioned us to offer voice,
data and video services in more than 8.4
million homes.
For 2006, revenues from the operations
in Brazil, based on accounting principles in
that country, increased 6.9%, mainly due
to higher revenues from data, local and
domestic long distance services. Embratel
was able to reduce the reserve related to
the ICMS tax (Imposto Sobre Circulação
de Mercadoria e Prestação de Serviços)
and therefore improve its financial position. The non-recurring charge related
to the ICMS tax was approximately 632
million reais. Additionally, results included
contingencies totaling 222 million reais related to the income tax applied to incoming international long distance services.
Rest of the operations in
Latin America.
In the rest of the operations in Latin
America, we continue enhancing our
service offerings. In Colombia and Peru
we acquired cable TV companies that
will allow us to offer triple play service to a base of 3.9 million and 230
thousand homes passed, respectively.
In Ecuador, TELMEX acquired 100%
of Ecutel, a company that provides
telecommunications services to the
corporate segment and to small and
medium-sized businesses.
Additionally, during 2006, we obtained
the concession to use the 3.5 GHz
frequency in Chile and Peru and soon in
Argentina, which will allow us to complement our value proposition for the small
and medium-sized business and residential segment with WiMax technology.
In order to develop the “Sección
Amarilla” (Yellow Pages) business in our
operations in Latin America, and taking
advantage of the “Sección Amarilla” with
its more than 100 years of experience
and well-recognized brand, TELMEX
acquired 80% of Cobalt Publishing, LLC.
It edits “Enlace” directories in more that
18 states in the United States of America.
We have expanded this business to Peru
and Argentina.
Commitment with society,
with our personnel and our
shareholders.
Fundación TELMEX.
Maintain a solid financial position.
Consolidated revenues increased 0.9%
compared with 2005 and majority net income totaled 28.534 billion pesos, generating earnings per ADR of 2.50 dollars. These
results were attained despite the impact of
39 US cents per ADR due to the non-recurring charges at Embratel related to the
ICMS tax and to the income tax applied to
international long distance services.
In 2006, we maintained a solid financial
structure that along with our access to other
financial resources allowed us to grow
and strengthen our position in the markets
where we participate. Net indebtedness
reached the equivalent of 7.519 billion
dollars, generated by borrowings that at
year-end 2006 rose to 9.263 billion dollars,
a year-over-year increase of 771 million
dollars. Of the 2006 total debt, 12.5% is
short-term, 87.2% is in foreign currency
and 44.5% carries a fixed rate.
TELMEX’s long-standing central business objective has been to offer more
and better telecommunications services
to a higher number of customers. As a
company committed to Mexico’s progress, moreover, we also have assumed
a social responsibility for contributing to solutions for structural problems that our country faces. Through
Fundación TELMEX, we have worked
on nationwide permanent programs
in education, health, justice, culture,
sports, human development and natural disasters to benefit Mexicans with
limited resources.
TELMEX and its Foundation have the
same objective: to contribute to the
development of the country. TELMEX
achieves this goal by providing more
advanced telecommunications services
and Fundación TELMEX by providing
support to hundreds of thousands of
Mexicans so that they improve their
quality of life and meet their commitments to their family and to Mexico.
In 2006, we continued to strengthen
training and a sense of belonging among
our personnel to offer the best and most
complete range of services to our customers and maintain our leadership position. We have achieved this through the
support of an organization of committed
women and men who believe in service
toward our company and customers. We
thank all of our staff members for their
dedication and effort.
We follow through on our commitment to
our customers by continually offering more
and better services and the best market
experience. In this manner we also provide
value to our shareholders, supported by
the profitable growth of the company,
a sound financial position and efficient
consolidation of our acquisitions. We have
followed a successful path that has been
put to the test in several scenarios, but the
service calling of our personnel and our
technological platform are key elements in
maintaining our leadership position in the
industry. We are well prepared and look
forward to facing new challenges.
Jaime Chico Pardo
Oscar Von Hauske Solís
Héctor Slim Seade
Carlos Slim Domit
Chairman
President TELMEX International
Chief Executive Officer
Co-Chairman
05
[ informe del director general ]
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informe anual 2006
chief executive officer’s report
At TELMEX, our objective is to offer our customers the telecommunications services
that they need when and where they want to use them, under the best conditions. During
2006, our strategies were focused on aligning products and services with the specific
needs of different market segments. Our near- and medium-term objective is to continue
strengthening our presence in the markets that we serve and, recognizing the capabilities of
our world-class platform and anticipate how best to satisfy the needs of our customers.
Commercial Initiatives
in Mexico
Residential Market
In 2006, our strategy for the Residential
Market was focused on promoting expansion of broadband services, differentiating
product offerings by market segment and
beginning to transform our 387 Tiendas
TELMEX (TELMEX Stores).
During the year, we promoted the expansion of broadband services under our
Infinitum brand by doubling the speed for
the same price and integrating additional
value-added services like e-mail accounts,
child-safe Internet navigation, antivirus
software and the Prodigy Cam service, an
Internet-based home security system. In
each initiative our goal was to maintain
the best value proposal in the market.
Additionally, we improved our telephone
In 2006, applying our philosophy of
providing what customers want when
and how they want the service, we took
further steps toward matching products to
customers’ consumption patterns. One
example is the introduction of Línea Hogar
in February 2006, a package that includes
a basic monthly service fee plus a flat rate
for 200, 300 or 400 calls, whichever level
the customer chooses. Another example is
the launch of “Paquete TELMEX” in August
2006, which combines broadband access
with different voice packages, offering customers preferred rates along with flexibility
according to their consumption patterns.
At Tiendas TELMEX (TELMEX Stores) we
began a project to transform the stores to
improve the customer experience. We
modified the display and made operating
improvements such as automated process
for handling bill payments so that personnel
can focus on the sale of our products and
TELMEX has made
significant investments to
develop a state-of-the-art
telecommunications
network that delivers our
diversified product and
service offering.
Infinitum accounts
1,822,550
387 TELMEX stores
technical support system so that we can
shorten response time and provide better
service to our customers. The penetration of our broadband Infinitum service
went from 4.9% of lines in December
2005 to 9.6% of lines in December
2006, serving more than 1.8 million
customers.
services. Now our stores allow our customers to touch and test TELMEX products
and services, and they have a single point of
contact to handle all of their business during
their visits to the store.
As part of this new store strategy, we expanded the available merchandise to offer
1,033,027
with an attractive product offering for our customers.
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informe anual 2006
rate but have the flexibility to mix various
types of traffic, including long distance and
calls to cellular users.
Technological advances along with
TELMEX´s high quality and far-reaching
Prodigy Móvil, our wireless access
in public sites, is part of Infinitum’s line of value-added services that have translated into universal
access to our broadband services and are available in 873 sites such as airports, restaurants,
hotels and other commercial establishments.
Small and Medium-sized
Businesses Market
This year, we took additional steps to tailor
our services to the needs of small and medium-sized businesses with the introduction
of Asesor es TELMEX (TELMEX Advisors).
The service gives business customers an
exclusive contact number (01-800-1230321) to reach specially trained personnel
who can help them build telecommunications solutions using the products and
services that best fit their needs. We also
began offering the Asesor es TELMEX
service in TELMEX stores and through the
telmex.com portal.
These channels make it easy for our
customers to access a wide offering of
voice packages and subscribe to the most
appropriate options. An example of how
we apply this strategy is the Línea Negocio
plan that includes 200, 500 or 1,000 local
service calls for fixed monthly rents. At
year-end 2006, more than 30% of our
small and medium-sized business customers had some type of Línea Negocio plan.
As a complement to Línea Negocio we
began to market Números Más Marcados
(Frequently Dialed Numbers). For an additional monthly fee, Línea Negocio allows
customers to choose five local numbers for
unlimited calls using speed dial.
Another attractively priced service that
we introduced to cover the various
communications needs of businesses is
the Minutos Flex (Flex Minutes) package. With it, customers pay a flat monthly
communications network provide our small
and medium-sized customers with stateof-the-art capabilities for their businesses
at the same time that it increases the value
of our connectivity services. Among these
services the most important are:
1. Conexión Segura
(Secure Connection).
A platform of virtual private networks
(VPN) over Infinitum that allows users
to share applications among several sites
with complete security while avoiding
additional equipment investment and
management expenses.
2. Correo Prodigy Negocios
(Prodigy Business E-Mail).
A professional e-mail platform based on
MicroSoft Outlook® technology that
provides secure Internet access along with
the capability of sharing schedules and
calendars among company personnel.
3. Respaldo en Línea Prodigy
(Prodigy on-line Back-up).
Guarantees automatic back-up and easy
recovery of the customer’s key files.
Billed line
equivalents
Corporate Market
In 2006 we focused our efforts on
expanding the Círculo Empresarial
TELMEX (TELMEX Corporate Circle)
program. It creates synergies and
provides benefits to different corporate functions such as Information
Technology, Provisioning and Human
Resources.
To enhance our commercial offering
and offer more flexible alternatives that
optimize the customer’s technology in-
2,330,033
computer retailer during 2006, positioning
the company as an important participant in
Mexico’s retail sales market.
Our attention and service
strategy for the small and
medium-sized business
segment is the result of
intense work and integrated
plans to anticipate and solve
these customers’ needs and
promote use of our products
and services to support their
growth.
2,010,866
a bigger variety of computer equipment
and peripherals, new generation telephone
equipment and entertainment-related
products that customers can use with their
Internet access platform. The changes
made TELMEX Stores the nation’s leading
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informe anual 2006
vestment and operating cost structure,
we developed managed solutions over
Uninet’s platform, Mexico’s largest public data network. One of these options
is the Hosted PBX service. Instead
of investing in switching equipment,
customers pay a flat monthly fee that
covers a wide variety of services supplied from our data center “Triara” and
transported over Uninet’s IP network.
Another priority in 2006 was the
development of services to help
increase Uninet’s market penetration.
We launched solutions like Sucursales
en Red (Interconnected Branches),
a single link that integrates voice and
data services. Customers can choose
among different levels of service with
fixed monthly rates. Additionally, we
launched Conexión Segura (Secure
in Argentina
TELMEX’s emphasis on providing
additional services that complement
corporate customers’ needs defined our
commercial initiatives in Argentina. There
we implemented a more interactive sales
process in order to develop integrated
solutions that satisfy the needs of our
customers. This commercial strategy also
takes advantage of the multi-service
network –based on IP/MPLS technology–
which is a convergence network that
accommodates voice, data and video
services.
Our corporate products
offer integrated voice and
data solutions with more
flexibility and growth
opportunities so our
customers can optimize
their resources and focus on
growing their business.
To better serve the small and mediumsized business segment, we enhanced
access infrastructure, particularly in
Our small and medium-sized
business customers can apply telecommunications solutions that previously
were available only for large corporations.
We also enhanced our Opciones
TELMEX SRI (Immediate Profitability
Solutions) package offerings in order
to provide more flexibility and growth
opportunities to our customers.
Simultaneously, we extended the fiber
optic long distance network by more than
1,300 km., reaching the cities of Bahía
Blanca and Mar del Plata in the south of
the country and linking important cities in
the interior of the province of Buenos
Aires. Nationwide, we now reach 80
communities that represent 53% of the
population. Our network upgrade gives
us direct access to a larger residential
market base and the opportunity to
provide value-added services in addition
to basic telephony.
Argentina revenues
(millions of Mexican pesos)
05
1,240
Even as we emphasized broadband
in 2006, we continued to enhance
our voice platform. In our LADA 800
product we incorporated new functionalities like Web page development to
help customers manage their services
on their own. In addition, we rolled
out and promoted other value-added
services that are unique in the market, such as Telespot and Conferencia
Prodigy.
regions with high concentrations of
potential customers. The pre-WiMax
network of 3.3 GHz was deployed in
Argentina’s main cities (Capital Federal
and GBA, La Plata, Mar del Plata,
Mendoza, Cordoba and Rosario),
allowing us to offer both high-quality data
and voice services to this market
segment. In November 2006, we
launched Páginas TELMEX, (TELMEX
Pages) our yellow pages service that
complements our portfolio of products in
the Argentinean market.
1,143
Connection), a service that supports
virtual private networks and is provided
through our Infinitum offering. This alternative is considered an introduction
to the world of integrated networks for
customers that have several branches
but need only the basic service level.
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in Chile
During 2006, our strategies in Chile
mainly focused on providing advanced
telecommunications services to more
corporate customers. Our efforts
produced an 85% increase in the
number of customer locations using
our services, including attractive
convergence offerings to take
advantage of the opportunities that
our multi-service IP/ MPLS network
provides. In January 2007, Chile
assigned 3.5 GHz frequency licenses
to support IP convergence services
with WiMax technology. This enables
Net Fone,
our convergence product provided in conjunction with Net, allows us to offer
triple play services in Brazil.
In local residential services, we improved quality of service for “Livre” (local wireless service access) by improving network operation and customer
service.
us to introduce additional service
offerings for small and medium-sized
businesses across the country. We
expect to cover 98% of the population
with this technology before year-end
2007.
05
42,676
06
We will continue to make
the required investments in
Mexico and in Latin
America in order to have
the technological platform
that allows us to guarantee
the security and quality of
our products and services.
Chile revenues
In the highly competitive residential
market, we are maintaining
our position with domestic and
international long distance package
offerings, along with our value-added
services like control móvil (mobile
control) which allows subscribers to
manage their telecommunications
budget by specifying the proportion
of their minutes that can be used for
calls from mobile phones and cobro
revertido móvil (Mobile Reverse
Charge to fixed lines).
1,364
In the residential segment, we promoted long distance service with
código 21 (code 21), focusing on customers and types of traffic with high
potential and profitability. Additionally,
we launched the market’s first “all in
one” package incorporating domestic
and international long distance regardless of whether the calls originated
on fixed or mobile phones. Mobileoriginated traffic continued to grow by
offering código 21 to Claro customers,
including customers of other mobile
operators.
Brazil revenues
40,250
Embratel, our company in Brazil, focused
its commercial efforts on increasing data
services and local telephony. In the
domestic long distance market, Embratel
was able to reverse the market share
slide of the previous year. In voice services, the strategy focused on launching new
value-added services like Solución 21
(Solution 21). It combines a platform with
a domestic number and software that can
handle incoming calls (like 800 numbers)
to provide various capabilities such as
voting from a distance, making donations
and accessing reports in real time through
an Internet site. In the market segment
made up of small and medium-sized
businesses, Embratel’s strategy focused
on accelerating growth by offering local
voice services and updating long distance
product offerings. The strategy also
emphasized packages designed to help
increase customer retention and attract
new customers.
In March, Net launched Net Fone
voice service, our convergence product
through which our customers in Brazil
have access to triple play services
combining voice, data and video with
coverage in 9 cities.
1,358
in Brazil
05
06
13
14
informe anual 2006
In 2007, with the integration of cable TV
companies, we will be able to offer triple
in Peru
TELMEX Peru offers data transmission
services, Internet access, public
telephony and voice services to
corporate, small and medium-sized
business and residential customers
through its fiber optic network and its
last mile wireless network using the 3.5
GHz band.
Colombia revenues
909
Expanded presence in the corporate
market and our entry into the small and
medium-sized business market opened up
new opportunities for our operations in
Colombia. In that market we are focused
on differentiating our product offerings
through innovation, entering the local
telephony market, developing managed IP
telephony services, introducing Internet
solutions for mid-sized companies and
promoting managed videoconferencing,
among others.
phone directories. They are distributed
in more than 18 states. The company
also offers Sección Amarilla, or Yellow
Pages, access through the Internet.
576
in Colombia
05
06
In Colombia
we laid the foundation for our upcoming triple play offering.
in the United States
of America
In the small and medium-sized business
segment, we launched the X-plor@
packages integrating voice and Internet
access. The service is available in the
main commercial districts in Lima and 8
other cities.
During 2006, the focus of our strategy
in the United States was to offer
integrated solutions, diversify alternatives and maximize the access conditions and maximize network function
for global and multi-national customers
and telecommunications operators. In
the mass market, TELMEX USA
continued selling prepaid telephone
cards in states with high concentrations
of Hispanic communities.
In order to diversify our services in the
United States, in October 2006
TELMEX acquired 80% of Cobalt
Publishing, LLC, an affiliate of Blue
Equity, LLC, a U.S. company that edits
the Spanish-language “Enlace” tele-
In order to enhance service to customers
and integrate a triple play offering, we
acquired Boga Telecomunicaciones S.A.,
a cable TV company operating in Lima
and Chiclayo.
Peru revenues
05
729
In 2006, we established a strategic
commercial alliance with IBM to use our
new multi-service network to provide
Data Center services to our corporate
customers.
655
play services to residential customers.
That capability enhances our value offering and places us in a leadership position
among telecommunications companies.
In Chile, the assignment of
the 3.5 GHz frequencies
opened up the opportunity
to offer IP convergence
services with WiMax
technology.
06
15
informe del director general
16
informe anual 2006
security of TELMEX’s
telecommunications networks
Through our Network Supervision
Centers, we have the capacity to operate
TELMEX’s telecommunications network
24 hours a day, 365 days a year. The
Network Supervision Centers have all of
the state-of-the-art technology needed
to handle in real time any event that
may harm the security of the equipment
and services supported by TELMEX’s
network.
With this organizational structure, TELMEX
guarantees the security of our telecommunications networks in Mexico and in Latin
America.
When disasters have caused interruptions in
telecommunications service, TELMEX has
demonstrated our commitment to reconstruct our infrastructure and recover service
as quickly as possible. An example of that occurred during 2006 in southeastern Mexico,
Our supervision centers
Security of the
telecommunications
networks in Mexico and in
Latin America is a priority
for TELMEX. This is why
the company makes
significant investments each
year that allow us to
guarantee customers the
highest degree of security for
their operations.
control 100% of the components of TELMEX’s telecommunications networks, assuring
service availability 24 hours a day, 365 days a year.
Moreover, the Centers are managed to require supervision of all access to the equipment
rooms as well as intervention in any of the
elements that comprise TELMEX´s telecommunications network. Nobody can interfere
with the network equipment without specific
authorization from these Supervision Centers.
In addition to our emphasis on security,
TELMEX operates one of the industry’s most
advanced organizations both in preventing
service interruption and in the ability to
continue to operate during crisis situations
such as those caused by natural disasters like
hurricanes, earthquakes, fires, etc.
where we not only quickly reinstated service
but also redesigned the network by installing
373 kilometers of fiber optic cable and thereby reduced the risk of severe interruptions in
the future.
17
informe del director general
18
informe anual 2006
social telephony
Since the company was privatized 16
years ago, TELMEX has followed a
policy of driving the development of
telecommunications based on social
responsibility and connectivity for all
market segments. Additionally, through
Fundación TELMEX we have helped
address some of the main social problems of the country.
During 2006, we obtained the concession to operate the Fondo de Cobertura
Social II (Fund for Social Coverage II), that
will allow us to provide voice, data and
Internet access in 7,225 communities. That
installation involves 94 thousand rural lines
and will benefit 5.2 million inhabitants.
Also in 2006, we obtained the license to
use the 450 MHz frequency with CDMA
7,225 communities
will have voice and data services as well as Internet access.
TELMEX is the only fixed line operator
with coverage in all local areas of the
country. We provide service in 100% of
communities with more than 5,000 inhabitants, which together represent 90.6%
of the population. This extensive TELMEX
presence is the result of our commitment to advance the development of the
telecommunications industry in the whole
country. As part of that commitment, we
deliver the benefits of telecommunications
to all communities in the country, especially
rural areas where access can be difficult.
To accomplish this, TELMEX has developed diverse programs like public and rural
telephony, the Fund for Social Coverage
and the e-México program.
technology in close to 12 thousand rural
communities. This represents another
opportunity to modernize our telecommunications platform in rural areas in such a
way as to optimize the required investment
and reduce operating costs.
In 2006, we invested close to 71 million
dollars in public telephony and rural connectivity, enabling us to increase coverage
and provide voice, data and Internet access
to 2,196 additional communities, benefiting
1.8 million inhabitants.
In Mexico, TELMEX is the
only telecommunications
company with presence in
the most remote areas of the
country. Our company
provides more than 1
million rural lines that
benefit more than 21
million inhabitants and
offers Internet access in
more than 4 thousand 800
Community Digital
Centers.
Regarding public and rural telephony, at
year-end 2006, TELMEX had more than
766 thousand public phones in service and
more than one million rural lines serving 21
thousand 341 rural communities, benefiting
more than 21 million inhabitants.
Additionally, TELMEX operates the stage II
and stage III of the e-México program that
along with the Federal Government provides Internet service to 4,800 Community
Digital Centers in 4,045 communities.
19
20
annual report 2006
Fundación TELMEX: commitment with society
Our community service is carried out
through Fundación TELMEX, which continues to act on its mission of helping solve
some of the main problems that affect our
country. The Foundation actively participates
in the areas of education, health, nutrition,
justice, culture and human development.
pairs of eyeglasses were donated to students
in the 1996-2006 period.
Fundación TELMEX supports culture as
part of fully developing human potential.
Therefore it eases access to art by supporting the Soumaya museum and its temporary
Support for 47,862 surgeries
occurred through the health and nutrition programs.
Additionally, it develops emergency programs in case of natural disasters. All of us
at TELMEX are proud to be associated with
the important activities that our foundation
supports.
In health, Fundación TELMEX supported
47,862 surgeries in 2006, bringing the total to
202,488 surgeries in the 1996-2006 period.
The program emphasizes general surgery
and specialties like orthopedics, ophthalmology and reconstructive surgery. In 2006, 862
transplants were carried out, bringing the total
to 3,615 organ and tissue transplants since
this program began in 2001.
In nutrition, 1,357,500 one-kilogram bags of
nutritional candy were distributed, benefiting children in rural areas mainly in the states
of Chiapas, Chihuahua, Durango, Estado
de México, Guerrero, Hidalgo, Oaxaca,
Quintana Roo, Sinaloa, Tlaxcala, Veracruz and
Zacatecas.
