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COMPAÑÍA ANÓNIMA NACIONAL<br />

TELÉFONOS DE VENEZUELA (CANTV)<br />

AND SUBSIDIARIES<br />

FINANCIAL AND OPERATING ANNUAL REPORT<br />

FOR THE YEAR ENDED DECEMBER 31, 2007


TABLE OF CONTENTS<br />

Page<br />

INTRODUCTION .............................................................................................................................. 1<br />

SECTION I. INFORMATION ON THE COMPANY ........................................................................ 5<br />

SECTION II. CAPITAL STOCK AND CORPORATE GOVERNANCE.............................................. 17<br />

SECTION III. TELECOMMUNICATIONS REGULATORY FRAMEWORK.......................................... 32<br />

SECTION IV. FINANCIAL AND OPERATING INFORMATION ........................................................ 38<br />

SECTION V. LITIGATION ...................................................................................................... 52<br />

SECTION VI. TRADING INFORMATION.................................................................................... 57<br />

SECTION VII. ADDITIONAL INFORMATION................................................................................ 61<br />

SECTION VIII. EXHIBITS ......................................................................................................... 72


Introduction<br />

As used in this financial and operating report for the year en<strong>de</strong>d December 31, 2007,<br />

unless the context otherwise requires, “we”, “us”, “our” and the “Company” means Compañía<br />

Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV) and its consolidated subsidiaries, and<br />

“CANTV” means Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV). Unless<br />

otherwise specified, all references in this report to “bolivars” or “Bs.” are to Venezuelan<br />

“bolívares”, the legal ten<strong>de</strong>r currency of the Bolivarian Republic of Venezuela (“Venezuela” or<br />

“the Republic”).<br />

CANTV has filed an annual report on Form 20-F with the United States Securities and<br />

Exchange Commission (“SEC”) since 1997. Its most recent annual report on Form 20-F was<br />

filed on May 18, 2007, for the year en<strong>de</strong>d December 31, 2006. The annual report on Form 20-F<br />

for the year en<strong>de</strong>d December 31, 2007 was not filed with the SEC because, on June 30, 2008,<br />

CANTV filed a request to <strong>de</strong>register from the SEC and terminate its reporting obligations. The<br />

purpose of this report is to present certain financial and operating information which is similar to<br />

the information that would have been inclu<strong>de</strong>d in the Form 20-F for the year en<strong>de</strong>d December<br />

31, 2007 if CANTV had been required to file it with the SEC.<br />

On June 30, 2008, CANTV filed a Form 15F with the SEC to <strong>de</strong>register its Class D<br />

shares (including the Class D shares represented by its American Depositary Shares) from the<br />

SEC and terminate its reporting obligations un<strong>de</strong>r the U.S. Securities Exchange Act of 1934 (the<br />

“Exchange Act”) pursuant to Rule 12h-6 un<strong>de</strong>r the Exchange Act. Subject to a number of<br />

conditions, Rule 12h-6 permits <strong>de</strong>registration of a class of registered securities if the average<br />

daily trading volume (“ADTV”) of a class in United States for a recent 12-month period has been<br />

no greater than 5% of the ADTV of the class on a worldwi<strong>de</strong> basis for the same period.<br />

CANTV’s reporting obligations un<strong>de</strong>r the Exchange Act (including the obligation to file the<br />

annual report on Form 20-F that would have otherwise been due in June 30, 2008) were<br />

suspen<strong>de</strong>d immediately upon filing of the Form 15F. The <strong>de</strong>registration and termination of<br />

reporting will become effective 90 days after the filing (unless the Form 15F is earlier withdrawn<br />

by CANTV).<br />

On January 8, 2007, the Presi<strong>de</strong>nt of the Republic announced Venezuela’s intention to<br />

nationalize CANTV, in or<strong>de</strong>r to recover one of the companies with highest strategic value for the<br />

nation’s integral <strong>de</strong>velopment. On February 12, 2007, the Republic entered into a<br />

“Memorandum of Un<strong>de</strong>rstanding” with Verizon Communications Inc. (“Verizon”) and Verizon’s<br />

wholly-owned subsidiary GTE Venholdings B.V. (“GTE Venholdings”) to acquire Verizon’s<br />

equity stake CANTV, which represented approximately 28.51% of the outstanding equity share<br />

capital of CANTV.<br />

On April 8 and 9, 2007, respectively, the Republic commenced concurrent public ten<strong>de</strong>r<br />

offers (each an “Offer” and collectively the “Offers”) in Venezuela to purchase any and all shares<br />

of CANTV’s outstanding capital stock, other than those already owned by the Republic, and in<br />

the United States to purchase any and all of CANTV’s outstanding American Depositary Shares<br />

(“ADSs”), each representing seven Class D shares. The purchase price paid in the U.S. Offer<br />

was U.S.$14.84791 per ADS. The purchase price paid in the Venezuelan Offer was the bolivar<br />

equivalent of U.S.$2.12113 per share based on the official exchange rate for the sale of dollars<br />

established by the Banco Central <strong>de</strong> Venezuela (the “Central Bank of Venezuela”) as of the<br />

settlement date for the Venezuelan Offer on the Bolsa <strong>de</strong> Valores <strong>de</strong> Caracas (the “Caracas<br />

Stock Exchange”). The Offers expired on May 8, 2007.<br />

1


On May 16, 2007, the Republic announced that it had purchased, through the Ministerio<br />

<strong>de</strong>l Po<strong>de</strong>r Popular para las Telecomunicaciones y la Informática (the “Ministry of the Popular<br />

Power for Telecommunications and Information Technology”), 61,257,605 ADSs (representing<br />

an aggregate of 428,803,235 Class D shares) ten<strong>de</strong>red in the U.S. Offer, and 197,949,721<br />

common shares ten<strong>de</strong>red in the Venezuelan Offer. Payment for the common shares and ADSs<br />

was ma<strong>de</strong> on or about May 21, 2007. The common shares and ADSs acquired by the Republic<br />

pursuant to the Offers (which inclu<strong>de</strong>d all of the shares and ADSs previously owned by<br />

Verizon), together with the 51,900,000 Class B shares already held by the Banco <strong>de</strong> Desarrollo<br />

Económico y Social <strong>de</strong> Venezuela (“BANDES”) (the Venezuelan Bank for Economic and Social<br />

Development) and the Ministerio <strong>de</strong>l Po<strong>de</strong>r Popular para la Infraestructura (the “Ministry of the<br />

Popular Power for Infrastructure”), represented an aggregate of approximately 86.2% of the<br />

outstanding shares of CANTV’s capital stock owned by the Republic.<br />

On June 18, 2007, the New York Stock Exchange (the “NYSE”) filed a notification with<br />

the SEC to <strong>de</strong>-list the ADSs from the NYSE. The <strong>de</strong>-listing became effective on June 28, 2007.<br />

As <strong>de</strong>scribed above, on June 30, 2008, CANTV filed a Form 15F with the SEC to <strong>de</strong>register<br />

from the SEC and terminate its reporting obligations un<strong>de</strong>r the Exchange Act pursuant to Rule<br />

12h-6.<br />

On March 31, 2008, the Republic entered into a purchase agreement with Renaissance<br />

Technologies LLC (“Renaissance”) to acquire 3,613,996 ADSs (representing 25,297,972 Class<br />

D shares) of CANTV owned by Renaissance. The acquisition was consummated on April 4,<br />

2008. The consi<strong>de</strong>ration paid to Renaissance consisted of a purchase price U.S.$11.27 per<br />

ADS, plus and an amount equal to the ordinary and extraordinary divi<strong>de</strong>nds, aggregating<br />

U.S.$2.88 per ADS, <strong>de</strong>clared by an Ordinary Sharehol<strong>de</strong>rs’ Assembly on March 31, 2008. As a<br />

result of the consummation of the Renaissance transaction, the Republic acquired 25,297,972<br />

Class D shares which, together with 626,752,956 Class D shares owned by the Republic,<br />

through the Ministry of the Popular Power for Telecommunications and Information Technology,<br />

and the 51,900,000 Class B shares held by BANDES and the Ministry of the Popular Power for<br />

Infrastructure, represent an aggregate of 89.4% of the outstanding common shares of CANTV<br />

which are owned by the Republic. As of June 26, 2008, all Class D shares owned by the<br />

Republic were converted into Class B shares pursuant to a provision of CANTV’s by-laws.<br />

On March 31, 2008, the Republic announced that as a result of its acquisition of ADSs<br />

from Renaissance, Venezuelan law requires the Republic to offer to purchase any and all of the<br />

other outstanding ADSs and Class D shares of CANTV not already owned by the Republic on<br />

the date the offer commences (i) at a price, payable in U.S. dollars, of U.S.$11.27 per ADS for<br />

ADSs, and (ii) at a price, payable in bolivars, of the Bolivar equivalent of U.S.$1.61 per share,<br />

calculated at the official exchange rate in the Republic for the sale of U.S. dollars by the Central<br />

Bank of Venezuela, in effect on the date of the settlement of the offer in a special session on the<br />

Caracas Stock Exchange, for shares that are not represented by ADSs (being the U.S.$11.27<br />

per ADS price divi<strong>de</strong>d by seven to reflect that each ADS represents seven Class D shares). It is<br />

contemplated that hol<strong>de</strong>rs of CANTV’s Class C shares will be able to participate in the offer by<br />

converting their Class C shares into Class D shares in accordance with the procedure<br />

established in CANTV’s by-laws. As of the date of this report, it is CANTV’s un<strong>de</strong>rstanding that<br />

the Republic is continuing to consi<strong>de</strong>r an appropriate structure for the transaction, and that it will<br />

continue to make available updated information as it becomes available.<br />

2


The Company’s consolidated financial statements comply in full and have been prepared<br />

in accordance with International Financial Reporting Standards (“IFRS”), issued by the<br />

International Accounting Standards Board (“IASB”), which inclu<strong>de</strong>: (i) IFRS, (ii) International<br />

Accounting Standards (“IAS”) and (iii) International Financial Reporting Interpretations<br />

Committee (“IFRIC”) or the former Standing Interpretations Committee (“SIC”) rules, and un<strong>de</strong>r<br />

the historical cost convention.<br />

Pursuant to Resolution No. 157-2004 published in the Official Gazette of Venezuela No.<br />

38,085 dated December 13, 2004, the Comisión Nacional <strong>de</strong> Valores (the “CNV”) (the<br />

Venezuelan National Securities Commission) resolved that companies offering securities to the<br />

public un<strong>de</strong>r the Venezuelan Capital Markets Law must prepare and present their financial<br />

statements in accordance with IFRS beginning January 1, 2006, with IFRS becoming effective<br />

on January 1, 2005. On December 8, 2005, the CNV issued Resolution No. 177-2005, which<br />

postponed the requirement to prepare financial statements un<strong>de</strong>r IFRS until the Fe<strong>de</strong>ración<br />

Venezolana <strong>de</strong> Colegios <strong>de</strong> Contadores Públicos <strong>de</strong> Venezuela (“FCCPV”) (the Venezuelan<br />

Fe<strong>de</strong>ration of Public Accountants) adopts IFRS as accounting principles generally accepted in<br />

Venezuela. However, early adoption of IFRS is permitted upon compliance with certain<br />

requirements. Accordingly, the Company adopted IFRS for the preparation of consolidated<br />

financial statements as of and for the year en<strong>de</strong>d December 31, 2005 for the first time.<br />

In January 2004, the FCCPV <strong>de</strong>ci<strong>de</strong>d to adopt IFRS and its interpretations, issued by<br />

the IASB. The FCCPV resolved that the initial adoption date of these standards for entities that<br />

offer securities to the public, will be established by the CNV, the regulatory body of public<br />

companies. The FCCPV established that the Venezuelan generally accepted accounting<br />

principles will be <strong>de</strong>signated by the symbol “VEN-FRS”. During 2005, the Company adopted<br />

IFRS which are different from VEN-FRS; therefore, the Company is currently analyzing the<br />

possible effects that the VEN-FRS could have on the consolidated financial statements.<br />

However, until the CNV issues a statement regarding this adoption plan, it is not possible to<br />

<strong>de</strong>termine the potential effects.<br />

On March 6, 2007, as published in the Official Gazette of Venezuela No. 38.638, the<br />

Decree with Status of Law regarding monetary conversion (“the Monetary Conversion Law”)<br />

was approved. Beginning January 1, 2008, the Monetary Conversion Law establishes a system<br />

whereby the current monetary unit, the “Bolivar” (“Bs.”), would replaced by a new unit, the<br />

“Bolivar Fuerte” (“Strong Bolivar”) (“Bs.F.”) which is the equivalent of Bs. 1,000.00. The Decree<br />

with Status of Law establishes that beginning on such date, all prices of goods and services,<br />

salaries, pensions, <strong>de</strong>bt, payment obligations, taxes, stock quotes in exchange markets,<br />

exchange rates, rates and tariffs, amounts contained in financial statements or any other<br />

accounting documents and, in general, any or reference expressed in local currency would be<br />

expressed in the new currency.<br />

On June 6, 2007, the Central Bank of Venezuela issued Resolution No. 07-06-02<br />

relating to the Rules for Monetary Conversion and Rounding, published in the Official Gazette of<br />

Venezuela No. 38.711. This resolution establishes, among other matters, that financial<br />

statements that are for periods en<strong>de</strong>d before January 1, 2008 but that will be approved after<br />

such date, must be prepared and presented in current Bs. as of December 31, 2007. For<br />

comparison with future periods, the amounts stated in such financial statements must be<br />

converted into Bs.F. using the equivalency established un<strong>de</strong>r the new law.<br />

3


On January, 24, 2008, the Central Bank of Venezuela issued Resolution No. 08-01-02<br />

which establishes that, beginning January 1, 2008, any comparison of statistical or accounting<br />

information with previous years must be ma<strong>de</strong> in the same monetary unit. Thus, financial<br />

information from year prior to 2008 which was originally expressed in Bs. must be converted into<br />

Bs.F. by dividing their amounts by 1,000.00, or alternatively, the financial information for 2008<br />

which is originally expressed in Bs.F. may be converted into Bs. by multiplying the amounts by<br />

1,000.00. Since the Company’s financial statements as of December 31, 2007 are expressed in<br />

Bs., solely for comparison purposes, any amounts in this report relating to 2008 originally<br />

expressed in Bs.F., have been converted into Bs. by multiplying such amounts by 1,000.00.<br />

All the information presented in this report with respect to business strategy, plans and<br />

trends, as well as the consolidated financial statements, have been prepared based on the<br />

Company’s current strategic business plan for the period 2008-2013 approved by the Board of<br />

Directors on February 12, 2008.<br />

The consolidated financial statements as of December 31, 2007 have been prepared<br />

based on events and facts known as of March 10, 2008, the date on which the Board of<br />

Directors approved their issuance.<br />

4


Introduction<br />

Section I. Information on the Company<br />

CANTV is the primary provi<strong>de</strong>r of telecommunications services in Venezuela, and the<br />

owner of a nationwi<strong>de</strong> basic telecommunications network, through which it provi<strong>de</strong>s local,<br />

domestic and international wireline telephone services, as well as private network, data<br />

networks, public telephony and rural telephony services. In addition, CANTV provi<strong>de</strong>s other<br />

telecommunications services, including national wireless communications, Internet access and<br />

publication of telephone directories through its principal subsidiaries: Telecomunicaciones<br />

Movilnet, C.A. (“Movilnet”), CANTV.Net, C.A. (“CANTV.Net”) and C.A. Venezolana <strong>de</strong> Guías<br />

(“Caveguías”).<br />

The purpose of the Company is to administer, <strong>de</strong>velop, establish and exploit<br />

telecommunication networks and ren<strong>de</strong>r telecommunications and information technology<br />

services that inclu<strong>de</strong> such service as: local fixed telephony and domestic and international long<br />

distance telephone services, radiotelephony, mobile cellular services, Internet, value-ad<strong>de</strong>d,<br />

transportation, transmission of and access to data networks, distribution by subscription, radio<br />

messages, radio <strong>de</strong>termination, land mobile radio communication, maritime radio<br />

communication, aeronautical radio communication, meteorological support, <strong>de</strong>velopment of<br />

content and telephone directory; to acquire and market telecommunications and information<br />

technology media and equipment; to lease circuits, collection services, billing and other services<br />

to third parties; to adopt and provi<strong>de</strong> new services established by technical advances in the<br />

telecommunications field; to issue bonds and obligations in accordance with legal requirements;<br />

to enter into agreements with foreign administrations or companies in all matters concerning<br />

Company activities in or<strong>de</strong>r to promote international integration; to participate in international<br />

associations, institutes or groups <strong>de</strong>dicated to perfecting telecommunications or to scientific and<br />

technological research; to participate in international organizations with expertise in<br />

telecommunications and to promote and create companies which it wholly or partly owns, in<br />

Venezuela or in other countries, to conduct activities related and connected to its corporate<br />

purpose, as well as to promote companies that are State-owned of whose production is for<br />

societal purposes, or cooperatives or any other type of entity associated with socially-oriented<br />

economy.<br />

CANTV is a “<strong>compañía</strong> <strong>anónima</strong>” incorporated in Venezuela as Compañía Anónima<br />

Nacional Teléfonos <strong>de</strong> Venezuela (CANTV) on June 20, 1930. CANTV is registered in the<br />

Registro Mercantil Primero <strong>de</strong>l Distrito Fe<strong>de</strong>ral y Estado Miranda (First Registry of Commerce of<br />

the Fe<strong>de</strong>ral District and State of Miranda) un<strong>de</strong>r file number 405. CANTV’s registered office is<br />

located at Avenida Libertador, Centro Nacional <strong>de</strong> Telecomunicaciones, Nuevo Edificio<br />

Administrativo, Piso 1, Apartado Postal 1226, Caracas, Venezuela 1010 (Telephone: +58 212<br />

500 6800). CANTV’s Internet website address is http://www.cantv.com.ve. The information on<br />

CANTV’s website is not incorporated in this document.<br />

History<br />

CANTV was incorporated on June 20, 1930 by private investors to operate certain<br />

telecommunications services. In 1953, CANTV was nationalized and remained un<strong>de</strong>r control of<br />

the Republic until 1991.<br />

5


In December 1991, the Republic, through the Fondo <strong>de</strong> Inversiones <strong>de</strong> Venezuela<br />

(“FIV”) (the Venezuelan Investment Fund) (currently BANDES), sold 40% of the equity share<br />

capital of CANTV to VenWorld Telecom, C.A. (“VenWorld”), a company organized un<strong>de</strong>r the<br />

laws of Venezuela originally by consortium led by GTE Corporation (currently Verizon), for a<br />

purchase price of U.S.$1,885 million.<br />

In November 1996, the Republic sold 348,100,000 Class D shares representing 34.8%<br />

of the equity share capital of CANTV in an international public offering.<br />

On February 25, 2002, the sharehol<strong>de</strong>rs of VenWorld approved a plan of liquidation<br />

pursuant to which Class A shares would be distributed to each of the VenWorld sharehol<strong>de</strong>rs on<br />

March 4, 2002.<br />

On January 8, 2007, the Presi<strong>de</strong>nt of the Republic announced Venezuela’s intention to<br />

nationalize several companies, including CANTV. On February 12, 2007, the Republic entered<br />

into the Memorandum of Un<strong>de</strong>rstanding with Verizon and Verizon’s subsidiary GTE<br />

Venholdings to acquire Verizon’s equity stake in CANTV, which represented approximately<br />

28.51% of the outstanding equity share capital of CANTV.<br />

On April 8 and 9, 2007, respectively, the Republic commenced concurrent public ten<strong>de</strong>r<br />

offers in Venezuela to purchase any and all shares of CANTV’s outstanding capital stock, other<br />

than those already owned by the Republic, and in the United States to purchase any and all of<br />

CANTV’s outstanding ADSs, each representing seven Class D shares. The purchase price paid<br />

in the U.S. Offer was U.S.$14.84791 per ADS. The purchase price paid in the Venezuelan<br />

Offer was the bolivar equivalent of U.S.$2.12113 per share based on the official exchange rate<br />

for the sale of dollars established by the Central Bank of Venezuela as of the settlement date for<br />

the Venezuelan Offer on the Caracas Stock Exchange. The Offers expired on May 8, 2007.<br />

On May 16, 2007, the Republic announced that it had purchased, through the Ministry of<br />

the Popular Power for Telecommunications and Information Technology, 61,257,605 ADSs<br />

(representing an aggregate of 428,803,235 Class D shares) ten<strong>de</strong>red in the U.S. Offer, and<br />

197,949,721 common shares ten<strong>de</strong>red in the Venezuelan Offer. Payment for the common<br />

shares and ADSs was ma<strong>de</strong> on or about May 21, 2007. The common shares and ADSs<br />

acquired by the Republic pursuant to the Offers (which inclu<strong>de</strong>d all of the shares and ADSs<br />

previously owned by Verizon), together with the 51,900,000 Class B shares already held by<br />

BANDES and the Ministry of the Popular Power for Infrastructure, represented an aggregate of<br />

approximately 86.2% of the outstanding shares of CANTV’s capital stock owned by the<br />

Republic.<br />

On March 31, 2008, the Republic entered into a purchase agreement with Renaissance<br />

to acquire 3,613,996 ADSs (representing 25,297,972 Class D shares) of CANTV owned by<br />

Renaissance. The acquisition was consummated on April 4, 2008. The consi<strong>de</strong>ration paid to<br />

Renaissance consisted of a purchase price U.S.$11.27 per ADS, plus and an amount equal to<br />

the ordinary and extraordinary divi<strong>de</strong>nds, aggregating U.S.$2.88 per ADS, <strong>de</strong>clared by an<br />

Ordinary Sharehol<strong>de</strong>rs’ Assembly on March 31, 2008. As a result of the consummation of the<br />

Renaissance transaction, the Republic acquired 25,297,972 Class D shares which, together<br />

with 626,752,956 Class D shares owned by the Republic, through the Ministry of the Popular<br />