In education, 11,970 scholarships were
granted in 2006, bringing the total for the
10-year period to 154,759 scholarships for
college and post-graduate students throughout the country. During 2006, Fundación
TELMEX supported 26 institutions that
received 3,342 PC’s. In the 1996-2006
period, the program helped 607 institutions
and provided 31,078 PC’s. As part of the
Programa “Ayúdame a Llegar” (Help me
get there Program), 29,379 bicycles were
donated. Along with the previous years’ donations, 87,443 bicycles have been provided
under this program. Additionally, 67,750
exhibits, special exhibits and loans to other
museums. In sports, the TELMEX amateur
soccer cup tournament was held for the
eighth consecutive year. It annually attracts
the nation’s largest number of tournament
participants, for a total of 84,283 female and
male teams since the program began in 1996.
Since 1996 Fundación
TELMEX has worked to
benefit the community and
improve the quality of life.
TELMEX and Fundación TELMEX offer
humanitarian aid in places affected by natural
disasters, providing groceries, bottled water,
generators, water purifying equipment, and
humanitarian help in general. In 2006, the
equivalent of 105 tons of humanitarian support was delivered, bringing the total to 27
thousand 479 tons of humanitarian support in
the 1996-2006 period.
Fundacion Telmex Results
• Education
Scholarships
Institutions that have received PC equipment
Computer equipment
Programa de Ayúdame a Llegar
(Help Me Get There Program) (bicycles)
• Health and nutrition
Surgeries
Transplants
Programa Arranque Parejo en la Vida
(special equipment)
Nutritional candy (1 kg. bags)
• Bail bonds
• Natural disasters support
(Tons of humanitarian support)
• Public and private institutions
Copa Mexico TELMEX (soccer teams)
2006
1996/2006
11,970
26
3,342
154,759
607
31,078
29,379
87,443
47,862
862
204,173
3,615
–
1,357,500
3,942
2,376
5,775,500
51,948
105
101
9,021
27,479
1,294
84,283
21
comments on the consolidated
financial statements
The following comments should be read along with the consolidated financial statements and their notes included in this Annual Report. Our financial statements have been prepared in conformity with Mexican Financial Reporting Standards (MFRS).
Consolidated statements of income
Millions of Mexican pesos with purchasing power at December 31, 2006
2006
Year ended December 31
million
pesos
Operating revenues:
Local service
Domestic long distance service
International long distance service
Interconnection
Corporate networks
Internet access service
Others
Operating costs and expenses:
Commercial, administrative and general
Operating income
Comprehensive financing cost:
Interest income
Interest expense
Exchange loss (gain), net
Monetary gain, net
Income before income tax and employee profit sharing
Provisions for:
Income tax
Employee profit sharing
Income before equity interest in net income
of affiliates
Equity interest in net income of affiliates
Net income
Distribution of net income:
Majority interest
Minority interest
22
annual report 2006
2005
% of total
revenues
million
pesos
% of total
revenues
Ps. 60,428
40,205
13,234
18,365
22,693
12,296
7,785
175,006
34.5 %
23.0
7.6
10.5
13.0
7.0
4.4
100.0
Ps. 62,252
39,335
14,025
19,586
20,324
11,071
6,912
173,505
35.9 %
22.7
8.1
11.3
11.7
6.4
3.9
100.0
35,799
35,035
31,318
24,563
126,715
48,291
20.5
20.0
17.9
14.0
72.4
27.6 %
36,064
29,174
30,421
25,999
121,658
51,847
20.8
16.8
17.5
15.0
70.1
29.9 %
(3,648)
8,088
1,639
(2,453)
3,626
44,665
(4,060)
8,060
3,762
(2,109)
5,653
46,194
13,059
3,002
16,061
12,310
3,049
15,359
28,604
458
Ps. 29,062
30,835
69
Ps. 30,904
Ps. 28,534
528
Ps. 29,062
Ps. 30,006
898
Ps. 30,904
Summary
In 2006, consolidated revenues rose 0.9% to 175,006
million pesos, mainly due to revenue increases from
corporate networks, Internet access and domestic long
distance of 11.7%, 11.1% and 2.2%, respectively, as
well as to the 12.6% increase in other revenues, which
include operations of Sección Amarilla (Yellow Pages)
and Tiendas TELMEX (TELMEX stores). Revenues from
interconnection, international long distance and local
service decreased 6.2%, 5.6% and 2.9%, respectively.
In 2006, the proportion of revenues generated by operations in Mexico was 73.3%,
while operations in Latin America contributed 26.7%. Of total revenues, 75.6% was
related to voice services, including local,
long distance and interconnection services,
and 20.0% to corporate networks and
Internet access services. The proportion
of revenues from voice-related services
represented a decline from 77.9% of total
revenues in 2005 to 75.6% in 2006.
In Mexico, our revenues decreased 1.1%
in 2006 despite the 12.9% increase in
revenues from Internet access and the
14.1% increase in other revenues (Tiendas
TELMEX, or TELMEX stores, and Sección
Amarilla, or Yellow Pages), which did not
offset the reduction of revenues from local
service, long distance and interconnection.
In 2006, the increases in the corporate
networks and domestic long distance businesses in Latin America offset the results
from Mexico. Operating income totaled
48,291 million pesos. If we eliminate the
impact from non-recurring charges in Brazil
related to the ICMS tax and income tax
applied to incoming international long distance traffic, operating income would have
reached 52,660 million pesos, 1.6% higher
than in 2005. Our consolidated operating
margin was 27.6% in 2006 compared with
29.9% in 2005. The operating margin for
our operations in Mexico was 37.2% in
2006 and 36.5% in 2005.
On a consolidated basis, majority net
income for 2006 was 1.36 pesos per share
and the equivalent of 2.50 dollars per ADR.
Operating revenues
Local service revenues
Local service revenues decreased 2.9% in
2006 from the previous year and totaled
60,428 million pesos. In our operations
in Mexico, revenues were 56,140 million
pesos in 2006 compared with 58,062
million pesos in 2005, a decrease of 3.3%.
Contributing factors included lower rates
in real terms, the introduction of packages
that stimulate usage but have lower rates,
the reduction of public telephony traffic
because of competition from cellular companies and other fixed telephony providers,
and the migration from dial-up Internet
access to broadband. These effects were
partially offset by higher penetration from
digital services. The percentage of lines with
at least one digital service (like call waiting,
caller ID, voice mail, three-way calling and
call forwarding) rose to 44.2% in 2006
compared with the year-earlier 41.4%.
In our operations outside Mexico, local
service revenues increased 34.2% in 2006.
The increase was mainly due to growth in
local service revenues at Embratel, reflecting more corporate lines and a significant
increase in residential customers subscribing
to the “Livre” service (previously Vésper),
which increased 32% to 939 thousand lines
at year-end 2006.
Domestic long distance
service revenues
In 2006, domestic long distance service
revenues increased 2.2%, totaling 40,205
million pesos. The increase was mainly
due to higher long distance revenues from
the operations in Latin America, particularly
Embratel, where traffic increased 16.2%
largely because of calls originated on mobile
phones and advanced voice services for
corporate customers. Domestic long
distance revenues from the operations in
Latin America totaled 22,681 million pesos.
In Mexico domestic long distance revenues
decreased 3.8% due to the reduction in
revenue per minute in real terms and the
introduction of domestic and international
calling party pays in November 2006,
which reduced domestic long distance traffic approximately 137 million minutes.
International long distance
service revenues
In 2006, international long distance service
revenues decreased 5.6%. The decrease
in part was due to Embratel’s operations,
which were adversely affected by a 7.2%
decline in traffic and a decrease in settlement rates for traffic terminated in Brazil.
International long distance revenues in
Mexico decreased 0.6% as a result of
lower rates in real terms, partially offset
by an increase in international settlement
revenues due to higher incoming traffic.
Outgoing billed minutes increased 4.8%
and incoming billed minutes 31.8%.
Interconnection service revenues
In 2006 interconnection service revenues
decreased 6.2%. The decrease was mainly
due to our operations in Mexico, where
calling party pays revenues declined 9.1%
and the calling party pays rate was cut 10%
23
Total revenues
04
05
175,006
03
173,505
137,311
02
154,052
137,345
(million pesos)
06
for the second consecutive year. Partially
offsetting these decreases were an
increase of 5.2% in interconnection traffic
and higher traffic with cellular and long
distance operators compared with the
previous year as well as the introduction
of domestic and international calling party
pays in November 2006.
Corporate networks service revenues
In 2006, corporate network service
revenues increased 11.7%. Our Latin
American operations were the primary
contributor to the increase. In particular, Embratel benefited from an increase
in billed line equivalents for high-speed
services of 64 Kbps from a 34.5% increase
with cellular operators and from the first full
year of revenues from Primesys, acquired
in December 2005. In Mexico during 2006,
corporate network services revenues remained at a level similar to that of 2005 as
the 15.9% increase in billed line equivalents
was offset by the competition-driven reduction in the average revenue per billed line
equivalent.
Internet access service revenues
Internet access service revenues are
comprised of dial-up access and broadband Internet access (Infinitum). In 2006,
Internet access service revenues increased
11.1%. The increase was mainly generated by Internet access revenues in Mexico,
which gained 12.9% as a result of a 76.4%
increase in the number of broadband
(Infinitum) customers to 1 million 823
thousand customers at year-end 2006.
Also contributing to the increase in Internet
access service revenues was the migration
of dial-up customers to broadband.
Basic earnings
per share
(pesos)
24
1.27
1.31
1.36
02
04
05
06
1.04
0.91
Other services revenues
03
annual report 2006
The main components of other revenues
are yellow pages advertising, Tiendas
TELMEX (TELMEX stores), sales of
telecommunications equipment and accessories, and third-party billing and collecting
services. In 2006, other revenues increased 12.6%, primarily due to the 14.1%
increase in other revenues in Mexico
driven by higher sales in Tiendas TELMEX
(TELMEX stores), strong yellow pages
advertising sales, and billing and collecting
services to third parties.
Operating costs
and expenses
In 2006, cost of sales and services
decreased 0.7%, totaling 35,799 million pesos. Cost of sales and services
of our operations outside Mexico rose
13.0%, reflecting an increase in regulatory charges at Embratel related to the
Telecommunications Service Universal
Fund (FUST), charges related to the new
long distance concession that took effect in
Brazil in January 2006, and the consolidation of Primesys, acquired in December
2005. In Mexico, cost of sales and services
decreased 2.0%, reflecting initiatives to
control costs and optimize resource use,
which decreased maintenance and materials
expenses and offset an increase in costs
from higher computer sales.
Commercial, administrative
and general expenses
In 2006, commercial, administrative and
general expenses increased 20.1%. The
increase reflected non-recurring charges
at Embratel of 3,240 million pesos (632
million reais) related to the ICMS tax
(Imposto Sobre Circulação de Mercadoria
e Prestação de Serviços) and 1,129 million
pesos (222 million reais) for contingencies
related to the income tax applied to incoming international long distance service in
Brazil. In México, commercial, administrative and general expenses increased 1.6%,
reflecting a higher level of uncollectables
as a result of writing off 201 million pesos
of unpaid charges in conjunction with a
2005 agreement with a data operator.
The increase in costs also reflected higher
advertising expenses to drive the sale of
packages.
Interconnection costs mainly comprise
payments to cellular companies in Mexico
under the calling party pays program and
transport costs related to our operations in
Latin America, including payments to other
operators for the use of infrastructure to
complete calls in areas where we don’t
have a network. In 2006, total interconnection and transport costs increased 2.9%.
In 2006, comprehensive financing cost declined
35.9% to 3,626 million pesos from the yearearlier 5,653 million pesos. The changes in key
components were as follows:
Interest income decreased 10.1% in 2006
from a year ago because of the lower average
level of financial assets and in addition, the pre-
1.16
0.93
0.98
1.06
04
05
06
Net debt is defined as total debt
less cash, cash equivalents and
marketable securities.
EBITDA is defined as operating
income plus depreciation and
amortization.
Because average monetary liabilities exceeded
average monetary assets, we recognized an
increase of a net gain from monetary position
of 16.3% in 2006. The increase reflected a
higher net monetary position and a higher
inflation rate compared with 2005.
Net income
Net income decreased 6.0% in 2006 due to
a decrease in operating income, partially offset
by a decrease in comprehensive financing
cost. Majority net income decreased 4.9%
year over year. Based on the weighted average number of outstanding shares in 2006
and 2005, majority net income was 1.36
pesos per basic share compared with 1.31
pesos per basic share the previous year.
Consolidated debt
At December 31, 2006, total debt rose
to 100,743 million pesos (approximately
9.263 billion dollars), compared with total
debt of 96,853 million pesos (approximately 8.492 billion dollars) at December
Capitalization ratio
(%)
02
03
04
05
48.7
Comprehensive
financing cost
03
45.0
In 2006, operating income decreased 6.9%
to 48,291 million pesos, reflecting the
increases of 0.9% in revenues and 4.2% in
costs and expenses. Our operating margin
decreased to 27.6% in 2006 due to factors
affecting the international operations. If we
eliminate the non-recurring charges of the
ICMS tax and income tax applied to incoming
international long distance traffic at Embratel,
the operating margin would have been
30.1% and operating income would have
totaled 52,660 million pesos, 1.6% higher
than in 2005. In 2006, operating income in
Mexico increased 0.7% due to the 1.1% decrease in revenues partly offset by the decline
of 2.2% in operating costs and expenses. The
operating margin in Mexico was 37.2% in
2006 and 36.5% in 2005, mainly due to the
reduction in costs and lower depreciation.
02
45.6
Operating income
In 2006, we had a net exchange loss of 1,639
million pesos, as a result of the depreciation
of approximately 1.5% in the value of the
peso against the dollar and approximately
11.2% in the value of the peso against the
Brazilian reais, partially offset by a net gain
of 169 million pesos from currency hedges.
At December 31, 2006, we had currency
hedges for 6.793 billion dollars, 95.76% of
the total in dollars to pesos, and 3.98% in
dollars to reais and 0.26% of dollars to euros.
46.6
In 2006, depreciation and amortization
decreased 5.5%, primarily reflecting an 8.0%
decrease in our operation in Mexico due to less
restatement of the value of fixed assets, fewer
depreciable assets, and technological advances
that have reduced equipment prices. In our
operations in Latin America, depreciation and
amortization charges increased 2.1% as a result
of higher investments and the recognition of
intangible assets at Embratel.
Interest expense increased 0.3%, mainly due
to the impact of 1,101 million pesos related
to interest rate swaps that effectively lowered
the rate to 8.54% at year-end-2006 from
the year-earlier 9.01%, offset by a lower
average cost of debt at Embratel and for the
repurchase of debt in 2005.
Net debt / EBITDA
0.91
vious year included the May 2005 gain of 534
million pesos on the sale of MCI shares, partially
offset by a non-recurring inflation-related gain
of 1,592 million pesos in Embratel’s income tax.
52.0
In our operations outside Mexico, these costs
increased due to long distance traffic growth
and last mile costs. In Mexico, interconnection
costs increased 0.5% due to the introduction of
domestic and international calling party pays.
06
25
Payments Due by Period
(as of December 31, 2006 in millions of pesos)
Total debt 1
1
Total
2007
2008-2009
2010-2011
2012
and beyond
100,743
12,551
33,215
29,802
25,175
Excludes interest payments.
31, 2005. At December 31, 2006, 85.97%
of our consolidated debt was in US dollars, 12.81% in Mexican pesos, 0.04%
in Brazilian reais and 1.18% in other currencies. At December 31, 2006, 55.5%
of our debt obligations bore interest at
floating rates.
The additional U.S. dollar- and peso-denominated debt incurred in 2006 was
primarily due to: i) the restructuring of
our syndicated loan, which increased our
indebtedness by 500 million dollars to 3
billion dollars, ii) a new 500 million dollars
syndicated loan, iii) our issuance of 4.5
billion pesos principal amount of peso-denominated global senior notes due 2016
and iv) new loans to Embratel for 611 million dollars, partly offset by the amortization
of our indebtedness.
The table shows the calendar for payments
of indebtedness (including financial leases)
as of December 31, 2006.
At December 31, 2006, our hedges
(excluding Embratel) reached 4.255 billion dollars and our cross currency swaps
were 2.250 billion dollars, compared with
a total U.S. dollar-denominated liability of
73,995 million pesos (approximately 6.804
billion dollars) in 2005. A little more than
half of our peso-denominated indebtedness (12,900 million pesos at December
31, 2006) bears interest at floating rates.
26
annual report 2006
At December 31, 2006, the total amount
covered with interest rate swaps in pesos
was 31,952 million pesos.
At December 31, 2006, Embratel had
swaps and forwards covering 288.3 million
dollars of its indebtedness. Embratel recognized a charge of 642.9 million pesos in
2006, reflecting the effects of exchange rate
variations under its hedging agreements.
Capital expenditures
Our capital expenditures were 21,537
million pesos in 2006 and 25,618 million
pesos in 2005. In 2006, we used 78.4%
of our capital expenditures for growthoriented projects that leverage our voice,
data and transport infrastructure, 18.1% for
operational support projects and operating
needs, and 3.5% for social telephony.
Dividends paid in cash
Dividends paid totaled 8,526 million pesos
in 2006 and 8,903 million pesos in 2005.
The dividend paid per share was 0.403
nominal pesos in 2006 and 0.370 nominal
pesos in 2005. Our subsidiary Embratel
paid dividends to minority shareholders for
an equivalent amount of 408 million pesos.
Share repurchases
The amount used for share repurchases
was 23,789 million pesos in 2006 and
17,981 million pesos in 2005. During
2006, 1,838 million Class “L” shares were
repurchased for 23,737 million pesos and
3.9 million Class “A” shares for 52 million
pesos. The total amount of repurchased
shares was equivalent to 8.3% of shares
outstanding at year-end 2005.
At December 31, 2006, total outstanding
shares were 20,203 million, comprised of
8,115 million Class “AA” shares, 446 million
Class “A” shares and 11,642 million Class
“L” shares.
On October 9, 2006, The Ordinary
Shareholders’ Meeting approved an increase of 15 billion pesos to the maximum
amount of the resources authorized for the
repurchase of the Company’s shares. The
program had a net balance of 931 million
pesos before the increase was approved.
Corporate Governance
At TELMEX, we adhere to the highest ethical
standards. Applying high values gives us a
solid basis for day-to-day decision-making so
that we can focus our attention on delivering
world-class telecommunications services and,
therefore, respond to our commitment to
benefit society. Carrying out our corporate
governance policy, we continue to enhance
the company’s management environment
through:
• Systematically following well-defined
processes and thereby providing more
transparency in strategic and operating
decisions;
• Clearly describing the attributes and
responsibilities of the company’s
management and supervisory bodies;
• Continuously seeking out best corporate
practices;
• Strengthening corporate ethics through
clearly identifying and complying with our
corporate values.
The creation of independent oversight bodies
is a key aspect of making the management
of the company more transparent. For this
reason, TELMEX’s Board of Directors has
Corporate Practices, Audit and Financial and
Planning Committees that ensure that corporate management is carried out in an ethical
environment and according to established
internal controls. The first edition of our Code
of Ethics was prepared in 1999, and in 2006
the content was restructured to make it easier
to consult as well as to incorporate material
related to new conditions in our environment.
We also updated our strategy for disseminating the Code of Ethics to make sure that it is
readily available throughout TELMEX.
The most relevant points of our Code of
Ethics are:
1. Values and principles.
This section presents our Mission,
Vision and Values, which are:
• Work.
• Growth.
• Social Responsibility.
• Austerity.
2. Corporate principles
In the Company, we focus all our
activities on the principles of:
• Customer Service.
• Quality.
• State-of-the-art Technology.
3. Our conduct principles
We enforce three conduct principles
in our Company: Abiding by established guidelines, non-discrimination
and integrity.
The benefits of transparency,
abiding by the rules and
responsibility to society
continue to prevail
throughout the Company.
As a result we have
developed a work culture
in which our company
will continue to evolve
and which gives us a strong
foundation to face
the challenges that come
with change.
4. The challenges of the new
regulatory environment
Lead us to highlight the importance
of the “Ley Federal de Competencia”
(Federal Competition Law) and the
Corporate Governance rules in our
everyday tasks.
These are the actions that TELMEX has carried
out in 2006 in Mexico and in the countries
where we have operations. We reiterate our
permanent commitment to our customers,
shareholders, and society. The continuing
development of the telecommunications sector,
particularly in Mexico, Argentina, Brazil, Chile,
Colombia and Peru, where we have operations, brings new challenges. With the strong
foundation that we have built in TELMEX, we
are ready to face them.
Héctor Slim Seade
Corporate governance practices
Pursuant to Section 303A.11 of the Listed
Company Manual of the New York Stock
Exchange (NYSE), we are required to provide
a summary of the significant ways in which our
corporate governance practices differ from
those required for U.S. companies under the
NYSE listing standards. This description is available on our website at www.telmex.com/explorer/esto/pdf/NYSEDisclosure.pdf
27
audit committee report
Mexico City, March 14, 2007
To the Board of Directors of Teléfonos de México, S.A.B. de C.V. (TELMEX).
Mr. Chairman and Board Members:
The Company’s management has the basic
responsibility of issuing financial statements
based on generally accepted accounting
principles in Mexico, preparing financial
information in a timely manner, and implementing internal control systems. The Audit
Committee has reviewed the consolidated
and audited financial statements of Teléfonos
de México, S.A.B. de C.V. (TELMEX) and
subsidiaries as of December 31, 2006. This
review included analysis and approval of policies, procedures and accounting practices
of the Company and its subsidiaries. The
accounting policies for the preparation of
the Company’s financial information proposed and recommended by this Committee
have received the approval of the Board of
Directors.
As a result of the review of the abovementioned financial statements, which
include financial information on the companies controlled by TELMEX, and based
on the activities carried out in connection
therewith by this Committee and the work
performed by the External Auditors and
the Telmex Internal Auditing Area, it is
concluded that such financial statements
reasonably reflect in all relevant aspects the
consolidated financial position of Telmex
and its subsidiaries at December 31, 2006,
the results of their operations, changes in
stockholders’ equity and changes in consolidated financial position for the year ending
as of such date, based on Mexican Financial
Reporting Standards.
28
annual report 2006
The Committee evaluated the performance
of the External Auditors, who are responsible for expressing an opinion about the
reasonableness of the financial statements
of the Company and the conformity of such
financial statements to Mexican Financial
Reporting Standards. The Committee determined that the external auditing firm retained for reviewing the financial statements
of the Company, as well as the External
Auditor who performed it, meet the professional standards and have the intellectual
and economic independence necessary to
perform this duty.