Power for Telecommunications and Information Technology, and the 51,900,000 Class B<br />

shares held by BANDES and the Ministry of the Popular Power for Infrastructure, represent an<br />

aggregate of 89.4% of the outstanding common shares of CANTV which are owned by the<br />

6


Republic. As of June 26, 2008, all Class D shares owned by the Republic were converted into<br />

Class B shares pursuant to a provision of CANTV’s by-laws.<br />

On March 31, 2008, the Republic announced that as a result of its acquisition of ADSs<br />

from Renaissance, Venezuelan law requires the Republic to offer to purchase any and all of the<br />

other outstanding ADSs and Class D shares of CANTV not already owned by the Republic on<br />

the date the offer commences (i) at a price, payable in U.S. dollars, of U.S.$11.27 per ADS for<br />

ADSs, and (ii) at a price, payable in bolivars, of the Bolivar equivalent of U.S.$1.61 per share,<br />

calculated at the official exchange rate in the Republic for the sale of U.S. dollars by the Central<br />

Bank of Venezuela, in effect on the date of the settlement of the offer in a special session on the<br />

Caracas Stock Exchange, for shares that are not represented by ADSs (being the U.S.$11.27<br />

per ADS price divi<strong>de</strong>d by seven to reflect that each ADS represents seven Class D shares). It is<br />

contemplated that hol<strong>de</strong>rs of CANTV’s Class C shares will be able to participate in the offer by<br />

converting their Class C shares into Class D shares in accordance with the procedure<br />

established in CANTV’s by-laws. As of the date of this report, it is CANTV’s un<strong>de</strong>rstanding that<br />

the Republic is continuing to consi<strong>de</strong>r an appropriate structure for the transaction, and that it will<br />

continue to make available updated information as it becomes available.<br />

On June 18, 2007, the NYSE filed a notification with the SEC to <strong>de</strong>-list the ADSs from<br />

the NYSE. The <strong>de</strong>-listing became effective on June 28, 2007.<br />

On June 30, 2008, CANTV filed a Form 15F with the SEC to <strong>de</strong>register its Class D<br />

shares (including the Class D shares represented by its ADSs) from the SEC and terminate its<br />

reporting obligations un<strong>de</strong>r the Exchange Act pursuant to Rule 12h-6 un<strong>de</strong>r the Exchange Act.<br />

Subject to a number of conditions, Rule 12h-6 permits <strong>de</strong>registration of a class of registered<br />

securities if the ADTV of a class in United States for a recent 12-month period has been no<br />

greater than 5% of the ADTV of the class on a worldwi<strong>de</strong> basis for the same period. CANTV’s<br />

reporting obligations un<strong>de</strong>r the Exchange Act (including the obligation to file the annual report<br />

on Form 20-F that would have otherwise been due in June 30, 2008) were suspen<strong>de</strong>d<br />

immediately upon filing of the Form 15F. The <strong>de</strong>registration and termination of reporting will<br />

become effective 90 days after the filing (unless the Form 15F is earlier withdrawn by CANTV).<br />

Organizational Structure<br />

2007:<br />

The following table shows the principal subsidiaries of the Company as of December 31,<br />

Name of Subsidiary Registered office<br />

7<br />

%<br />

Ownership<br />

Telecomunicaciones Movilnet, C.A. Caracas, Venezuela 100%<br />

Compañía Anónima Venezolana <strong>de</strong> Guías<br />

(Caveguías)<br />

Caracas, Venezuela 80%<br />

CANTV.Net, C.A. Caracas, Venezuela 100%<br />

INVERCANTV, S.A. Caracas, Venezuela 100%<br />

CANTV Finance, LTD. Grand Cayman, Cayman<br />

Islands<br />

100%<br />

CANTV International, LTD. Grand Cayman, Cayman<br />

Islands<br />

100%


Movilnet was incorporated on March 24, 1992. Its mains purpose is to manage, provi<strong>de</strong>,<br />

<strong>de</strong>velop and exploit cellular services, transportation services, ground mobile radio<br />

communications and establishment and use of telecommunications networks.<br />

CANTV.Net was incorporated on January 26, 1994. Its main purpose is to offer valuead<strong>de</strong>d<br />

telecommunications services, including Internet access and voice mail, among others. In<br />

addition, it provi<strong>de</strong>s consulting, engineering, and management of private and public networks.<br />

Caveguías was incorporated on November 12, 1975. Its main activity is the<br />

<strong>de</strong>velopment and an sale of advertising space in the telephone directories that it publishes and<br />

distributes.<br />

CANTV as a State-Owned Company<br />

With the nationalization of CANTV, Venezuela recovered one of the companies with the<br />

highest strategic value to the integral <strong>de</strong>velopment of the country. This initiative placed the<br />

leading provi<strong>de</strong>r of telecommunications services in the service of all Venezuelans.<br />

The Venezuelan Government ratified its commitment to the achievement of the Plena<br />

Soberanía y Auto<strong>de</strong>terminación <strong>de</strong> la Nación (“Full Sovereignty Plan and Self-Determination of<br />

the Nation”), to take telecommunications services to every corner of the country.<br />

The Company, as a Venezuelan State-owned entity, will contribute <strong>de</strong>cisively to the<br />

process of inclusion and social transformation in Venezuela, in or<strong>de</strong>r to guarantee<br />

communication rights to the people, through the <strong>de</strong>mocratization of telecommunications and the<br />

use of information and communication technologies as tools to further that nation’s social,<br />

economic, political, territorial and cultural knowledge and <strong>de</strong>velopment, as well as national<br />

security.<br />

The Company will contribute to achievement of the strategic objectives of the<br />

Venezuelan State, supporting its transformation through the use of technology. Likewise, it will<br />

tend to result in the expansion of national production capacity, promoting technological<br />

sovereignty, the organic connection of different economic entities and the participation of the<br />

Po<strong>de</strong>r Popular (Popular Power or power of the people) in the Company’s activities. In addition,<br />

CANTV will further the involvement of all of its workers in the task of bringing about social<br />

inclusion and stimulate their commitment to and i<strong>de</strong>ntification with the Company’s objectives.<br />

As a State-owned entity serving the Venezuelan people, the Company has set as its<br />

goal to offer basic telephony, Internet and other services to population centers which have until<br />

now been exclu<strong>de</strong>d, with significant investment programs to address the nation’s<br />

telecommunications needs.<br />

One of the first benefits of nationalization is the strengthening and expansion of our<br />

infrastructure as a result of the integration of all the fiber-optic networks of other State-owned<br />

entities with CANTV’s network, in or<strong>de</strong>r to <strong>de</strong>dicate them to providing nationwi<strong>de</strong><br />

telecommunications services. As a result of this alliance among institutions, the Company will<br />

operate in the first phase a total of 14,062 kilometers of fiber optics, almost double the 7,737<br />

kilometers that it had when it was a private company. With the integration of the State<br />

networks, 88% of the population will be covered, which will promote national integration. In<br />

8


addition, CANTV will operate the telecommunications capacity of the Simón Bolívar Satellite,<br />

which is to be launched in September 2008, allowing Venezuela to have its own satellite<br />

capacity fore the first time, which will facilitate the provision of telecommunications services in<br />

regions with difficult access.<br />

Through all of these initiatives, CANTV is leveraging the <strong>de</strong>velopment and<br />

transformation of Venezuela and meeting its social commitment to the State, the community, its<br />

workers and its retirees, in the quest for the collective good and supreme social happiness.<br />

Company Strategy<br />

When the nationalization of CANTV was completed on May 21 2007, the new<br />

management began to <strong>de</strong>fine the Company’s new strategic orientation centered on the<br />

nonwaivable principle of access to telecommunications as a fundamental human right. The new<br />

strategic orientation will promote the creation of a social structure based on values of equality,<br />

solidarity, participation and coresponsibility and will take telecommunications and information<br />

technology services to every corner of the country. These objectives have been incorporated in<br />

the Company’s mission and vision statements, which are <strong>de</strong>scribed below:<br />

Mission: “We are the strategic company of the Venezuelan state operating and<br />

supplying integral telecommunications and information technology solutions, coresponsible for<br />

the sovereignty and transformation of the nation, focused on strengthening the power of the<br />

people and the integration of the region, capable of serving with quality, efficiency and efficacy<br />

and with the participation of the people in a leading role, and contributing to the supreme social<br />

happiness”.<br />

Vision: “To be socialist company operating and supplying integral telecommunications<br />

and information technology solutions, recognized for its innovative capacity, enabler of<br />

sustainable <strong>de</strong>velopment and national and regional integration, committed to the<br />

<strong>de</strong>mocratization of knowledge, the collective well-being, the efficiency of the State and national<br />

sovereignty.”<br />

Based on these concepts, CANTV has <strong>de</strong>fined the following strategic objectives:<br />

Democratize service with social justice. Access to telecommunications is a<br />

fundamental human right. CANTV is rapidly expanding its geographic coverage to inclu<strong>de</strong> all<br />

segments of the population. Pursuant to the National Plan, CANTV will take<br />

telecommunications and information technology to every citizen, where, how and when nee<strong>de</strong>d,<br />

relying on the robust interconnection of State networks with CANTV’s access and transportation<br />

network. CANTV favors participation and cooperation with other operators to work together to<br />

provi<strong>de</strong> all sectors of the population with opportunities to access all services. CANTV also<br />

supports new socio-economic actors in the industry. Empresas <strong>de</strong> Producción Social (“Social<br />

Production Companies”), cooperatives and new types of organizations are being introduced into<br />

the supply chain, in or<strong>de</strong>r to pave the way toward building a socialist economy. CANTV will<br />

reinvest the majority of its profits to address the telecommunications needs of the Venezuelan<br />

people.<br />

9


Be a lea<strong>de</strong>r in service quality, product portfolio and client service. CANTV will<br />

focus on offering innovative products and services <strong>de</strong>signed to meet the needs of individuals,<br />

homes, organized communities, enterprises and corporations, as well as the Venezuelan State.<br />

Our competitive advantage will resi<strong>de</strong> in:<br />

• The capacity to effectively address the needs and expectations of the population;<br />

• The capacity to <strong>de</strong>velop the necessary products and services to meet the different<br />

needs of the population and to improve their quality of life, taking advantage of<br />

innovative technologies in the industry;<br />

• A solid and efficient network of service channels; and<br />

• A distinctive <strong>de</strong>dication to customer service.<br />

Guarantee the capacity of the Company to be self- financed. The Company will<br />

optimize the benefits it provi<strong>de</strong>s to society by <strong>de</strong>veloping various corporate plans to ensure its<br />

economic profitability. A healthy cost structure combined with efficient procedures will produce<br />

advantages that can be transferred to society and will enable CANTV to maintain and expand its<br />

operations. By continually seeking operational efficiency and including organized communities<br />

in its management activities, the Company will ensure continual review of its internal procedures<br />

and reasonable management of its resources.<br />

Strengthen the power and participation of the people. Through the Mesas Técnicas<br />

<strong>de</strong> Telecomunicaciones (“Technical Telecommunications Tables”), CANTV will promote the<br />

growing leading role being played by organized communities in the i<strong>de</strong>ntification, <strong>de</strong>sign,<br />

implementation and management of the most appropriate solutions to meet their needs. The<br />

Company will turn these communities into strategic allies for service supply. CANTV will work<br />

together with the Consejos Comunales (“Communal Councils”), the principal form of the<br />

community self-management mo<strong>de</strong>l that the Venezuelan State is promoting to empower the<br />

people, in or<strong>de</strong>r to generate growth which is accompanied by a mutual commitment between<br />

CANTV and the people. CANTV supports the new Esquemas Asociativos Solidarios (“Mutually<br />

Binding Cooperative Production Mo<strong>de</strong>ls”) promoted by the Venezuela State and will leverage its<br />

extraordinary purchasing and hiring capacity to become one of the main <strong>de</strong>velopers of these<br />

production mo<strong>de</strong>ls, progressively <strong>de</strong>legating the business support activities to them.<br />

Become a socialist State-owned company. Honesty, efficiency, and an integral public<br />

service vocation are the foundation for the implementation of a mo<strong>de</strong>l of socialist public servant<br />

that will do away with the traditional concept of a public official. As a State-owned company,<br />

CANTV is adjusting to the legal framework of the public sector, making room for Mutually<br />

Binding Cooperative Production Mo<strong>de</strong>ls, promoting the leading role increasingly played by its<br />

workers and furthering a socialist labor mo<strong>de</strong>l.<br />

Advance toward technological sovereignty. CANTV will enable national <strong>de</strong>velopment<br />

of human talent, technical solutions, technological innovation and products and services in the<br />

telecommunications and information technology sector that will contribute to the nation’s<br />

in<strong>de</strong>pen<strong>de</strong>nce. In or<strong>de</strong>r to achieve this objective, specific actions will be carried out to promote<br />

the transfer of technological knowledge in the agreements for alliances and assistance that it<br />

enters into, which will plant the seeds for endogenous <strong>de</strong>velopment of the Venezuelan<br />

telecommunications and information technology industry. Additionally, the implementation of<br />

Decree 3,390 for Free Software, relating to the free use of software in public administration, will<br />

promote technological sovereignty.<br />

10


Leverage the transformation of the State. CANTV will assist in the implementation of<br />

electronic Government by the use of technology in public management through the following<br />

contributions:<br />

• Optimizing the coordination and integration among public administration entities in all<br />

sectors and geographic regions, improving their response to social needs;<br />

• Participation of citizens in the <strong>de</strong>sign, implementation, execution and control of public<br />

policy;<br />

• Offering public servants the necessary tools to improve service to Venezuelans; and<br />

• Streamlining relationships with the suppliers and partners of public institutions to<br />

improve their operational efficiency and the effectiveness of their use of budgetary<br />

resources.<br />

Support national and international integration. With CANTV’s nationalization, the<br />

Venezuelan State can count on a telecommunications network of national reach that supports<br />

State security and <strong>de</strong>fense functions. The Company will take the necessary steps to integrate<br />

the State-owned networks, creating a communications platform that will facilitate interaction<br />

between Venezuelan citizens and the State, in or<strong>de</strong>r to guarantee complete inclusion<br />

nationwi<strong>de</strong>. By becoming a communications platform with and among Venezuela’s regional<br />

allies, CANTV is promoting <strong>de</strong>velopment in a setting of international integration and<br />

cooperation.<br />

Property, Plant and Equipment, and Capital Expenditures<br />

The Company’s property consists principally of network facilities, land and structures<br />

required to provi<strong>de</strong> telecommunications services. As of December 31, 2007, the Company’s<br />

property, plant and equipment, net of accumulated <strong>de</strong>preciation was comprised of network<br />

facilities (64.1%), buildings and facilities (17.6%), equipment and other assets (7.2%) and<br />

construction work in progress (11.1%).<br />

The Company provi<strong>de</strong>s telecommunications services in Venezuela through a full-service<br />

telecommunications network. As of December 31, 2007, the Company maintains 4,999,630<br />

access lines in service and 9,501,796 wireless subscribers. The percentage of digital access<br />

lines installed in the Company’s network is 93.6% as of December 31, 2007. All of the<br />

Company’s international and domestic long distance switches are digital.<br />

The Company ma<strong>de</strong> capital expenditures of approximately U.S.$456 million, U.S.$553<br />

million and U.S.$715 million in 2005, 2006 and 2007, respectively. The Company is planning<br />

capital expenditures of approximately U.S.$1,110 million in 2008, and are directed towards<br />

<strong>de</strong>velopment and network expansion to support growth of the Company’s customer base (41%),<br />

administration (14%), overhead (2%), network and maintenance (36%) and systems (7%). The<br />

Company fun<strong>de</strong>d, through internally generated cash, its 2007 capital expenditures. Capital<br />

expenditures in the 2008 to 2013 planning period as approved in 2008 will <strong>de</strong>pend on the<br />

economic environment and will continue to be directed towards network optimization, systems<br />

platforms and the launch of new services. The Company began the <strong>de</strong>ployment of its Global<br />

System for Mobile Communications (“GSM”) network during 2007 and plans to continue to focus<br />

its capital investments on high growth wireless, broadband Internet and Evolution-Data<br />

Optimized (“EvDO”) services, data transmission, substitution of public telephones and<br />

mo<strong>de</strong>rnization of analog switches.<br />

11


Capital investments during 2007 inclu<strong>de</strong>d: (i) the expansion of the Company’s Co<strong>de</strong><br />

Division Multiple Access (“CDMA-1X”) network footprint to support projected <strong>de</strong>mand in mobile<br />

and fixed wireless services; (ii) <strong>de</strong>ployment of the new mobile GSM network; (iii) <strong>de</strong>ployment of<br />

backbone and data networks to sustain the growth in the Company’s Asymmetrical Digital<br />

Subscriber Lines (“ADSL”) and other data product lines; (iv) the integration and transformation<br />

of the Company’s information systems; (v) <strong>de</strong>ployment of EvDO technology for wireless<br />

broadband services; and (iv) substitution of analog switches with multi-service access no<strong>de</strong>s to<br />

support service enhancements and increase operating efficiency.<br />

Business Overview<br />

Fixed Telephony<br />

Local and Domestic Long Distance Services<br />

The Company’s revenues from local and domestic long distance telephone services<br />

consist of installation charges and charges for new lines, basic monthly recurring charges,<br />

usage charges, public telephony usage, and equipment sales. All traffic is measured and billed<br />

based on duration and, in the case of domestic long distance calls different tariffs apply based<br />

on the time of day when the call is ma<strong>de</strong>. A local and international call impulse is generated<br />

every 60 seconds, while call impulses for domestic long distance calls is generated every<br />

second. Nighttime consumption is less expensive than daytime consumption.<br />

The Company offers Domestic Long Distance plans, Noches y Fines <strong>de</strong> Semana Libre<br />

(“Free Nights and Weekends”) and Plan Nacional 3000 (“National Plan 3000”). The Free Nights<br />

and Weekends plan offers special rates for calls placed between 8:00 p.m. and 7:59 a.m. from<br />

Monday through Thursday, and on weekends from Friday at 8:00 p.m. until Monday at 7:59 a.m.<br />

The National Plan 3000 inclu<strong>de</strong>s 3,000 seconds for a monthly fixed payment and a special rate<br />

for each additional second for domestic long distance calls.<br />

Public Telephony<br />

As of December 31, 2007, the Company owned and operated 115,060 public telephone<br />

lines, located throughout Venezuela. Users of public telephones in Venezuela pay for calls<br />

based on the duration and <strong>de</strong>stination of the call. CANTV bills all public telephone calls at a flat<br />

per minute charge. Domestic long distance calls from public telephones are charged based<br />

upon the time of day and the duration of the call at the non-resi<strong>de</strong>ntial rate. International long<br />

distance call rates are the same tariffs applied to non-resi<strong>de</strong>ntial international long distance<br />

calls.<br />

Telecommunication Centers<br />

The Company facilitates public access to telecommunications services via its<br />

Telecommunication Centers program.<br />

Telecommunication Centers are operated by third parties as franchises or strategic<br />

allies, with technical support from the Company. These Telecommunication Centers provi<strong>de</strong><br />

local, domestic long distance and international long distance telecommunications services,<br />

Internet access, equipment sales, sale of prepaid cards, mailing services and copying and<br />

12


faxing services. Telecommunication Center franchises have grown to 855 as of December<br />

2007, a 13.2% increase over December 2006.<br />

The Company is required to pay commissions as sales incentives established by type<br />

and volume of services ren<strong>de</strong>red by the Telecommunication Centers in its own installations.<br />

Rural Service<br />

As of December 31, 2007, the Company had 292 satellite-based lines serving rural<br />

areas with satellite technology. The Company also provi<strong>de</strong>s rural services through wireless<br />

systems and by microwave radio-based stations.<br />

International Long Distance Services<br />

Revenues from international telephone services are primarily <strong>de</strong>rived from (i) charges to<br />

subscribers in Venezuela for outgoing calls (a portion of which the Company must pay to other<br />

international operators for calls carried on their networks once outsi<strong>de</strong> Venezuela) and<br />

(ii) access charges paid by other international telecommunications operators for incoming calls<br />

originating outsi<strong>de</strong> Venezuela and carried through the Company’s network in Venezuela. The<br />

Company charges its customers for outgoing international long distance calls based on the<br />

<strong>de</strong>stination country, duration and time of day of the call and whether the call is direct-dial or<br />

operator assisted. International long distance rates do not vary between resi<strong>de</strong>ntial and<br />

non-resi<strong>de</strong>ntial customers, except for Cuba, Japan, Greece, Hong Kong, Honduras and the U.S.<br />

State of Hawaii.<br />

The Company provi<strong>de</strong>s international services through submarine cables, satellite and<br />

microwave links. The Company has two international digital switches, both located in Caracas.<br />

The Company’s largest international traffic routes are between Venezuela and North<br />

America (the United States, Mexico and Canada) and South America (Colombia), which<br />

accounted for approximately 84% of 2007 international traffic.<br />

Wireless Services<br />

The Company, through its wholly-owned subsidiary Movilnet, provi<strong>de</strong>d wireless<br />

communication services in areas that covered approximately 87.8% of Venezuela’s population<br />

as of December 31, 2007.<br />

Wireless service is one of the Company’s fastest growing businesses. As of<br />

December 31, 2007, Movilnet reached 9,501,796 subscribers, which represented an estimated<br />

market share of 39.9%, according to figures published by the Comisión Nacional <strong>de</strong><br />

Telecomunicaciones (“CONATEL”) (the Venezuelan National Telecommunications<br />

Commission).<br />

Usage charges are based on a “calling party pays” principle un<strong>de</strong>r which Movilnet’s<br />

customers are charged only for calls they originate, with the exception of international roaming<br />

charges <strong>de</strong>rived from customers receiving calls when they are outsi<strong>de</strong> Venezuela. Wireless<br />

service customers are charged an activation fee, a basic monthly charge, special fees and<br />

usage fees on a per-minute basis and per-second basis.<br />

13


Movilnet provi<strong>de</strong>s a number of services and products, such as: voice mail, Short<br />