The Committee has ensured that interim
public financial information, such as the quarterly financial information presented to the
Mexican Stock Exchange and the National
Banking and Securities Commission, has
been prepared in accordance with the same
principles, procedures, criteria and accounting practices used in the preparation of the
annual financial information.
Based on the aforesaid reviews and comments, the Committee recommends that
the Board of Directors approve the audited
consolidated financial statements of Telmex
and subsidiaries as of December 31, 2006,
so that they may be included in the Annual
Report by the Chief Executive Officer on the
2006 fiscal period, which is to be submitted, in due course, for approval by the
Shareholders’ Meeting.
Additionally, TELMEX has an Internal
Auditing Area. The internal control and
internal auditing system of the Company
and the companies it controls has been
reviewed and evaluated by the Audit
Committee and, in the Committee’s
opinion, is sufficient to allow the Company
to operate in an effective control environment. The External Auditors have studied,
evaluated and validated the effectiveness of
the internal control system and the Internal
Auditing Area for the purpose of auditing
the financial statements and have provided additional services, which were also
adequate and satisfactory
The External Auditor’s report on the effectiveness of internal controls at December
31, 2006 will be issued in conjunction with
the 20-F “Annual Report” to be filed with
the Securities and Exchange Commission,
without any significant deficiencies or
deviations having been reported in the
meetings held by this Committee with the
External Auditor. The aforesaid system
covers the general guidelines approved by
the Board of Directors, upon the recommendation by this Committee.
Neither this Committee nor the General
Management of the Company has had
any knowledge of non-compliance with
the operational and accounting records
guidelines and policies of the Company
or of any companies it controls, nor, to its
knowledge, have any remarks by shareholders, board members, relevant executives,
employees and any other third parties,
been brought to its attention, regarding
accounting, internal controls and other
matters relating to the internal or external
audit, nor is it aware of any claims made
with respect to any actions deemed irregular in the management thereof.
The members of this Committee have
been following the resolutions issued at
the Meetings of the Shareholders and the
Board of Directors mainly through the reports submitted to, and matters discussed
in, the Meetings of the Board of Directors
and the Audit Committee itself.
The Committee verified that there are
controls in the Company that allow a
determination of whether the Company
compiles with applicable legal and administrative dispositions and reviewed the
respective reports regarding litigation
and proceedings that in each case could
represent a contingency. As a result, the
Committee did not detect any significant
risk that could result from the current legal
situation of the Company and that could
have an effect on the Company’s financial
statements.
Finally, TELMEX’s Audit Committee also
submits for consideration by the Board of
Directors, for eventual submission to the
Shareholders’ Meeting, the opinion referred to in Article 28, Section IV, paragraph
(c) of the Mexican Securities Market Law
in connection with the audited consolidated financial statements of Telmex and
subsidiaries as of December 31, 2006, and
the Notes thereto, issued by the External
Auditors of the Company, which form an
integral part of the report of TELMEX’s
Chief Executive Officer prescribed by article 44, section XI of the aforesaid Law.
Based on the analysis of this Committee
of the above-mentioned financial statements and on the respective report by
the External Auditor, the Audit Committee
issues the following opinion:
1. The accounting and information policies
and criteria followed by the Company
are adequate and sufficient, taking into
account its specific circumstances.
2. Such policies and criteria have been
consistently applied in the information
submitted by the Chief Executive Officer.
3. As a result of the remarks stated in
paragraphs 1 and 2, the information
submitted by TELMEX’s Chief Executive
Officer reasonably reflects the financial
position and the results of the Company.
Antonio del Valle Ruiz
Chairman
29
corporate practices
committee report
Mr. Chairman and Board Members:
The principal issues that have been
discussed by the Corporate Practices
Committee are the following:
We analyzed the Performance Evaluation
System applicable to relevant executives, as
well as the system under which cash bonus
payments have been made as additional
compensation, considering that both adhere to policies and guidelines approved by
the Board.
We analyzed the structure and policies
used in determining the compensation
packages for TELMEX top-level executives which, once reviewed, received the
favorable opinion of the Committee and
the subsequent approval of the Board, as
they were considered proportional to the
executives’ performance and within market
standards. Such compensation packages
comprise of fixed compensation, which
includes base salary, monthly benefits and
various annual benefits, as well as, in accordance with respective evaluations, an
annual compensation granted as incentive
through a cash bonus.
We became acquainted with TELMEX’s
transactions with related parties, its subsidiaries in Mexico and Latin America, during
the period of January to December 2006,
which were audited by the firm Mancera,
S.C., a member practice of Ernst & Young
Global (TELMEX’s external auditors). The
30
annual report 2006
following significant transactions (which
exceed 1% of the value of TELMEX’s
consolidated assets) were identified:
• With Radiomóvil DIPSA in Mexico
as well as with BCP, Tess, Algar
Telecom Leste, BSE, Americel, Stemar,
Telecomunicaciones Limited, Telet and
ALBRA (corporations of América Móvil
in Brazil which operate under the Claro
brand), for telecommunications services.
• With Carso Infraestructura y
Construcción, Sinergia Soluciones
Integrales para la Construcción, P.C.
Industrial, Grupo P.C. Constructores,
Sitcom Electronics, Microm, Proyectos
Construcciones e Instalaciones,
Industrial Afiliada (Grupo Carso subsidiaries), for expansion and maintenance
of TELMEX’s plant.
• Transactions with related parties.
• Complete compensation for the
Chief Executive Officer and relevant
executives.
• Use or enjoyment of the assets of the
Company and of the companies it
controls.
• Use of aircraft.
• Authorization of loans or any other type
of credit or guarantee to related parties
The fourth edition of the Code of Ethics,
which incorporates the demands of the
new environment, was reviewed.
In order to prepare this report, the opinions of relevant executives were obtained,
and such opinions concur with this report.
During the period of operations of this
Committee, no request whatsoever was
received to allow board members, relevant
executives or persons in management
positions to take advantage of business opportunities that belong to the Company or
to the companies it controls, or over which
the Company has significant influence.
The Committee, in due observance of the
Mexican Securities Market Act, issued its
favorable opinion and submitted in due
course for consideration by the Board, the
applicable policies and guidelines for the
following matters:
Fernando Solana Morales
Chairman
finance and planning
committee report
Mr. Chairman and Board members:
The principal issues that have been
discussed in the sessions of the Finance
and Planning Committee of the Board of
Directors are the following:
• We reviewed the results of the investment programs and liabilities of the
Company at year-end 2006. The investments and financing complied with
the policies established by the Board
and achieved the projected viability.
• In addition, we carried out an evaluation and verified that the strategic
position of the Company is consistent
with its strategic plan.
We consider that this information should
be included in the Annual Report of the
Board of Directors to the Shareholders’
Meeting, at which the 2006 results will be
presented, in order to comply with the
Code of Best Corporate Practices.
• We analyzed and evaluated the projected investment and liabilities plan for
2007. Both the projected investments
and liabilities are within framework of
the policies established by the Board,
which policies are also in line with
the established strategic vision of the
Company.
• Therefore, the Committee determined
that the principal investments and
financing for 2007 planned by management are viable and adequate.
• We also reviewed the figures of the
financial statements as of December
31, 2006, compared them with the
figures for 2005 and with the 2006
budget, and analyzed the premises
and financial projections included in
the Company’s budget for 2007.
The Committee determined that
these projections are in line with the
Company’s strategic plan.
Juan Antonio Pérez Simón
Chairman
31
consolidated financial statements
Contents
Report of independent auditors
Consolidated statements of income
Consolidated statements of changes in financial position
Consolidated balance sheets
Consolidated statements of changes in stockholders’ equity
Notes to consolidated financial statements
32 32
annual
annual
report
report
2006
2006
33
34
35
36
38
40
report
of independent auditors
To the Stockholders of
Teléfonos de México, S.A.B. de C.V.
We have audited the accompanying consolidated balance sheets of Teléfonos de México, S.A.B. de C.V. and subsidiaries
as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in stockholders’
equity and changes in financial position for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and are prepared in conformity with Mexican Financial Reporting Standards. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, as well as
assessing the financial reporting standards used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Teléfonos de México, S.A.B. de C.V. and its subsidiaries at December 31, 2006 and
2005, and the consolidated results of their operations, changes in their stockholders’ equity and changes in their financial
position for the years then ended, in conformity with Mexican Financial Reporting Standards.
Mancera, S.C.
A Member Practice of Ernst & Young Global
Fernando Espinosa
Mexico City, Mexico
March 12, 2007
33
consolidated statements
of income
In thousands of Mexican pesos, except for earnings per share, with purchasing power at December 31, 2006
2006
Operating revenues:
Local service
Long-distance service:
Domestic
International
Interconnection service
Corporate networks
Internet
Other
Ps.
Commercial, administrative and general expenses
Depreciation and amortization (Notes 4 to 6)
Operating income
Comprehensive financing cost:
Interest income
Interest expense
Exchange loss, net
Monetary gain, net
(
(
Income before income tax and employee profit sharing
Provisions for (Note 15):
Income tax
Income before equity interest in net income of affiliates
2005
60,428,477
Ps. 62,252,241
40,204,759
13,234,336
18,364,587
22,693,486
12,295,559
7,784,919
175,006,123
39,335,258
14,024,566
19,586,241
20,324,018
11,071,078
6,911,314
173,504,716
35,799,289
35,035,378
31,317,562
24,563,262
126,715,491
36,064,400
29,172,748
30,421,270
25,998,693
121,657,111
48,290,632
51,847,605
3,647,768)
8,088,002
1,639,144
2,453,292)
3,626,086
44,664,546
(
4,059,624)
8,060,066
3,761,792
( 2,108,722)
5,653,512
46,194,093
13,058,898
3,001,692
16,060,590
28,603,956
12,309,779
3,049,252
15,359,031
30,835,062
457,876
69,056
Net income
Ps.
29,061,832
Ps. 30,904,118
Distribution of net income:
Majority interest
Minority interest
Ps.
28,533,965
527,867
29,061,832
Ps. 30,005,924
898,194
Ps. 30,904,118
20,948
22,893
Ps.
Weighted average of shares issued and outstanding (millions)
Majority net income per share
The accompanying notes are an integral part of these financial statements.
34
Year ended
December 31,
annual report 2006
Ps.
1.36
Ps.
1.31
consolidated statements of changes in
financial position
In thousands of Mexican pesos with purchasing power at December 31, 2006
2006
Operating activities
Net income
Add (deduct) items not requiring the use of resources:
Depreciation
Amortization
Deferred charges
Deferred taxes
Impairment of goodwill
Labor obligation costs
Changes in operating assets and liabilities:
(Increase) decrease in:
Marketable securities
Accounts receivable
Inventories for sale
Prepaid expenses and others
(Decrease) increase in:
Labor obligations:
Contributions to trust fund
Payments to employees
Accounts payable and accrued liabilities
Taxes payable
Deferred credits
Resources provided by operating activities
Financing activities
New loans
Repayment of loans
Effect of exchange rate differences and variances in debt expressed in constant pesos
Decrease in capital stock and retained earnings due to repurchases of Company’s own shares
Dividends paid
Contribution of minority stockholders
Dividends paid to minority stockholders in subsidiary
Resources used in financing activities
Investing activities
Plant, property and equipment
Available-for-sale securities
Inventories for operation of the telephone plant
Subsidiaries and affiliated companies
Initial cash balance from equity investment in subsidiaries
Other investments
Resources used in investing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Ps.
Year ended
December 31,
29,061,832
2005
Ps. 30,904,118
23,253,805
1,309,457
222,591
755,696)
457,876)
294,241
4,721,761
57,650,115
25,051,988
946,705
327,109
( 2,570,165)
(
69,056)
(
(
(
(
2,758,465)
5,689,407)
1,315,076)
744,918)
303,623
2,543,957
866,038)
376,322
(
(
91,270 )
203,759 )
5,561,067
1,497,355
16,392
53,922,034
(
(
(
(
(
(
(
(
(
24,167,284
15,458,733)
4,819,639)
23,789,308)
8,525,608)
26,463,962
( 20,677,797)
( 8,011,869)
( 18,241,105)
( 8,902,638)
1,076,552
(
(
408,059)
28,834,063)
(
21,152,514)
(
(
384,511)
11,621,950)
55,705
548,595)
33,651,865)
8,563,894)
24,715,138
16,151,244
(
(
(
(
(
Ps.
4,854,317
59,445,016
(
63,238)
233,502)
771,659)
5,972,710)
206,663)
54,555,108
( 28,292,895)
( 25,614,596 )
7,617,249
(
3,254)
( 5,600,756)
133,846
(
633,752)
( 24,101,263)
2,160,950
22,554,188
Ps. 24,715,138
35
consolidated balance sheets
In thousands of Mexican pesos with purchasing power at December 31, 2006
December 31,
2006
Assets
Current assets:
Cash and cash equivalents
16,151,244
Ps. 24,715,138
2,815,145
56,680
36,595,279
30,983,818
Inventories for sale, net
1,738,761
1,209,679
Prepaid expenses and others
3,355,962
2,071,306
60,656,391
59,036,621
156,902,853
160,334,146
Inventories, primarily for operation of the telephone plant, net
2,798,615
2,398,445
Licenses and trademarks, net (Note 5)
5,267,451
4,965,949
Equity investments (Note 6)
3,006,436
856,208
Net projected asset (Note 7)
19,171,780
23,933,925
Deferred taxes (Note 15)
6,616,527
6,163,043
Goodwill, net (Note 6)
9,142,434
8,055,791
467,510
458,634
Ps. 264,029,997
Ps. 266,202,762
Marketable securities (Note 2)
Accounts receivable, net (Note 3)
Total current assets
Plant, property and equipment, net (Note 4)
Deferred charges, net
Total assets
36
annual report 2006
Ps.
2005
December 31,
2006
Liabilities and stockholders’ equity
Current liabilities:
Short-term debt and current portion of long-term debt (Note 8)
Accounts payable and accrued liabilities (Note 10)
Taxes payable
Deferred credits (Note 9)
Total current liabilities
Ps.
Long-term debt (Note 8)
Labor obligations (Note 7)
Deferred taxes (Note 15)
Total liabilities
Stockholders’ equity (Note 14):
Capital stock:
Historical
Restatement increment
Premium on sale of shares
Retained earnings:
Prior years
Current year
Other accumulated comprehensive income
Majority stockholders’ equity
Minority interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
(
2005
12,551,272
33,967,468
2,952,123
2,158,819
51,629,682
Ps. 15,540,961
28,292,467
1,793,372
2,067,641
47,694,441
88,192,065
2,271,122
15,981,198
158,074,067
81,311,857
2,123,851
16,509,620
147,639,769
252,539
26,743,735
26,996,274
275,564
28,375,590
28,651,154
20,161,138
20,161,138
101,082,282
28,533,965
129,616,247
101,556,165
30,005,924
131,562,089
73,561,354)
103,212,305
2,743,625
105,955,930
Ps. 264,029,997
( 72,391,715)
107,982,666
10,580,327
118,562,993
Ps. 266,202,762
37
consolidated statements of changes in
stockholders’ equity
For the years ended December 31, 2006 and 2005
In thousands of Mexican pesos, except for dividends per share, with purchasing power at December 31, 2006
Premium
on sale
of shares
Capital
stock
Balances at December 31, 2004
Initial accumulated effect of swaps, net of deferred taxes
Appropriation of earnings approved at ordinary stockholders’ meeting
held in April 2005:
Cash dividends paid at Ps. 0.391 per share (Ps. 0.370 historical)
Repurchase of Company’s own shares in cash
Excess of book value over sale price of shares sold to companies
under common control
Gain on sale of entities to companies under common control
Acquisition of minority interest and contribution from minority stockholders
Comprehensive income:
Net income of the year
Other comprehensive income:
Effect of available-for-sale securities:
Gain for the year
Gain on sale recognized in income
Changes in fair value of swaps, net of deferred taxes
Effect of translation of foreign entities
Deficit from holding non-monetary assets, net of deferred taxes
Comprehensive income
Ps. 30,106,118
(
Balances at December 31, 2005
Appropriation of earnings approved at ordinary stockholders’ meeting
held in April 2006:
Cash dividends paid at Ps.0.411 per share (Ps. 0.403 historical)
Cash dividend paid to minority stockholders in subsidiary
Repurchase of Company’s own shares in cash
Acquisition of minority interest
Gain on dilution of investment in affiliate
Comprehensive income:
Net income of the year
Other comprehensive income:
Changes in fair value of swaps, net of deferred taxes
Effect of translation of foreign entities
Deficit from holding non-monetary assets, net of deferred taxes
Comprehensive income
Balances at December 31, 2006 (Note 14)
38
annual report 2006
Ps.
Ps.
15,563,309
1,454,964)
28,651,154
(
20,161,138
Legal
reserve
20,161,138
15,563,309
1,654,880)
Ps. 26,996,274
Ps.
20,161,138
Ps.
15,563,309
Retained earnings
Unappropriated
Total
Ps. 106,980,805
Ps. 122,544,114
Other accumulated
comprehensive
income
Majority
stockholders’
equity
Ps. ( 70,170,474) Ps. 102,640,896
335,846
( 8,902,638)
( 16,786,141)
( 8,902,638)
( 16,786,141)
(
(
101,245)
1,154,232
3,647,843
30,005,924
101,245)
1,154,232
3,647,843
115,998,780
131,562,089
( 8,525,608)
(
193,552)
( 22,134,428)
373,781
( 8,525,608)
(
193,552)
( 22,134,428)
373,781
28,533,965
(
(
(
( 1,181,188)
( 3,114,916)
(
30,005,924
898,194
1,749,490
533,842)
175,999)
387,664
4,262,810)
402,495
( 1,785,353)
107,982,666
10,580,327
(
121,475)
1,320,123
3,195,464)
(
(
1,749,490
533,842)
175,999)
790,159
( 6,048,163)
Ps. 26,685,763
(
Ps.
2,743,625
(
(
(
1,749,490
533,842)
175,999)
790,159
6,048,163)
( 8,525,608)
(
408,059)
( 23,789,308)
( 8,516,096)
853,081
Ps. 29,061,832
(
889,328
175,417)
30,904,118
118,562,993
( 8,889,877)
25,904
121,475)
1,320,123
3,195,464)
Ps. ( 73,561,354) Ps. 103,212,305
Ps. 30,904,118
214,507)
527,867
101,245)
784,381
(
(
28,533,965
(
Ps. 129,616,247
101,245)
1,181,188
3,899,297
( 8,525,608)
(
193,552)
( 23,789,308)
373,781
827,177
28,533,965
(
Ps. 114,052,938
( 8,902,638)
( 18,241,105)
( 72,391,715)
827,177
Ps. 118,001,991
( 8,902,638)
( 18,241,105)
30,005,924
(
Ps. 15,361,095
Total
stockholders’
equity
335,846
(
1,749,490
533,842)
175,999)
387,664
4,262,810)
Comprehensive
income
335,846
26,956
251,454
(
(
Minority
interest
121,475)
2,209,451
( 3,370,881)
Ps. 27,778,927
29,061,832
(
(
121,475)
2,209,451
3,370,881)
Ps. 105,955,930
39
notes to consolidated
financial statements
December 31, 2006 and 2005. In thousands of Mexican pesos with purchasing power at December 31, 2006.
1. Description of the Business and Significant Accounting Policies
I. Description of the Business
Teléfonos de México, S.A.B. de C.V. and its subsidiaries (collectively “the Company” or “TELMEX”) provide telecommunications services, primarily
in Mexico and several countries in Latin America.
Revenues are obtained primarily from telecommunications services, which are comprised of local telephone services, domestic and international
long-distance services, interconnection of subscribers with cellular networks (calling party pays), as well as the interconnection of domestic longdistance operators’, cellular telephone companies’ and local service operators’ networks with the TELMEX local network and data transmission
to corporate networks and internet services. Other revenues are also obtained from the sale of advertising in the published telephone directory
and the sale of telephone equipment.
An analysis of the principal subsidiaries and associated companies at December 31, 2006 and 2005 is as follows:
Equity interest %
at December 31
Company
Subsidiaries:
Controladora de Servicios de
Telecomunicaciones, S.A. de C.V.
Alquiladora de Casas, S.A. de C.V.
Anuncios en Directorios, S.A. de C.V.
Cía. de Teléfonos y Bienes Raíces, S.A. de C.V.
Consorcio Red Uno, S.A. de C.V.
Teléfonos del Noroeste, S.A. de C.V.
Uninet, S.A. de C.V.
Embratel Participações S.A.
Empresa Brasileira de Telecomunicações S.A.
Star One S.A.
Primesys Soluçoes Empresariais, S.A.
Telmex do Brasil Ltda.
Telmex Chile Holding S.A.
Telmex Corp. S.A. (formerly Chilesat Corp. S.A.)
Techtel LMDS Comunicaciones Interactivas, S.A.
Telmex Argentina S.A.
Metrored Telecomunicaciones S.R.L.
Telmex Colombia S.A.
Superview Telecomunicaciones, S.A.
Telmex Perú S.A.
Sección Amarilla USA LLC
Affiliated companies:
Net Serviços de Comunicação S.A.
Grupo Telvista, S.A. de C.V.
2Wire, Inc.
Country
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Mexico
Brazil
Brazil
Brazil
Brazil
Brazil
Chile
Chile
Argentina
Argentina
Argentina
Colombia
Colombia
Peru
U.S.A.
Brazil
Mexico
U.S.A.
2006
2005
100.0
100.0
100.0
100.0
100.0
100.0
100.0
97.0 (1)
96.0
76.8
96.0
97.0
100.0
99.7
100.0
100.0
100.0
100.0
99.2
100.0
80.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
72.3 (1)
71.6
57.3
71.6
72.3
100.0
99.7
100.0
100.0
100.0
100.0
38.6 (2)
45.0
13.0
26.8 (2)
45.0
100.0
(1)
At December 31, 2006 TELMEX holds 98.0% of the controlling shares of this subsidiary (97.3% in 2005).
(2)
Corresponds to the indirect shareholding percentage of TELMEX in Net; the direct and indirect interest of Embratel Participações S.A. in Net Serviços de
Comunicação S.A. at December 31, 2006, is 39.9% (37.1% in 2005).
The amended Mexican government concession under which TELMEX operates in Mexico was reviewed on August 10, 1990. The concession
runs through the year 2026, but it may be renewed for an additional period of fifteen years. The concession defines, among other things, the
quality standards for telephone service and establishes the basis for regulating rates.
Under this concession, the Company’s basic telephone service rates are subject to a ceiling determined by the Federal Telecommunications
Commission (COFETEL). During the last six years, TELMEX management has decided not to raise the rates for basic services.
40
annual report 2006
Empresa Brasileira de Telecomunicações S.A. (Embratel), TELMEX’s most important foreign subsidiary, provides domestic and international longdistance services, data transmission and other services, and through its subsidiary Star One S.A. (Star One), it provides satellite services. Both
companies operate under two separate concessions granted by the Brazilian federal government via the Brazilian Telecommunications Agency
(ANATEL).
The concession for domestic and international long-distance services is in force through December 31, 2025 and the satellite concession is in force
through December 31, 2020. Both concessions may be renewed upon expiration. The rest of the countries also operate under concessions and
government licenses.
II. Significant Accounting Policies
The following are the significant accounting policies and practices observed by the Company in the preparation of the financial statements, which
are in conformity with Mexican Financial Reporting Standards (MFRS), which are comprised of the bulletins issued by the Mexican Institute of Public
Accountants that have not yet been modified, replaced or abolished by the MFRS, as well as the MFRS issued by the Mexican Financial Information
Standards Research and Development Board (Consejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera, A.C.
or “CINIF”).
On March 12, 2007, TELMEX’s Audit Committee and management authorized the issuance of the accompanying financial statement and its
corresponding notes at December 31, 2006 and 2005. These financial statements must also be approved by the Company’s board of directors
and stockholders at their next meetings.
a) Consolidation and basis of translation of financial statements of foreign subsidiaries
i) Consolidation
The consolidated financial statements include the accounts of Teléfonos de México, S.A.B. de C.V. and its subsidiaries. All the companies operate
in the telecommunications sector or provide services to companies operating in this sector.
The results of operations of the subsidiaries and affiliates were included in the Company’s financial statements as of the month following its
acquisition.
All intercompany balances and transactions have been eliminated in the consolidated financial statements. Minority interest refers primarily to
certain foreign subsidiaries.
ii) Translation of financial statements of foreign subsidiaries
The financial statements of foreign subsidiaries and affiliates were translated into Mexican pesos, as follows:
The financial statements as reported by the foreign subsidiaries are adjusted to conform to MFRS, in their local currency, and are subsequently restated
to local currency with purchasing power as of the balance sheet date, based on the inflation rate of the country in which the subsidiary operates.
All balance sheet amounts, except for stockholders’ equity, are translated into Mexican pesos at the prevailing exchange rate at year-end;
stockholders’ equity accounts are translated at the prevailing exchange rate at the time capital contributions were made and earnings were
generated. The restated amounts of the statements of income are translated into Mexican pesos at the prevailing exchange rate at the end of the
year being reported.
Exchange rate changes and the monetary position effect derived from intercompany monetary items are included in the consolidated statements
of income.
The difference resulting from the translation process is called “Effect of translation of foreign entities” and is included in stockholders’ equity as part
of the caption “Other comprehensive income”.
b) Recognition of revenues
Revenues are recognized when services are rendered. Revenues from the sale of prepaid telephone service cards are recognized based on an
estimate of the usage of time covered by the prepaid card. Revenues from prepaid internet plans are recorded as service is provided. Revenues
and expenses from the sale of advertising in the telephone directory are recorded at the time telephone directories are published. Revenues from
the sale of equipment are recorded when the product is delivered.
Revenues from local service are comprised of new-line installation charges, monthly service fees, measured usage charges based on the number of
calls made, and other service charges to subscribers. Local service revenues also include measured usage charges based on the number of minutes
in the case of prepaid plans.
Revenues from domestic and international long-distance telephone services are determined on the basis of the duration of the calls and the type of
service used. All these services are billed monthly, based on the rates authorized by the relevant regulatory bodies of each country. Revenues for
international long-distance service also include the revenues earned under agreements with foreign telephone service providers or operators for the
use of facilities in interconnecting international calls. These agreements specify the rates for the use of such international interconnecting facilities.
41
notes to consolidated financial statements
c) Recognition of the effects of inflation on financial information
The effects of inflation on financial information are recognized in the financial statements, consequently, the amounts shown in the accompanying
financial statements and in these notes are expressed in thousands of Mexican pesos with purchasing power at December 31, 2006. The weighted
restatement factor applied to the financial statements at December 31, 2005 as originally issued was 1.0648, which was determined based on
revenues, as well as on the average weighted inflation rate and on the changes in the exchange rate for each of the countries in which the Company
operates.
Plant, property and equipment and construction in progress were restated as described in Note 4. Telephone plant and equipment is depreciated
using the straight-line method based on the estimated useful lives of the related assets (see Note 4c).
Inventories for the operation of the telephone plant are valued using the average cost method and are restated on the basis of specific indexes.
The restated value of inventories is similar to its replacement cost, not in excess of its market value.
Other non-monetary assets are restated using the inflation adjustment factors for each country.
Capital stock, premium on sale of shares and retained earnings were restated using adjustment factors obtained from the Mexican National
Consumer Price Index (NCPI) published by Banco de México (Mexico’s central bank).
The deficit from restatement of stockholders’ equity consists of the accumulated monetary position loss at the time the provisions of Bulletin B-10
were first applied, which was Ps. 14,613,114, and of the result from holding non-monetary assets, which represents the difference between the
restatement by the specific indexation method and restatement based on the NCPI. This item is included in stockholders’ equity as part of the
caption “Other accumulated comprehensive income”.
The net monetary position gain included in the statements of income as part of the caption “Comprehensive financing cost”, represents the effect
of inflation on monetary assets and liabilities.
The statement of changes in financial position is prepared based on the financial statements expressed in constant Mexican pesos. The sources and
applications of resources represent the change in constant Mexican pesos in the different balance sheet items that affect cash balances. Monetary
a�
d) Cash equivalents, marketable securities and instruments available for sale
Cash equivalents are represented basically by time deposits in financial institutions with maturities of less than 90 days.
Marketable securities are represented by equity securities held for trading; instruments available for sale were represented by equity securities
(see Note 2). Both are stated at market value. Changes in the market value of instruments classified as trading are recognized in the statement of
income. Changes in the market value of instruments classified as available for sale are included in stockholders’ equity until they are sold.
e) Allowance for doubtful accounts
The allowance for doubtful accounts is determined based on the Company’s experience, the age of balances and economic trends, as well as on the
assessment of accounts receivable in litigation. The allowance for doubtful accounts covers basically balances of accounts receivable over 90 days old.
f) Equity investment in affiliates
The equity investment in affiliates is valued using the equity method. This accounting method consists basically of recognizing our equity interest in
the results of operations and in the stockholders’ equity of investees at the time such results are determined (see Note 6).
g) Business acquisitions and goodwill
Business acquisitions are recorded using the purchase method. The acquisition of minority interest is considered a transaction between entities
under common control and any difference between the purchase price and the carrying value of net assets acquired is recognized as an equity
transaction.
Goodwill represents the difference between the purchase price and the fair value of the net assets acquired at purchase date. Goodwill is not
amortized, however it is subject to annual impairment tests, and is adjusted for any impairment losses.
In 2006, the Company recorded impairment of goodwill in the amount of Ps. 294,241, which was included in the caption “Comprehensive
financing cost”.
h) Licenses
TELMEX records licenses at acquisition cost and restates them based on the inflation rate of each country. Licenses are amortized in conformity
with the terms of each license, over periods ranging from five to twenty-nine years.
i) Impairment of assets
When there are indications of impairment in the value of long-lived assets, the recoverable value of the related assets is estimated, which is defined
as the higher of the asset’s net selling price or its value in use, which is computed based on discounted cash flows. When the net carrying amount
of an asset exceeds its recoverable value, the difference is recognized as an impairment loss.
j) Exchange differences
Transactions in foreign currencies are recorded at the prevailing exchange rate at the time of the related transactions. Foreign currency denominated
assets and liabilities are translated at the prevailing exchange rate at the balance sheet date. Exchange rate differences are charged or credited
directly to income of the year.
k) Labor obligations
Pension, seniority premium and medical assistance plan costs and dismissal costs are recognized periodically during the years of service of personnel,
based on actuarial computations made by independent actuaries, using the projected unit-credit method (see Note 7)
42
annual report 2006
l) Accruals
Accruals are recognized whenever (i) the Company has a current obligation (legal or assumed) as a result of a past event, (ii) it is probable that a
cash disbursement will be required to settle such obligation and (iii) the obligation can be reasonably estimated.
If the effect of the time value of money is material, accrued amounts are determined as the present value of the expected disbursements to settle
the obligation. The discount rate applied is determined on a pre-tax basis and reflects market conditions at the balance sheet date and, where
appropriate, the specific risk to the corresponding liability. In these cases, the increase in the accrual is recognized as a financing expense.
The Company recognizes contingent liabilities only when a cash disbursement is probable. Also, commitments are only recognized when they
generate a loss.
m) Financial derivative instruments and hedging activities
To protect itself against risks from fluctuations in interest and exchange rates, the Company uses derivative financial instruments that have been
designated and qualified as cash flow hedges (interest-rate swaps).
For cash flow hedges, the effective portion of the derivative’s gains or losses is recognized in stockholders’ equity in the caption “Other accumulated
comprehensive income”, and the ineffective portion is recognized in income. The effectiveness of the hedging instruments is determined at the
time they are designated as a hedge. Hedges are considered to be highly effective when in the initial assessment and during the hedging period,
the changes in the fair value or cash flows of the hedged item are offset on a period-by-period or cumulative basis, as selected, and the hedge
documentation establishes changes in the fair value or cash flows of the derivative itself by a range between 80% and 125%.
n) Income tax and employee profit sharing
Deferred taxes are determined using the asset and liability method. Under this method, deferred tax assets and liabilities are determined on all
temporary differences between the financial reporting and tax bases of assets and liabilities, applying the enacted income tax rate at the date of the
financial statements, or the enacted income tax rate that will be in effect at the time the temporary differences giving rise to deferred tax assets and
liabilities are expected to be recovered or settled.
The Company evaluates periodically the possibility of recovering deferred tax assets and, if necessary, creates a valuation allowance for those assets
that are more likely than not to be realized.
Employee profit sharing is recognized only on temporary differences considered non-recurring with a known turnaround time.
o) Comprehensive income
In conformity with Mexican accounting Bulletin B-4, Comprehensive Income, comprehensive income consists of current year net income plus
the effects of deferred taxes, the effects of translation of foreign entities, changes in minority interest, the result from holding non-monetary assets,
the changes in the fair value of financial instruments classified as available for sale and the changes in the fair value of the swaps applied directly to
stockholders’ equity.
p) Earnings per share
The Company determined earnings per share by dividing majority net income by the average weighted number of shares issued and outstanding
during the year, with the exception of shares acquired by the Company, as specified in Mexican accounting Bulletin B-14, Earnings per Share.
q) Use of estimates
The preparation of financial statements in conformity with Mexican Financial Reporting Standards requires the use of estimates and assumptions in
certain areas. Actual results could differ from these estimates.
r) Concentration of risk
The Company invests a portion of its excess cash in time deposits in financial institutions with strong credit ratings. TELMEX does not believe it has
significant concentrations of credit risks in its accounts receivable, as it has a broad customer base that is geographically diverse.
s) Segment information
Segment information is prepared based on information used by the Company in its decision making processes based on the geographical areas in
which TELMEX operates, in conformity with the requirements of Mexican accounting Bulletin B-5, Financial Information by Segment (see Note 16).
t) New accounting pronouncements
The most important matters from the new pronouncements that came into force in 2006 are as follows:
MFRS A-3, “User Needs and the Objective of Financial Statements”, establishes, among other provisions, that the statement of changes in financial
position will be substituted by a statement of cash flows whenever so required by the specific standards. At December 31, 2006, there are not
yet any specific rules for the issuance of the statement of cash flows. Therefore, the statement of changes in financial position will continue being
used, until such time as the specific standards have been issued.
MFRS A-5, “Basic Elements of Financial Statements”, includes a new classification of revenues and expenses in the statement of income, as either
ordinary or non-ordinary. Ordinary revenues and expenses result from common transactions or events; in other words, they are those transactions
carried out for the entity’s own business purposes, either on a frequent or infrequent basis. Non-ordinary revenues and expenses correspond to
unusual transactions or events, either frequent or infrequent. Also, this pronouncement excludes such items that, under the abolished Mexican
accounting Bulletin A-7, “Comparability”, issued by the Accounting Principles Board, were considered either as special or extraordinary. Therefore,
these items must be considered as part of the ordinary or non-ordinary result, respectively.
This MFRS also requires entities to recognize in income “other comprehensive income” at the time the net assets that gave rise to them are
realized.
43
However, Mexican accounting Bulletin B-3, “Statements of Income”, in force at December 31, 2006, issued by the Accounting Principles Board,
has made no reference to such classification or provided the rules for transfering “other comprehensive income”. Consequently, statements of
income are still presented, as required by Bulletin B-3 in force as of December 31, 2006, based on the conclusions of Interpretation MFRS 3,
“Initial Application of the FRSs”, issued in January 2006, which establishes that companies must temporarily observe the requirements of the specific
MFRS that have yet to be modified, while their adaptation to the MFRS conceptual framework is underway.
The new MFRS B-3, “Statements of Income”, issued by the CINIF, will take effect on January 1, 2007. Therefore, the requirement to classify
revenues and expenses as either ordinary or non-ordinary will be effective in the December 31, 2007 financial statements, as required by the
presentation rules provided under the standard.
MFRS A-7, “Presentation and Disclosure”, requires that the date on which the issuance of the financial statements was approved, as well as the
names of the entity officers or governing bodies that authorize their issuance, be disclosed in the financial statements.
MFRS B-1, “Accounting Changes and Error Corrections”, establishes that changes in internal accounting policies and reclassifications and error
corrections must be recognized retrospectively, so that both the basic financial statements for the most recent period presented and those
presented for comparison with the current period statements are adjusted as if the new policy, classification or error correction had always been
applied. This MFRS also requires that, in the event of reclassifications, the affected captions and the related amounts be disclosed as they were
previously presented and after giving effect to each reclassification.
The adoption of these new rules had no effect on the Company’s financial statements.
The following new pronouncements entered into force on January 1, 2007:
MFRS B-3, “Statement of Income”, establishes the guidelines for classifying revenues, costs and expenses as either “ordinary or non-ordinary”,
modifies certain specific MFRS, redefines the primary sections of the statements of income making emphasis in “ordinary” items, and eliminates the
special and extraordinary item classifications from the statement of income, as well as the caption initial accumulated effect of changes in accounting
principles, which is consistent with the MFRS B-1 mentioned above.
The Interpretation of MFRS 4, “Presentation of Employee Profit Sharing in the Statement of Income” establishes that employee profit sharing shall no
longer be presented as a tax provision, but instead, such item shall be included as an ordinary expense in the caption “Other income and expenses”.
MFRS B-13, “Subsequent Events at the Date of the Financial Statements”, modifies the former rules relative to subsequent events, by establishing
that certain events, such as the restructuring of assets and liabilities and the relinquishing of creditors of their collection rights in the case of debt
default, shall be disclosed in the notes to the financial statements and recognized in the period in which they took place. Accordingly, the financial
statements may no longer be adjusted to reflect such subsequent events, as was permitted under Bulletin B-13.
MFRS C-13, “Related Parties”, broadens the concept of related parties to mention joint ventures in which the reporting entity participates,
immediate family members of key management personnel or directors, as well as funds derived from labor obligation plans. This standard obligates
entities to disclose the relationship between the controlling company and its subsidiary, irrespective of whether transactions were carried out
between them in the period or not. MFRS C-13 also establishes that the reporting entity may disclose that the considerations for transactions
carried out with its related parties are at arm’s length, provided that it can be demonstrated. Finally, MFRS C-13 also requires entities to disclose
information on the compensation paid to the entity’s key managerial personnel or relevant Company directors.
MFRS D-6, “Capitalization of the Comprehensive Financing Cost”, establishes that entities must capitalize Comprehensive Financing Cost (CFC),
which was previously optional. Capitalizable CFC is defined as the amount attributable to qualifying assets that could have been avoided if such
acquisition had not taken place. Qualifying assets are defined as those assets acquired by an entity requiring a prolonged acquisition period in
order to use, sell or lease them. MFRS D-6 establishes the conditions necessary for the capitalization of CFC and the method under which the
cap�
u) Reclassifications
Certain captions shown in the 2005 financial statements as originally issued have been reclassified for uniformity of presentation with the 2006
financial statements. In 2005, minority interest in Mexican subsidiaries was reclassified since, due to its materiality, this item had been presented in
the caption “Other accumulated comprehensive income” under majority stockholders’ equity.
2. Marketable Securities and Instruments Available for Sale
An analysis of investments in financial instruments at December 31, 2006 and 2005 is as follows:
December 31, 2006
Cost
Marketable securities
Shares
Corporate bonds
Total
December 31, 2005
Market value
Cost
Ps.
2,764,641
Ps.
2,815,145
Ps.
Ps.
2,764,641
Ps.
2,815,145
Ps.
447,725
50,064
497,789
Market value
Ps.
Ps.
197
56,483
56,680
Marketable Securities
At December 31, 2006, the net unrealized gain on marketable securities was Ps. 50,504 (unrealized loss of Ps. 441,109 in 2005).
The realized losses on sale of shares and bonds in 2006 were Ps. 424,701 (Ps. 72,762 in 2005) and Ps. 15,548 (realized gain of Ps. 11,814 in 2005),
respectively, which correspond to the difference between the original cost and the market value of the shares and bonds at the time of sale.
In 2006, the Company acquired 20.7 million common shares of Portugal Telecom, SGPS, S.A. (Portugal Telecom) for Ps. 2,849,671 (USD 252.3
million) and sold 700,000 shares for Ps. 96,072 (USD 8.7 million). Portugal Telecom provides telecommunication services in Portugal and Brazil.
44
annual report 2006
Instruments Available for Sale
On April 21, 2004, the Company converted Ps. 7,617,249 (USD 597.9 million) of bonds issued by MCI Inc. (MCI) with a face value of
USD 1,759 million, in exchange for 25.6 million common MCI shares, which were classified as available for sale. At that time, MCI was subject to
the proceedings of Chapter 11 of the U.S. Bankruptcy Code.
On April 9, 2005, TELMEX and other related parties entered into an agreement to sell their MCI shares to Verizon Communications Inc.
(Verizon). On May 17, 2005, Verizon paid in cash USD 25.72 per MCI common stock, for a total of Ps. 8,334,225. TELMEX recognized a gain
of Ps. 533,842 in 2005 as a result of the sale of these shares, which was recognized in “Comprehensive financing cost”.
In 2005, TELMEX received dividends from MCI of Ps. 126,435, which were recognized in “Comprehensive financing cost”.
3. Accounts Receivable
An analysis of accounts receivable is as follows:
2006
Subscribers
Net settlement receivables
Related parties
Other
Less:
Allowance for doubtful accounts
Total
Ps.
2005
34,112,807
1,087,966
799,429
5,975,357
41,975,559
5,380,280
36,595,279
Ps.
Ps.
34,652,241
1,346,559
392,799
2,642,025
39,033,624
8,049,806
30,983,818
Ps.
An analysis of activity in the allowance for doubtful accounts for the years ended December 31, 2006 and 2005 is as follows:
2006
Beginning balance at January 1
Effect of acquired companies
Increase through charge to expenses
Charges to allowance, principally related to Embratel
Translation effect
Ending balance at December 31
Ps.
(
Ps.
2005
8,049,806
7,775
3,275,057
6,078,218)
125,860
5,380,280
Ps.
(
Ps.
12,882,147
4,894
2,799,847
8,029,489)
392,407
8,049,806
4. Plant, Property and Equipment
a) Plant, property and equipment consist of the following:
2006
Telephone plant and equipment
Land and buildings
Computer equipment and other assets
Less:
Accumulated depreciation
Net
Construction in progress and advances to equipment suppliers
Total
2005
Ps. 362,532,636
47,227,563
62,880,547
472,640,746
323,917,451
148,723,295
8,179,558
Ps. 156,902,853
Ps.
Ps.
349,654,776
46,423,984
60,174,774
456,253,534
305,089,101
151,164,433
9,169,713
160,334,146
Construction in progress is comprised mainly of investments being made by Embratel and Star One.
Embratel’s construction in progress refers mainly to projects related to its telephone plant. Accumulated costs of such projects at December 31,
2006 and 2005 aggregate to Ps. 2,266,143 and Ps. 2,913,993, respectively. These projects are scheduled to be completed and transferred to the
plant mostly during the first half of 2007.
At December 31, 2006 and 2005, Star One increased its constructions in progress by Ps. 1,443,756 and Ps. 1,593,422, respectively, due to the
beginning of the construction of satellite C-2 in 2005 and the increase in the investment in progress of satellite C-1; both satellites C-2 and C-1
are scheduled to enter into orbit in 2007. The total amount of these contracts is Ps. 5,633,667 and the balance of these projects recorded in
construction in progress at December 31, 2006 aggregates to Ps. 4,087,902.
45
In plant, property and equipment, include the following assets which are held under capital leases:
2006
Assets under capital leases
Less:
Accumulated depreciation
Net
2005
Ps.
464,590
Ps.
3,370,469
Ps.
256,818
207,772
Ps.
1,407,188
1,963,281
b) Through December 31, 1996, items comprising the telephone plant were restated based on the acquisition date and cost, applying the factors
derived from the specific indexes determined by the Company and validated by an independent appraiser registered with the National Banking
and Securities Commission (CNBV).
Effective January 1, 1997, the use of appraisals was eliminated. At December 31, 2006 and 2005, this caption was restated in each country, as
follows:
• The December 31, 1996 appraised value of the imported telephone plant, as well as the cost of subsequent additions to such plant, were
restated based on the rate of inflation in the respective country of origin and the prevailing exchange rate at the balance sheet date (specific
indexation factors).
• The appraised value of land, buildings and other fixed assets of Mexican origin at December 31, 1996, and the cost of subsequent additions to
such assets are restated based on the NCPI.
At December 31, 2006, approximately 61% (60% in 2005) of the value of the plant, property and equipment has been restated using specific
indexation factors.
c) Depreciation of the telephone plant has been calculated at annual rates ranging from 3.3% to 20.0%. The rest of the Company’s assets are
depreciated at rates ranging from 10% to 33.3%. Depreciation charged to expenses was Ps. 23,253,805 in 2006 and Ps. 25,051,988 in 2005.