Message Service (“SMS”), Multimedia Messaging Service (“MMS”), call forwarding, call waiting,<br />

caller ID, conferencing, international long distance, international roaming, emergency number,<br />

vi<strong>de</strong>o streaming, among others. In addition Movilnet provi<strong>de</strong>s Global Positioning System<br />

(“GPS”) satellite technology that provi<strong>de</strong>s vehicle tracking via the Internet, wireless broadband<br />

service through EvDO, Windows Mobile services, and BlackBerry service (a Research in Motion<br />

Ltd. tra<strong>de</strong>marked product), which allows customers to stay connected with wireless access to<br />

email, corporate data, Internet and organizer features through the phone.<br />

Movilnet is continually <strong>de</strong>veloping applications to support its migration strategy into<br />

advanced data services. In November 2002, Movilnet launched a nationwi<strong>de</strong> CDMA-1X<br />

technology platform which provi<strong>de</strong>s digital cellular services and broadband wireless data<br />

transmission and Internet access. CDMA-1X technology affords the Company the flexibility to<br />

combine both fixed and wireless services un<strong>de</strong>r the same platform and allows for a more<br />

efficient use of voice spectrum. Movilnet is the pioneer in offering EvDO mobile broadband in<br />

Venezuela and is the second carrier to provi<strong>de</strong> this advanced service in Latin America.<br />

During 2007, the Company began the <strong>de</strong>ployment of its GSM network, which will coexist<br />

with its current CDMA-1X. The Company believes it will be able to strengthen its market share<br />

position. The Company expects that this new technology will be in commercial operation at the<br />

end of 2008.<br />

The Company markets its wireless services through a network of authorized agents and<br />

the Company’s commercial offices. The Company has agreements with third parties to act as<br />

exclusive authorized agents to capture and provi<strong>de</strong> wireless services and equipment to new<br />

customers.<br />

Other Telecommunications-Related Services<br />

Data Transmission<br />

The Company’s data transmission services are provi<strong>de</strong>d through high-capacity private<br />

links. The Company has implemented Virtual Private Network (“VPN”) technology and intends<br />

to encourage its use by private line customers. VPN technology should enable the Company to<br />

provi<strong>de</strong> higher quality <strong>de</strong>dicated services while improving network efficiency.<br />

In 2000, CANTV introduced ADSL technology, which allows simultaneous voice and<br />

data traffic on the same line. As of December 31, 2007, the Company had 735,507 ADSL<br />

subscribers, which reflects a 63.6% increase as compared to 2006.<br />

Internet Access<br />

The Company provi<strong>de</strong>s Internet access service through its wholly-owned subsidiary,<br />

CANTV.Net. CANTV.Net provi<strong>de</strong>s broadband access through its product, Acceso a Banda<br />

Ancha (“ABA”) (Broadband Access) via ADSL and nationwi<strong>de</strong> one-number dial-up Internet<br />

access as well as international Internet roaming capabilities. CANTV.Net is the largest Internet<br />

service provi<strong>de</strong>r in Venezuela, serving 848,917 subscribers as of December 31, 2007. In<br />

addition to Internet access, subscribers may choose from an array of products such as web<br />

14


hosting, Intranet <strong>de</strong>velopment, VPN, e-commerce solutions, among others. In addition,<br />

CANTV.Net also provi<strong>de</strong>s Internet access through prepaid cards.<br />

In June 2006, the Company launched a wireless broadband Internet access offer<br />

exclusively for its ABA broadband subscribers, using Wireless Fi<strong>de</strong>lity (“Wi-Fi”) technology,<br />

called Zona ABA Wi-Fi (“Wi-Fi ABA Zone”). The Company provi<strong>de</strong>s 62 wireless access points<br />

(“hotspots”) nationwi<strong>de</strong>, including 40 hotspots in Caracas.<br />

Value-Ad<strong>de</strong>d Services and Other Services<br />

The Company offers an array of value-ad<strong>de</strong>d services and other services, including voice<br />

mail, call waiting, call forwarding, call blocking, caller ID, speed dialing, toll-free and 800-number<br />

services, vi<strong>de</strong>o conferencing, audio text, 900 services, computer network management,<br />

outsourcing of telecommunications networks, and other intelligent network and data capabilities.<br />

Directory Information Services<br />

The Company provi<strong>de</strong>s telephone directory information services through its 80%-owned<br />

subsidiary Caveguías (the remaining 20% is owned by an affiliate of a major newspaper<br />

publisher in Venezuela). Caveguías publishes telephone directories (“White Pages”) and<br />

business directories (“Yellow Pages”). It also operates an Internet portal that provi<strong>de</strong>s on-line<br />

access to the Company’s directories. Other directory services offered inclu<strong>de</strong>: (i) Travel Gui<strong>de</strong>,<br />

which provi<strong>de</strong>s tourism information; (ii) Mobile Gui<strong>de</strong>, which gives cellular users access to<br />

commercial information and local, regional and national services; (iii) specialized gui<strong>de</strong>s for<br />

shopping malls, entertainment and events, aesthetics and beauty; (iv) Oil Gui<strong>de</strong>, which provi<strong>de</strong>s<br />

information on the oil industry; and (v) City Maps, which allows city map search to facilitate<br />

address searches. Caveguías <strong>de</strong>rives revenues from sales of advertising space in its printed<br />

and electronic directories. Advertisers in the Company’s printed telephone directories are<br />

charged an annual fee, which varies <strong>de</strong>pending on the size of the advertisement placed and the<br />

circulation of the edition of the directory in which such advertisement is published.<br />

Competition<br />

Competition in services provi<strong>de</strong>d by the Company may arise from a variety of existing<br />

competitors and new entrants, including telecommunications service provi<strong>de</strong>rs from other<br />

countries.<br />

In January 1991, CONATEL granted the first cellular concession to Telcel, C.A.<br />

(“Movistar”).<br />

In December 1996, Infonet Re<strong>de</strong>s <strong>de</strong> Información, C.A. (“Infonet”) was granted a rural<br />

concession to provi<strong>de</strong> multiple services to population centers with 5,000 or fewer inhabitants in<br />

eight western states of Venezuela. In January 1998, two additional companies were granted<br />

multiple service concessions. Corporación Digitel C.A. (“Digitel”), was granted a concession to<br />

provi<strong>de</strong> services in seven central states and Digicel, C.A. (“Digicel”) was granted a concession<br />

to provi<strong>de</strong> services in six eastern states.<br />

15


On January 19, 2006, Telvenco S.A. (“Telvenco”), a subsidiary of Cisneros Group of<br />

Companies, agreed to acquire Venezuelan mobile operator Digitel from Telecom Italia Mobile<br />

International N.V. (“TIM International”). On May 18, 2006, CONATEL approved the transaction<br />

and also inclu<strong>de</strong>d the merger of the assets of two regional carriers, Infonet and Digicel. Digitel<br />

continues as the surviving entity after the merger. Digitel provi<strong>de</strong>s digital fixed wireless and<br />

cellular services, where it competes with services provi<strong>de</strong>d by the Company.<br />

On November 28, 2007, CONATEL granted Movilnet and Movistar with cellular<br />

concessions for the use of the radioelectric service in the 1900 MHz band which will allow these<br />

companies to provi<strong>de</strong> new services, including third generation services un<strong>de</strong>r GSM.<br />

In May 2008, CONATEL granted Digitel a cellular concession for the use of the<br />

radioelectric service in the 900 MHz band to expand its services un<strong>de</strong>r GSM. Digitel’s network<br />

has been un<strong>de</strong>r GSM in the 900 MHz band since its beginnings.<br />

As of June 30, 2008, the Venezuelan telecommunications market is composed by: of<br />

fixed local telephone and public telephony service provi<strong>de</strong>rs, such as CANTV, Movistar, Digitel,<br />

Veninfotel Comunicaciones Vitcom, C.A. (“Veninfotel”) and Corporación Telemic, C.A.<br />

(“Intercable”); domestic long distance service provi<strong>de</strong>rs, such as CANTV, Movistar, Digitel,<br />

Veninfotel, Telecomunicaciones NGTV, S.A. (“New Global Telecom”), 123.com.ve, C.A.<br />

(“123.com.ve”), Multiphone Venezuela, C.A. (“Multiphone”) and Totalcom Venezuela C.A.<br />

(“Totalcom”); international long distance service provi<strong>de</strong>rs, such as CANTV, Movistar, Digitel,<br />

Veninfotel, New Global Telecom, 123.com.ve, Multiphone, LD Telecom Comunicaciones C.A.<br />

(“LD Telecom”) and Convergia Venezuela, S.A. (“Convergia”); wireless service provi<strong>de</strong>rs, such<br />

as Movilnet, Movistar, and Digitel; data transmission service provi<strong>de</strong>rs, such as CANTV,<br />

Movistar, New Global Telecom, Totalcom, Global Crossing Venezuela B.V. (“Global Crossing”),<br />

Comsat Venezuela, C.A. (“Comsat”), Telecomunicaciones Bantel, C.A. (“Bantel”), NetUno, C.A.<br />

(“NetUno”), Procesamiento Electrónico <strong>de</strong> Datos, S.A. (“Procedatos”), Satélites y<br />

Telecomunicaciones, C.A. (“Satelca”), Genesis Telecom, C.A. (“Genesis Telecom”), E-Quant<br />

Venezuela, S.A. (“E-Quant”), Charter Communications International <strong>de</strong> Venezuela C.A.<br />

(“Charter International”), Zulia Electrónica, C.A. (“Zulia Electrónica”) and MCI <strong>de</strong> Venezuela,<br />

C.A. (“MCI Venezuela”); Internet service provi<strong>de</strong>rs, such as CANTV.Net, Movistar, Etheron<br />

Servicios, C.A. (“Etheron”), Genesis Telecom, New Global Telecom, Totalcom, NetUno,<br />

Procedatos, E-Quant, Comsat, Charter International, Intercable, SuperCable ALK Inter<strong>nacional</strong>,<br />

S.A. (“SuperCable”), Centro Nacional <strong>de</strong> Tecnologías <strong>de</strong> Información (“CNTI”), IFX Networks<br />

Venezuela S.R.L. (“IFX Networks”), Dayco Telecom, C.A. (“Daycohost”); Global Crossing,<br />

World Tel-Fax Electronics, C.A. (“World Tel-Fax”), MCI Venezuela, Sprint International, S.R.L.<br />

(“Sprint International”), IP Net, C.A. (“IP Net”), Gold Data, C.A. (“Gold Data”), AT&T Global<br />

Network Services Venezuela, LLC (“AT&T Venezuela”), Atos Origin IT Servicios <strong>de</strong> Venezuela,<br />

S.A. (“Atos Origin Venezuela”) and Viptel Communications, C.A. (“Viptel”); satellite operator<br />

Globalstar <strong>de</strong> Venezuela (“Globalstar”); paging operators, such as Telemensajes<br />

Metropolitanos, C.A. (“Telemensajes Metropolitanos”) and Elca Telecomunicaciones, C.A.<br />

(“Elca Telecomunicaciones”); trunking service provi<strong>de</strong>rs, such as Movistar, Procedatos, Satelca,<br />

Elca Telecomunicaciones, Americatel Sistemas <strong>de</strong> Comunicación, C.A. (“Americatel”), Radio<br />

Móvil Digital Venezuela, C.A. (“Radio Móvil Digital”), Comunicaciones Móviles EDC, C.A.<br />

(“Conmóvil”) and Evcon Telecomunicaciones, C.A. (“Evcon”); radio<strong>de</strong>termination services<br />

provi<strong>de</strong>rs, such as Movilnet, Sistemas Timetrak, C.A. (“Sistemas Timetrack”), Scada Com<br />

System, S.A. (“Scada Com System”) and Vehicle Security Resources <strong>de</strong> Venezuela, C.A.<br />

(“Vehicle Security Resources”); and cable TV operators, such as SuperCable, NetUno,<br />

Intercable, Vearco Telecom, C.A. (“Vearco”), Sistemas Cablevisión, C.A. (“Cablevisión”) and<br />

Galaxy Entertainment <strong>de</strong> Venezuela, C.A. (“DirecTV”).<br />

16


In 2004, the Venezuelan Government incorporated CVG Telecomunicaciones (currently<br />

“Telecom Venezuela”), a telephone company to provi<strong>de</strong> data transmission and other services<br />

through fiber-optics and Internet protocol platforms in north-central Venezuela and the Guayana<br />

region, located in the southeast of Venezuela. On August 14, 2007, Telecom Venezuela<br />

became a company un<strong>de</strong>r the direction of the Ministry of the Popular Power for<br />

Telecommunications and Information Technology (the Republic, through the Ministry of the<br />

Popular Power for Telecommunications and Information Technology, is the principal<br />

sharehol<strong>de</strong>r of CANTV).<br />

The scope of increased competition and any corresponding adverse effect on the<br />

Company’s results will <strong>de</strong>pend on a variety of factors, such as business strategies and financial<br />

and technical capabilities of potential competitors, prevailing market conditions, and the<br />

effectiveness of the Company’s efforts to prepare for increased competition.<br />

Corporate Image<br />

The Company promotes its image through advertisements based on nationwi<strong>de</strong> mass<br />

campaigns via television, radio and print media. In 2007, following the nationalization, CANTV<br />

changed the colors of its corporate logo, incorporating the colors of the Venezuelan flag, and<br />

launched the new slogan “mueve la fibra <strong>nacional</strong>” (“moves the national fiber”). Movilnet also<br />

adopted the new slogan “la señal que nos une” (“the signal that unifies us”). Both phrases are<br />

aligned with the Company’s new mission, vision and values, and represent the nationalistic<br />

spirit.<br />

Major Sharehol<strong>de</strong>rs<br />

Section II. Capital Stock and Corporate Governance<br />

The following table sets forth CANTV’s capital stock as of December 31, 2007:<br />

17<br />

Class<br />

Number of<br />

shares<br />

Ownership<br />

Percentage<br />

Bolivarian Republic of Venezuela, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology<br />

D 626,752,956 79.62%<br />

Venezuelan Economic and Social Development Fund Bank (BANDES) B 51,899,999 6.59%<br />

Bolivarian Republic of Venezuela, through Ministry of the Popular Power for Infrastructure B 1 -<br />

Company employees and retirees (1) C 44,334,550 5.63%<br />

Others (2) D 64,153,343 8.16%<br />

787,140,849<br />

(1) Class C shares inclu<strong>de</strong> shares held in trust for distribution to employees at the Company’s discretion. The trust for<br />

benefit of employees held 2,883,099 Class C shares at December 31, 2007. For accounting purposes these shares<br />

are consi<strong>de</strong>red treasury shares.<br />

(2) Inclu<strong>de</strong>s Class D shares held by The Bank of New York as Depositary for ADSs of CANTV, each of which represents<br />

seven Class D shares.


As of December 31, 2007, the Company estimates that 4,994,936 ADSs were held in the<br />

United States, representing approximately 54,5% of the total Class D shares outstanding<br />

(excluding Class D shares held by the Republic, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology).<br />

On May 21, 2008, an Extraordinary Sharehol<strong>de</strong>rs’ Assembly approved amen<strong>de</strong>d and<br />

restated by-laws which, among other things, set forth classes of shares comprising CANTV’s<br />

share capital and its divi<strong>de</strong>nd policy. Un<strong>de</strong>r the new by-laws, the share capital of CANTV<br />

consists of three classes of shares, <strong>de</strong>signated as Class B, Class C and Class D.<br />

Class B shares may only be owned by the Republic and other Venezuelan public sector<br />

entities. The transfer of Class D shares to the Republic will cause such transferred shares to be<br />

automatically converted into an equal number of Class B shares upon transfer of the shares.<br />

Class C shares may be owned by active workers of the Company with a contract for an<br />

in<strong>de</strong>terminate period of time and workers retired from the Company, heirs of Class C<br />

sharehol<strong>de</strong>rs who received the shares in succession, trusts and benefit plans established for the<br />

benefit of workers or retired workers of the Company, and former workers and former spouses<br />

of Class C sharehol<strong>de</strong>rs who received the shares through partition of marital property and<br />

hol<strong>de</strong>rs of these Class C shares prior to the filing of the new by-laws in the Registry of<br />

Commerce.<br />

Class D shares are held by different sharehol<strong>de</strong>rs and are registered in the capital<br />

markets.<br />

The by-laws state that each share of CANTV, regardless of class <strong>de</strong>signation, is entitled<br />

to one vote on all matters submitted for the approval for CANTV’s sharehol<strong>de</strong>rs at a<br />

Sharehol<strong>de</strong>rs’ Assembly. In general, matters submitted to vote at a Sharehol<strong>de</strong>rs’ Assembly will<br />

be adopted only if a majority of the hol<strong>de</strong>rs of the shares present at such Sharehol<strong>de</strong>rs’<br />

Assembly vote in favor of such matters.<br />

Record hol<strong>de</strong>rs of ordinary shares are registered in CANTV’s share register, which is<br />

administered on behalf of CANTV by Banco Venezolano <strong>de</strong> Crédito, S.A.C.A., as transfer agent,<br />

and registered in Venezuela. In the United States the Depositary acts as transfer agent and<br />

registrar in respect of hol<strong>de</strong>rs of ADSs.<br />

On January 8, 2007, the Presi<strong>de</strong>nt of the Republic announced Venezuela’s intention to<br />

nationalize several companies, including CANTV. On February 12, 2007, the Republic entered<br />

into the Memorandum of Un<strong>de</strong>rstanding with Verizon and Verizon’s subsidiary GTE<br />

Venholdings to acquire Verizon’s equity stake in CANTV, which represented approximately<br />

28.51% of the outstanding equity share capital of CANTV.<br />

On April 8 and 9, 2007, respectively, the Republic commenced concurrent public ten<strong>de</strong>r<br />

offers in Venezuela to purchase any and all shares of CANTV’s outstanding capital stock, other<br />

than those already owned by the Republic, and in the United States to purchase any and all of<br />

CANTV’s outstanding ADSs, each representing seven Class D shares. The purchase price paid<br />

in the U.S. Offer was U.S.$14.84791 per ADS. The purchase price paid in the Venezuelan<br />

Offer was the bolivar equivalent of U.S.$2.12113 per share based on the official exchange rate<br />

for the sale of dollars established by the Central Bank of Venezuela as of the settlement date for<br />

the Venezuelan Offer on the Caracas Stock Exchange. The Offers expired on May 8, 2007.<br />

18


On May 16, 2007, the Republic announced that it had purchased, through the Ministry of<br />

the Popular Power for Telecommunications and Information Technology, 61,257,605 ADSs<br />

(representing an aggregate of 428,803,235 Class D shares) ten<strong>de</strong>red in the U.S. Offer, and<br />

197,949,721 common shares ten<strong>de</strong>red in the Venezuelan Offer. Payment for the common<br />

shares and ADSs was ma<strong>de</strong> on or about May 21, 2007. The common shares and ADSs<br />

acquired by the Republic pursuant to the Offers (which inclu<strong>de</strong>d all of the shares and ADSs<br />

previously owned by Verizon), together with the 51,900,000 Class B shares already held by<br />

BANDES and the Ministry of the Popular Power for Infrastructure, represented an aggregate of<br />

approximately 86.2% of the outstanding shares of CANTV’s capital stock owned by the<br />

Republic.<br />

On March 31, 2008, the Republic entered into a purchase agreement with Renaissance<br />

to acquire 3,613,996 ADSs (representing 25,297,972 Class D shares) of CANTV owned by<br />

Renaissance. The acquisition was consummated on April 4, 2008. The consi<strong>de</strong>ration paid to<br />

Renaissance consisted of a purchase price U.S.$11.27 per ADS, plus and an amount equal to<br />

the ordinary and extraordinary divi<strong>de</strong>nds, aggregating U.S.$2.88 per ADS, <strong>de</strong>clared by an<br />

Ordinary Sharehol<strong>de</strong>rs’ Assembly on March 31, 2008. As a result of the consummation of the<br />

Renaissance transaction, the Republic acquired 25,297,972 Class D shares which, together<br />

with 626,752,956 Class D shares owned by the Republic, through the Ministry of the Popular<br />

Power for Telecommunications and Information Technology, and the 51,900,000 Class B<br />

shares held by BANDES and the Ministry of the Popular Power for Infrastructure, represent an<br />

aggregate of 89.4% of the outstanding common shares of CANTV which are owned by the<br />

Republic. As of June 26, 2008, all Class D shares owned by the Republic were converted into<br />

Class B shares pursuant to a provision of CANTV’s by-laws.<br />

On March 31, 2008, the Republic announced that as a result of its acquisition of ADSs<br />

from Renaissance, Venezuelan law requires the Republic to offer to purchase any and all of the<br />

other outstanding ADSs and Class D shares of CANTV not already owned by the Republic on<br />

the date the offer commences (i) at a price, payable in U.S. dollars, of U.S.$11.27 per ADS for<br />

ADSs, and (ii) at a price, payable in bolivars, of the Bolivar equivalent of U.S.$1.61 per share,<br />

calculated at the official exchange rate in the Republic for the sale of U.S. dollars by the Central<br />

Bank of Venezuela, in effect on the date of the settlement of the offer in a special session on the<br />

Caracas Stock Exchange, for shares that are not represented by ADSs (being the U.S.$11.27<br />

per ADS price divi<strong>de</strong>d by seven to reflect that each ADS represents seven Class D shares). It is<br />

contemplated that hol<strong>de</strong>rs of CANTV’s Class C shares will be able to participate in the offer by<br />

converting their Class C shares into Class D shares in accordance with the procedure<br />

established in CANTV’s by-laws. As of the date of this report, it is CANTV’s un<strong>de</strong>rstanding that<br />

the Republic is continuing to consi<strong>de</strong>r an appropriate structure for the transaction, and that it will<br />

continue to make available updated information as it becomes available.<br />

On June 18, 2007, the NYSE filed a notification with the SEC to <strong>de</strong>-list the ADSs from<br />

the NYSE. The <strong>de</strong>-listing became effective on June 28, 2007.<br />

On June 30, 2008, CANTV filed a Form 15F with the SEC to <strong>de</strong>register its Class D<br />

shares (including the Class D shares represented by its ADSs) from the SEC and terminate its<br />

reporting obligations un<strong>de</strong>r the Exchange Act pursuant to Rule 12h-6 un<strong>de</strong>r the Exchange Act.<br />

Subject to a number of conditions, Rule 12h-6 permits <strong>de</strong>registration of a class of registered<br />

securities if the ADTV of a class in United States for a recent 12-month period has been no<br />

greater than 5% of the ADTV of the class on a worldwi<strong>de</strong> basis for the same period. CANTV’s<br />

reporting obligations un<strong>de</strong>r the Exchange Act (including the obligation to file the annual report<br />

on Form 20-F that would have otherwise been due in June 30, 2008) were suspen<strong>de</strong>d<br />

19


immediately upon filing of the Form 15F. The <strong>de</strong>registration and termination of reporting will<br />

become effective 90 days after the filing (unless the Form 15F is earlier withdrawn by CANTV).<br />

Divi<strong>de</strong>nds<br />

The Venezuelan Co<strong>de</strong> of Commerce, the Venezuelan Capital Markets Law and the<br />

standards issued by the CNV regulate the Company’s ability to pay divi<strong>de</strong>nds. The Venezuelan<br />

Co<strong>de</strong> of Commerce establishes that divi<strong>de</strong>nds shall be paid solely out of liquid and collected<br />

earnings <strong>de</strong>rived from financial statements from a closed fiscal year. The Venezuelan Capital<br />

Markets Law stipulates that the Company must distribute annually no less than 50% of its net<br />

annual income to its stockhol<strong>de</strong>rs, after income tax and legal reserve <strong>de</strong>ductions. Likewise, the<br />

Venezuelan Capital Markets Law establishes that at least 25% of such 50% shall be distributed<br />

in cash. However, if the Company has accumulated losses, net income shall be used to offset<br />

such <strong>de</strong>ficit.<br />

According to CNV standards, unconsolidated net income, excluding the equity<br />

participation in subsidiaries, is the basis for divi<strong>de</strong>nd distribution.<br />

The Venezuelan Capital Markets Law establishes that divi<strong>de</strong>nds must be <strong>de</strong>clared by a<br />

Sharehol<strong>de</strong>rs’ Assembly at which the sharehol<strong>de</strong>rs <strong>de</strong>termine the amount, form and frequency<br />

of divi<strong>de</strong>nd payments. Furthermore, un<strong>de</strong>r CNV regulations, companies’ by-laws must state<br />

their divi<strong>de</strong>nd policies.<br />

On May 21, 2008, an Extraordinary Sharehol<strong>de</strong>r’s Assembly approved CANTV’s new bylaws<br />

which, among other things, set forth the Company’s new divi<strong>de</strong>nd policy.<br />

The by-laws state that the Company’s divi<strong>de</strong>nd policy will be to distribute a percentage<br />

of its profits, which is keeping with its investment plans for upcoming years, the availability of<br />

cash and any other asset with which the respective divi<strong>de</strong>nds are to be paid, as well as the<br />

general economic condition of the Company and the country. The Company’s investment plans<br />

shall allow for the continued operation of the business, its technological <strong>de</strong>velopment, and the<br />

<strong>de</strong>velopment of socially-oriented investment projects, so long as the sustainability of the<br />

Company and its subsidiaries, the quality of life of its workers and retirees, and the benefits to<br />

society are guaranteed.<br />

The by-laws provi<strong>de</strong> that the Board of Directors will recommend the amounts, frequency<br />

and form of payment of ordinary and extraordinary divi<strong>de</strong>nds to the Sharehol<strong>de</strong>r’s Assembly.<br />

The Sharehol<strong>de</strong>r’s Assembly may instruct the Board of Directors to make the <strong>de</strong>cisions that it<br />

<strong>de</strong>ems appropriate regarding the divi<strong>de</strong>nds in any fiscal year, taking into consi<strong>de</strong>ration the<br />

economic and treasury conditions of the Company and the country, and the Company’s<br />

investment plans for upcoming years.<br />

20


The Company has <strong>de</strong>clared ordinary and extraordinary divi<strong>de</strong>nds from 2002 to 2008 as<br />

follows:<br />

Declaration Date<br />

Payment Date<br />

Type<br />

21<br />

Bolivars<br />

per share (1)<br />

Bolivars<br />

per ADS (1)(2)<br />

U.S.$<br />

per share (3)<br />

U.S.$<br />

per ADS (2)(3)<br />

March 22, 2002 June 6, 2002 Ordinary 41.60 291.20 0.05 0.32<br />

December 10, 2002 January 15, 2003 Extraordinary 165.00 1,155.00 0.12 0.82<br />

December 10, 2002 January 15, 2003 Ordinary 140.00 980.00 0.10 0.70<br />

March 28, 2003 April 23, 2003 Ordinary 71.00 497.00 0.04 0.31<br />

December 2, 2003 December 19, 2003 Extraordinary 350.00 2,450.00 0.22 1.53<br />

March 31, 2004 April 16, 2004 Ordinary 550.00 3,850.00 0.29 2.01<br />

December 7, 2004 December 22, 2004 Extraordinary 120.00 840.00 0.06 0.44<br />

March 31, 2005 April 27, 2005 Ordinary 505.00 3,535.00 0.23 1.64<br />

March 31, 2006 April 27, 2006 Ordinary 700.00 4,900.00 0.33 2.28<br />

November 27, 2006 December 13, 2006 Extraordinary 307.14 2,150.00 0.14 1.00<br />

March 30, 2007 April 18, 2007 Ordinary 922.07 6,454.49 0.43 3.00<br />

March 31, 2008 April 15, 2008 Extraordinary 127.04 889.28 0.06 0.41<br />

March 31, 2008 April 15, 2008 Ordinary 757.14 5,299.98 0.35 2.47<br />

(1) Expressed in nominal bolivars.<br />

(2) Each ADS represents seven Class D shares.<br />

(3) Divi<strong>de</strong>nd information in U.S. dollars is expressed at the exchange rate as of the divi<strong>de</strong>nd payment date.<br />

The conversion of divi<strong>de</strong>nds from bolivars to U.S. dollars payable to ADS hol<strong>de</strong>rs<br />

requires the approval by the Comisión <strong>de</strong> Administración <strong>de</strong> Divisas (“CADIVI”) (the<br />

Commission for Administration of Foreign Exchange).<br />

Sharehol<strong>de</strong>rs’ Assembly<br />

Ordinary Sharehol<strong>de</strong>rs’ Assemblies must take place within three months after the end of<br />

each fiscal year. Any other general Sharehol<strong>de</strong>rs’ Assembly is an Extraordinary Sharehol<strong>de</strong>rs’<br />

Assembly and may be called by the Board of Directors, the statutory auditors or sharehol<strong>de</strong>rs<br />

representing at least 20% of the equity share capital of CANTV. The quorum required for either<br />

any Ordinary or Extraordinary Sharehol<strong>de</strong>rs’ Assembly consists of shares representing at least<br />

50% of the votes of the equity share capital or, in the case of a meeting convened solely for the<br />

purpose of election or removal of directors, shares representing at least 50% of the votes of the<br />

equity share capital entitled to vote with respect to such directors.<br />

Ordinary Sharehol<strong>de</strong>rs’ Assemblies are called to consi<strong>de</strong>r the annual report of CANTV’s<br />

consolidated financial statements, elect the Board of Directors and their alternates, elect the<br />

principal Statutory Auditors and their alternates, elect the external auditors, <strong>de</strong>clare divi<strong>de</strong>nds<br />

and to consi<strong>de</strong>r any other matters that may be properly presented to the meeting.<br />

The by-laws state that each share of CANTV, regardless of class <strong>de</strong>signation, is entitled<br />

to one vote on all matters submitted for the approval for CANTV’s sharehol<strong>de</strong>rs at a<br />

Sharehol<strong>de</strong>rs’ Assembly. In general, matters submitted to vote at a Sharehol<strong>de</strong>rs’ Assembly will<br />

be adopted only if a majority of the hol<strong>de</strong>rs of the shares present at such Sharehol<strong>de</strong>rs’<br />

Assembly vote in favor of such matters.


Directors and Senior Management<br />

Directors<br />

On May 21, 2008, an Extraordinary Sharehol<strong>de</strong>r’s Assembly approved CANTV’s new bylaws.<br />

Un<strong>de</strong>r the new by-laws, CANTV is managed by its Board of Directors which consists of<br />

the Company’s Presi<strong>de</strong>nt and ten principal directors, each of whom has an alternate to act in his<br />

or her absence. The principal directors and their respective alternates are elected annually by<br />

the Sharehol<strong>de</strong>rs’ Assembly.<br />

The Republic, as hol<strong>de</strong>r of a majority of the shares, appoints the Presi<strong>de</strong>nt of the<br />

Company and seven Principal Directors and their alternates as representatives of the Ministries<br />

of Telecommunications and Information Technology, Finance, Defense, Energy and Oil,<br />

Science and Technology, and Light and Commercial Industries. Hol<strong>de</strong>rs of Class C shares have<br />

the right, voting as a separate class, to elect one Principal Director and an alternate, if Class C<br />

shares represent at least 2.5% of CANTV’s equity share capital. In addition, all of the<br />

Company’s employees have the right to elect two labor Principal Directors and their alternates,<br />

in a universal, direct and secret vote, and such Directors must be active employees of the<br />

Company for no less than three years. Currently, these labor directors have not been elected.<br />

CANTV’s by-laws require that the Board of Directors meet at least once every month.<br />

A quorum at any meeting of the Board of Directors is six members. In addition, CANTV’s bylaws<br />

require Directors with proven experience, executive capacity, and competence to manage<br />

the operations of the Company.<br />

CANTV’s current directors, elected at the Extraordinary Sharehol<strong>de</strong>rs’ Assembly on May<br />

21, 2008, are:<br />

Name<br />

First<br />

appointed<br />

22<br />

Current term<br />

ends<br />

Present principal occupation or<br />

employment<br />

Elected by the Republic as<br />

hol<strong>de</strong>r of the majority of all<br />

shares:<br />

Presi<strong>de</strong>nt-<br />

Socorro Hernán<strong>de</strong>z May 2007 May 2009 Presi<strong>de</strong>nt, Chairwoman and Chief<br />

Executive Officer, CANTV and<br />

Minister of the Popular Power for<br />

Telecommunications and Information<br />

Technology<br />

Principal Directors-<br />

Franco Silva May 2007 May 2009 Executive Vice Presi<strong>de</strong>nt and Chief<br />

Operating Officer, CANTV<br />

Manuel Fernán<strong>de</strong>z May 2007 May 2009 Presi<strong>de</strong>nt, Red <strong>de</strong> Transmisiones <strong>de</strong><br />

Venezuela, C.A. (RedTV)<br />

Nuris Orihuela May 2007 May 2009 Minister of the Popular Power for<br />

Science and Technology<br />

Eucli<strong>de</strong>s Campos Aponte May 2007 May 2009 Second Comman<strong>de</strong>r and Chief of Staff<br />

of the Third Infantry Division of the<br />

Venezuelan Army


Name<br />

First<br />

appointed<br />

23<br />

Current term<br />

ends<br />

Present principal occupation or<br />

employment<br />

Jesús Villanueva May 2007 May 2009 Director, Petróleos <strong>de</strong> Venezuela, S.A.<br />

(PDVSA)<br />

Ángel Belisario May 2007 May 2009 Advisor to the Minister of the Popular<br />

Power for Light Industries and<br />

Commerce<br />

Rafael Isea May 2007 May 2009 Former Minister of the Popular Power<br />

for Finance<br />

Alternate Directors-<br />

Carlos Figueira May 2007 May 2009 Presi<strong>de</strong>nt, Centro Nacional <strong>de</strong><br />

Tecnología e Información (CNTI)<br />

Eva Escalona May 2008 May 2009 Presi<strong>de</strong>nt, Instituto Postal Telegráfico <strong>de</strong><br />

Venezuela (IPOSTEL)<br />

Vicente Mujica May 2007 May 2009 Telecommunications Project Engineer of<br />

the Venezuelan Space Center<br />

Henry Rangel Silva May 2007 May 2009 General Director, Servicios <strong>de</strong><br />

Inteligencia y Prevención (DISIP)<br />

Ower Manrique May 2007 May 2009 Manager Director of Automation,<br />

Information Systems and<br />

Telecommunications, Petróleos <strong>de</strong><br />

Venezuela, S.A. (PDVSA)<br />

Gerardo Ramírez May 2008 May 2009 Presi<strong>de</strong>nt, Servicios <strong>de</strong> Gestión<br />

Financiera<br />

Eyil<strong>de</strong> Margarita Gracia May 2007 May 2009 General Manager, Banco <strong>de</strong> Desarrollo<br />

Económico y Social <strong>de</strong> Venezuela<br />

(BANDES)<br />

Elected by CANTV Employees<br />

and Retirees as hol<strong>de</strong>rs of<br />

Class C shares:<br />

Principal Director-<br />

Yelitza García March 2001 May 2009 Coordinator of Life Quality, Participation<br />

and Voluntary Work, CANTV<br />

Alternate Director-<br />

Ricardo Armas March 2002 May 2009 Technician in Telecommunication<br />

Systems, CANTV<br />

Executive Officers<br />

All executive officers of CANTV are appointed by the Board of Directors and hold office<br />

at the discretion of the Board.


The Company’s current executive officers are:<br />

Name<br />

Position<br />

24<br />

Current Position<br />

Held Since<br />

Socorro Hernán<strong>de</strong>z Presi<strong>de</strong>nt, Chairwoman and Chief Executive Officer May 2007<br />

Franco Silva Executive Vice Presi<strong>de</strong>nt and Chief Operating<br />

Officer<br />

Alexan<strong>de</strong>r Sarmiento General Manager, Finance and Chief Financial<br />

Officer<br />

January 2008<br />

May 2007<br />

María Amparo Genovés General Manager, Planning and Corporate Matters May 2007<br />

Eloína Pérez General Manager, General Counsel April 2007<br />

Enrique Velásquez General Manager, Corporate Marketing May 2007<br />

Dicsa Chacón General Manager, Communications and Public<br />

Affairs<br />

June 2008<br />

Leonardo Hernán<strong>de</strong>z General Manager, Services Center May 2007<br />

Ramón Gómez General Manager, Regulatory Affairs May 2007<br />

Isabel Bianco General Manager, Human Resources May 2007<br />

Carmen Rodríguez General Manager, Technology and Operations May 2007<br />

Wilfredo Figueroa Chacín General Manager, Revenue Assurance May 2007<br />

Evelyn Vásquez General Manager, Transition to Socialism May 2007<br />

Ignacio Ramírez Interim General Manager, Internal Audit May 2007<br />

Sharaid Contreras General Manager, Telecommunications Operators May 2007<br />

Enrique Cayama General Manager, Enterprises and Private<br />

Institutions<br />

October 2007<br />

Carlos Joa General Manager, Public Institutions June 2008<br />

Carlos Alviárez General Manager, Mass Markets May 2007<br />

Jacqueline Faría Presi<strong>de</strong>nt, Movilnet May 2007<br />

Annie Monange Presi<strong>de</strong>nt, Caveguías May 2007<br />

Set forth below is additional biographical information concerning the Company’s<br />

directors and executive officers:<br />

Socorro Hernán<strong>de</strong>z, Presi<strong>de</strong>nt, Chairwoman and Chief Executive Officer, CANTV and<br />

Minister of the Popular Power for Telecommunications and Information Technology. Mrs.<br />

Hernán<strong>de</strong>z has been the Presi<strong>de</strong>nt, Chairwoman and Chief Executive Officer since May 2007.<br />

Additionally, in January 2008, she was appointed Minister of the Popular Power for<br />

Telecommunications and Information Technology. Prior to her appointment in CANTV, Mrs.<br />

Hernán<strong>de</strong>z worked for 25 years in Petróleos <strong>de</strong> Venezuela S.A. (PDVSA), where she served as<br />

Manager Director of Automation, Information Systems and Telecommunications, as well as in<br />

other several positions in this area, and was responsible for PDVSA’s Automation, Information<br />

Systems and Telecommunications Situation Room during the work stoppage in 2002. In<br />

addition, she was the lea<strong>de</strong>r of the team for the transition of CANTV to a State-owned company<br />

in 2007.


Franco Silva, Executive Vice Presi<strong>de</strong>nt and Chief Operating Officer, CANTV. Mr. Silva<br />

has been Executive Vice Presi<strong>de</strong>nt and Chief Operating Officer since January 2008. In<br />

addition, he has been a member of the Board of Directors of CANTV since May 2007. Prior to<br />

joining CANTV, Mr. Silva served as Operating General Manager of the Comisión Nacional <strong>de</strong><br />

Telecomunicaciones (CONATEL) where he was responsible for the transition of CANTV to a<br />

State-owned company and the <strong>de</strong>velopment of the National Telecommunications, Information<br />

Systems and Postal Services Plan. In addition he served as Planning and Telecommunications<br />

Development Manager. In the Ministry for Interior Affairs and Justice he also served as<br />

Coordinator for the Ministry’s program with the Inter-American Development Bank and as<br />

General Coordinator of Institutional Transformation Projects. On the international level, he<br />

served as Chief of the Venezuelan Delegation in several meetings of the International<br />

Telecommunication Union, Inter-American Telecommunication Commission and the An<strong>de</strong>an<br />

Committee of Telecommunications Authorities.<br />

Manuel Fernán<strong>de</strong>z, Presi<strong>de</strong>nt, Red <strong>de</strong> Transmisiones <strong>de</strong> Venezuela, C.A. (RedTV). Mr.<br />

Fernán<strong>de</strong>z has served in this position since 2007. Prior to this appointment, Mr. Fernán<strong>de</strong>z<br />

served as Vice Presi<strong>de</strong>nt of Technical Support, Director of Technical Adjustments Projects and<br />

Transmission Manager at C.A. Venezolana <strong>de</strong> Televisión (VTV). Previously, he served as<br />

National Transmission Manager at Telecaribe, Field and Project Engineer at Ecuatronix and<br />

Installation Engineer at Eproserca. In addition he served as Transmission Engineer at<br />

Omnivisión and at Canal Metropolitano <strong>de</strong> Televisión (CMT).<br />

Nuris Orihuela, Minister of the Popular Power for Science and Technology. Mrs.<br />

Orihuela was appointed Minister of the Popular Power for Science and Technology in May<br />

2008. In addition, Mrs. Orihuela serves as Interim Presi<strong>de</strong>nt of the Venezuelan Space Center.<br />

Previously, she served as Deputy Minister of Research and Innovation at the Ministry of<br />

Science and Technology and Interim Presi<strong>de</strong>nt of the Venezuelan Foundation for Seismological<br />

Research. In addition Mrs. Orihuela has been Professor of Engineering and Geophysics at the<br />

Universidad Central <strong>de</strong> Venezuela (UCV).<br />

Eucli<strong>de</strong>s Campos Aponte, Second Comman<strong>de</strong>r and Chief of Staff of the Third Infantry<br />

Division of the Venezuelan Army. Eucli<strong>de</strong>s Campos Aponte is a Brigadier General of the<br />

Venezuelan Army. Previously, he has served as Comman<strong>de</strong>r of the 34 th Regiment of<br />

Communications. In addition, he was member of the team for the transition of CANTV to a<br />

State-owned company in 2007.<br />

Jesús Villanueva, Director, Petróleos <strong>de</strong> Venezuela, S.A. (PDVSA). Mr. Villanueva has<br />

been member of the board of directors of PDVSA since 2005. Mr. Villanueva has 26-years of<br />

experience in the oil industry, where he has served as General Auditor and Deputy Internal<br />

Controller of PDVSA, Internal Control Evaluation Manager at Corpoven and Audit and Finance<br />

Manager at Meneven. Prior to joining PDVSA, he served as Audit Manager at Espiñeira,<br />

Sheldon y Asociados. Mr. Villanueva is certified as a Certified Internal Auditor by the Institute of<br />

Internal Auditors and as a Certified Fraud Examiner by the Association of Certified Fraud<br />

Examiners.<br />

Ángel Belisario, Advisor to the Minister of the Popular Power for Light Industries and<br />

Commerce. Mr. Belisario also serves as member of the board of directors of the Universal<br />

Service Fund of the Comisión Nacional <strong>de</strong> Telecomunicaciones (CONATEL) and of Venirauto,<br />

C.A. Previously, he served as Advisor to the Minister of the Popular Power for Labor and Social<br />

Security and Consultant to the Comisión Interministerial para Formular el Plan <strong>de</strong> Implantación<br />

<strong>de</strong> la Ley Orgánica <strong>de</strong>l Sistema <strong>de</strong> Seguridad Social Venezolano.<br />

25


Rafael Isea, Former Minister of the Popular Power for Finance. Mr. Isea was Minister<br />

of the Popular Power for Finance from January 2008 to June 2008. Prior to this time<br />

appointment, he served as Presi<strong>de</strong>nt of Banco <strong>de</strong> Desarrollo Económico y Social <strong>de</strong> Venezuela<br />

(BANDES) and as Venezuela’s Counselor at the Inter-American Development Bank. Mr. Isea<br />

was Assistant to the Minister of Planning and Development in 1999 and Assistant to the<br />

Presi<strong>de</strong>nt of the Republic in 2000.<br />

Yelitza García, Coordinator of Life Quality, Participation and Voluntary Work, CANTV.<br />

Mrs. García has served in this position since 2008. Previously, she served as Coordinator of<br />

Retirees at CANTV. Mrs. García has served as a member of the Board of Directors in<br />

representation of Class C sharehol<strong>de</strong>rs since March 2001.<br />

Carlos Figueira, Presi<strong>de</strong>nt, Centro Nacional <strong>de</strong> Tecnología e Información (CNTI). Mr.<br />

Figueira has served in this position since February 2007. Currently he also serves as Associate<br />

Professor of Computer Science and Information Technology at the Universidad Simón Bolívar.<br />