5. Licenses and Trademarks
An analysis of licenses and trademarks at December 31, 2006 and 2005 is as follows:
2006
Ps.
Licenses, net
Trademarks, net
Total
4,132,508
1,134,943
5,267,451
Ps.
2005
Ps.
Ps.
4,306,188
659,761
4,965,949
Licenses
An analysis of licenses and their amortization at December 31, 2006 and 2005 is as follows:
2006
Ps.
Investment
Accumulated amortization
Net
7,059,046
2,926,538
4,132,508
Ps.
2005
Ps.
Ps.
5,809,187
1,502,999
4,306,188
In Mexico, TELMEX has concessions to operate radio spectrum wave frequency bands to provide fixed wireless telephone services and to operate
radio spectrum wave frequency bands for point-to-point and point-to-multipoint microwave communications.
Foreign entities have software licenses and licenses for use of point-to-point and point-to-multipoint links.
An analysis of changes in 2006 is as follows:
Effect of
acquired
companies
Balance at
January 1, 2006
Investment
Net
Ps.
Ps.
5,809,187
1,502,999
4,306,188
Investment and
amortization
of the year
Ps.
3,777
Ps.
Ps.
3,777
Ps. (
655,397
1,081,668
426,271)
Balance at
December 31,
2006
Translation
effect
Ps.
Ps.
590,685
341,871
248,814
Ps.
Ps.
7,059,046
2,926,538
4,132,508
An analysis of changes in 2005 is as follows:
Effect of
acquired
companies
Balance at
January 1, 2005
Investment
Net
46
annual report 2006
Ps.
Ps.
4,637,312
420,594
4,216,718
Investment and
amortization
of the year
Ps.
216,840
Ps.
Ps.
216,840
Ps. (
633,752
908,487
274,735)
Balance at
December 31,
2005
Translation
effect
Ps.
Ps.
321,283
173,918
147,365
Ps.
Ps.
5,809,187
1,502,999
4,306,188
Trademarks
At December 31, 2006, the Company has well-known trademarks of certain acquired foreign companies, which were recognized at their fair
value, based on appraisals performed by independent experts.
An analysis of trademarks and their amortization at December 31, 2006 and 2005 is as follows:
2006
Ps.
Investment
Net
Ps.
2005
1,328,334
193,391
1,134,943
Ps.
659,761
Ps.
659,761
An analysis of the changes in 2006 is as follows:
Balance at
January 1, 2006
Investment
Net
Investment and
amortization
of the year
Ps.
659,761
Ps.
Ps.
659,761
Ps.
613,159
193,391
419,768
Balance at
December 31,
2006
Translation
effect
Ps.
55,414
Ps.
Ps.
55,414
Ps.
1,328,334
193,391
1,134,943
The amortization expense related to other deferred charges amounted to Ps. 34,398 in 2006 and Ps. 83,394 in 2005.
6. Equity Investments
I. Investments in affiliates
An analysis of the equity investments in affiliated companies at December 31, 2006 and 2005, and a brief description of each, is as follows:
2006
Equity investments in:
Grupo Telvista, S.A. de C.V.
Net Serviços de Comunicação S.A.
2Wire, Inc.
Other
Ps.
Ps.
2005
432,208
2,177,845
166,610
229,773
3,006,436
Ps.
Ps.
405,856
245,270
205,082
856,208
Grupo Telvista
TELMEX holds a 45% equity interest in Grupo Telvista, S.A. de C.V., a company which through its subsidiaries provides telemarketing services in
Mexico and the U.S.A.
Net
During 2006, Embratel Participações S.A. (Embrapar) increased its equity interest in Net Serviços de Comunicação S.A. (Net) by 2.8% through
four successive transactions: in May for Ps. 1,264,229 (USD 108.0 million), in June for Ps. 339,107 (USD 30.8 million), in November for
Ps. 151,474 (USD 13.7 million) and in December for Ps. 1,002 (USD 0.09 million). After such increases, Embrapar’s equity interest in Net is
39.9% and TELMEX’s effective indirect equity interest in Net is 38.6%
At an extraordinary stockholders’ meeting held on October 31, 2006, it was decided to increase Net’s capital stock by Ps. 2,740,172 (R$537,023).
Consequently, in November and December 2006, Embrapar and Embratel made capital contributions to Net, which correspond to the
contributions made in November and December 2006 described in the preceding paragraph. As a result of this capital increase, and since new
stockholders took part in such capital increase, Embrapar’s and Embratel’s equity interest in Net was diluted from 43.0 % to 39.9%, which gave
rise to a credit to TELMEX’s stockholders’ equity of Ps. 853,081. This capital increase was made in order to allow Net to acquire a 36.7% equity
interest in Vivax S.A., a cable television operator and one of Brazil’s main broadband Internet service providers.
In 2005 and in accordance with the agreements entered into by and between TELMEX and Globo Comunicações e Participações S.A., Distel
Holding S.A. and Roma Participações Ltda. (together, “Globo”), TELMEX acquired an equity interest in Net, which is the largest cable television
operator in Brazil. The total acquisition cost of these transactions amounted to Ps. 4,027,382 (USD 326.3 million). TELMEX’s total equity interest
in Net was 37.1%, which was subsequently transferred to Embrapar in October 2005.
2Wire
In December 2005, TELMEX agreed with Alcatel USA and AT&T, to jointly invest in 2Wire, Inc. (2Wire), a broadband platform service provider
for homes and small offices, located in the U.S. On January 27, 2006, TELMEX acquired an 18.5% equity interest in 2Wire for Ps. 943,842
(USD 87.8 million). Subsequently, AT&T acquired from TELMEX an additional 5.5% equity interest in 2Wire for Ps. 280,035 (USD 26.05 million),
through the prepayment of an option and at the same price paid by TELMEX. This transaction took place on December 1, 2006. Consequently,
at December 31, 2006, TELMEX holds a 13% equity interest in 2Wire. Goodwill generated was Ps. 431,927.
47
Technology and Internet
On June 21, 2005, the Company sold its 50% equity interest in Technology and Internet LLC to Grupo Condumex, S.A. de C.V., an entity under
common control, for Ps. 46,261. As a result of this transaction, the Company recognized a charge of Ps. 101,245 in its stockholders’ equity.
For the years ended December 31, 2006 and 2005, the equity interest in affiliated companies represented credits to results of operations of
Ps. 457,876 and Ps. 69,056, respectively, and charges to stockholders’ equity of Ps. 209,295 and Ps. 209,040, respectively.
An analysis of changes in goodwill at December 31, 2006 and 2005 is as follows:
2006
Ps.
Initial balance
Negative goodwill credited to income
Goodwill generated
Impairment adjustment
Purchase adjustments
Effect of translation
Ending balance
2005
8,055,791
(
(
Ps.
2,330,864
294,241)
1,109,198)
159,218
9,142,434
Ps.
3,502,404
45,176
4,851,082
(
342,871)
Ps.
8,055,791
II. Investments in subsidiaries
Investments in 2006
In 2006, the Company acquired two subsidiaries and one associated company, and increased Embrapar’s equity interest in Net by 2.8%. The
results of operations of such acquisitions were included in the Company’s financial statements as of the month following the acquisition
All acquisitions were recorded using the purchase method. The allocation of the purchase price to the net assets acquired based on its fair values
at acquisition date is as follows:
Values at acquisition date
2Wire
January
2006
Current assets
Fixed assets
Licenses and trademarks
Less:
Current liabilities
Long-term liabilities
Fair value of net assets
acquired prior to
giving effect to the
increase in equity
interest acquired
% of equity acquired
Net assets acquired
prior to capital
stock increase
Net
May
2006
Net
June
2006
Superview
October
2006
Sausa
October
2006
Embrapar
November
2006
Embrapar
December
2006
991,436
410,239
1,757,673
6,742,372
1,905,366
6,644,083
53,472
148,168
17,839,182
11,093,983
2,119,227
8,099,838
17,791,153
11,237,863
2,241,406
7,678,011
1,783,692
13%
2,567,328
4.99%
2,265,397
1%
297,207
99.15%
( 68,514)
80%
36,063,550
24.61%
2,692,294
( 3.27%)
36,592,912
0.04%
5,462,340
0.04%
231,880
128,110
22,654
294,681
(
8,875,240
( 88,038)
14,637
54,811)
Total
231,880
663,807
431,927
128,110
1,264,229
1,136,119
22,654
339,107
316,453
294,681
400,048
105,367
(
54,811)
286,187
340,998
8,875,240
8,502,325
( 372,915)
997
39.87%
1,091,013
397
1,091,410
2,582
1,002
1,580)
10,517,948
11,621,950
1,104,002
1,580
1,226,862
Ps.2,330,864
1,002,975
151,474
( 851,501)
372,915
Ps. 431,927 Ps.1,136,119 Ps. 316,453 Ps. 105,367 Ps. 340,998 Ps.
annual report 2006
2,185 Ps.9,426,538
2,739,175
39.83%
(
851,501
Ps.
14,637
13,771
866)
(
866
Ps.
TELMEX determined the fair value of fixed assets by means of appraisals performed by independent experts.
48
Net
December
2006
Ps. 2,135,326 Ps.5,545,319 Ps.5,361,401 Ps. 71,911 Ps. 75,413 Ps.28,393,515 Ps.7,183,279 Ps.28,811,202 Ps.9,152,480
1,050,041
4,726,186
4,666,179
275,914
4,241 36,603,200
4,983,725 36,810,726
5,493,528
795,868
787,266
2,854
744,355
735,749
Capital stock increase
Equity interest acquired
Fair value of capital
increase acquired
Total fair value
of net assets
acquired
Acquistion cost
Goodwill
Less: Negative
goodwill credited to
stockholders’ equity
Goodwill, net
Net
November
2006
Ps.
Embrapar
On May 8, 2006, TELMEX, through its subsidiary Telmex Solutions Telecomunicações Ltda., announced a public offering to acquire in cash all
of Embrapar’s ordinary and preferred shares issued and outstanding. The price offered was R$ 6.95 for every 1,000 shares, plus a restatement
adjustment through the date on which each purchase is paid for. The offer included the holders of preferred shares in the form of American
Depositary Sha�
On November 6, 2006, the initial period of this public offering expired, and based on the conditions agreed on such offering, a second purchase
period initiated whereby the remaining stockholders could sell their Embrapar shares. As a result of these acquisitions, which totaled Ps. 8,516,096
(USD 769.7 million), TELMEX holds a 98.0% of all the Embrapar’s ordinary shares and 97.0% of all its outstanding shares at December 31,
2006.
Superview
On October 27, 2006, the Company acquired a 99.15% equity interest in Superview Telecomunicaciones, S.A. (Superview), a cable television
operator in Colombia, for Ps. 400,048 (USD 37 million).
At the date of issuance of these financial statements, the fair value of the acquired assets and liabilities is being determined and, accordingly, the
amount of goodwill from this acquisition is subject to adjustment.
Sección Amarilla USA
On October 20, 2006, the Company acquired 80% of Sección Amarilla USA, LLC (Sausa) (formerly Cobalt Publishing, LLC), a yellow pages
company in the U.S.A., for Ps. 286,187 (USD 26.5 million).
Goodwill from this acquisition has yet to be determined, since the Company has not concluded the determination of the fair value of acquired
assets and liabilities.
TV Cable and Cable Pacífico
On December 4, 2006, TELMEX announced that it had entered into an agreement with the controlling shareholders of TV Cable, S.A. and TV.
Cable Comunicaciones S.A. E.S.P. (jointly TV Cable) and of T.V. Cable del Pacífico, S.A. E.S.P. (Cable Pacífico) to acquire 100% of the shares of TV
Cable and a 97.5% of the shares of Cable Pacífico. The transactions are subject to the corresponding regulatory approvals and other conditions.
TV Cable provides the cable television, Internet and IP voice services in Bogotá and Cali, Colombia. Cable Pacífico operates in several states in
Colombia, and has its main operation in Medellin.
Pro forma financial data
The following unaudited pro forma combined financial data for 2006 and 2005 are based on the Company’s historical financial statements, adjusted
to give effect to (i) the series of acquisitions mentioned in the preceding paragraphs; and to (ii) certain accounting adjustments related to the net
assets of the acquired companies.
The unuadited pro forma adjustments assume that acquisitions were made at the beginning of 2005 and are based on available information and
other assumptions that management believes are reasonable.
The unaudted pro forma financial information data does not purport to represent what the effect on the Company’s consolidated operations would
have been had the transactions occurred at the beginning of such year, nor are they intended to predict the Company’s results of operations.
Unaudited pro forma combined
TELMEX
for the years ended December 31
2006
Operating revenues
Majority net income
Earnings per share (in Mexican pesos):
Basic
2005
Ps. 175,258,174
28,580,099
1.36
Ps.
175,047,173
30,240,671
1.32
49
Investments in 2005
During 2005, several subsidiaries and an affiliate in Latin America were acquired. The results of operations of the acquired subsidiaries and afiiliate
were incorporated into the Company’s financial statements in the month following its acquisition.
All acquisitions were recorded using the purchase method. The allocation of the purchase price to the net assets acquired based on its fair values
at acquisition date is as follows:
Values at acquisition date
Net
January 2005
Current assets
Fixed assets
Licencias
Less:
Current liabilities
Long-term liabilities
Fair value of net
assets acquired
Equity interest acquired
Net assets acquired
Acquisition cost
Goodwill
Ps.
(
(
Ps.
Net
March 2005
Net
May 2005
Millicom
July 2005
Primesys
November
2005
Net
December
2005
4,790,791 Ps. 4,286,765 Ps. 4,595,688 Ps.
3,833,807
3,743,199
3,577,779
10,096
9,757
10,220
241 Ps.
363,499 Ps. 5,361,318
309,852
3,583,901
216,838
10,484
9,219,459
2,413,038
661
141,336
7,647
2,510,955
6,135,945
2,997,803) (
607,179)
1.56%
46.7%
46,766) (
283,552)
253,107
3,588,266
299,873 Ps. 3,871,818 Ps.
1,660,114
6,186,608
336,965 (
0.23%
775 (
22,155
21,380 Ps.
420)
741,206
100%
100%
420)
741,206
12,070
1,222,873
12,490 Ps. 481,667 Ps.
Total
2,036,474
6,249,850
669,379
0%
Ps. 411,243
163,854
5,262,325
163,854 Ps. 4,851,082
The Company determined the fair value of fixed assets by means of appraisals performed by independent experts and through estimates made
of fair values.
Embrapar
From March through May 2005, TELMEX contributed Ps. 7,026,599 (USD 611.5 million) to increase capital stock of its subsidiary Embrapar, thus
increasing its ownership to 95.1% of Embrapar’s voting shares and 63.9% of all of its issued and outstanding shares.
Minority shareholders contributed Ps.1,076,552 (USD 88 million) during the same period, giving rise to an increase in stockholders’ equity.
On October 24, 2005, TELMEX contributed to Embrapar all of Telmex do Brasil Ltda. (Telmex do Brasil) capital stock and its 37.1% equity
interest in Net, thereby increasing its equity interest in Embrapar to 97.3% of the voting shares and 72.3% of all issued and outstanding shares.
This transaction was carried out through the merger of Atlantis Holdings do Brasil and Latam do Brasil Participações S.A., companies that held the
capital stock of Telmex do Brasil and Net, respectively. Such transaction gave rise to a credit of Ps. 1,181,188, which was recognized in majority
stockholders’ equity.
Primesys
In November 2005, Embratel acquired from Portugal Telecom do Brasil S.A. 100% of the capital stock of Primesys Soluções Empresariais S.A
(Primesys), for Ps. 1,222,873 (R$ 250.8 million).
Primesys provides high value-added services in Brazil, such as comprehensive communication solutions and network outsourcing.
Techtel
On June 23, 2005, TELMEX exercised its right to acquire from Intelec, S.A. an additional equity interest of approximately 10% in Techtel for
Ps. 176,718 (USD 15 million), increasing its equity interest to 93.4%. On December 27, 2005, TELMEX acquired from Intelec the remaining
6.6% equity interest in Techtel for Ps. 115,452 (USD 10 million). These amounts exceeded the proportionate book value of the shares acquired,
giving rise to a charge of Ps. 292,170 to stockholders’ equity.
Pro forma financial data
The following unaudited pro forma combined financial data for 2005 is based on the Company’s historical financial statements, adjusted to give
effect to (i) the series of acquisitions mentioned in the preceding paragraphs; and to (ii) certain accounting adjustments related to the net assets of
the acquired companies.
The unaudited pro forma adjustments assume that acquisitions were made at the beginning of 2005 and are based on available information and
other assumptions that management believes are reasonable.
The unaudited pro forma financial information data does not purport to represent what the effect on the Company’s consolidated operations would
have been had the transactions occurred at the beginning of such year, nor are they intended to predict the Company’s results of operations.
Unaudited pro forma
combined TELMEX
for the year ended
December 31, 2005
Operating revenues
Majority net income
Earnings per share (in Mexican pesos):
Basic
50
annual report 2006
Ps. 174,753,560
30,282,190
1.32
III. Subsequent Events
Embrapar
From January 1 through February 12, 2007, TELMEX has made additional acquisitions totaling Ps. 164,394 (USD 15.2 million), thereby increasing
its ownership to 98.0% of all the ordinary shares and 97.4% of all outstanding shares of Embrapar.
CANTV
On February 8, 2007, TELMEX and América Móvil, S.A.B. de C.V. (América Móvil), a related party, agreed with Verizon to terminate the
agreement signed in April 2006 to acquire Verizon’s equity interest in Compañía Anónima Nacional Teléfonos de Venezuela (CANTV), since they
did not expect to obtain the necessary authorizations from the Venezuelan government to complete the acquisition.
Ecutel
On March 12, 2007, TELMEX acquired 100% of the shares of Ecuador Telecom S.A., a company that provides telecommunication services to
corporate clients and to small and medium size companies in Guayaquil, Ecuador, for Ps. 263,514 (USD 23.6 million).
Boga
On March 9, 2007, TELMEX acquired 100% of the shares of Boga Comunicaciones, S.A., a cable television operator in Lima and Chiclayo in
Peru.
7. Labor Obligations
Mexico - Pensions and seniority premiums
Substantially all of the Company’s employees are covered under defined benefit retirement and seniority premium plans. Pension benefits are
determined on the basis of compensation of employees in their final year of employment, their seniority, and their age at the time of retirement.
The Company has set up an irrevocable trust fund to finance its plans and has adopted the policy of making annual contributions to such fund,
which totaled Ps. 90,939 in 2006 and Ps. 62,925 in 2005. These contributions are deductible for Mexican corporate income tax purposes. The
unrecognized net transition obligation, unrecognized prior service costs and unrecognized gains/losses are being amortized over a 12 year period,
which is the estimated average remaining working lifetime of Company employees. The most relevant information related to labor obligations is
as follows:
An analysis of net periodic cost is as follows:
2006
Labor cost
Financing cost on projected benefit obligation
Expected return on plan assets
Amortization of unrecognized net transition obligation and prior service cost
Amortization of unrecognized losses
Net periodic cost
Ps.
(
Ps.
2005
3,214,129
7,749,378
8,037,370)
1,291,920
274,413
4,492,470
Ps.
(
Ps.
3,064,869
6,969,286
7,344,838)
1,347,025
501,452
4,537,794
An analysis of the projected benefit obligation is as follows:
2006
Actuarial present value of labor obligation:
Vested benefit obligation
Non-vested benefit obligation
Accumulated benefit obligation (ABO)
Effect of salary projection
Projected benefit obligation (PBO)
2005
Ps.
64,588,338
62,249,802
126,838,140
3,953,052
Ps. 130,791,192
Ps.
Ps.
56,852,126
52,060,944
108,913,070
4,244,542
113,157,612
An analysis of changes in the projected benefit obligation is as follows:
2006
Projected benefit obligation at beginning of year
Labor cost
Actuarial loss
Benefits paid to employees
Payments from trust fund
Translation effect
Projected benefit obligation at end of year
2005
Ps. 113,157,612
3,214,129
7,749,378
15,413,346
(
184,736)
( 5,976,146)
( 2,582,391)
Ps. 130,791,192
Ps.
105,014,032
3,064,869
6,969,286
3,896,947
(
217,326)
(
5,570,196)
Ps.
113,157,612
51
An analysis of changes in plan assets is as follows:
2006
Fair value of plan assets at beginning of year
Actuarial gain
Contributions to trust fund
Translation effect
Fair value of plan assets at end of year
Ps. 122,093,753
8,037,370
17,188,949
90,939
( 5,976,146)
( 2,786,323)
Ps. 138,648,542
2005
Ps.
110,384,302
7,344,838
9,871,884
62,925
(
5,570,196)
Ps.
122,093,753
An analysis of the net projected asset is as follows:
2006
Plan assets in excess of projected benefit obligation
Unrecognized actuarial loss
Unrecognized net transition obligation at the date of initial application
Unrecognized prior service cost and changes in the plan
Net projected asset
Ps.
Ps.
7,857,350
8,409,344
2,678,490
226,596
19,171,780
2005
Ps.
Ps.
8,936,141
10,704,039
4,028,689
265,056
23,933,925
At December 31, 2006 and 2005, the market value of the trust fund for pensions and seniority premiums exceeded the current benefit obligation
by Ps. 11,810,402 and Ps. 13,180,683, respectively. In conformity with Mexican accounting Bulletin D-3, Labor Obligations, the balance sheets
show a net projected asset of Ps. 19,171,780 and Ps. 23,933,925 in 2006 and 2005, respectively.
In 2006, the net actuarial gain of Ps. 1,775,603 is the result of a favorable actuarial difference of Ps. 17,188,949, due to the behavior of the plan
assets invested in shares of companies listed on the Mexican Stock Exchange, and of an actuarial loss of Ps. 15,413,346, mostly attributable to
the revision made in July 2006 of the demographical actuarial assumptions used in the computation of pensions. The changes in these assumptions
were based on the experience of the Company and of the general trends in Mexico during the last few years, as well as on future expectations.
The change in assumptions represented an increase of Ps. 667,859 in the 2006 net periodic cost, with respect to the cost that would have resulted
had the Company continued to apply the actuarial assumptions used in prior years. In addition, the actuarial loss is also due in part to the change
in the estimated retirement age and the Company’s experience with retired personnel.