He has been Chief of the High-Performance Computer Lab and Chief of Information Technology<br />

Lab of the Universidad Simón Bolívar, Visiting Professor in the Technology Department at the<br />

Universitat Pempeu Fabra in Barcelona, Spain, and Visiting Research Fellow at the University<br />

of Wisconsin. He has also served as Technology Advisor of Automation of Electoral Processes<br />

to the National Electoral Council (CNE) and member of several science and aca<strong>de</strong>mic<br />

committees.<br />

Eva Escalona, Presi<strong>de</strong>nt, Instituto Postal Telegráfico <strong>de</strong> Venezuela (IPOSTEL). Mrs.<br />

Escalona has served in this position since 2006. Prior to this appointment, she served as<br />

Advisor in Information Technology to the Instituto Nacional <strong>de</strong> Espacios Acuáticos (INEA),<br />

Executive Vice Presi<strong>de</strong>nt of Finance and Planning of Compañía Anónima <strong>de</strong> Administración y<br />

Fomento Eléctrico (CADAFE) and member of the board of directors of CVG Electrificación <strong>de</strong>l<br />

Caroní (EDELCA). Mrs. Escalona has also served as Deputy Minister of Administrative<br />

Management and Deputy Minister of Communications Management at the Ministerio <strong>de</strong> la<br />

Secretaría <strong>de</strong> la Presi<strong>de</strong>ncia <strong>de</strong> la República. Currently, she also serves as a member of the<br />

board of directors of Telecomunicaciones Movilnet, C.A. and the Comisión Nacional <strong>de</strong><br />

Telecomunicaciones (CONATEL).<br />

Vicente Mujica, Telecommunications Project Engineer of the Venezuelan Space<br />

Center. Mr. Mujica has served in this position since 2007. Prior to this appointment, he served<br />

as Telecommunications Project Engineer at the Fraunhofer Institute for Open Communication<br />

Systems (FOKUS) in Berlin, Germany, and Professor of Electronics, Computer Sciences and<br />

Control at the Universidad Central <strong>de</strong> Venezuela (UCV).<br />

Henry Rangel Silva, General Director, Servicios <strong>de</strong> Inteligencia y Prevención (DISIP).<br />

Henry Rangel Silva is a Brigadier General of the Venezuelan Army. He has been Comman<strong>de</strong>r<br />

of Basic Units of Transmission, Communications Officer and Ai<strong>de</strong>-<strong>de</strong>-Camp of the Presi<strong>de</strong>nt of<br />

the Republic. He has also served as Presi<strong>de</strong>nt of the Instituto Nacional <strong>de</strong> la Vivienda (INAVI)<br />

and member of the board of directors of the Fondo Nacional <strong>de</strong> Desarrollo Urbano (FONDUR).<br />

Ower Manrique, Manager Director of Automation, Information Systems and<br />

Telecommunications, Petróleos <strong>de</strong> Venezuela, S.A. (PDVSA). Mr. Manrique has 19 years of<br />

experience at PDVSA, were he has served also as Corporate Manager of Industrial Automation,<br />

Corporate Coordinator of Production Automation, Lea<strong>de</strong>r of Automation Planning and Lea<strong>de</strong>r of<br />

Automation Projects.<br />

26


Gerardo Ramírez, Presi<strong>de</strong>nt, Servicios <strong>de</strong> Gestión Financiera. Mr. Ramirez has served<br />

as Sales Representative at C.A. Venezolana <strong>de</strong> las Industrias Militares (CAVIM), Presi<strong>de</strong>nt of<br />

Armería Nacional Monagas, Presi<strong>de</strong>nt of Armas Guayana, Director of the Sheriff Centro and<br />

Director of Nit <strong>de</strong> Venezuela.<br />

Eyil<strong>de</strong> Margarita Gracia, General Manager, Banco <strong>de</strong> Desarrollo Económico y Social<br />

<strong>de</strong> Venezuela (BANDES). Mrs. Gracia has held this position since 2007. Prior to this<br />

appointment, she served as Presi<strong>de</strong>nt of Expertia Consultores, C.A., Chief Financial Officer of<br />

Multiphone Venezuela, Collections Manager of Enterprises and Institutions of CANTV and<br />

Strategic Planning Advisor at Steyr Venezuela. She has also served as Advisor to the Deputy<br />

Minister of Economic Development at the Ministry of the Planning and Development, Financial<br />

Advisor of the Executive Direction of Commerce and Supply of Petróleos <strong>de</strong> Venezuela S.A.<br />

(PDVSA) and Director of Public Debt Management at the Ministry of Finance. Currently, she<br />

also serves as member of the board of directors of Telecomunicaciones Movilnet, C.A., Banco<br />

Industrial <strong>de</strong> Venezuela (BIV) and BANDES Uruguay.<br />

Ricardo Armas, Technician in Telecommunication Systems, CANTV. Mr. Armas has<br />

worked for 29 years at CANTV where he has also served as Supervisor of Analog Switches. In<br />

addition, Mr. Armas has served as a member of the Board of Directors in representation of<br />

Class C sharehol<strong>de</strong>rs since March 2002.<br />

Alexan<strong>de</strong>r Sarmiento, General Manager, Finance and Chief Financial Officer, CANTV.<br />

Mr. Sarmiento was appointed to his current position in May 2007. In 2007 he was a member of<br />

the Executive Secretariat of the Presi<strong>de</strong>ntial Commission for the creation of the Bank of the<br />

South. He was foun<strong>de</strong>r of the Banco Agrícola <strong>de</strong> Venezuela, C.A. Banco Universal where he<br />

served as Executive Vice Presi<strong>de</strong>nt. Mr. Sarmiento served as Financial Advisor to the Deputy<br />

Minister of Financial Management, Deputy Director of the General Direction for Planning at the<br />

Ministry of the Popular Power for Finance and Treasurer of CVG Electrificación <strong>de</strong>l Caroní<br />

(EDELCA). Currently, he also serves as a member of the board of directors of Banco <strong>de</strong>l<br />

Tesoro, C.A. Banco Universal.<br />

María Amparo Genovés, General Manager, Planning and Corporate Matters, CANTV.<br />

Mrs. Genovés has served in this position since May 2007. Prior to that time, she was a member<br />

of the team for the transition of CANTV to a State-owned company in 2007. Mrs. Genovés has<br />

worked for more that 20 years in Petróleos <strong>de</strong> Venezuela, S.A. (PDVSA), were she has served<br />

as Corporate Manager of Quality Management, Lea<strong>de</strong>r of the Corporate Project of Migration to<br />

Free Software, Corporate Manager of Information Technology, and was responsible for the<br />

recovery of the technological platform for trading and supply during the work stoppage in 2002<br />

Eloína Pérez, General Manager, General Counsel, CANTV. Mrs. Pérez has served in<br />

this position since April 2007. Previously, Mrs. Pérez served as General Manager, Regulatory<br />

Affairs, from April 2000 to April 2007. Before joining CANTV, she served as Director at the<br />

Procuraduría General <strong>de</strong> la República, Legal Consultant at the Ministerio <strong>de</strong> Justicia, Legal<br />

Consultant at the Ministerio <strong>de</strong> Transporte y Comunicaciones, Legal Consultant at the Ministerio<br />

<strong>de</strong> Secretaría <strong>de</strong> la Presi<strong>de</strong>ncia <strong>de</strong> la República and Legal Advisor of the Ministerio <strong>de</strong><br />

Planificación y Desarrollo (CORDIPLAN), Si<strong>de</strong>rúrgica <strong>de</strong>l Orinoco, C.A. (SIDOR) and C.A.<br />

Energía Eléctrica <strong>de</strong> Barquisimeto (ENELBAR).<br />

27


Enrique Velásquez, General Manager, Corporate Marketing, CANTV. Mr. Velásquez<br />

has served in this position since May 2007. Prior to this period, Mr. Velázquez served in other<br />

positions in CANTV such as Corporate Manager, Product and Pricing, Voice Products<br />

Coordinator, and Business Development Manager. Before joining CANTV he served as<br />

Category Manager, Promotions Manager and Category Assistant at Mavesa, S.A. and as<br />

Marketing and Sales Manager at Cellular Trading, C.A.<br />

Dicsa Chacón, General Manager, Communications and Public Affairs, CANTV. Mrs.<br />

Chacón has served in this position since June 2008. Previously, Mrs. Chacón served as<br />

General Manager, Public Institutions from May 2007 until June 2008. Before joining CANTV,<br />

Mrs. Chacón worked for 20 years at Petróleos <strong>de</strong> Venezuela S.A. (PDVSA), were she served in<br />

several positions in the information technology area, such as International Manager of<br />

Automation, Information Technology and Telecommunications. In addition, she was member of<br />

the drafting Commission for First Agreement of the Bolivarian Alternative for the Americas<br />

(ALBA) in telecommunications and information technology matters for PDVSA.<br />

Leonardo Hernán<strong>de</strong>z, General Manager, Services Center, CANTV. Mr. Hernán<strong>de</strong>z has<br />

served in this position since May 2007. Before joining CANTV, Mr. Hernán<strong>de</strong>z served as<br />

General Director of Information Technology at the Electoral National Council (CNE), Information<br />

Technology General Manager at Hidrocapital, C.A., Presi<strong>de</strong>nt of Rightsizing Software Solution,<br />

C.A. and Information Systems Development Coordinator at Banco Mercantil.<br />

Ramón Gómez, General Manager, Regulatory Affairs, CANTV. Mr. Gómez has served<br />

in this position since May 2007. Prior to this period, Mr. Gómez served in other positions in<br />

CANTV such as Planning and Marketing Manager of the Telecommunications Operators Unit,<br />

Manager of Economic Analysis, Manager of Environment Analysis, and Director of Planning and<br />

Logistic Resource Control. Before joining CANTV he served as Associate Consultant at EEFCA<br />

Consultores. In addition, Mr. Gómez has represented CANTV at a speaker at a number<br />

conferences such as the International Telecommunications Society conference in Seville, Spain,<br />

the First Conference of Operators and Telecommunication Regulators in San José <strong>de</strong> Costa<br />

Rica, the Caribbean Telecommunications Council conference in Puerto Rico, and a conference<br />

of the Cámara <strong>de</strong> Empresas <strong>de</strong> Servicios <strong>de</strong> Telecomunicaciones <strong>de</strong> Venezuela (CASETEL),<br />

among others.<br />

Isabel Bianco, General Manager, Human Resources, CANTV. Mrs. Bianco has served<br />

in this position since May 2007. Prior to her current appointment, Mrs. Bianco worked for 19<br />

years at Petróleos <strong>de</strong> Venezuela, S.A. (PDVSA), were she was assigned by PDVSA as Advisor<br />

to the board of directors of the Medical Fe<strong>de</strong>ration of the Metropolitan District of Caracas. Prior<br />

to that time she served as Functional Manager of PDVSA’s Organizational Services, Human<br />

Resources Manager of PDVSA’s subsidiaries, and Corporate Manager of Organizational<br />

Development, among other management positions in PDVSA’s human resources <strong>de</strong>partment.<br />

Carmen Rodríguez, General Manager, Technology and Operations. Mrs. Rodríguez<br />

has served in this position since May 2007. Prior to this period, she was a member of the team<br />

for the transition of CANTV to a State-owned company in 2007. Previously, she worked at<br />

Petróleos <strong>de</strong> Venezuela, S.A. (PDVSA), where she served in several positions such as<br />

Manager of Automation, Information Technology and Telecommunications for Eastern Region,<br />

Manager of Administration Services, Manager of Information Technology and was responsible<br />

for the protection of PDVSA’s Data Centers in the Metropolitan Area during the work stoppage<br />

in 2002.<br />

28


Wilfredo Figueroa Chacín, General Manager, Revenue Assurance, CANTV. He has<br />

served in this position since May 2007. Wilfredo Figueroa Chacín is a Colonel of the<br />

Venezuelan Army with studies in Electronic Engineering and Information Technology and<br />

Communications.<br />

Evelyn Vásquez, General Manager, Transition to Socialism, CANTV. Mrs. Vásquez<br />

has served in this position since May 2007. Before joining CANTV, Mrs. Vásquez served as<br />

General Director of Environmental Quality and as Assistant Deputy Minister of Environmental<br />

Management at the Ministry of Environment. She served in several positions in the engineering<br />

area at Hidrocapital, Instituto <strong>de</strong> Tecnología Venezolana para el Petróleo (INTEVEP) and<br />

Si<strong>de</strong>rúrgica <strong>de</strong>l Orinoco, C.A. (SIDOR).<br />

Ignacio Ramírez, Interim General Manager, Internal Audit, CANTV. Mr. Ramírez has<br />

served in this position since May 2007. Prior to joining CANTV, Mr. Ramírez was General<br />

Director of the Instituto Nacional <strong>de</strong> Tierras (INTI). Previously, he served as Principal Advisor to<br />

the Executive Finance Direction and as Advisor to the board of directors of Petróleos <strong>de</strong><br />

Venezuela, S.A. (PDVSA). He has also been Legal Advisor to the Attorney General’s Office,<br />

Legal Advisor to the Instituto Universitario <strong>de</strong> Tecnología <strong>de</strong>l Oeste Mariscal Sucre (IUTOMS),<br />

Legal Advisor to the Economic Development Commission and Agriculture Sub-Commission of<br />

the National Assembly, and Alternate Superior Judge of the Appeal Court of the State of<br />

Miranda.<br />

Sharaid Contreras, General Manager, Telecommunications Operators, CANTV. Mrs.<br />

Contreras has served in this position since May 2007. During her 15-year career at CANTV,<br />

she has held several positions, such as Telecommunications Operators Planning and Marketing<br />

Manager, Telecommunications Operators Customer Service Manager, Interconnection<br />

Collection and Reconciliation Coordinator, Interconnection Billing Coordinator, Network Billing<br />

Coordinator and Network Projects Coordinator.<br />

Enrique Cayama, General Manager, Enterprises and Private Institutions, CANTV. Mr.<br />

Cayama has served in this position since October 2007. Previously, Mr. Cayama served in<br />

other positions in CANTV such as Voice and Data Product Manager, Network Functional<br />

Integration Manager, Engineering and Technical Support Manager and Corporate Sales<br />

Manager of Enterprises and Institutions. Before joining CANTV, he was Promotion Manager at<br />

Corposistemas Tec.<br />

Carlos Joa, General Manager, Public Institutions. Mr. Joa has served in this position<br />

since June 2008. Before joining CANTV, Mr. Joa served as Director of Information Systems at<br />

the Ministry of the Popular Power for External Affairs. Previously, he was Presi<strong>de</strong>nt of the<br />

Bolivarian Foundation of Information Systems and Telematics (FUNDABIT) and General<br />

Director of the Office of Information Systems of the Ministry of Education. He also served as<br />

Director of Information Systems of the Contraloría <strong>de</strong>l Municipio Libertador, Coordinator of the<br />

Data Processing Department of the Fundación Nacional <strong>de</strong> Transporte Urbano (FONTUR) and<br />

y Chief of Information Systems Department of the Venezuelan Foundation for Seismological<br />

Research.<br />

Carlos Alviárez, General Manager, Mass Markets, CANTV. Mr. Alviárez has served in<br />

this position since May 2007. During his 16-year career at CANTV and its subsidiaries, Mr.<br />

Alviárez has served in several positions such as Mass Markets Commercial Manager at<br />

CANTV; and Commercial Director, Director of Corporate Subscribers, Sales Manager for Large<br />

29


Subscribers, and Project Manager at Telecomunicaciones Movilnet, C.A. Before joining CANTV<br />

he served as Systems Programming Engineer at Corpoven S.A.<br />

Jacqueline Faría, Presi<strong>de</strong>nt, Movilnet. Mrs. Faría has been the Presi<strong>de</strong>nt of Movilnet<br />

since May 2007. She was member of the team for the transition of CANTV to a State-owned<br />

company in 2007. Before joining CANTV, she served in several high-level positions such as<br />

Minister of Environment and Presi<strong>de</strong>nt of Hidrocapital, C.A.<br />

Annie Monange, Presi<strong>de</strong>nt, Caveguías. Mrs. Monange has been the Presi<strong>de</strong>nt of<br />

Caveguías since May 2007. Prior to her appointment in Caveguías, she served in Petróleos <strong>de</strong><br />

Venezuela S.A. (PDVSA) as Assistant to the Vice Presi<strong>de</strong>nt of Finance and Planning,<br />

Coordinator of Accounting and Assistant to the Executive Finance Director. In the past she<br />

worked at CANTV and its subsidiaries where she served as Assistant to the Finance Manager<br />

and Planning and Financial Analysis Manager of CANTV, and as Production Manager, Planning<br />

and Budget Manager and Vice Presi<strong>de</strong>nt for Production of Caveguías.<br />

Share ownership<br />

As of May 31, 2008, the members of the Board of Directors and executive officers of<br />

CANTV as a group owned an aggregate of 10,745 shares, representing 0.0014% of CANTV’s<br />

issued and outstanding shares at such date.<br />

Corporate Governance Principles<br />

Pursuant to Resolution No. 19-1-2005 published in the Official Gazette of Venezuela No.<br />

38,129 dated February 17, 2005, the CNV adopted <strong>de</strong> corporate governance principles for<br />

companies with shares registered in the Registro Nacional <strong>de</strong> Valores (the “Venezuelan<br />

National Securities Registry”), such as the Company. The corporate governance principles<br />

establish, among other things, that:<br />

- Companies must present to their Ordinary Sharehol<strong>de</strong>rs’ Assembly a report on<br />

compliance with the corporate governance principles.<br />

- At least one-fifth of a company’s board of directors must be comprised of<br />

in<strong>de</strong>pen<strong>de</strong>nt directors.<br />

- Registered companies should have an audit committee comprised of a majority of<br />

in<strong>de</strong>pen<strong>de</strong>nt directors.<br />

Corporate Governance<br />

The supreme governing body of CANTV with power to consi<strong>de</strong>r and <strong>de</strong>ci<strong>de</strong> matters of<br />

interest to CANTV is the Sharehol<strong>de</strong>rs’ Assembly followed by the Board of Directors and its<br />

Committees.<br />

The Board of Directors is in charge of the of direction and management of CANTV. The<br />

Board of Directors has chief responsibility for establishing policies to prepare plans, programs<br />

and budgets, the <strong>de</strong>finition and control of corporate strategies and the <strong>de</strong>termination of business<br />

30


policies. In addition, it authorizes entering into all types of contracts, recommends the amount<br />

of divi<strong>de</strong>nds to be submitted to sharehol<strong>de</strong>rs for consi<strong>de</strong>ration, approves business and<br />

accounting reports for submission to the Sharehol<strong>de</strong>rs’ Assembly, recommends and establishes<br />

administrative policies and creates management and/or consulting committees.<br />

The Board of Directors must consi<strong>de</strong>r the interests of CANTV’s sharehol<strong>de</strong>rs and its<br />

employees, retirees and the public interest. Those Directors who violate their duties may be<br />

held jointly and severally liable for any resulting damages. In addition, un<strong>de</strong>r the Anti-Corruption<br />

Law, members of the board of directors of State-owned companies are consi<strong>de</strong>red public<br />

officers and as such are subject to liability un<strong>de</strong>r this Law and the Organic Law of the General<br />

Controller of the Republic and National System of Tax Control.<br />

Audit Committee<br />

The Audit Committee consists of five members of the Board of Directors. Since July 4,<br />

2007, the Audit Committee members are Jesús Villanueva, Franco Silva, Eyil<strong>de</strong> Margarita<br />

Gracia and Ángel Belisario. Until January 2008, Elda Rodríguez was also a member of the<br />

Audit Committee, and her replacement has not been appointed. The Audit Committee is<br />

responsible primarily for overseeing the accounting and financial reporting processes of the<br />

Company and audits of the consolidated financial statements of the Company. The Audit<br />

Committee is responsible for the evaluation of in<strong>de</strong>pen<strong>de</strong>nt auditors and assists the Board in<br />

their selection, whose appointment is subject to an affirmative vote by the sharehol<strong>de</strong>rs at the<br />

annual general Sharehol<strong>de</strong>rs’ Assembly, and reviewing the scope of external audit services,<br />

including compatibility of non-audit services with in<strong>de</strong>pen<strong>de</strong>nce requirements. The Audit<br />

Committee also provi<strong>de</strong>s support to the Board of Directors of CANTV in supervising the<br />

procedures for the preparation of financial reports; reviewing compliance with internal control,<br />

including monitoring and management of business risk and compliance with legal and ethical<br />

requirements; reviewing the annual and quarterly consolidated financial statements of CANTV<br />

and monitoring the qualifications, in<strong>de</strong>pen<strong>de</strong>nce and performance of the external auditors and<br />

discussing any issues to be communicated to the Audit Committee by the external auditors. In<br />

addition, the Audit Committee meets separately with internal and external auditors, with or<br />

without the presence of the Company’s management, to discuss the results of the audits and<br />

provi<strong>de</strong> sufficient opportunity for a private meeting between members of internal and external<br />

audit and the Audit Committee, who may also request additional information from employees<br />

and legal counsel.<br />

Compensation and Executive Development Committee<br />

The Compensation and Executive Development Committee consists of six members<br />

responsible for the administration of human resources, including matters related to evaluation,<br />

<strong>de</strong>velopment, training and compensation. The Compensation and Executive Development<br />

Committee members are Socorro Hernán<strong>de</strong>z, Jacqueline Faría, Annie Monange, Franco Silva,<br />

María Amparo Genovés and Isabel Bianco.<br />

31


Section III. Telecommunications Regulatory Framework<br />

The legal requirements that regulate the services provi<strong>de</strong>d by the Company are<br />

established un<strong>de</strong>r each of the concessions granted to it by the Venezuelan Government, the<br />

Telecommunications Law and its Regulations.<br />

CONATEL is an in<strong>de</strong>pen<strong>de</strong>nt regulatory body un<strong>de</strong>r the direction of the Ministry of the<br />

Popular Power for Telecommunications and Information Technology (the Republic, through the<br />

Ministry of the Popular Power for Telecommunications and Information Technology, is the<br />

principal sharehol<strong>de</strong>r of the Company). Among others things, CONATEL has the authority to<br />

manage, regulate and control the use of limited resources for telecommunications services,<br />

grant administrative licenses and concessions, recommend the approval of tariffs and collection<br />

of taxes and, together with the Superinten<strong>de</strong>ncia para la Promoción <strong>de</strong> la Libre Competencia<br />

(“Pro-Competencia”) (Superinten<strong>de</strong>ncy for the Promotion of Free Competition), promote and<br />

protect free competition.<br />

Telecommunications Law and Regulations<br />

The Telecommunications Law provi<strong>de</strong>s the general legal framework for the provision<br />

and regulation of telecommunications services in Venezuela with the stated objectives of<br />

establishing the conditions for fair competition between operators and service provi<strong>de</strong>rs, setting<br />

the rules on tariffs and interconnection, <strong>de</strong>veloping and mo<strong>de</strong>rnizing telecommunications<br />

systems, and at the same time obtaining and establishing universal service contributions.<br />

The Telecommunications Law consi<strong>de</strong>rs the provision of telecommunications services to<br />

be an economic activity that affects the public interest, which may be provi<strong>de</strong>d by the private<br />

sector on a competitive basis subject to regulation, and inclu<strong>de</strong>s a requirement for universal<br />

contributions. Provi<strong>de</strong>rs are free to set their own rates unless there is insufficient competition, in<br />

which case certain telecommunications services would become subject to tariff regulation by<br />

CONATEL.<br />

The Telecommunications Law provi<strong>de</strong>s for the creation of the Universal Service Fund<br />

and the Telecommunications Training and Development Fund. The purpose of the Universal<br />

Service Fund is to ensure that every citizen has the opportunity to access telecommunications<br />

services, including the Internet. This fund is used to subsidize the <strong>de</strong>velopment of infrastructure<br />

for the provision of telecommunications services by operators in unprofitable areas. Also, a<br />

research and <strong>de</strong>velopment fund was created to provi<strong>de</strong> financial resources to universities,<br />

technology institutes and research institutions to study and research telecommunications<br />

technology. In May 2006, CANTV signed an agreement with CONATEL to provi<strong>de</strong> for the<br />

installation, operation, administration and maintenance of telecommunications infrastructure<br />

related to the Universal Service Fund. Un<strong>de</strong>r this agreement CANTV will provi<strong>de</strong> for the<br />

connectivity of the civil records’ and notaries’ offices of the Ministerio <strong>de</strong>l Po<strong>de</strong>r Popular para las<br />

Relaciones Interiores y Justicia (the “Ministry of the Popular Power for Interior Affairs and<br />

Justice”). In addition, in December 2006, CANTV and CONATEL signed an agreement to<br />

provi<strong>de</strong> for the installation, operation, administration and maintenance of telecommunications<br />

infrastructure for the creation of a virtual private network that would connect 47 offices and 100<br />

mobile i<strong>de</strong>ntification units with the main office of the Oficina Nacional <strong>de</strong> I<strong>de</strong>ntificación y<br />

Extranjería (“ONIDEX”) (National Office of I<strong>de</strong>ntification and Immigration). The funding for the<br />

infrastructure of both projects will be provi<strong>de</strong>d by the Universal Service Fund, and the property<br />

32


ights to the infrastructure will be transferred to CANTV once the obligation is met and subject to<br />

certain other conditions.<br />

The Telecommunications Law also provi<strong>de</strong>s for a tax regime applicable to all<br />

telecommunications service provi<strong>de</strong>rs on the basis of annual revenues. These taxes total 4.8%<br />

and consist of a 2.3% activity tax, a 0.5% tax to cover CONATEL’s activities, a maximum 0.5%<br />

tax for spectrum allocation, a 1.0% tax to create the Universal Service Fund, a 0.5% tax for the<br />

Telecommunications Training and Development Fund and charges for administrative<br />

procedures.<br />

The Regulations for Basic Telephony Services<br />

The Reglamento <strong>de</strong> Apertura <strong>de</strong>l Servicio <strong>de</strong> Telefonía Básica (the “Regulation for Basic<br />

Telephony Services”) establishes the general mo<strong>de</strong>l, requirements, conditions, limitations and<br />

general provisions necessary to ensure the opening of the basic telephony services market to<br />

free competition, transparency and equality of opportunity.<br />

The Regulations for Basic Telephony Services also govern the system for pre-selecting<br />

domestic and international long distance carriers. Consumers may select the long distance<br />

carrier of their choice on a per-call basis by dialing the operator’s prefix before the <strong>de</strong>sired<br />

phone number.<br />

The Interconnection Regulations<br />

The Telecommunications Law provi<strong>de</strong>s for mandatory interconnections with charges<br />

based on costs to stimulate the commencement of effective competition and promote selfregulation<br />

of the sector. The Reglamento <strong>de</strong> Interconexión (the “Interconnection Regulations”)<br />

require access for the interconnection of other operators’ networks to CANTV’s telephone<br />

network and allow interested parties to negotiate the terms and conditions of their<br />

interconnections subject to general principles of non-discrimination, equality of access and good<br />

faith. Pursuant to the Interconnection Regulations, operators are required to make available to<br />

other operators soliciting interconnection, the essential resources of their network nee<strong>de</strong>d to<br />

provi<strong>de</strong> telecommunications services.<br />

New interconnection agreements are required to be consummated no later than 60 days<br />

following the receipt of a request for interconnection and are subject to review by CONATEL. In<br />

the event parties fail to enter into an interconnection agreement within 60 days, CONATEL must<br />

establish the terms and conditions of interconnection between the two parties within 30 days,<br />

setting interconnection charges based on long-term incremental costs related to the provision of<br />

unbundled network elements.<br />

Current operators maintaining interconnection agreements with the Company are<br />

Movistar, Digitel, Convergence Communications <strong>de</strong> Venezuela (“Convergence”), Veninfotel,<br />

123.com.ve, Multiphone, Totalcom, Etelix, C.A. (“Etelix”), New Global Telecom, LD Telecom,<br />

Convergia, Corporación Intercall, C.A. (“Intercall”) and Intercable. These agreements permit<br />

interoperations between CANTV’s basic telecommunications network and local and long<br />

distance domestic and international services of these companies.<br />

33


The Administrative and Concessions Regulations<br />

The Reglamento <strong>de</strong> la Ley Orgánica <strong>de</strong> Telecomunicaciones Sobre Habilitaciones<br />

Administrativas y Concesiones <strong>de</strong> Uso y Explotación <strong>de</strong>l Espectro Radioeléctrico (the<br />

“Administrative and Concessions Regulations”) establishes that all service provi<strong>de</strong>rs are<br />

required to obtain an administrative licenses and concessions to provi<strong>de</strong> basic<br />

telecommunications services and to establish and make use of a network.<br />

CONATEL has established the general conditions required to obtain an administrative<br />

license, with the objectives of providing a<strong>de</strong>quate telecommunications services, consumer<br />

protection, free competition among operators, efficient and effective numbering administration,<br />

satisfaction of technical and service quality, obligations for interconnection, and universal<br />

service contributions, among others. Administrative licenses have a term of up to 25 years, are<br />

subject to renewal for equal periods.<br />

Regulation for Quality Service<br />

On June 28, 2004, CONATEL enacted the Provi<strong>de</strong>ncia Administrativa sobre Parámetros<br />

<strong>de</strong> Calidad <strong>de</strong> Servicio para los Servicios <strong>de</strong> Telefonía Fija Local, Larga Distancia Nacional,<br />

Larga Distancia Inter<strong>nacional</strong> y Telefonía Móvil (the “Regulation for Quality Service”), a new<br />

regulation for quality and service standards for Basic Telephony Services and Mobile operators<br />

effective in January 2005. This regulation established a period of 120 days for the operators to<br />

adapt their systems and measuring mechanisms, after which they have an adaptation period of<br />

up to three quarters to reach minimum and maximum targets established.<br />

Regulation of Tariffs<br />

The telecommunications regulations establish with respect to tariffs that operators are<br />

free to set prices and that only the tariffs of an operator providing services in a dominant<br />

position will be regulated. The asymmetric regulation of services provi<strong>de</strong>d in a dominant<br />

position is based on the concept of setting “price-caps” which are in<strong>de</strong>xed by applying a<br />

compound in<strong>de</strong>x established in the Regulations for Basic Telephony Services.<br />

Since the enactment of the Telecommunications Law and its Regulations in 2001,<br />

CONATEL has established maximum tariffs as a result of agreements reached with CANTV.<br />

These agreements cover, in addition to the <strong>de</strong>finition of price-caps for each telecommunication<br />

service, other tariff-related matters including: <strong>de</strong>finition of the compound in<strong>de</strong>x of adjustment<br />

tied to the Wholesale Price In<strong>de</strong>x (WPI) and the <strong>de</strong>valuation rate of the bolivar against the U.S.<br />

dollar; establishment of schemes for extraordinary adjustments allowing additional adjustments<br />

to established tariffs in case of <strong>de</strong>viations in the projected macroeconomic variables inclu<strong>de</strong>d in<br />

the compound in<strong>de</strong>x of tariff adjustment; changes in resi<strong>de</strong>ntial plans and migration of clients<br />

between resi<strong>de</strong>ntial plans; and the possibility of incorporation of new proposals for additional<br />

plans.<br />

On February 13, 2003, as published in the Official Gazette of Venezuela No. 37,631, the<br />

Venezuelan Government instituted price controls for all products consi<strong>de</strong>red as essential needs,<br />

including resi<strong>de</strong>ntial fixed telephone services. The adoption of the price controls has suspen<strong>de</strong>d<br />

the approval of tariff increases applicable to CANTV since 2003 for resi<strong>de</strong>ntial services. In<br />

34


addition, this situation has affected approval of tariff increases in non-resi<strong>de</strong>ntial and public<br />

telephony where tariffs have been frozen since 2004.<br />

Beginning July 1, 2007, CANTV reduced its fixed-to-mobile tariffs by an average of 21%,<br />

as part of its new corporate strategy and to support the new regulatory framework for<br />

interconnection matters that CONATEL will announce in the coming months.<br />

On November 22, 2007, pursuant to Administrative Ruling No. 1.110 published in the<br />

Official Gazette of Venezuela No. 38,816, CONATEL established the price-caps that apply to<br />

CANTV’s international long distance services for non-resi<strong>de</strong>ntial subscribers and public<br />

telephony. This Administrative Ruling reiterated the existing price-caps, except for the price-cap<br />

applicable to Cuba which was increased by 65%.<br />

On January 3, 2008, pursuant to the Joint Resolution No. DM 323 and DM 023 published<br />

in the Official Gazette of Venezuela No. 38,842, CONATEL established the price-caps that<br />

apply to CANTV’s international long distance services for resi<strong>de</strong>ntial subscribers. This<br />

Resolution reiterated the existing price-caps, except for increases of the price-caps applicable to<br />

Cuba by 107%, Greece by 46%, Hong King by 46%, Honduras by 39%, Japan by 107% and<br />

Hawaii by 206%.<br />

Currently, CANTV and CONATEL are reviewing various tariff issues relating to basic<br />

services, including the <strong>de</strong>velopment of a new tariff proposal for the inclusion of plans for socioeconomic<br />

sectors with the lowest resources, and the study, <strong>de</strong>sign and implementation of a new<br />

regulatory tariff regime for basic services.<br />

Wireless tariffs are unregulated, and only require the filing of a notice with CONATEL 15<br />

days before effective date of the tariff increase.<br />

Concession Agreement<br />

In 1991, CANTV entered into a Concession Agreement (the Concession) with the<br />

Venezuelan Government to provi<strong>de</strong>, manage and operate national telecommunications<br />

services, including wireline telephone services, private networks and value-ad<strong>de</strong>d services,<br />

guaranteeing high quality service, mo<strong>de</strong>rnizing and expanding the network, introducing<br />

progressive rate rebalancing and establishing a framework for the introduction of competition<br />

into the market.<br />

The Concession is for 35 years (ending in 2026), and is renewable, with no cost, for an<br />

additional period of 20 years, subject to the approval of the Venezuelan Government and<br />

satisfactory performance by CANTV of its obligations un<strong>de</strong>r the Concession.<br />

Upon any termination of the Concession, all of CANTV’s real estate, equipment,<br />

structures and facilities assets utilized in the performance of services un<strong>de</strong>r the Concession<br />

would be forfeited to the Venezuelan Government in exchange for a payment equal to an<br />

amount <strong>de</strong>termined by an expert and in<strong>de</strong>pen<strong>de</strong>nt entity agreed by the Venezuelan Government<br />

and CANTV.<br />

The Concession specifies various penalties that may be imposed on CANTV for<br />

negligent or intentional violation of its provisions. Depending on the nature of the violation,<br />

35


penalties may inclu<strong>de</strong> a public reprimand, a fine up to 1% of services billed, and/or the<br />

termination of the Concession.<br />

On May 21, 2007, the Republic became the owner of 86.2% of CANTV’s capital stock,<br />

mainly through the Ministry of the Popular Power for Telecommunications and Information<br />

Technology, and assumed operating control of the Company, without changing the terms of the<br />

Concession, which remain in effect until its expiration date. The telecommunications regulatory<br />

body (CONATEL) is un<strong>de</strong>r the direction of the Ministry of the Popular Power for<br />

Telecommunications and Information Technology.<br />

Cellular Concession<br />

The Company acquired the B-band Cellular Concession (the “Cellular Concession”) on<br />

May 19, 1992. The Cellular Concession was granted for 20 years and is renewable with no cost<br />

for an additional 20-year period, subject to the satisfactory performance of the obligations<br />

established in the Cellular Concession.<br />

On August 14, 2006, CONATEL granted Movilnet an administrative license with the<br />

attributes of ground mobile radio communications and establishment and use of<br />

telecommunication networks. On November 28, 2007, CONATEL converted the Cellular<br />

Concession to an administrative license and incorporated the attributes of mobile telephony and<br />

transportation.<br />

On May 21, 2007, the Republic became the owner of 86.2% of CANTV’s capital stock,<br />

mainly through the Ministry of the Popular Power for Telecommunications and Information<br />

Technology, and assumed operating control of the Company, without changing the terms of the<br />

Cellular Concession, which remain in effect until its expiration date. The telecommunications<br />

regulatory body (CONATEL) is un<strong>de</strong>r the direction of the Ministry of the Popular Power for<br />

Telecommunications and Information Technology.<br />

Cellular Concession for 1900 MHz Band<br />

On November 28, 2007, Movilnet obtained a cellular concession for the use of<br />

radioelectric service in the 1900 MHz band (the “Cellular Concession for 1900 MHz band”).<br />

The Cellular Concession for 1900 MHz band was granted for 15 years in accordance<br />

with the Telecommunications Law Regulations on Administrative Licenses and Concessions for<br />

the Use of the Radioelectric Spectrum.<br />

Value-Ad<strong>de</strong>d Services Concession<br />

The majority of the Company’s value-ad<strong>de</strong>d services are provi<strong>de</strong>d directly by the<br />

Company’s wholly owned subsidiary, CANTV.Net, un<strong>de</strong>r the Value-Ad<strong>de</strong>d Services<br />

Concession. On October 5, 1995, CONATEL granted CANTV.Net the Value-Ad<strong>de</strong>d Services<br />

Concession, which has an initial term of 10 years. The Value-Ad<strong>de</strong>d Services Concession is<br />

renewable for another 10-year term, subject to certain conditions.<br />

36


The Value-Ad<strong>de</strong>d Services Concession granted CANTV.Net the right to offer voice-mail<br />

services nationwi<strong>de</strong>. Pursuant to the Telecommunications Law, CANTV.Net applied for the<br />

conversion of its Value-Ad<strong>de</strong>d Concession into an administrative license. The conversion of<br />

concessions into administrative licenses had to be completed within two years following the<br />

enactment of the Telecommunications Law. CONATEL has not issued the administrative<br />

license to CANTV.Net. The Company is currently performing the necessary formalities to obtain<br />

the rights to continue offering these services. The Value-Ad<strong>de</strong>d Services Concession has been<br />

expan<strong>de</strong>d to allow CANTV.Net to offer additional services such as Internet access. On March<br />

30, 2006, CANTV.Net received a communication from CONATEL indicating that all rights and<br />

obligations established in the concession remain in effect until CONATEL completes the<br />

conversion of the administrative licenses.<br />

On May 21, 2007, the Republic became the owner of 86.2% of CANTV’s capital stock,<br />

mainly through the Ministry of the Popular Power for Telecommunications and Information<br />

Technology, and assumed operating control of the Company, without changing the terms of the<br />

Value-Ad<strong>de</strong>d Services Concession, which remain in effect until its expiration date. The<br />

telecommunications regulatory body (CONATEL) is un<strong>de</strong>r the direction of the Ministry of the<br />

Popular Power for Telecommunications and Information Technology.<br />

TV Subscription Administrative License<br />

On April 30, 2008, CANTV obtained a general concession for TV subscription (the “TV<br />

Subscription Administrative License”). The TV Subscription Administrative License allows<br />

CANTV to install and exploit equipments and infrastructure to transmit, issue or receive signal,<br />

writings, images, sounds o information of any nature, by wire, radioelectricity, optical media or<br />

other similar media.<br />

The TV Subscription Administrative License was granted for 25 years in accordance to<br />

the Telecommunications Law Regulations on Administrative Licenses and Concessions for the<br />

Use of the Radioelectric Spectrum.<br />

37


Executive Summary<br />

Section IV. Financial and Operating Information<br />

The Company’s operating revenues are <strong>de</strong>rived from domestic telephone services,<br />

including public telephones and rural telephone services, and from international telephone<br />

services, wireless services, directory information services, Internet access, data transmission,<br />

and other value-ad<strong>de</strong>d services.<br />

Revenues from local and domestic long distance services <strong>de</strong>pend on the number of<br />

access lines in service, utilization of the network as measured by minutes or seconds of use, the<br />

rates charged by the Company to its customers and utilization of public telephones.<br />

Revenues from international telephone services are primarily <strong>de</strong>rived from charges to<br />

subscribers in Venezuela for outgoing calls and access charges paid by other international<br />

telecommunications operators for incoming calls originating outsi<strong>de</strong> Venezuela and carried<br />

through the Company’s network in Venezuela.<br />

Un<strong>de</strong>r the “calling party pays” concept, wireline customers pay a rate to make a call to a<br />

wireless line.<br />

Interconnection incoming revenue consists of charges paid by other operators for<br />

connection to the Company’s wireline network.<br />

Revenues from data transmission services inclu<strong>de</strong> ADSL, Frame Relay and Digital<br />

Private Lines services.<br />

Revenues from other wireline-related services consist of interconnection facilities<br />

charges, late payment charges, reconnection fees, equipment sales, vertical services and<br />

miscellaneous charges. Vertical services inclu<strong>de</strong> caller ID, voice mail, call blocking and call<br />

forwarding, among others.<br />

Revenues from wireless services consist primarily of basic monthly recurring charges,<br />

usage charges, activation fees and revenues from handsets and equipment sales. Revenues<br />

from wireless services <strong>de</strong>pend on the number of cellular subscribers, utilization of the network<br />

as measured by minutes or seconds of use and rates charged by the Company to its customers.<br />

Wireless service revenues inclu<strong>de</strong> access, airtime, interconnection, activation, special services,<br />

wireless equipment sales and other wireless-related services.<br />

Revenues from other telecommunications-related services primarily inclu<strong>de</strong> Internetrelated<br />

services and directory information services. Internet-related services inclu<strong>de</strong> Internet<br />

access via dial-up and broadband or <strong>de</strong>dicated channels. The Company earns directory<br />

information services revenues from sales of advertising space in its printed White Pages and<br />

Yellow Pages, sales of information from its database, and electronic dissemination of<br />

information. Revenue is recognized based on the point-of-publication method as directories are<br />

distributed.<br />

The Company’s operating expenses mainly consist of a provision for uncollectibles,<br />

operations, maintenance, repairs and administrative expenses, labor and benefits, <strong>de</strong>preciation<br />

and amortization, interconnection costs, concession and other operating taxes, and other<br />

(income) expense, net.<br />

38


The provision for uncollectibles is an estimate that reflects the anticipated loss due to<br />

uncollectible accounts receivable.<br />

The Company’s operations, maintenance, repairs and other expenses are comprised of<br />

contractors, materials and other miscellaneous expenses. Contractors inclu<strong>de</strong> expenses<br />

related to services ren<strong>de</strong>red to the Company related to maintenance and customer services, as<br />

well as audit, legal and consulting fees. Materials costs inclu<strong>de</strong> use of inventories, spares and<br />

supplies and the provisions for obsolescence and net realizable value of inventories. Other<br />

miscellaneous expenses inclu<strong>de</strong> the costs related to provision for litigation and advertising,<br />

among others.<br />

Labor and benefits expenses <strong>de</strong>pend on the number of employees, changes in wages<br />

and benefits negotiated in collective bargaining agreements, pension plan assumptions,<br />

together with other factors.<br />

Depreciation and amortization expense is <strong>de</strong>pen<strong>de</strong>nt on the book value of fixed assets<br />

and intangible assets.<br />

Interconnection costs cover all traffic from the Company’s network to other operators’<br />

networks, including traffic from fixed to mobile, traffic from fixed to fixed of CANTV, and traffic<br />

from mobile to mobile and mobile to fixed of Movilnet.<br />

Concession and other operating taxes consist primarily of amounts due to the<br />

Venezuelan Government un<strong>de</strong>r the various concession agreements, and municipal taxes. The<br />

amount of concession and other taxes is generally assessed based on a percentage of billings.<br />

Other (income) expense net, inclu<strong>de</strong>s gain on sale of investments and gains and losses<br />

for transactions of purchase-sale and exchange transactions with securities in bolivars and<br />

foreign currency.<br />

Interest and exchange gain (loss), net, consists of net foreign exchange gain or loss,<br />

interest income and interest expense.<br />

Interest income is the result of the Company’s temporary cash investments, and the<br />

interest expense in the result of the Company’s <strong>de</strong>bt.<br />

Foreign exchange gain or loss represents the impact of <strong>de</strong>valuation of the bolivar on the<br />