In 2005, the net actuarial gain of Ps. 5,974,937 was derived primarily from an actuarial gain of Ps. 9,871,884, due to the favorable effect of
plan assets represented by shares of companies listed on the Mexican Stock Exchange and to the increases in interest rates in our fixed-yield
investments, which was partially offset by an actuarial loss of Ps. 3,896,947, derived from changes in the experience with retired personnel and
differences between the inflation rate and the increase in projected salaries.
The rates used in the actuarial studies at December 31, 2006 and 2005 are as follows:
2006
%
Discount of labor obligations:
Long-term average
Salary increase:
Long-term average
Return on plan assets
2005
%
5.72
5.77
0.94
6.82
0.94
6.82
At December 31, 2006, 43.7% (44.3% in 2005) of plan assets were invested in fixed-yield securities and the remaining 56.3% (55.7% in 2005)
in variable-yield securities.
Dismissal
The most important information related to labor obligations for dismissals is as follows:
An analysis of net periodic cost is as follows:
2006
Labor cost
Amortization of unrecognized net transition obligation and prior service cost
Net periodic cost
Ps.
Ps.
23,840
17,657
65,873
107,370
2005
Ps.
Ps.
8,190
9,446
147,101
164,737
An analysis of the projected benefit obligation is as follows:
2006
Actuarial present value of labor obligation:
Accumulated benefit obligation (ABO)
Effect of salary projection
Projected benefit obligation (PBO)
52
annual report 2006
Ps.
Ps.
144,017
6,682
150,699
2005
Ps.
Ps.
142,360
5,544
147,904
An analysis of labor obligations for dismissals is as follows:
2006
Ps.
Projected benefit obligation
Unrecognized actuarial loss
Net projected liability
2005
150,699
82,819
233,518
Ps.
Ps.
147,904
657
148,561
Ps.
A reconciliation of the book reserve is as follows:
2006
Ps.
Balance at beginning of year
Net periodic cost
Payments
Translation effect
Balance at end of year
(
(
Ps.
2005
148,561
107,370
19,023)
3,390)
233,518
Ps.
(
Ps.
164,737
16,176)
148,561
Brazil
Embratel has established a defined-benefit pension plan (DBP) and a defined-contribution plan (DCP) that covers virtually all of its employees,
as well as a medical assistance plan (MAP) for its DBP participants. Liabilities recorded at December 31, 2006 and 2005 for such plans are as
follows:
2006
2005
Ps.
Defined-benefit pension plan (DPB)
Medical assistance plan (MAP)
Defined-contribution plan (DCP)
Total
133,146
1,327,462
576,996
2,037,604
Ps.
Ps.
182,053
1,100,523
692,714
1,975,290
Ps.
Pension benefits are determined on the basis of compensation of employees in their final year of employment, their seniority, and their age at
the time of retirement. The Company has established funds through Fundación Embratel de Seguridad Social – Telos, an independent entity that
manages the fund.
The unrecognized net obligation at the date of initial application related to the DPB is being amortized over a period of 20 years, which is the
estimated remaining working lifetime of the Company’s employees. Unrecognized gains/losses are being amortized over a period of 19 years,
which is the expected remaining lifetime of the Company’s retired personnel.
Defined-benefit and medical assistance plans
An analysis of net period cost of Embratel’s benefit plans for 2006 and 2005 is as follows:
2006
2005
DBP
Labor cost
Financial cost of benefit obligation
Amortization of (gains) losses
Net periodic (benefit) cost
Ps.
(
(
Ps. (
MAP
280
596,417
652,168)
1,155)
56,626)
Ps.
(
Ps.
36
195,791
26,345)
9,065
178,547
DBP
Ps.
(
Ps. (
MAP
429
579,886
622,612)
1,364
40,933)
Ps.
(
Ps.
93
198,648
28,089)
22,067
192,719
An analysis of the defined-benefit plan and medical assistance plan is as follows:
2006
DBP
Present value of labor obligations:
Vested benefit obligation
Non-vested benefit obligation
Projected benefit obligation
2005
MAP
Ps.
5,738,948
Ps.
Ps.
5,738,948
Ps.
1,921,254
885
1,922,139
DBP
Ps.
Ps.
MAP
5,270,963
6,758
5,277,721
Ps.
Ps.
1,693,701
726
1,694,427
53
An analysis of changes in defined-benefit plan and medical assistance plan obligations is as follows:
2006
2005
DBP
Projected benefit obligation at beginning of year
Ps.
Labor cost
Financial cost on defined-benefit obligation
and medical assistance
Actuarial loss (gain)
(
Defined-benefit plan obligation and obligations
under medical assistance plan at end of year Ps.
MAP
5,277,721
280
Ps.
596,417
131,831
499,514)
232,213
5,738,948
1,694,427
36
(
Ps.
DBP
Ps.
195,791
27,403
70,071)
74,553
1,922,139
MAP
5,131,764
429
(
(
Ps.
Ps.
579,886
180,231)
477,366)
223,239
5,277,721
1,719,353
93
(
(
Ps.
198,648
232,166)
66,294)
74,793
1,694,427
Changes in the plan assets were as follows:
2006
2005
DBP
Fair value of plan assets at beginning of year
Actuarial gain (loss)
Contributions to fund
Administrative expenses
Fair value of plan assets at end of year
Ps.
(
MAP
5,750,159
652,168
314,732
499,514)
300
Ps.
(
(
Ps.
253,002
6,470,847
Ps.
258,073
26,345
8,259
70,071)
31
4,675)
11,356
229,318
DBP
Ps.
(
(
MAP
5,493,448
622,612
127,789)
477,366)
282
Ps.
(
(
Ps.
238,972
5,750,159
Ps.
272,886
28,089
16,445
66,294)
31
4,957)
11,873
258,073
An analysis of the net projected liability for the pension plan and medical assistance plan is as follows:
2006
DBP
Plan assets in excess (short) of defined-benefit
obligation and medical assistance plan
Unrecognized net obligation at the date
of initial application
Unamortized actuarial (gain) loss
Accrued pension cost
Ps.
731,899
(
Ps. (
4,253
869,298)
133,146)
2005
MAP
DBP
MAP
Ps. (
1,692,821)
Ps.
472,438
Ps. (
1,436,354)
Ps. (
365,359
1,327,462)
(
Ps. (
7,451
661,942)
182,053)
Ps. (
335,831
1,100,523)
In 2006, the net actuarial gain of Ps. 182,901 in the DBP and the net actuarial loss of Ps. 19,144 in the MAP, are due principally to actuarial losses
on the defined-benefit obligation and medical assistance plan of Ps. 131,831 and Ps. 27,403, respectively, and the actuarial gain on plan assets of
Ps. 314,732 and Ps. 8,259, respectively.
In 2005, the net actuarial gains of Ps. 52,442 in the DBP and Ps. 248,611 in the MAP are due principally to the actuarial gain on the defined-benefit
obligations and medical assistance plan of Ps. 180,231 and Ps. 232,166, respectively, and the actuarial (loss) gain on plan assets of Ps. (127,789)
and Ps. 16,445, respectively.
The rates used in the actuarial studies at December 31, 2006 and 2005 are as follows:
2006
2005
%
%
Discount of labor obligations:
Long-term average
Salary increase:
Long-term average
Return on plan assets
Annual inflation:
Long-term average
11.3
11.3
5.0
11.3
5.0
11.3
5.0
5.0
At December 31, 2006, 80.0% (80.2% in 2005) of plan assets are represented by fixed-yield instruments, 13.5% (12.8% in 2005) by variableyield instruments and the remaining 6.5% (7.0% in 2005) by other assets.
Defined-contribution plan
The unfunded liability represents Embratel’s obligation for those participants that migrated from DBP to the DCP. This liability is being amortized
over a 20 year period starting on January 1, 1999. Any unpaid balance is adjusted monthly based on the return of the assets portfolio at that date,
which is subject to increases based on the Brazilian general price index plus 6 percentage points per annum. At December 31, 2006, the balance
of the DCP obligation amounted to Ps. 576,996 (Ps. 692,714 in 2005).
54
annual report 2006
8. Long-term Debt
Long-term debt consists of the following:
Average weighted interest
rate at December 31
U.S. dollar denominated debt:
Consolidated excluding Embratel:
Bonds
Banks
Suppliers’ credits
Financial leases
Total
Embratel’s U.S. dollar denominated debt:
Bonds
Banks
Financial leases
Total U.S. dollar denominated debt
Mexican peso denominated debt:
Bonds
Domestic senior notes (“Certificados Bursátiles”)
Banks
Total Mexican peso denominated debt
Maturities from
2006
2005
2007 to
4.9%
5.7%
6.0%
6.3%
5.8%
5.2%
6.6%
5.8%
2015
2014
2011
2011
11.0%
6.2%
11.0%
5.9%
11.3%
2008
2013
Balance at December 31
2006
2005
Ps.29,907,625 Ps.43,548,644
44,121,738
36,532,890
94,943
36,477
92,776
420,978
74,217,082
80,538,989
1,935,589
10,460,335
86,613,006
2,029,822
4,720,777
713
87,290,301
8.8%
9.0%
7.5%
9.4%
8.5%
2016
2012
2007
4,500,000
7,100,000
1,300,000
12,900,000
7,027,680
1,384,240
8,411,920
Brazilian real denominated debt:
Banks
Financial leases
Total Brazilian real denominated debt
12.7%
17.0%
15.2%
18.2%
2010
2008
38,243
2,524
40,767
76,111
14,065
90,176
Debt denominated in other currencies:
Banks
Financial leases
Suppliers’ credits
Total debt denominated in other currencies:
7.4%
10.8%
2.0%
6.6%
12.5%
2.0%
2016
2027
2022
762,295
181,533
245,736
1,189,564
617,648
192,063
250,710
1,060,421
100,743,337
96,852,818
Total debt
Less short-term debt and current portion
of long-term debt excluding Embratel
Embratel
Short-term debt
Long-term debt
9,195,743
14,590,305
3,355,529
950,656
12,551,272
15,540,961
Ps.88,192,065 Ps.81,311,857
The above-mentioned rates are subject to market variances and do not include the effect of the Company’s agreement to reimburse certain
lenders for Mexican taxes withheld. The Company’s weighted average cost of borrowed funds at December 31, 2006 (including interest, interestrate swaps, commissions and Mexican taxes withheld), was approximately 7.0% excluding Embratel (6.4% in 2005), and 7.1% (6.7% in 2005)
including Embratel.
The Company’s short–term debt at December 31, 2006, excluding Embratel, is Ps. 9,195,743 (Ps. 14,590,305 in 2005), which primarily includes
Ps. 3,223,246 in bank debt (Ps. 2,348,949 in 2005) and Ps. 5,900,000 (Ps. 12,184,987 in 2005) in bonds.
Bonds:
a) On January 26, 2001, TELMEX issued a Ps. 12,800,986 (USD 1,000 million) bond, maturing in January 2006 and bearing an 8.25% annual
interest rate, payable semiannually. As a supplement to this bond, on May 8, 2001, the Company issued Ps. 6,036,495 (USD 500 million) with
the same terms. Interest expense on the bonds was Ps. 70,215 for the year ended December 31, 2006 (Ps. 1,440,375 for the year ended
December 31, 2005). During 2005, TELMEX repurchased a total Ps. 5,213,907 (USD 431.6 million) (book value) of these bonds. The
repurchase price was higher than the book value by Ps. 190,510 (USD 15.6 million), which was recognized in Comprehensive financing cost.
In January 2006, the Company paid Ps. 11,612,115 (USD 1,068.4 million) for the outstanding balance of the bonds.
b) On November 19, 2003, a Ps. 13,007,964 (USD 1,000 million) bond was issued, maturing in 2008 and bearing a 4.5% annual interest rate,
payable semiannually. Interest expense on the bond for the year ended December 31, 2006 was Ps. 530,265 (Ps. 562,308 for the year ended
December 31, 2005).
55
c) On January 27, 2005, TELMEX issued bonds for a total of Ps. 16,123,614 (USD 1,300 million), divided into two tranches of Ps. 8,061,807
(USD 650 million) each. The first tranch matures in 2010 and bears a 4.75% annual interest rate and the second tranch matures in 2015
bearing a 5.5% annual interest rate. Interest is payable semi-annually. On February 22, 2005, additional bonds were issued thereby increasing
the initial bond issuances to Ps. 11,707,269 and Ps. 9,884,538, respectively (USD 950 million and USD 800 million, respectively). Interest
expense on the bonds that mature in 2010 amounted to Ps. 531,585 for the year ended December 31, 2006 (Ps. 507,257 for the year ended
December 31, 2005); and to Ps. 518,329 for the year ended December 31, 2006 (Ps. 500,032 for the year ended December 31, 2005) on
the bond that matures in 2015.
d) On January 26, 2006, TELMEX issued abroad a Ps. 4,500 million bond, which matures in 2016 and bears an 8.75% annual interest rate.
Interest expense on the bond was Ps. 392,794 for the year ended December 31, 2006.
Syndicated loans:
On July 15, 2004, TELMEX entered into a syndicated loan agreement for Ps. 31,535,816 (USD 2,425 million) divided in two tranches, the first
tranch for Ps. 19,925,622 (USD 1,525 million) with a maturity of three years, and the second tranch for Ps. 11,610,194 (USD 900 million) with
a five-year maturity.
On October 20, 2005, TELMEX entered into an agreement to restructure the above-mentioned syndicated loan of Ps. 31,535,816 (USD 2,425
million), in order to improve the credit terms and modify the total loan amount to Ps. 29,201,161 (USD 2,500 million) divided in two tranches.
The first tranch for Ps. 17,520,697 (USD 1,500 million) with a four-year maturity, and the second tranch for Ps. 11,680,464 (USD 1,000 million)
with a six-year maturity. No penalties were assessed for the restructuring of the syndicated loan.
On August 11, 2006, this loan was restructured again, in order to improve the credit terms and increasing the total loan amount to Ps. 33,280,186
(USD 3,000 million) divided into three tranches. The first tranch for Ps. 14,421,414 (USD 1,300 million) and with a three-year maturity, the
second tranch for Ps. 11,093,395 (USD 1,000 million) with a five-year maturity, and the third tranch for Ps. 7,765,377 (USD 700 million) with a
seven-year maturity. The outstanding balance as of December 31, 2006 has been included in Bank debt (U.S. dollar denominated liabilities).
On June 30, 2006, TELMEX entered into a syndicated loan agreement for Ps. 5,769,616 (USD 500 million) divided into two tranches of
Ps. 2,884,808 (USD 250 million) each, with a four-year and six-year maturity, respectively.
Domestic senior notes (“Certificados Bursátiles”):
At December 31, 2006, Ps. 7,450,000 domestic senior notes had been issued under the program authorized by the CNBV in 2001; the
outstanding balance at such date is Ps. 6,600,000. The term of this program ended in April 2004 and TELMEX is only paying the outstanding
balance of the transactions carried out.
On September 30, 2005, TELMEX obtained the approval from the CNBV for a new program to issue long-term domestic senior notes for up to
Ps. 10,000,000 (nominal amount). At December 31, 2006, Ps. 500,000 of long-term domestic senior notes under this new program have been
issued; the unused balance at such date is Ps. 9,500,000.
Lines of credit:
At December 31, 2006, TELMEX has long-term lines of credit with certain foreign financial institutions. The unused portion of committed lines of
credit totaled Ps. 1,786,368 (USD 164.2 million), and bear a floating interest rate of LIBOR plus 30 basis points, approximately, at the time of use.
At December 31, 2006, Embratel has unused lines of credit of Ps. 879,933 (USD 80.9 million) that bear a 4.1% interest.
Prepayments of debt:
During 2005, TELMEX prepaid a portion of its debt with certain financial institutions, excluding the repurchase of the bonds that mature in 2006,
totaling Ps. 215,101 (approximately USD 18.3 million), without penalty.
During 2005, Embratel prepaid 35% of the bond that matures in 2008 (Ps. 1,141,552, equal to USD 96.3 million), and Ps. 2,362,411 (USD 200
million) of its short-term debt.
Covenants:
The above-mentioned debt is subject to certain restrictive covenants with respect to maintaining certain financial ratios, and the restriction to sell
and i�
In addition, a portion of the debt is also subject to early maturity or repurchase at the option of the holders in the event of change of control of the
Company, as defined in the related instruments. The definition of change of control varies from instrument to instrument; however, no change
in control shall be considered to have occurred as long as Carso Global Telecom, S.A.B. de C.V. (Carso Global Telecom) (TELMEX’s controlling
company) or its current stockholders continue to control the majority of the Company’s voting shares.
Foreign currency debt:
An analysis of the foreign currency denominated debt at December 31, 2006 is as follows:
Foreign currency
(in thousands)
U.S. dollar
Brazilian real
Other currencies
Total
56
annual report 2006
7,964,048
8,013
Exchange rate at
December 31,
2006 (in units)
Ps.
10.87
5.09
Equivalent in
Mexican pesos
Ps.
Ps.
86,613,006
40,767
1,189,564
87,843,337
Maturities of long-term debt at December 31, 2006 are as follows:
Years
Excluding Embratel
2008
2009
2010
2011
2012 and thereafter
Total
Ps.
Ps.
12,284,108
15,809,124
14,202,120
12,473,142
24,132,230
78,900,724
Embratel
Ps.
Ps.
Total
3,578,991
1,543,239
1,682,691
1,443,969
1,042,451
9,291,341
Ps.
Ps.
15,863,099
17,352,363
15,884,811
13,917,111
25,174,681
88,192,065
Hedges:
At December 31, 2006 and 2005, the financial instruments contracted by the Company are as follows:
2006
Financial instrument
Consolidated excluding Embratel:
Interest-rate swaps in pesos
Interest-rate swaps in dollars
Interest-rate swaps in dollars
Cross currency swaps
Forwards dollar-peso
Hedges of Embratel:
Interest-rate swaps and forwards
dollar-Brazilian real
Notional amount
(in millions)
2005
Fair value
Notional amount
(in millions)
Fair value
Ps.
USD
USD
USD
USD
31,952
1,050
1,050
2,250
4,255
Ps. (
Ps.
Ps. (
Ps.
Ps. (
1,455)
429
280)
765
761)
Ps.
USD
USD
15,900
1,050
1,050
Ps. (
Ps.
Ps. (
254)
592
352)
USD
6,320
Ps. (
1,447)
USD
288
Ps. (
622)
USD
410
Ps. (
219)
As part of its currency hedging strategy, the Company (excluding Embratel) uses derivative financial instruments to minimize the impact of exchange
rate fluctuations on U.S. dollar denominated transactions. During 2006, the Company entered into short-term exchange hedges which, at
December 31, 2006, hedged liabilities of Ps. 46,275,253 million (USD 4,255 million) (Ps. 72,079,387 or USD 6,320 million in 2005). In 2006,
the Company recognized a credit of Ps. 50,043 (charge of Ps. 7,595,495 in 2005) in its statement of income for these hedges corresponding to
changes in their fair value.
In 2006, the Company also entered into cross currency swaps that cover liabilities of Ps. 24,469,875 (USD 2,250 million). The Company
recognized a charge of Ps. 76,450 in its statement of income for these swaps corresponding to changes in their fair value.
Embratel uses hedging derivative instruments (foreign currency swaps and forwards) to protect itself from the effects of exchange rate fluctuations
on the Brazilian real due to foreign currency denominated loans. At December 31, 2006 and 2005, liabilities hedged amounted to Ps. 3,135,081
(USD 288.3 million) and Ps. 4,676,443 (USD 410.3 million), respectively. Embratel recognized a charge of Ps. 1,095,141 in 2006 (charge of
Ps. 729,163 in 2005) corresponding to changes in their fair value of these hedging derivative instruments.
To offset its exposure to financial risks related to the variable-yield debt, the Company (excluding Embratel) entered into interest-rate swaps. Under
these contracts, the Company agreed to receive the 28-day “TIIE” interbank rate and the 182-day treasury certificate (CETES) rate and to pay fixed
rates. Th�
At December 31, 2006, the Company had interest-rate swaps for a total nominal amount of Ps. 31,952,125. In addition, the Company had interestrate swaps for a total nominal amount of Ps. 11,419,275 (USD 1,050 million), paying fixed rates and receiving a six-month LIBOR rate, and of
Ps. 11,419,275 (USD 1,050 million) under which it pays a six-month LIBOR rate and receives a fixed rate. At December 31, 2005, the Company
had interest-rate swaps for a total nominal amount of Ps. 15,900,000 and Ps. 11,975,215 (USD 1,050 million), paying fixed rates and receiving
a six-month LIBOR rate, as well as Ps. 11,975,215 (USD 1,050 million) under which it pays a six-month LIBOR rate and receives a fixed rate. In
2006, the Company recognized a net expense for these swaps in comprehensive financing cost of Ps. 723,568 (Ps. 197,480 in 2005). This amount
includes a charge of Ps. 549,138 (Ps. 310,725 in 2005) derived from the replacement of its Mexican peso-denominated interest rate swaps.
9. Deferred Credits
At December 31, 2006 and 2005, deferred credits consist of the following:
2006
Advance billings
Advances from subscribers and others
Total
Ps.
Ps.
2005
1,326,016
832,803
2,158,819
Ps.
Ps.
1,390,851
676,790
2,067,641
57
10. Accounts Payable and Accrued Liabilities
An analysis of accounts payable and accrued liabilities is as follows:
December 31
2006
Suppliers
Sundry creditors
Net settlement payables
Related parties
Accrued interest
Accruals for other contractual employee benefits
Vacation accrual
Accruals for Embratel contingencies
Other
Ps.
11,341,170
5,158,343
349,860
3,510,346
2,053,975
1,360,732
1,547,519
6,562,620
2,082,903
33,967,468
Ps.
2005
Ps.
10,688,869
4,776,595
628,993
2,731,342
1,579,160
1,417,253
1,560,868
3,087,760
1,821,627
28,292,467
Ps.
The activity in the principal accrued liabilities for the years ended December 31, 2006 and 2005 is as follows:
Accruals for other contractual employee benefits:
2006
Charges to provision
Translation effect
Ps.
(
(
Ps.
1,417,253
3,935,062
3,925,349)
66,234)
1,360,732
2005
Ps.
(
(
Ps.