Company’s net holdings of net monetary liabilities <strong>de</strong>nominated in U.S. dollars and other foreign<br />

currencies. All balances and transactions in foreign currency are recor<strong>de</strong>d at the equivalent in<br />

bolivars using the official exchange rate.<br />

39


Operating Data for the Years En<strong>de</strong>d December 31, 2005, 2006 and 2007<br />

The following table sets forth operating data of the Company for the years en<strong>de</strong>d<br />

December 31, 2005, 2006 and 2007:<br />

2005<br />

40<br />

2006<br />

%<br />

increase<br />

(<strong>de</strong>crease)<br />

from prior<br />

year<br />

2007<br />

%<br />

increase<br />

(<strong>de</strong>crease)<br />

from prior<br />

year<br />

Wireline Services:<br />

Access lines in service:<br />

Resi<strong>de</strong>ntial 2,384,672 2,701,113 13.3 3,413,684 26.4<br />

Non-resi<strong>de</strong>ntial 625,446 651,794 4.2 735,379 12.8<br />

Public telephony 104,558 112,974 8.0 115,060 1.8<br />

ADSL 289,931 449,445 55.0 735,507 63.6<br />

Total 3,404,607 3,915,326 15.0 4,999,630 27.7<br />

Access lines per 100 inhabitants 12.8 14.5 13.3 18.5 39.1<br />

Call Volume(in millions):<br />

Local unbundled minutes (billed): (1)<br />

Resi<strong>de</strong>ntial 6,058 5,486 (9.4) 4,740 (13.6)<br />

Non-resi<strong>de</strong>ntial 3,174 2,869 (9.6) 3,956 37.9<br />

Public telephones 312 134 (57.1) 105 (21.6)<br />

Telecommunication Centers 363 344 (5.2) 239 (30.5)<br />

Total 9,907 8,833 (10.8) 9,040 2.3<br />

Local bundled minutes consumed: (2)<br />

Resi<strong>de</strong>ntial 3,447 3,188 (7.5) 3,166 (0.7)<br />

Non-resi<strong>de</strong>ntial 611 442 (27.7) 438 (0.9)<br />

Total 4,058 3,630 (10.5) 3,604 (0.7)<br />

Total local bundled and unbundled minutes 13,965 12,463 (10.8) 12,644 1.5<br />

Domestic long distance:<br />

Resi<strong>de</strong>ntial 507 533 5.1 695 30.4<br />

Nights and weekends 729 630 (13.6) 521 (17.3)<br />

Non-resi<strong>de</strong>ntial 657 625 (4.9) 698 11.7<br />

Public telephones 56 32 (42.9) 24 (25.0)<br />

Telecommunication Centers 227 217 (4.4) 169 (22.1)<br />

Total 2,176 2,037 (6.4) 2,107 3.4<br />

International long distance:<br />

Incoming minutes 427 588 37.7 592 0.7<br />

Outgoing minutes (3) 304 416 36.8 501 20.4<br />

Net settlement minutes 123 172 39.8 91 (47.1)<br />

Incoming/outgoing ratio 1.40 1.41 0.7 1.18 (16.4)<br />

Outgoing minutes charged to customers (3) 263 315 19.8 364 15.6<br />

Interconnection:<br />

Local fixed to mobile:<br />

Resi<strong>de</strong>ntial 611 723 18.3 943 30.4<br />

Non-resi<strong>de</strong>ntial 697 774 11.0 722 (6.7)<br />

Public telephony 288 322 11.8 285 (11.5)<br />

Total 1,596 1,819 14.0 1,950 7.2<br />

Domestic long distance fixed to mobile:<br />

Resi<strong>de</strong>ntial 224 316 41.1 483 52.8<br />

Non-resi<strong>de</strong>ntial 331 415 25.4 531 28.0<br />

Public telephony 217 310 42.9 330 6.5<br />

Total 772 1,041 34.8 1,344 29.1<br />

Incoming: (4) 1,951 1,797 (7.9) 1,829 1.8<br />

Wireless Services:<br />

Wireless subscribers:<br />

Postpaid 254,790 356,109 39.8 445,258 25.0<br />

Prepaid 4,933,380 7,561,840 53.3 9,056,538 19.8<br />

Total 5,188,170 7,917,949 52.6 9,501,796 20.0<br />

Minutes of use outgoing (collect): (1)<br />

Postpaid 489 748 53.0 1,045 39.7<br />

Prepaid 1,326 1,751 32.1 2,507 43.2<br />

Total 1,815 2,499 37.7 3,552 42.1


2005<br />

41<br />

2006<br />

%<br />

increase<br />

(<strong>de</strong>crease)<br />

from prior<br />

year<br />

2007<br />

%<br />

increase<br />

(<strong>de</strong>crease)<br />

from prior<br />

year<br />

Minutes of use outgoing (bundled) (2) 1,684 3,542 110.3 5,144 45.2<br />

Minutes of use incoming: (5)<br />

Fixed to mobile 216 419 94.0 407 (2.9)<br />

Mobile to mobile 310 489 57.7 751 53.6<br />

Total 526 908 72.6 1,158 27.5<br />

Total minutes of use (collect + bundled + incoming) 4,025 6,949 72.6 9,854 41.8<br />

Short message service (SMS) (in millions) 6,675 10,698 60.3 13,118 22.6<br />

Internet Services:<br />

ADSL subscribers 289,931 449,445 55.0 735,507 63.6<br />

Dial-up subscribers 239,268 186,862 (21.9) 113,410 (39.3)<br />

Total 529,199 636,307 20.2 848,917 33.4<br />

Employees:<br />

CANTV 6,185 6,022 (2.6) 6,124 1.7<br />

Subsidiaries 3,014 3,446 14.3 3,684 6.9<br />

Total 9,199 9,468 2.9 9,808 3.6<br />

Economic statistics:<br />

Increase in the Consumer Price In<strong>de</strong>x 14.4% 17.0% 260 bps 22.5% 550 bps<br />

Increase in the Wholesale Price In<strong>de</strong>x 14.2% 15.9% 170 bps 17.2% 130 bps<br />

Exchange rate at the end of year 2,150 2,150 - 2,150 -<br />

(1) Represents billed minutes of use, excluding free minutes inclu<strong>de</strong>d in certain of the Company’s tariff plans.<br />

(2) A “bundled minute” refers to minutes inclu<strong>de</strong>d in the various monthly rate plans. Any minute in excess of what is inclu<strong>de</strong>d in<br />

the rate plan is billed separately and is termed “unbundled minutes.” Certain plans such as “Nights and Weekends” allow<br />

unlimited usage, so there is no direct correlation between usage and revenues for minutes generated un<strong>de</strong>r those plans.<br />

(3) Outgoing net settlement minutes are measured on settlement periods negotiated with each carrier which may differ from the<br />

dates customers are billed.<br />

(4) Interconnection incoming minutes excluding minutes from Movilnet.<br />

(5) Interconnection incoming minutes excluding minutes from CANTV.


Results of Operations for the Years En<strong>de</strong>d December 31, 2005, 2006 and 2007<br />

The following table sets forth the results of operations of the Company for the years<br />

en<strong>de</strong>d December 31, 2005, 2006 and 2007 (in millions of bolivars except per share and per<br />

ADS data):<br />

Bs.<br />

2005 2006 2007<br />

% of<br />

total<br />

operating<br />

revenues<br />

42<br />

Bs.<br />

% of<br />

total<br />

operating<br />

revenues<br />

%<br />

increase<br />

(<strong>de</strong>crease)<br />

from prior year<br />

Bs.<br />

% of<br />

total<br />

operating<br />

revenues<br />

%<br />

increase<br />

(<strong>de</strong>crease)<br />

from prior year<br />

Operating revenues:<br />

Local services (1) 912,042 17.9 920,574 13.5 0.9 966,129 11.6 4.9<br />

Domestic long distance 296,380 5.8 284,253 4.2 (4.1) 303,873 3.7 6.9<br />

International long distance 115,435 2.3 121,894 1.8 5.6 146,051 1.8 19.8<br />

Fixed to mobile – outgoing calls 751,561 14.8 922,810 13.6 22.8 992,480 11.9 7.5<br />

Interconnection incoming 97,963 1.9 91,307 1.3 (6.8) 88,193 1.1 (3.4)<br />

Data transmission 542,112 10.7 687,191 10.1 26.8 908,073 10.9 32.1<br />

Other wireline-related services 200,662 3.9 213,735 3.2 6.5 376,249 4.5 76.0<br />

Total wireline services 2,916,155 57.3 3,241,764 47.7 11.2 3,781,048 45.5 16.6<br />

Access 119,758 2.4 172,850 2.5 44.3 228,273 2.7 32.1<br />

Airtime 769,304 15.1 1,366,645 20.1 77.6 1,782,798 21.4 30.5<br />

Interconnection 215,244 4.2 339,050 5.0 57.5 373,796 4.5 10.2<br />

Activation 42,925 0.8 56,452 0.8 31.5 66,066 0.8 17.0<br />

Special services 376,487 7.4 677,030 10.0 79.8 1,004,469 12.1 48.4<br />

Wireless equipment sales 431,169 8.5 571,654 8.4 32.6 586,228 7.1 2.5<br />

Other wireless-related services 26,771 0.5 58,957 0.9 120.2 103,362 1.2 75.3<br />

Total wireless services 1,981,658 38.9 3,242,638 47.7 63.6 4,144,992 49.8 27.8<br />

Other telecommunications-related services 190,579 3.8 313,265 4.6 64.4 393,576 4.7 25.6<br />

Total operating revenues<br />

Operating expenses:<br />

5,088,392 100.0 6,797,667 100.0 33.6 8,319,616 100.0 22.4<br />

Labor and benefits 898,016 17.7 1,147,256 16.9 27.8 1,492,430 17.9 30.1<br />

Operations, maintenance, repairs and other 1,217,369 23.9 1,536,891 22.6 26.2 2,157,179 25.9 40.4<br />

Cost of sales of wireless equipment<br />

Additional pension obligation due to Supreme<br />

Court ruling, Master Agreement and Monthly<br />

743,556 14.6 1,172,817 17.3 57.7 1,397,550 16.8 19.2<br />

Incentive<br />

694,916<br />

13.7<br />

23,043<br />

0.3<br />

(96.7)<br />

362,162<br />

Provision for uncollectibles 35,068 0.7 65,438 1.0 86.6 117,521 1.4 79.6<br />

Interconnection costs 534,494 10.5 656,431 9.7 22.8 718,132 8.6 9.4<br />

Depreciation and amortization 827,692 16.3 858,476 12.6 3.7 965,782 11.6 12.5<br />

Concession and other taxes 295,161 5.8 429,192 6.3 45.4 490,774 5.9 14.3<br />

Other (income) expense, net (71,721) (1.5) 8,738 0.1 N.M. (116,633) (1.3) N.M.<br />

Total operating expenses 5,174,551 101.7 5,898,282 86.8 14.0 7,584,897 91.2 28.6<br />

Operating (loss) income<br />

Interest and exchange gain (loss), net:<br />

(86,159) (1.7) 899,385 13.2 N.M. 734,719 8.8 (18.3)<br />

Interest income 85,572 1.7 92,987 1.4 8.7 50,014 0.6 (46.2)<br />

Interest expense (27,393) (0.5) (12,351) (0.2) (54.9) (9,212) (0.1) (25.5)<br />

Exchange gain (loss), net 32,843 0.6 (530) (0.0) (101.6) (2,037) (0.0) 284.3<br />

Total interest and exchange gain (loss), net 91,022 1.8 80,106 1.2 (12.0) 38,765 0.5 (51.6)<br />

Income before income tax<br />

Income tax:<br />

4,863 0.1 979,491 14.4 N.M. 773,484 9.3 (21.0)<br />

Current tax (provision) (147,881) (2.9) (186,576) (2.8) 26.2 (302,018) (3.6) 61.9<br />

Deferred tax benefit 357,426 7.0 337,460 5.0 (5.6) 552,461 6.6 63.7<br />

Total net income tax benefit 209,545 4.1 150,884 2.2 (28.0) 250,443 3.0 66.0<br />

Net income<br />

Net income attributable to:<br />

214,408 4.2 1,130,375 16.6 427.2 1,023,927 12.3 (9.4)<br />

Equity hol<strong>de</strong>rs of the Company 213,929 4.2 1,127,420 16.6 427.0 1,021,295 12.3 (9.4)<br />

Minority interest in subsidiary 479 0.0 2,955 0.0 516.9 2,632 0.0 (10.9)<br />

Net income 214,408 4.2 1,130,375 16.6 427.2 1,023,927 12.3 (9.4)<br />

Basic and diluted net income per share 276 N/A 1,457 N/A 427.2 1,316 N/A (9.4)<br />

Basic and diluted net income per ADS (1) Weighted average shares outstanding (in<br />

1,934 N/A 10,197 N/A 427.2 9,213 N/A (9.4)<br />

millions)<br />

776 N/A 776 N/A<br />

778 N/A<br />

(1) Each ADS represents seven Class D shares.<br />

N.M. Not Meaningful<br />

4.4<br />

N.M.


Comparison of Results of Operations - Years En<strong>de</strong>d December 31, 2007 and 2006<br />

Operating Revenues<br />

Consolidated net operating revenues increased by Bs. 1,521.9 billion (22.4%) in 2007 to<br />

Bs. 8,319.6 billion compared to Bs. 6,797.7 billion in 2006, primarily due to increased wireless<br />

revenues of Bs. 902.4 billion, data revenues of Bs. 220.9 billion and other wireline-related<br />

services of Bs. 162.5 billion.<br />

For the years en<strong>de</strong>d December 31, 2005, 2006 and 2007, 57.3%, 47.7% and 45.5%,<br />

respectively, of total operating revenues were <strong>de</strong>rived from wireline services. Revenues from<br />

wireless communications services accounted for 38.9%, 47.7% and 49.8%, respectively, of total<br />

operating revenues for the years en<strong>de</strong>d December 31, 2005, 2006 and 2007. Revenues from<br />

Internet and directory publications accounted for 3.8%, 4.6% and 4.7%, respectively, of total<br />

operating revenues for the years en<strong>de</strong>d December 31, 2005, 2006 and 2007.<br />

Local Services<br />

Local services revenues, which inclu<strong>de</strong> local usage, basic monthly recurring charges,<br />

installation charges and equipment sales, increased by Bs. 45.5 billion (4.9%) to Bs. 966.1<br />

billion in 2007 compared to Bs. 920.6 billion in 2006.<br />

Basic monthly recurring charges increased by Bs. 52.2 billion (9.8%) to Bs. 585.9 billion<br />

in 2007 compared to Bs. 533.6 billion in 2006, attributable to a Bs. 45.6 billion (14.5%) increase<br />

in resi<strong>de</strong>ntial charges and a Bs. 6.6 billion (3.0%) increase in non-resi<strong>de</strong>ntial charges, both<br />

driven by the increase in lines.<br />

Installation charges <strong>de</strong>creased by Bs. 5.7 billion (10.7%) to Bs. 47.1 billion in 2007<br />

compared to Bs. 52.8 billion in 2006, due to lower fixed equipment sales and installation<br />

charges.<br />

Local usage revenues <strong>de</strong>creased by Bs. 1.0 billion (0.3%) to Bs. 333.1 billion in 2007<br />

compared to Bs. 334.1 billion in 2006. At the end of 2007, there were 1,759,017 prepaid<br />

resi<strong>de</strong>ntial lines compared to 1,094,882 prepaid resi<strong>de</strong>ntial lines at the end of 2006. The<br />

prepaid customer segment generally has lower-usage consumers.<br />

The total number of fixed access lines in service increased by 27.7% to 4,999,630 lines<br />

at December 31, 2007, compared to 3,915,326 lines at December 31, 2006. This increase<br />

reflects the success of the prepaid platform which increased 64.1%. During 2007, resi<strong>de</strong>ntial<br />

access lines increased 26.4% and non-resi<strong>de</strong>ntial access lines increased 13.0% from 2006.<br />

The number of public telephones in service increased by 1.8% during the same period.<br />

Total billed minutes of use <strong>de</strong>creased by 2.3% to 9,040 million minutes in 2007<br />

compared to 8,833 million minutes in 2006.<br />

Total bundled minutes of use <strong>de</strong>creased by 0.7% to 3,604 million minutes in 2007<br />

compared to 3,630 million minutes in 2006.<br />

43


Public telephony minutes of use <strong>de</strong>creased by 28.0% to 344 million minutes in 2007<br />

compared to 478 million minutes in 2006 as a result of the Company’s customers using other<br />

communications alternatives, such as wireless, and the illegal rental of fixed wireless phones or<br />

wireless handsets. During 2007, the Company continued fostering the growth in the number of<br />

Telecommunication Centers. As of December 2007, CANTV had 855 Telecommunication<br />

Center franchises, a 13.2% increase over December 2006.<br />

Domestic Long Distance<br />

Revenues from domestic long distance increased by Bs. 19.6 billion (6.9%) to Bs. 303.9<br />

billion in 2007 from Bs. 284.3 billion in 2006, primarily due to a 3.4% increase in domestic long<br />

distance minutes traffic.<br />

Total bundled and unbundled domestic long distance minutes of use increased by 3.4%<br />

to 2,107 million minutes in 2007 compared to 2,037 million minutes in 2006. Total resi<strong>de</strong>ntial<br />

bundled and unbundled domestic long distance minutes of use increased by 4.6% to 1,216<br />

million minutes in 2007 from 1,163 million minutes in 2006. Unbundled resi<strong>de</strong>ntial domestic<br />

long distance minutes of use increased by 30.4% to 695 million minutes in 2007 compared to<br />

533 million minutes in 2006. Bundled resi<strong>de</strong>ntial domestic long distance minutes of use<br />

<strong>de</strong>creased by 17.3% to 521 million minutes in 2007 compared to 630 million minutes in 2006.<br />

Non-resi<strong>de</strong>ntial domestic long distance minutes of use increased by 11.7% to 698 million<br />

minutes in 2007 compared to 625 million minutes in 2006. Public telephony volumes <strong>de</strong>creased<br />

by 22.5% to 193 million minutes in 2007 compared to 249 million minutes in 2006, driven by<br />

<strong>de</strong>creased usage at Telecommunication Centers.<br />

International Long Distance<br />

Total international long distance revenues increased by Bs. 24.2 billion (19.8%) to<br />

Bs. 146.1 billion in 2007 compared to Bs. 121.9 billion in 2006.<br />

International long distance revenues from calls charged to customers increased by Bs.<br />

36.4 billion (27.4%) to Bs. 169.2 billion in 2007 compared to Bs. 132.8 billion in 2006, resulting<br />

from a 15.6% increase in outgoing minutes charged to customers.<br />

Net settlement expense with international carriers increased by Bs. 12.2 billion to<br />

Bs. 23.1 billion in 2007 compared to Bs. 10.9 billion in 2006. Outgoing minutes increased by<br />

20.4% to 501 million minutes in 2007 compared to 416 million minutes in 2006. Incoming<br />

minutes increased by 0.7% to 592 million minutes in 2007 compared to 588 million minutes in<br />

2006. The ratio of incoming to outgoing calls was 1.18 in 2007 compared to 1.41 in 2006.<br />

The Company’s largest international traffic route is between Venezuela and North<br />

America (the United States, Mexico and Canada), which represented 71.0% and 73.3% of the<br />

minutes recor<strong>de</strong>d in 2007 and 2006, respectively.<br />

Fixed to Mobile – Outgoing Calls<br />

Fixed to mobile revenues increased by Bs. 69.7 billion (7.5%) to Bs. 992.5 billion in 2007<br />

compared to Bs. 922.8 billion in 2006, mainly due to volume increases of 7.2% and 29.1% in<br />

local and domestic long distance traffic, respectively, and the sharp increase in wireless<br />

subscribers in Venezuela.<br />

44


Local fixed to mobile revenues increased by Bs. 16.2 billion (2.7%) to Bs. 612.9 billion in<br />

2007 compared to Bs. 596.7 billion in 2006. Local fixed to mobile resi<strong>de</strong>ntial minutes increased<br />

by 30.4% to 943 million minutes in 2007 compared to 723 million minutes in 2006. Local fixed<br />

to mobile non-resi<strong>de</strong>ntial minutes <strong>de</strong>creased by 6.7% to 722 million minutes in 2007 compared<br />

to 774 million minutes in 2006. Local minutes of use from public telephony to mobile <strong>de</strong>creased<br />

by 11.5% to 285 million minutes in 2007 compared to 322 million minutes in 2006.<br />

Domestic long distance fixed to mobile revenues increased by Bs. 53.3 billion (16.4%) to<br />

Bs. 379.5 billion in 2007 compared to Bs. 326.2 billion in 2006. Domestic long distance fixed to<br />

mobile resi<strong>de</strong>ntial minutes increased by 52.8% to 483 million minutes in 2007 compared to 316<br />

million minutes in 2006. Domestic long distance fixed to mobile non-resi<strong>de</strong>ntial minutes<br />

increased by 28.0% to 531 million minutes in 2007 compared to 415 million minutes in 2006.<br />

Domestic long distance from public telephony to mobile minutes increased by 6.5% to 330<br />

million minutes in 2007 compared to 310 million minutes in 2006.<br />

Interconnection Incoming<br />

Interconnection incoming revenue <strong>de</strong>creased by Bs. 3.1 billion (3.4%) to Bs. 88.2 billion<br />

in 2007 compared to Bs. 91.3 billion in 2006, mainly driven by call transit <strong>de</strong>creases in locations<br />

with no interconnection facilities, partially offset by the increase of incoming minutes of use by<br />