1,271,413
3,982,193
3,803,388)
32,965)
1,417,253
Vacation accrual:
2006
Translation effect
Ps.
(
(
Ps.
1,560,868
2,756,844
2,688,930)
81,263)
1,547,519
2005
Ps.
(
(
Ps.
1,564,215
2,903,112
2,880,765)
25,694)
1,560,868
Accruals for Embratel contingencies:
2006
Increase charged to other accounts
Translation effect
58
annual report 2006
Ps.
(
Ps.
3,087,760
2,821,199
2,252,200
1,677,203)
78,664
6,562,620
2005
Ps.
2,228,492
1,034,190
(
Ps.
272,356)
97,434
3,087,760
11. Foreign Currency Position and Transactions
a) At December 31, 2006 and 2005, the Company had rights and obligations denominated in the following foreign currencies:
Foreign currency in millions
Exchange rate
at December 31,
Assets:
U.S. dollar
Argentinean peso
Brazilian real
Chilean peso
Colombian peso
Peruvian sol
Liabilities:
U.S. dollar
Argentinean peso
Brazilian real
Chilean peso
Colombian peso
Peruvian sol
Euro
Exchange rate
at December 31,
2006
2006
2005
674
182
3,376
28,266
27,350
91
Ps. 10.88
3.55
5.09
0.02
0.0049
3.40
492
132
2,265
23,735
19,845
94
Ps. 10.71
3.53
4.58
0.02
0.0047
3.12
8,197
256
3,066
49,417
91,335
96
32
Ps. 10.88
3.55
5.09
0.02
0.0049
3.40
14.33
7,883
170
2,180
48,754
34,617
90
47
Ps. 10.71
3.53
4.58
0.02
0.0047
3.12
12.65
2005
At March 12, 2007, exchange rates are as follows:
Currency
Exchange rate
U.S. dollar
Argentinean peso
Brazilian real
Chilean peso
Colombian peso
Peruvian sol
Euro
Ps. 11.14
3.59
5.33
0.02
0.0050
3.50
14.65
b) During 2006 and 2005, the Company had the following transactions denominated in foreign currencies. Currencies other than the U.S. dollar
were translated to U.S. dollars using the average exchange rate for the year.
Millions of dollars
2006
Revenue
Operating costs and expenses
Interest income
Interest expense
USD
2005
4,703
3,957
196
484
USD
3,855
2,933
117
563
12. Commitments and Contingencies
Commitments
a) The Company leases certain equipment used in its operations under capital leases. At December 31, 2006, the Company had the following
commitments under non-cancelable capital leases:
Year ended December 31,
2007
2008
2009
2010
2011
2012 and thereafter
Total
Less unaccrued interest
Present value of minimum net rental payments
Less current portion
Long-term obligation at December 31, 2006
Ps.
76,025
47,278
41,074
33,553
58,411
157,918
414,259
137,426
276,833
54,403
Ps. 222,430
59
b) At December 31, 2006, the Company has non-cancelable commitments of Ps. 10,168,547 (Ps. 8,878,809 in 2005) for the purchase of
equipment. Payments made under purchase agreements aggregated to Ps. 5,322,487 in 2006 (Ps. 8,672,807 in 2005).
c) At December 31, 2006 there are outstanding letters of credit for Ps. 32,627 (Ps. 227,734 in 2005), issued to foreign suppliers for purchase of
materials and supplies.
Contingencies Mexico
d) On December 4, 1997, the Federal Commission of Economic Competition (COFECO) issued a preliminary ruling declaring that Teléfonos de
México, S.A.B. de C.V. exercises substantial power over what it referred to as five telecommunications markets. Teléfonos de México, S.A.B. de
C.V. filed an appeal against such ruling and refuted the final ruling issued by the COFECO on February 19, 1998. After several judicial instances
and rulings, the plenary meeting of the COFECO issued a ruling dated February 23, 2007, in which it revoked the preliminary ruling and ordered
that the file be closed.
e) In December 1995, a competitor that provides cellular telephone services reported Teléfonos de México, S.A.B. de C.V. to the COFECO for
alleged monopolistic practices and undue concentration.
In July 2001, the COFECO ruled that Teléfonos de México, S.A.B. de C.V. was responsible for monopolistic practices and undue concentration.
Teléfonos de México, S.A.B. de C.V. filed an appeal for reconsideration against the ruling, but the appeal was declared unfounded and the ruling
confirmed.
The respective defense against the confirmation of the ruling has been filed with the Federal Court of Justice for Tax and Administrative Matters.
f) The Mexican Social Security Institute (IMSS) audited Teléfonos de México, S.A.B. de C.V. for the 1997-2001 period. At the conclusion of the
audit, it was determined that Teléfonos de México, S.A.B. de C.V. owed a total of approximately Ps. 330,000 (historical amount) in taxes, fines,
surcharges and restatements at July 2, 2003. Teléfonos de México, S.A.B. de C.V. filed an appeal with the Federal Court of Justice for Tax and
Administrative Matters, and in accordance with Mexican law, by means of a bank trust, the Company guaranteed payment of such tax liability
through July 19, 2007. The Company’s external lawyers who are handling this matter are of the opinion that although the Company’s appeal is
well founded, there is no guarantee that it will prevail.
Contingencies of Embratel, Star One and Vésper
Brazilian value-added goods and services tax (ICMS)
In August 2006, an agreement was published granting a proportional reduction of Embratel’s debt plus restatement penalties and surcharges
generated through July 2006 related to the so-called Brazilian ICMS tax on communication services. The provisions of this agreement are applicable
throughout all the states of Brazil, and the Federal District (Brasilia). The effective application of the benefits of this agreement will depend on the
regulations of each state.
In those states in which Embratel has already implemented the benefits of this agreement, it has made payments of Ps. 2,352,360, thus laying to
rest any disputes related to the matter. Regarding the states in which the benefits of this agreement have not yet been implemented, Embratel has
created a reserve of Ps. 2,002,287, as it considers that such states will most likely enter into the agreement related to the payment of debts.
Embratel received assessments by the tax authorities related to alleged undue ICMS tax credits of Ps. 400,672 not addressed by the referred
agreement that are considered by the external lawyers as probable losses. Claims in which the lawyers consider Embratel will prevail are
Ps. 424,397 which consequently, has not been provided for in the financial statements.
In July 2002, the subsidiary Star One received an assessment by the tax authorities in the State of Rio de Janeiro for payment of ICMS on internet
and satellite use of Ps. 1,200,485. In March 2004, Star One was required to pay Ps. 100,479 in the Brazilian Federal District (Brasilia) for ICMS not
paid on satellite use. Based on the lawyers’ estimates, Embratel considers the probability of a loss in this contingency as possible and, consequently,
has not provided for such amount in the financial statements.
The subsidiaries Vésper S.A. and Telmex do Brasil Ltda. received assessments related to ICMS of Ps. 119,586, which were provided for, since they
are considered as probable losses. These subsidiaries received additional assessment of Ps. 91,054, which are considered as a possible loss and,
consequently, have not been provided for in the financial statements.
Income tax on inbound international income
In March 1999, the Brazilian Federal Tax Agency (SRF) assessed the subsidiary Embratel in the amount of Ps. 1,461,127 for failing to pay income tax
for years 1996 and 1997. Embratel filed an appeal against this assessment with Brazil’s Special Federal Tax Court, which is still pending; however,
the Company’s external lawyers are of the opinion that there is a likelihood of loss and therefore, a provision of Ps. 2,577,965 was provided for
at December 31, 2006.
In June 1999, the subsidiary Embratel was further assessed for nonpayment of income tax on net foreign source income for 1998 amounting to
Ps. 327,570. Embratel first filed an appeal with the administrative courts, and after receiving an unfavorable ruling, Embratel filed a lawsuit before
judicial court, whose ruling in the first instance was unfavorable. However, after further review, the court nullified the ruling and issued a new ruling
dec�
Brazilian Social Welfare Tax on Service Exports (PIS)
In August 2001, Embratel received an assessment from the Brazilian Federal Revenue Service (SRF) totaling Ps. 808,801 for payment of the PIS
prior to 1995 that had been offset in accordance with Brazilian tax law. Based on the known facts and on both management’s and the lawyers’
arguments and opinions, Embratel considers a loss from this contingency as possible and, consequently, has not provided for such amount in the
financial statements.
60
annual report 2006
Brazilian Social Welfare Tax for Service Export Security Tax (COFINS)
In August 2001, Embratel also received an assessment of Ps. 1,739,686 related to its exemption from payment of the COFINS on the exportation
of telecommunication services during 1999. The government auditor made several errors in the computation of this tax and, consequently, such
amount was later reduced to Ps. 1,203,537. Embratel appealed the case in Brazil’s Federal Tax Court and ruling is still pending. Based on the
known facts and on both management’s and the lawyers’ arguments and opinions, Embratel considers the probability of a loss in this contingency
as possible and, consequently, has not provided for such amount in the financial statements.
In November 2006, Embratel received an assessment by the SRF of Ps. 82,956 for the payment of the COFINS in 1999, which is considered by
the external lawyers as a probable loss.
Other tax contingencies
Embratel, Vesper, S.A., Telmex do Brasil Ltda. and Primesys Soluções Empresariais S.A. have other on-going tax litigations involving the National
Institute of Social Security (INSS), Social Contribution on Net Income (CSLL), Telecom Development Fund (FUST) and Income Tax on Payments
Abroad (IRRF), among others, which could give rise to tax contingencies, of which Ps. 1,753,486 is considered as a possible loss and consequently,
has not been provided for in the financial statements.
Disputes with third parties
Certain cases on a number of different matters are in advanced stages of the litigation process and, according to Embratel’s external lawyers, the
subsidiary stands a chance of losing at least some of these suits; consequently, Ps. 607,166 has been reserved for possible unfavorable rulings.
According to the Company’s external lawyers, although the Company’s arguments in these cases are well founded, there is no guarantee of a
favorable outcome.
Other civil and labor contingencies
There are other on-going civil and labor litigations that could give rise to contingencies of which Ps. 657,072 has been reserved to cover the
portion considered as probable losses, and Ps. 1,292,703, which corresponds to the portion that represents a possible loss, has not been provided
for in the financial statements. According to the Company’s external lawyers, although the Company’s arguments in these cases are well founded,
there is no guarantee of a favorable outcome.
13. Related Parties
During the years ended December 31, 2006 and 2005, the most importarnt transactions with related parties are as follows:
2006
Investment and expenses:
Purchase of materials, inventories and fixed assets (1)
Insurance premiums, fees for administrative and operating services,
security trading and others (2)
Interconnection under the “Calling Party Pays” program (3)
Revenues:
Sale of materials and other services (4)
Sale of long-distance and other telecommunications services (5)
Sale of 50% of Technology and Internet LLC
Ps.
2005
5,359,756
Ps.
6,283,707
3,759,286
12,837,421
4,043,199
12,107,196
1,333,894
6,989,687
1,579,770
6,408,369
46,261
(1)
Includes Ps. 4,306,760 in 2006 (Ps. 6,216,731 in 2005) for purchase of network construction services and material from subsidiaries of Grupo
Carso, S.A.B. de C.V. (Carso Group), which is an entity under common control of Carso Global Telecom, the company that controls Teléfonos
de México, S.A.B. de C.V.
(2)
Includes Ps. 1,298,644 in 2006 (Ps. 1,633,852 in 2005) for network maintenance services from a subsidiary of Carso Group; Ps. 766,244 in
2006 (Ps. 793,184 in 2005) for services received from subsidiaries of Impulsora del Desarrollo y el Empleo en América Latina, S.A.B. de C.V.
(IDEAL); Ps. 441,497 in 2006 (Ps. 378,466 in 2005) for insurance premiums with Seguros Inbursa, S.A. (Seguros), which, in turn, places most
of this amount in reinsurance with third parties; Ps. 63,902 in 2006 (Ps. 133,992 in 2005) for security trading fees paid to Inversora Bursátil,
S.A. (Inversora), and Ps. 425,275 in 2006 (Ps. 492,857 in 2005) for administrative and operating services paid to technology partners (AT&T
and Carso Global Telecom). Carso Group, IDEAL, Seguros and Inversora are entities under common control of Carso Global Telecom.
(3)
Interconnection expenses under the “Calling Party Pays” program are derived from outgoing calls from a fixed lined telephone to a cellular
telephone paid to a subsidiary of América Móvil. It also includes Ps. 3,848,239 in 2006 (Ps. 2,200,740 in 2005) paid by Embratel for cellular
interconnection to subsidiaries of América Móvil that operate under the brand “Claro” in Brazil. América Móvil is an entity under common
control of Carso Global Telecom.
(4)
Includes Ps. 323,311 in 2006 (Ps. 426,642 in 2005) from the sale of materials and other services to subsidiaries of the Carso Group.
(5)
Includes revenues billed to América Móvil’s subsidiaries that operate under the brand “Claro” for Ps. 850,492 in 2006 (Ps. 1,836,095 in 2005).
At December 31, 2006, Telmex had net amounts payable to a subsidiary of the Carso Group and one subsidiary of América Móvil of
Ps. 419,155 and Ps. 1,105,785, respectively (Ps. 230,020 and Ps. 1,128,397, respectively, in 2005). Also, Embratel had an outstanding loan from a
subsidiary of Grupo Financiero Inbursa, S.A.B. de C.V. (Inbursa Financial Group) of Ps. 285,161 in 2005. Inbursa Financial Group is an entity under
common control of Carso Global Telecom.
The companies mentioned in this note are considered to be related parties, since the Company’s main stockholders are also, directly or indirectly, stockholders
of such companies. Carso Global Telecom holds the majority of the Company’s voting shares. AT&T is a minority shareholder of the Company.
61
14. Stockholders’ Equity
a) At an extraordinary meeting held on December 5, 2006, the stockholders approved, based on the requirements of the Securities Trading
Act in force, to amend the Company’s bylaws, primarily to modify the integration, organization and functioning of its corporate bodies. In this
regard, several resolutions were adopted and are related to i) the exchange of certain series of shares that in due time must be carried out, ii) the
corporate powers previously conferred to the Board, iii) the operation of the Board of Directors, the Corporate Practices Committee and the
Audit Committee under their current structures, iv) the appointment and ratification of the President of the Corporate Practices Committee and
of the President of the Audit Committee and v) the revocation of the appointments of the Statutory Auditor and the Alternate Statutory Auditor; as
well to modify the bylaws to change its business name to Teléfonos de México, Sociedad Anónima Bursátil de Capital Variable or its abbreviation
S.A.B. de C.V.
At an extraordinary stockholders’ meeting held on April 28, 2005, the stockholders approved the restructuring of the number of outstanding Series
“AA”, “A” and “L” shares, through a two-for-one stock split (two new shares for each prior outstanding share) as of May 25, 2005.
All figures related to the number of shares included in the accompanying financial statements and in these notes consider the aforementioned stock
split, regardless of whether such figures refer to dates prior to the date of the split.
b) At December 31, 2006, capital stock is represented by 20,203 million common shares issued and outstanding with no par value, representing
the Company’s fixed capital (Ps. 22,045 million in 2005), comprised as follows:
2006
8,115 million Series “AA” shares
446 million Series “A” shares (479 in 2005)
11,642 million Series “L” shares with limited voting rights (13,451 in 2005)
Total
Ps.
Ps.
15,540,853
1,000,918
10,454,503
26,996,274
2005
Ps.
Ps.
15,540,853
1,075,979
12,034,322
28,651,154
The Company’s capital stock must be represented in a percentage of no less than 20% by common Series “AA” shares, which may be subscribed
only by Mexican individuals and corporate entities, and that shall represent at all times at least 51% of all common shares issued and outstanding;
by common Series “A” shares, which may be freely subscribed, in a percentage not to exceed 19.6% of capital stock and in a percentage not to
exceed 49% of common shares issued and outstanding, and that both shares, Series “AA” and “A”, do not represent more than 51% of capital
stock; and by Series “L” shares, which have limited voting rights and may be freely subscribed, which together with Series “A” shares shall not exceed
80% of capital stock.
Voting rights
Each ordinary Series “AA” and “A” shares entitle the holder to one vote at general shareholders’ meetings. Each Series “L” shares entitle the holder
to one vote at any shareholders’ meetings in which Series “L” holders are authorized to vote. According to the Bylaws´ Clause Eight, Series “L”
shares will have only the right to vote to designate two directors to the Board of Directors and their corresponding alternate directors, and on the
following matters:
• The transformation of the corporation;
• Merger with another entity, as a disappearing company, or a merger with another entity as a surviving company when the disappearing entity’s
corporate purpose differs from that of the Company; and
• Cancellation of the registration of the shares issued by the Company in the securities or special sections of the National Registry of Securities
and in other foreign stock exchanges in which they are registered;
The resolutions adopted by the Extraordinary Shareholders’ Meetings related to any of the matters in which the Series “L” shares are entitled to
vote will be also required to be approved by the majority vote of Series “AA” and Series “A” shares in order to be valid.
Under Mexican law, holders of any series of shares are also entitled to vote as one class on any proposal that could adversely affect the rights of the
holders of that series. The shareholders of the Company (including Series “L”) who individually or jointly represents 20% or more of the capital
stock are entitled to legally oppose to the general shareholders’ meetings resolutions in which they have the right to vote. Determining whether
a proposal requires the vote by the holders of Series “L” under such basis would initially be made by the Board of Directors or by any other party
that calls a shareholders’ meeting to decide on the proposal. A negative decision would be subject to judicial challenge by any affected stockholder,
and a court would ultimately determine the need for a class vote. There are no other procedures to determine whether a proposal requires a class
vote, and Mexican law provides no additional guidance with respect to the criteria to be applied in making such determination.
c) In 1994, TELMEX initiated a program to purchase its own shares. A charge is made to retained earnings for the excess cost of the shares
purchased over the theroetical nominal value of capital stock of the shares acquired.
At a regular stockholders’ meeting held on October 9, 2006, the stockholders approved to increase by Ps. 15,000,000 (historical) the total
nominal amount authorized for the repurchase of the Company’s own shares, bringing the total maximum amount to be used for this purpose to
Ps. 15,931,293 (historical).
62
annual report 2006
In 2006, the Company acquired 1,838.0 million Series “L” shares for Ps. 23,737,186 (historical cost of Ps. 23,092,355) and 3.9 million Series “A”
shares for Ps. 52,122 (historical cost of Ps. 50,682).
In 2005, the Company acquired 1,577.6 million Series “L” shares for Ps. 17,911,445 (historical cost of Ps. 16,926,983) and 6.2 million Series “A”
shares for Ps. 69,744 (historical cost of Ps. 65,761).
d) In conformity with the Mexican Corporations Act, at least 5% of net income of the year must be appropriated to increase the legal reserve, until
the legal reserve reaches at least 20% of capital stock.
e) At December 31, 2006, the caption “Other accumulated comprehensive income” include the deficit from the restatement of stockholders’
equity net of deferred taxes, gain on dilution of investment in affiliate, the fair value of swaps net of deferred taxes and the effect of translation of
foreign entities of (Ps. 79,416,229), Ps. 827,177, Ps. 34,725 and Ps. 4,992,973, respectively (deficit from restatement of stockholders’ equity net
of deferred taxes, the fair value of swaps net of deferred taxes and the effect of translation of foreign entities of (Ps. 76,220,765), Ps. 159,848 and
Ps. 3,669,202, respectively, in 2005).
15. Income Tax, Asset Tax and Employee Profit Sharing
a) The Ministry of Finance and Public Credit authorized Teléfonos de México, S.A.B. de C.V. to consolidate its tax results effective January 1, 1995.
The tax consolidation excludes the tax results of Instituto Tecnológico de Teléfonos de México, S.C. and of the Mexican subsidiaries acquired during
the year.
On November 1, 2004, the Ministry of Finance and Public Credit authorized the transfer of the tax consolidation of Teléfonos de México, S.A.B.
de C.V. to that of Carso Global Telecom (TELMEX’s controlling company), starting in the 2005 fiscal year, in conformity with the Mexican Income
Tax Law, which did not result in the tax deconsolidation of Teléfonos de México, S.A.B. de C.V. nor its subsidiaries, nor in their exclusion from the
tax consolidation regime.
b) The asset tax is a minimum income tax, computed on the average value of most assets net of certain liabilities. Income tax can be credited against
asset tax; therefore, the latter is actually payable only to the extent that it exceeds income tax. Asset tax for the years ended December 31, 2006 and
2005 was Ps. 1,290,270 and Ps. 1,172,510, respectively, amounts that were paid by crediting the corporate income tax paid in such years.
c) An analysis of income tax expense is as follows:
2006
Current year income tax:
From Mexican operations
From foreign operations
Deferred tax of Mexican operations, net of related monetary position gain
of Ps. 738,058 (Ps. 663,275 in 2005)
Deferred tax of foreign operations, net of related monetary position gain
of Ps. 82,281 (Ps. 28,130 in 2005)
Total
Ps.
Ps.
2005
13,031,228
783,366
(
320,680)
(
435,016)
13,058,898
Ps.
14,506,917
373,027
(
Ps.
2,760,751)
190,586
12,309,779
A reconciliation of the statutory corporate income tax rate to the effective rate recognized for financial reporting purposes is as follows:
Statutory income tax rate
Depreciation
Financial cost
Other
Effective tax rate for Mexican operations
Revenues and costs of foreign subsidiaries
Effective income tax rate
2006
%
2005
%
29.0
(0.3)
0.3
(1.8)
1.4
28.6
0.6
29.2
30.0
(0.5)
(0.1)
(2.0)
(0.5)
26.9
(0.2)
26.7
On December 1, 2004, an annual gradual decrease in the corporate income tax rate was approved starting in 2005, until it reaches a 28% in 2007.
63
At December 31, 2006 and 2005, the Company (excluding foreign entities) has recognized deferred taxes on the following temporary differences:
2006
Deferred tax assets:
Allowance for bad debts and slow-moving inventories
Tax losses
Advance billings
Accrued liabilities
Financial instruments
Ps.
Deferred tax liabilities:
Fixed assets
Inventories
Licenses
Pensions
Prepaid expenses
Financial instruments
Net deferred tax liability
510,434
78,508
369,364
826,170
819,356
31,378
2,635,210
( 12,585,436)
(
183,500)
(
119,907)
( 5,333,245)
(
394,320)
( 18,616,408)
Ps. ( 15,981,198)
2005
Ps.
637,300
77,346
368,068
919,698
833,126
2,835,538
(
(
(
(
(
(
(
Ps. (
11,386,931)
281,787)
180,819)
6,657,508)
299,995)
538,118)
19,345,158)
16,509,620)
d) In Mexico the Company is subject to the payment of employee profit sharing in addition to its contractual compensations and benefits. In 2006
and 2005, employee profit sharing was computed applying a 10% rate to taxable income, after eliminating certain inflationary effects as well as the
restatement of depreciation expense.
Beginning in 2005, deferred income taxes started to be recognized on employee profit sharing expense, since as of 2006, employee profit sharing
can be deducted from the income tax base at the time of payment to employees.
e) At December 31, 2006, the balance of the restated contributed capital account (CUCA) and the net tax profit account (CUFIN) was
Ps. 28,854,568 and Ps. 41,534,658, respectively. These amounts correspond to Teléfonos de México, S.A.B. de C.V. on a stand-alone basis.
f) At December 31, 2006 and 2005, foreign entities recognized deferred taxes on the following temporary differences:
2006
Deferred tax assets:
Fixed assets
Allowance for bad debts and slow-moving inventories
Tax losses
Advance billings
Accrued liabilities
Ps.
Deferred tax liabilities:
Licenses
Net deferred tax asset
64
annual report 2006
1,631,756
1,102,295
1,648,727
64,491
2,500,995
6,948,264
(
(
Ps.
331,737)
331,737)
6,616,527
2005
Ps.
1,608,160
1,878,856
1,707,151
61,774
1,267,147
6,523,088
(
(
Ps.
360,045)
360,045)
6,163,043
16. Segments
TELMEX operates primarily in Mexico, the U.S.A. and in other countries in Latin America. Additional information related to the Company’s
operat�
(In millions of Mexican pesos with purchasing power at December 31, 2006)
Mexico
Brazil
Argentina
Chile
Colombia
December 31, 2006
Operating revenues
Operating income
Segment assets
Goodwill
Ps. 128,267 Ps. 42,676 Ps.
18,062
5,732
47,756
307
(
368,230
106,320
432
6,859
1,240 Ps.
192
77)
(
2,369
192
1,364 Ps.
238
21)
3,052
1,214
December 31, 2005
Operating revenues
Operating income
Segment assets
Goodwill
Ps. 129,749 Ps. 40,250 Ps.
19,634
5,766
47,408
3,259
(
358,114
101,901
6,681
1,143 Ps.
134
18)
2,025
338
1,358
189
85
2,592
1,508
Ps.
Peru
U.S.A.
Adjustment
Consolidated
total
909 Ps.
128
263
1,463
105
729 Ps.
156
43
1,639
684 Ps. (
55
11
546
340
863) Ps. 175,006
24,563
9
48,291
483,619
9,142
576 Ps.
79
146
846
655 Ps.
158
2
1,508
528 Ps. (
21
42
271
(
754) Ps. 173,505
18
25,999
924
51,848
565
467,822
471)
8,056
Intersegmental income by country is omitted as it is considered immaterial. Comprehensive financing cost and income tax and employee profit
sharing expense are not allocated to each segment, as they are handled at corporate level.
Segment assets include plant, property and equipment (excluding accumulated depreciation), construction in progress and advances to equipment
suppliers, and inventories for operation of the telephone plant.
65
proposal to the shareholders’
meeting *
Thousands of Mexican pesos, except for dividends per share, with purchasing power at December 31, 2006
Regarding dividend payments for the 2006 fiscal year, and according to Clause Forty-five of Teléfonos de México S.A.B. de C.V. Bylaws, the
following amounts are available to shareholders:
Retained earnings of prior years according to the balance sheet at December 31, 2006.
Ps. 85,518,973
Less: Separation of the fourth dividend payment in cash to shareholders since March 22, 2007 of Ps. 0.1025
per share by presenting coupon 41, according to the Ordinary Shareholders’ Meeting held on April 27, 2006.
2,043,183
Less: Earnings applied for the repurchase of the Company’s shares during the period of January 1 to March 31, 2007
according to the maximum amount of the Company’s resources of Ps. 15,931,293(1) approved by the Ordinary
Shareholders’ Meeting held on October 9, 2006.
5,513,421
77,962,369
28,533,965
Plus: Net income for the year 2006.
Total
Ps. 106,496,334
The balance of Ps. 106,496,334 made available to the shareholders will be allocated as follows:
There will be no retention for the legal reserve since it is in compliance with Article 20 of the “Ley General de
Sociedades Mercantiles” (Mexican Commercial Corporations Act).
To pay a cash dividend of Ps. 0.45 per outstanding share coming from the Net Tax Profit Account in four
equal payments of Ps. 0.1125 each.
To the retained earnings account.
Total
Ps.
8,941,434 (2)
97,554,900 (3)
Ps. 106,496,334
The corresponding cash dividend payments proposed to the Ordinary Shareholders’ Meeting will be paid since June 21, 2007, September 20,
2007, December 20, 2007 and March 27, 2008, by presenting coupons 42, 43, 44 and 45, respectively, of the outstanding shares in effect at
the time the corresponding payments are made. While the amounts of the dividend are not allocated to shareholders, they will continue in the
Company’s retained earnings account.
* Subject to the proceeding updates at the moment the Ordinary Shareholders’ Meeting is held.
66
(1)
This figure was reduced by Ps. 7,184,507 for share repurchases in the period from October 9, 2006 to March 31, 2007.
(2)
Estimated figure considering a total of 19,869,853,070 outstanding shares at March 31, 2007.
(3)
Figure subject to the reductions coming from repurchases of shares that are part of the Company’s capital stock, according to the applicable resolutions of the Ordinary
Shareholders’ Meeting to be held on April 27, 2007.
annual report 2006
significant results of accounting separation of local and
long-distance telephone services in Mexico
Millions of Mexican pesos with purchasing power at December 31, 2006
Based on Condition 7-5 of the Amendments of the Concession Title, the commitment to present the accounting separation of the local and
long-distance services is presented below for 2006 and 2005.
2006
Local service
Long-distance service
2006
2005
2005
Years ended December 31,
Operating revenues:
Access, rents and measured service
Domestic long distance service
International long distance service
LADA Interconnection
Interconnection with operators
Interconnection with cellular operators
Other
Total
Commercial, administrative and general
Interconnection
Interconnection to the local network
Total
Operating income
At December 31 of each year
Assets by segment
Personnel
Ps.
55,595
Ps.
57,779
Ps.
Ps.
Ps.
4,463
1,619
15,117
9,342
86,136
4,395
1,481
16,561
9,256
89,472
21,843
16,791
11,974
11,360
22,672
15,808
13,101
12,503
61,968
24,168
64,084
25,388
266,766
37,660
Ps.
Ps.
259,098
38,430
Ps.
Ps.
17,678
8,927
Ps
17,335
8,902
26,605
26,237
5,367
5,423
2,381
5,635
5,390
2,687
4,800
17,971
8,634
3,870
17,582
8,655
52,147
6,630
Ps.
Ps.
52,052
7,170
Notes:
This information varies to the one presented in the consolidated financial statements of this annual report due to:
1) The information that was considered in its elaboration was only the one corresponding to the companies that are directly involved in rendering local and long
distance telephone services in Mexico as follows: Teléfonos de México, S.A.B. de C.V.; Teléfonos del Noroeste, S.A. de C.V.; Compañía de Teléfonos y Bienes
Raices, S.A. de C.V. and Alquiladora de Casas, S.A. de C.V.
2) Local service: includes revenues from basic rent, measured service, installation charges, equipment sales and interconnection.
3) Long-distance service: includes revenues from basic services of domestic and international long-distance; it does not include revenues from rural and public
telephony and data transmission services.
4) The services being disclosed consider the corresponding imputations for interconnection, billing, collecting, colocation, and leased lines.
5) Interconnection with cellular companies includes revenues from calling party pays.
67
board of directors
Board Members appointed
by Common Shares
Amparo Espinosa Rugarcía (i) (3)
Documentación y Estudios de Mujeres, A.C.
Born in Puebla, Pue., Mexico
Experience: human development.
Rayford Wilkins Jr. (r)
Group President
AT&T, Inc.
Born in Waco, Texas, U.S.A.
Experience: telecommunications
Carlos Slim Helú (r, p)
Lifetime Honorary Chairman
Born in Mexico D.F., Mexico
Experience: telecommunications,
commercial, finance and construction.
Elmer Franco Macías (i)
Grupo Infra, S.A. de C.V.
Born in Mexico, D.F., Mexico
Experience: industrial and medical gas.
Board Members Appointed
by Series “L” Shares
Jaime Chico Pardo (r) (1)
Chairman of the Board
Experience: telecommunications and
automotive.
Carlos Slim Domit (r, p) (1)
Co-Chairman of the Board
Experience: telecommunications,
commercial and construction.
Emilio Azcárraga Jean (i)
Grupo Televisa, S.A.B. de C.V.
Experience: media.
Ángel Losada Moreno (i)
Executive President
and Chairman of the Board
Grupo Gigante, S.A.B. de C.V.
Experience: retailing.
Rómulo O´Farrill Jr. (i) (deceased)
President and Chief Executive Officer
Novedades de Acapulco, S.A. de C.V.
Experience: media
Juan Antonio Pérez Simón (i) (1, 4)
Vice Chairman of the Board
Born in Turanzas, Asturias, Spain.
Experience: telecommunications
and retailing.
Larry Boyle (r) (1)
Chief Financial Officer
AT&T-México, Inc.
Born in Dallas, Texas, U.S.A..
Experience: finance and telecommunications.
Richard P. Resnick (r) (1)
President
AT&T-México, Inc.
Born in Los Angeles, Cal., U.S.A.
Experience: finance and
telecommunications.
Antonio Cosío Ariño (i) (1, 3)
Compañía Industrial Tepeji del Río,
S.A. de C.V.
Experience: textiles.
Fernando Senderos Mestre (i)
Chairman of the Board and Executive
President
DESC, S.A.B. de C.V.
Experience: chemicals, real estate and food.
Laura Diez Barroso de Laviada (i) (3)
President
Tenedora y Promotora Azteca,
S.A. de C.V.
Born in Mexico, D.F., Mexico.
Experience: publishing
Marco Antonio Slim Domit (r, p) (1)
Chaiman of the Board and
Grupo Financiero Inbursa, S.A.B. de C.V.
Experience: finance and telecommunications.
68
annual report 2006
Rafael Moisés Kalach Mizrahi (i) (2)
Chairman of the Board and
Grupo Kaltex, S.A. de C.V.
Ricardo Martín Bringas (i) (4)
Organización Soriana, S.A.B. de C.V.
Born in Torreón, Coah., Mexico
Common Share Alternates
Jaime Alverde Goya (i) (4)
Hoteles Presidente Intercontinental,
S.A. de C.V.
Experience: tourism and retailing.
Carlos Bernal Verea (i)
Partner
Noriega y Escobedo, A.C.
Experience: law.
Antonio Cosío Pando (i)
General Manager
Compañía Industrial Tepeji del Río, S.A. de C.V.
Jorge A. Chapa Salazar (r)
Board Member
Grupo Chapa, S.A. de C.V.
Born in Monterrey, N.L., Mexico
Federico Laffan Fano (i)
Senior Partner
Laffan y Asociados, S.C.
Born in Tampico, Tamps., Mexico
Experience: law.
Antonio del Valle Ruiz (i) (2)
President
Grupo Empresarial Kaluz, S.A. de C.V. and
Mexichem, S.A. de C.V.
Experience: banking, steel and chemicals.
Patrick Slim Domit (r, p)
Mass Market Director
Experience: telecommunications.
Arturo Elías Ayub (r)
Director of Strategic Alliances,
Communication and Institutional
Relations Teléfonos de México,
S.A.B. de C.V.
Experience: telecommunications.
Ángeles Espinosa Yglesias (i) (4)
Director
Museo Amparo
Born in Puebla, Pue., Mexico
Experience: history and art.
Jorge C. Esteve Recolons (i)
HSBC Previsión América Latina
Experience: finance.
Agustín Franco Macías (i)
Cryoinfra, S.A. de C.V.
Experience: industrial and medical gas.
José Humberto Gutiérrez Olvera
Zubizarreta (r) (1)
Grupo Carso, S.A.B. de C.V.
Experience: construction,
telecommunications and electronics.
José Kuri Harfush (i) (2)
Janel, S.A. de C.V.
Fernando Solana Morales (i) (3)
Solana y Asociados, S.C.
Experience: public policies.
Eduardo Tricio Haro (i)
Grupo Industrial Lala, S.A. de C.V.
Born in Torreón, Coah., Mexico
Experience: food and beverages.
Eduardo Valdés Acra (r)
Inversora Bursátil, S.A. de C.V.
Born in Toluca, Edo. de Mex. Mexico.
Experience: finance.
Secretary
Sergio F. Medina Noriega
Legal Director
Born in Tenancingo, Edo. de Mex., Mexico
Experience: law and telecommunications.
Assistant Secretary
Rafael Robles Miaja
Founding Partner
Galicia y Robles, S.C.
Born in Meico, D.F., Mexico
Experience: law.
Series “L” Shares Alternates
Francisco Medina Chávez (i) (3)
Grupo Fame, S.A. de C.V.
Born in Morelia, Mich., Mexico
Experience: automotive and retailing.
Bernardo Quintana Isaac (i)
Empresas ICA, S.A.B. de C.V.
Experience: construction.
Type of Board Member
(i) Independent
(p) Patrimonial
(r) Related
Committees
(1) Executive
(2) Audit
(3) Corporate Practices
(4) Finance and Planning
69
advisory board
Sergio Abraham Mafud (Mérida)
Super San Francisco de Asís, S.A. de C.V.
Retailing
Raúl E. Casares G. Cantón (Mérida)
Productos Prácticos de Madera, S.A de C.V.
Industrial
Carlos Álvarez Bermejillo (Guadalajara)
Executive President
Laboratorios PiSA, S.A. de C.V.
Pharmaceutical
José Cernicchiaro Maimone (Puebla)
La Italiana, S.A. de C.V.
Processed food
Luis Aranguren Tréllez (Guadalajara)
Executive President
Arancia Industrial, S.A. de C.V.
Processed food
Luis Alberto Chapa González (Monterrey)
and Chief Executive Officer
Grupo Chapa, S.A. de C.V.
Retailing
José Joaquín Arizpe y de la Maza (Saltillo)
Vice-Chairman of the Board
Grupo Corporativo ARCA,
S.A. de C.V.
Beverages
Carolina Aubanel Riedel (Tijuana)
Síntesis Comunicación-Síntesis TV,
S.A. de C.V.
Media
Alfonso Barba González (Aguascalientes)
Barba Apparel International
Textiles
José Antonio Chapur Zahoul (Cancún)
Palace Resorts, S.C
Tourism
Antonio Chedraui Obeso (Xalapa)
Grupo Comercial Chedraui, S.A. de C.V.
Retailing
Enrique Coppel Luken (Culiacán)
Coppel, S.A.B. de C.V.
Retailing
Miguel Carlos Barragán Villarreal (Monterrey)
Board Member
Proyección Corporativa, S.A. de C.V.
Beverages
Alberto Coppel Tirado (Los Cabos)
Director of Corporate Operations
Pueblo Bonito Oceanfront Resorts
and Spas
Tourism
José Berrondo Mir (Querétaro)
Vice-President of Technology and Projects
Mabe México, S. de R.L. de C.V.
Home appliances
Juan Manuel Diez Francos (Orizaba)
Grupo Diez-Fénix, S.A. de C.V.
Automotive and retailing
Rómulo Farrera Escudero (Tuxtla Gutiérrez)
Grupo Farrera, S.A. de C.V.
Automotive
José Ramón Fernández Aguilar (Hermosillo)
Grupo Empresarial Sonorense, S.A. de C.V.
Processed food and automotive
Herman H. Fleishman Cahn (Tampico)
Grupo Tampico, S.A.
Beverages
Roberto García Navarro (San Luis Potosí)
Grupo Canel’s, S.A. de C.V.
Processed food
Gemma Garciarce Monraz (Puerto Vallarta)
Hotel Sheraton Bugambilias Resort & Towers
Tourism
Roberto González Alcalá (Monterrey)
Gruma de México
Agricultural industry
Juan José Gutiérrez Ruiz (Oaxaca)
President
Business Council of Oaxaca
Beverages
Luis Lara Armendáriz (Chihuahua)
President
American Industries, S.A. de C.V.
Construction
Marcelo Canales Clariond (Monterrey)
Co-Chairman of the Board and Director of
Planning and Finance
Grupo IMSA, S.A. de C.V.
Industrial
Juan Manuel Ley López (Culiacán)
Grupo Ley, S.A. de C.V.
Retailing
Luis Germán Cárcoba García (Guadalajara)
Promotora Terracasa, S.A. de C.V.
Construction
Shelby Longoria Kowalski (Reynosa)
Grupo Inlosa, S.A. de C.V.
Construction, automotive and banking
70
annual report 2006
Ernesto López De Nigris (Saltillo)
Co-Chairman of the Board
Grupo Industrial Saltillo, S.A.B. de C.V.
Construction
Gastón Luken Aguilar (Mexicali)
Consejo Consultivo del Agua, A.C.
Banking and ecology
Nicolás Madahuar Cámara (Mérida)
Operadora de Tiendas Voluntarias, S.A. de C.V.
Retailing
Carlos Maldonado Quiroga (Monterrey)
President
Milenium Grupo Hotelero Mexicano
Tourism and paper
Ricardo E. Marcos Touché (Torreón)
Compañía Manufacturera Libra, S.A. de C.V.
Textiles
Gilberto Marín Quintero (Puebla)
Grupo PI Mabe, S.A. de C.V.
Hygiene products
Armando José Millet Molina
(Cancún)
Real Arenas de Cancún, S.A. de C.V.
Tourism
Enrique Montoto Arámburo (Puebla)
C. Montoto, S.A. de C.V.
Automotive and real state
Cuauhtémoc Pérez Román (Mexicali)
Urbi Desarrollos Urbanos, S.A.B. de C.V.
Construction
Jaime Rodríguez Silva (Monterrey)
Grupo Senda Autotransporte, S.A. de C.V.
Transport
Manuel Romo Muñoz (Guadalajara)
Proteína Animal, S.A. de C.V.
Poultry and livestock industry
Roberto Ruiz Rubio (Querétaro)
Grupo Fomento Queretano, S.A. de C.V.
Beverages
Felipe Pablo Martínez Treviño (León)
Grupo Emyco, S.A. de C.V.
Footwear
Federico Terrazas Torres (Chihuahua)
Grupo Cementos de Chihuahua,
S.A.B. de C.V.
Cement industry
José O. Menchaca Díaz del Guante (Tepic)
Ingenio El Molino, S.A. de C.V.
Sugarcane industry
Félix Tonella Luken (Hermosillo)
Dinisa, S.A. de C. V.
Construction
Marcelo Zambrano Lozano (Monterrey)
Partner and Director
Carza, S.A. de C.V.
Construction
Jaime Zorrilla de San Martín Diego
(Oaxaca)
Procasa
Construction
71
directory
Héctor Slim Seade
Oscar Von Hauske Solís
President of TELMEX International; Systems
and Telecommunications Operators
Corporate
Divisions
International Operations
Isidoro Ambe Attar
Corporate Market
José Covarrubias Bravo
South Division Coordinator
Argentina
Víctor Cortés Algara
General Manager
Adolfo Cerezo Pérez
Finance and Administration
Darío Fernández Lizardi
Gulf
Javier Elguea Solís
Dean of Inttelmex
Gerardo Leal Garza
South Metro
Brazil
Carlos Henrique Moreira
President
Arturo Elías Ayub
Strategic Alliances, Communication and
Institutional Relations
Miguel Macías Viveros
Northwest
José Formoso Martínez
General Manager
María del Consuelo Gómez Colín
Operational Support
Eduardo J. Gómez Chibli
Technical and Long Distance
Javier Mondragón Alarcón
Regulatory and Legal Affairs
Jaime Pérez Gómez
Human Resources
Patrick Slim Domit
Mass Market
Andrés R. Vázquez del Mercado
Benshimol
Investments and Strategic Development
Oscar Lucio Aguilar Ramírez
North Metro
Hiram Ontiveros Medrano
Southeast
Francisco J. Ortega Castañeda
West
Raymundo Paulín Velasco
Northeast / North Division Coordinator
Chile
Alejandro Rojas
President
Eduardo Díaz Corona Jiménez
General Manager
Colombia
Luz Janeth Rovira González
General Manager
Jorge Luis Suástegui Esquivel
Center
Luis Villanueva Gómez
Telnor
Peru
José A. Gandulia Castro
President
Jesús Gerardo Zozaya
North
Mauricio Escobedo Vázquez
General Manager
United States of America
Jorge Rodríguez
General Manager
72
annual report 2006
shareholder information
Headquarters
Shares traded in Mexico
Parque Via 190
Colonia Cuauhtémoc
México D.F., C.P. 06599
“A”: Bolsa Mexicana de Valores
Symbol: TELMEX A
“L”: Bolsa Mexicana de Valores
Symbol: TELMEX L
Investor Relations
Parque Via 198, Oficina 701
Colonia Cuauhtémoc
México D.F., C.P. 06599
Phone 52 (55) 5703-3990, 52 (55) 5222-5462
Fax 52 (55) 5545-5550
e-mail: ri@telmex.com
Shares traded in the U.S.
ADS: New York Stock Exchange
Symbol: TMX
One ADS represents 20 “L” shares
ADS: NASDAQ
Symbol: TFONY
One ADS represents 20 “A” shares
Shareholder services
Phone 52 (55) 5222-1083
Fax 52 (55) 5546-2111
e-mail: valores@telmex.com
Independent Auditors
Transfer and Depositary Agent
JP Morgan Chase Bank
4 New York Plaza, floor 13,
New York, NY 10004
1-800-990-1135
Phone (201) 680-6630
e-mail: adr@jpmorgan.com
Mancera, S.C., Ernst & Young
Ticker Symbols
www.telmex.com
Design: Signi, S.C.
TELMEX: BMV
TMX: NYSE
TFONY: NASDAQ
XTMXL: LATIBEX
III
www.telmex.com
IV
annual report 2006

annual report 2006 - Bad Request

Transcription

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