1.8%.<br />

Data Transmission<br />

Revenues from data transmission increased by Bs. 220.9 billion (32.1%) to Bs. 908.1<br />

billion in 2007 compared to Bs. 687.2 billion in 2006. This increase was mainly due to an<br />

increase of Bs. 146.6 billion in ADSL revenues and a 63.6% increase in ADSL subscribers,<br />

combined with Bs. 11.6 billion from services provi<strong>de</strong>d for electoral processes.<br />

Other Wireline-Related Services<br />

Other wireline-related service revenues increased by Bs. 162.5 billion (76.0%) to<br />

Bs. 376.2 billion in 2007 compared to Bs. 213.7 billion in 2006, mainly driven by equipment<br />

sales and vertical services.<br />

Wireless Services<br />

Wireless service revenues increased by Bs. 902.4 billion (27.8%) to Bs. 4,145.0 billion in<br />

2007 compared to Bs. 3,242.6 billion in 2006, reflecting continued growth in both the postpaid<br />

and the prepaid customer base combined with handset sales increases.<br />

The total number of wireless subscribers increased by 20.0% to 9,501,796 at December<br />

31, 2007 from 7,917,949 at December 2006. The postpaid customer base increased 25.0%,<br />

reaching 445,258 subscribers at December 31, 2007, compared to 356,109 subscribers at<br />

December 31, 2006, while the prepaid subscribers increased by 19.8%, reaching a total of<br />

9,056,538 customers at December 31, 2007, compared to 7,561,840 customers at<br />

December 31, 2006. This growth was generated by several promotions offered during 2007,<br />

including, among others, Valentine’s Day Promotion, Mother’s Day Promotion, Father’s Day<br />

Promotion and Christmas Promotion. These promotions inclu<strong>de</strong>d special prices for cellular<br />

handsets and bundling services such as activation fees, credits and short messages, among<br />

others. In addition, during 2007, the Company launched two new plans, the Plan Consejo<br />

45


Comunal (“Communal Council Plan”) and the Plan Servidor Público (“Public Servant Plan”).<br />

The Communal Council Plan, exclusively for members of these community organizations, offers<br />

a low basic monthly access charge, 3,000 free seconds for Movilnet-to-Movilnet and Movilnetto-CANTV<br />

calls and 500 free SMS. The Public Servant Plan, exclusively for employees of<br />

Venezuelan Government agencies and State-owned companies, offers a low basic monthly<br />

access charge, 100 free minutes and 300 free SMS.<br />

Total minutes of use (incoming and outgoing) increased by 41.8% to 9,854 million<br />

minutes in 2007 compared to 6,949 million minutes in 2006. Total outgoing billed minutes of<br />

use increased by 42.1% to 3,552 million minutes in 2007 compared to 2,499 million minutes in<br />

2006. Total usage of bundled minutes increased by 45.2% to 5,144 million minutes in 2007<br />

compared to 3,542 million minutes in 2006. Total incoming minutes of use increased by 27.5%<br />

to 1,158 million minutes in 2006 compared to 908 million minutes in 2007, driven by a 53.6%<br />

increase in fixed to mobile calls, partially offset by a 2.9% <strong>de</strong>crease in mobile to mobile calls.<br />

Airtime revenues increased by Bs. 416.1 billion (30.5%) to Bs. 1,782.8 billion in 2007<br />

compared to Bs. 1,366.7 billion in 2006, as a result of lines and volume growth.<br />

Revenues from wireless special services increased by Bs. 327.5 billion (48.4%) to Bs.<br />

1,004.5 billion in 2007 compared to Bs. 677.0 billion in 2006, mainly driven by the increase in<br />

SMS messages of 22.6% to 13,118 million messages in 2007 compared to 10,698 million<br />

messages in 2006.<br />

Equipment sales increased by Bs. 14.5 billion (2.5%) to Bs. 586.2 billion in 2007<br />

compared to Bs. 571.7 billion in 2006. During 2007, the Company sold approximately<br />

5,557,591 handsets, a 19.9% increase compared to the approximately 4,637,087 handsets sold<br />

in 2006.<br />

Other Telecommunications-Related Services<br />

Revenues from other telecommunications-related services increased by Bs. 80.3 billion<br />

(25.6%) to Bs. 393.6 billion in 2007 compared to Bs. 313.3 billion in 2006.<br />

Internet revenues increased by Bs. 88.3 billion (34.4%) to Bs. 346.0 billion in 2007<br />

compared to Bs. 257.5 billion in 2006, due to a 33.4% increase in the subscriber base, which<br />

reached 848,917 subscribers at December 31, 2007 compared to 636,307 subscribers at<br />

December 31, 2006. The growth in the subscriber base was due to promotional campaigns,<br />

improved connectivity and attractive pricing. In addition, the Company continues to offer, as<br />

part of its Internet market promotion strategy, the Internet Equipado (“Internet with Equipment”)<br />

program, which facilitates customers’ acquisition of personal computers together with<br />

CANTV.Net services through attractive financing offers.<br />

Revenues from directory publications <strong>de</strong>creased by Bs. 8.2 billion (14.7%) to Bs. 47.6<br />

billion in 2007 compared to Bs. 55.8 billion in 2006.<br />

Operating Expenses<br />

Total operating expenses increased by Bs. 1,686.6 billion (28.6%) to Bs. 7,584.9 billion<br />

in 2007 compared to Bs. 5,898.3 billion in 2006 mainly due to the recognition of additional<br />

pension obligations due to the Supreme Court ruling, the Acuerdo Marco (“Master Agreement”)<br />

46


and Bono Solidario (“Monthly Incentive”), higher cost of cellular handsets, labor and benefits,<br />

and contractor and miscellaneous expenses.<br />

Labor and benefits expenses increased by Bs. 345.1 billion (30.1%) to Bs. 1,492.4 billion<br />

in 2007 compared to Bs. 1,147.3 billion in 2006, mainly due to higher pension and<br />

postretirement benefits expenses and salary increases. In addition, the Company’s employees<br />

increased by 3.6% to 9,808 employees at December 31, 2007 compared to 9,468 employees at<br />

December 31, 2006.<br />

Operations, maintenance, repairs and other expenses increased by Bs. 620.3 billion<br />

(40.4%) to Bs. 2,157.2 billion in 2007 compared to Bs. 1,536.9 billion in 2006. This increase<br />

was mainly due to a Bs. 170.0 billion increase in contractor expenses supporting our customer<br />

service activities and network maintenance, Bs. 116.9 billion regarding tax assessments due to<br />

CONATEL for telecommunication taxes, Bs. 261.3 billion in miscellaneous expenses, and Bs.<br />

75.9 billion in material expenses for use of inventories, spares and supplies and the provisions<br />

for obsolescence and net realizable value.<br />

Cost of sales of wireless equipment increased by Bs. 224.8 billion (19.2%) to Bs. 1,397.6<br />

billion in 2007 compared to 1,172.8 billion in 2006, mainly due to the increase in equipment<br />

sales as a result of to the significant growth in the number of subscribers.<br />

Additional pension obligations due to the Supreme Court <strong>de</strong>cision on pension payment<br />

liabilities increased by Bs. 339.2 billion to Bs. 362.2 billion in 2007 compared to Bs. 23.0 billion<br />

in 2006. The amount recor<strong>de</strong>d in 2007 resulted from an April 16, 2007 <strong>de</strong>cision ren<strong>de</strong>red by the<br />

Second Superior Court for the Transitory Procedural Regime of the Circuit Court of the<br />

Metropolitan Area of Caracas and inclu<strong>de</strong>s Bs. 291.1 billion regarding the Master Agreement<br />

and Bs. 71.1 billion from the Monthly Incentive, which, beginning in January 2008, is being paid<br />

to retirees as <strong>de</strong>termined during the Mesa <strong>de</strong> Conciliación (the “Mediation Board”) process<br />

managed by the Social Chamber of the Supreme Court. The amount recor<strong>de</strong>d in 2006 resulted<br />

from the December 13, 2006 <strong>de</strong>cision ren<strong>de</strong>red by the Thirty Seventh Court of First Instance of<br />

Substantiation, Mediation and Labor Execution of the Circuit Court of the Metropolitan Area of<br />

Caracas on the calculations ma<strong>de</strong> by the experts appointed by the Execution Court to <strong>de</strong>termine<br />

the pension payments.<br />

Provision for uncollectibles increased by Bs. 52.1 billion (79.6%) to Bs. 117.5 billion in<br />

2007 compared to Bs. 65.4 billion in 2006, due to the implementation of a new fixed telephony<br />

billing system, which generated <strong>de</strong>lays in the Company’s collections.<br />

Interconnection costs increased by Bs. 61.7 billion (9.4%) to Bs. 718.1 billion in 2007<br />

compared to Bs. 656.4 billion in 2006 due to increases in traffic volumes.<br />

Depreciation and amortization expense increased by Bs. 107.3 billion (12.5%) to<br />

Bs. 965.8 billion in 2007 compared to Bs. 858.5 billion in 2006, mainly due to continuing capital<br />

investments ma<strong>de</strong> and the reduction of useful lives of certain assets during 2006 and 2007.<br />

Concession and other non-income taxes increased by Bs. 61.6 billion (14.3%) to Bs.<br />

490.8 billion in 2007 compared to Bs. 429.2 billion in 2006, resulting from a higher revenue<br />

base.<br />

During 2007, the Company recor<strong>de</strong>d Bs. 116.6 billion in other income, net, compared to<br />

Bs. 8.8 billion of other expense, net. In 2007, other income, net inclu<strong>de</strong>s Bs. 71.9 billion of<br />

47


income generated in the purchase-sale and exchange transactions with securities in bolivars<br />

and foreign currency and Bs. 35.0 billion of income related to subscriber <strong>de</strong>posits of customers<br />

who lost the refund rights due to a <strong>de</strong>fault in compliance of their contracts. In 2006, other<br />

expense, net inclu<strong>de</strong>s Bs. 60.6 billion of expense generated in the purchase-sale and exchange<br />

transactions with securities in bolivars and foreign currency and Bs. 43.1 billion of income<br />

related to subscriber <strong>de</strong>posits of customers who lost the refund rights due to a <strong>de</strong>fault in<br />

compliance of their contracts.<br />

Interest and Exchange Loss, Net<br />

Interest income <strong>de</strong>creased by Bs. 43.0 billion (46.2%) to Bs. 50.0 billion in 2007<br />

compared to Bs. 93.0 billion in 2006, due to lower average short-term and temporary<br />

investments during 2007.<br />

Interest expense <strong>de</strong>creased by Bs. 3.2 billion (25.5%) to Bs. 9.2 billion in 2007 compared<br />

to Bs. 12.4 billion in 2006, due to reduction of <strong>de</strong>bt balances.<br />

Exchange loss, net increased by Bs. 1.5 billion to Bs. 2.0 billion in 2007 compared to Bs.<br />

0.5 billion in 2006, due to the appreciation of the exchange rate of the Japanese yen against the<br />

U.S. dollar.<br />

Income Tax<br />

Total income tax benefit increased by Bs. 99.5 billion (66.0%) to Bs. 250.4 billion in 2007<br />

compared to Bs. 150.9 billion for 2006.<br />

Current income tax provision increased by Bs. 115.4 billion (61.9%) to Bs. 302.0 billion in<br />

2007 compared to Bs. 186.6 billion in 2006, due a higher taxable income in 2007 and the<br />

recognition in 2006 of investment tax credits for new investments from 2005 and 2006 of Bs.<br />

199.8 billion as a result of a favorable tax ruling issued in July 2006.<br />

Deferred tax benefit increased by Bs. 215.0 billion (63.7%) to Bs. 552.5 billion in 2007<br />

compared to Bs. 337.5 billion in 2006. The 2007 <strong>de</strong>ferred tax benefit inclu<strong>de</strong>s the impact of the<br />

provision for the additional pension obligations due to the Supreme Court <strong>de</strong>cision on pension<br />

payment liabilities.<br />

48


Cash Flows, Liquidity and Capital Resources<br />

The following table summarizes cash flow data for the Company for the years en<strong>de</strong>d<br />

December 31, 2005, 2006 and 2007 (in millions of Bs.):<br />

Cash and temporary investments beginning of the year 967,543 1,098,629 1,151,987<br />

Operating activities:<br />

Net income<br />

Adjustments to reconcile net income to<br />

214,408 1,130,375 1,023,927<br />

49<br />

2005<br />

net cash provi<strong>de</strong>d by operating activities 1,593,178<br />

2006<br />

1,296,303<br />

2007<br />

1,969,142<br />

Changes in current assets and liabilities (152,109) (225,856) (939,241)<br />

Changes in non-current assets and liabilities (5,326) (315,248) 58,514<br />

Net cash provi<strong>de</strong>d by operating activities 1,650,151 1,885,574 2,112,342<br />

Investing activities:<br />

Acquisition of 1900 MHz band cellular concession - - (129,000)<br />

Acquisition of information systems (software) (177,573) (195,681) (194,938)<br />

Acquisition of property, plant and equipment (867,339) (1,042,573) (1,250,683)<br />

Disposal of property, plant and equipment and information systems<br />

(software) 86,522 37,901 38,375<br />

Net cash used in investing activities (958,390) (1,200,353) (1,536,246)<br />

Financing activities:<br />

Proceeds from borrowings 69,095 6,237 -<br />

Payments of <strong>de</strong>bt (243,007) (52,150) (28,906)<br />

Divi<strong>de</strong>nd payments (415,133) (583,745) (916,086)<br />

Purchase of shares for workers’ benefit fund, net (2,255) (2,205) (6,780)<br />

Net cash used in financing activities (591,300) (631,863) (951,772)<br />

Increase (<strong>de</strong>crease) in cash and temporary investments before effect<br />

of exchange rate changes on cash and temporary investments 100,461 53,358 (375,676)<br />

Effect of exchange rate changes on cash and temporary investments 30,625 - -<br />

Increase (<strong>de</strong>crease) in cash and temporary investments 131,086 53,358 (375,676)<br />

Cash and temporary investments at the end of the year 1,098,629 1,151,987 776,311<br />

Comparison of Cash Flows - Years En<strong>de</strong>d December 31, 2007 and 2006<br />

Net cash provi<strong>de</strong>d by operating activities increased by Bs. 226.7 billion (12.0%) to<br />

Bs. 2,112.3 billion in 2007 compared to Bs. 1,885.6 billion in 2006.<br />

Net cash used in investing activities increased by Bs. 335.8 billion (28.0%) to Bs. 1,536.2<br />

billion in 2007 compared to Bs. 1,200.4 billion in 2006. Capital expenditures during 2007<br />

inclu<strong>de</strong>d: (i) Bs. 129.0 billion for the acquisition of a concession for the use of the radioelectric<br />

spectrum in the 1900 MHz band for cellular services; (ii) Bs. 157.3 billion for the <strong>de</strong>ployment of<br />

the new GSM network for mobile telephony, which will contribute towards strengthening the<br />

mobile network’s growth program and expansion of coverage throughout the country; (iii) the<br />

expansion of the Company’s CDMA-1X network footprint to support projected <strong>de</strong>mand in mobile


and fixed wireless services; (iv) <strong>de</strong>ployment of backbone and data transmission networks to<br />

sustain the growth in the Company’s ADSL and other data transmission product lines; (v)<br />

integration and transformation of the Company’s information systems; (vi) <strong>de</strong>ployment of EvDO<br />

technology for wireless broadband services; and (vii) substitution of analog switches with multiservice<br />

access no<strong>de</strong>s to support service enhancements and increase operating efficiency.<br />

Net cash used in financing activities increased by Bs. 319.9 billion (50.6%) to Bs. 951.8<br />

billion in 2007 compared to Bs. 631.9 billion in 2006. During 2007, the Company ma<strong>de</strong> <strong>de</strong>bt<br />

payments totaling Bs. 28.9 billion, a Bs. 23.3 billion <strong>de</strong>crease when compared to Bs. 52.2 billion<br />

in 2006. During 2007, <strong>de</strong>bt payments inclu<strong>de</strong>d Bs. 9.4 billion (U.S.$4.4 million) for the IFC loans<br />

(as <strong>de</strong>scribed below) and Bs. 19.5 billion (¥1,081.9 million) for the JBIC loan (as <strong>de</strong>scribed<br />

below). During 2006, <strong>de</strong>bt payments inclu<strong>de</strong>d Bs. 9.4 billion (U.S.$4.4 million) for the IFC loans<br />

(as <strong>de</strong>scribed below), Bs. 20.1 billion (¥1,081.9 million) for the JBIC loan (as <strong>de</strong>scribed below),<br />

repayment of Bs. 11.2 billion of commercial paper, and Bs. 11.5 billion for other local loans.<br />

During 2007, the Company paid Bs. 916.1 billion in divi<strong>de</strong>nds, compared to Bs. 583.7 billion in<br />

2006.<br />

Liquidity and Capital Resources<br />

As of December 31, 2007, the Company’s current assets totaled Bs. 2,942.7 billion, an<br />

<strong>de</strong>crease of Bs. 275.4 billion (8.6%) compared to Bs. 3,218.1 billion at December 31, 2006. The<br />

Company’s current liabilities totaled Bs. 3,589.9 billion at December 31, 2007, a <strong>de</strong>crease of<br />

Bs. 491.5 billion (12.0%) compared to Bs. 4,081.4 billion at December 31, 2006. As a result,<br />

the Company’s working capital ratio increased to 0.82 at December 31, 2007, from 0.79 at<br />

December 31, 2006, mainly due to lower accounts payable and divi<strong>de</strong>nds payable.<br />

Management believes that as of December 31, 2007, the Company’s working capital is<br />

sufficient to meet its operating requirements.<br />

During 2007, the Company reduced its total <strong>de</strong>bt obligations by Bs. 27.4 billion (47.1%).<br />

As of December 31, 2007, the Company’s outstanding in<strong>de</strong>btedness totaled Bs. 30.8 billion,<br />

with Bs. 20.6 billion classified as short-term <strong>de</strong>bt, as compared to total <strong>de</strong>bt of Bs. 58.2 billion<br />

with Bs. 28.9 billion classified as short-term <strong>de</strong>bt at December 31, 2006. The Company<br />

continues to maintain a strong capital structure as evi<strong>de</strong>nced by a 0.8% <strong>de</strong>bt-to-equity position<br />

at December 31, 2007.<br />

In February 1990, CANTV obtained a loan from the Japan Bank for International<br />

Cooperation (“JBIC”) (formerly The Export-Import Bank of Japan) of ¥16,228 million, and<br />

invested in technological changes in the transmission and urban connection network. This loan<br />

is amortized semi-annually at a fixed annual rate of 5.8% maturing in 2009, and as of December<br />

31, 2007, the outstanding balance of this loan was ¥1,622.8 million.<br />

On June 7, 1996, CANTV entered into an agreement with the International Finance<br />

Corporation (“IFC”) and obtained loan commitments of U.S.$261 million, of which U.S.$175<br />

million was disbursed. Of the amount disbursed, U.S.$75 million was used in CANTV’s<br />

mo<strong>de</strong>rnization and expansion program, as mandated by the Concession, and for certain other<br />

capital expenditures. The remaining U.S.$100 million represented the conversion of certain<br />

<strong>de</strong>bt outstanding into longer-term <strong>de</strong>bt. In March 1998, CANTV paid U.S.$150 million of this<br />

loan with the proceeds from the sale of variable interest rate notes issued by CANTV Finance,<br />

which are unconditionally and irrevocably guaranteed as to payment of principal and interest by<br />

50


CANTV. The IFC loan balance of U.S.$25 million was repaid in a single installment in<br />

September 2005.<br />

In 1997, Movilnet signed an agreement with the IFC for two loans totaling U.S.$95<br />

million, which were drawn down during 1998. These loans were used for expansion and<br />

mo<strong>de</strong>rnization of the cellular network. The final installment of this loan was paid in July 2007.<br />

In September and December 2000, two loan agreements were signed with local banks<br />

for Bs. 7.0 billion each, with maturities between five and ten years. During 2006, these loans<br />

were paid in full.<br />

At a Sharehol<strong>de</strong>rs’ Assembly held on March 31, 2004, the issuance of commercial paper<br />

for an amount up to U.S.$100 million or the equivalent in bolivars was approved. During 2004<br />

and 2005, six series were issued for a total amount of Bs. 80 billion from the first issuance. The<br />

total amount was placed in the market on a discount basis and at annual interest rates between<br />

12.5% and 12.59%. The paper matured in June 2005 and July 2005. During 2005, three series<br />

of commercial paper were issued, for a total amount of Bs. 33.6 billion. The total amount was<br />

placed in the market at a discount at annual interest rates between 12.50% and 12.625%. The<br />

commercial paper matured between August 2005 and January 2006. All of this commercial<br />

paper was paid in full during 2005 and 2006.<br />

As of December 31, 2007, the estimated <strong>de</strong>bt payments are Bs. 20.6 billion in 2008 and<br />

Bs. 10.2 billion in 2009, translated into bolivars at the exchange rate at this date.<br />

Related Party Transactions<br />

On May 21, 2007, the Republic, became the owner of 86.2% of CANTV’s capital stock,<br />

mainly through the Ministry of the Popular Power for Telecommunications and Information<br />

Technology, and assumed operating control of the Company.<br />

The Company’s largest customer is the Venezuelan public sector, including the central<br />

Venezuelan Government and its centralized and <strong>de</strong>centralized entities, State-owned<br />

companies, and agencies at both the state and municipal level. During the year en<strong>de</strong>d<br />

December 31, 2007, the Company billed Bs. 623.2 billion to Venezuelan Government entities,<br />

which represents 7% of the Company’s consolidated revenues.<br />

Additionally, during 2007, the Company recor<strong>de</strong>d as expenses Bs. 38.6 billion for basic<br />

services of electricity, water supply and mail services with Venezuelan Government entities.<br />

51


Section V. Litigation<br />

The Company is involved in a number of legal and administrative proceedings; the main<br />

cases are presented below:<br />

Income tax:<br />

In May 2000 and December 1999, the Servicio Nacional Integrado <strong>de</strong> Administración<br />

Aduanera y Tributaria (“SENIAT”) (the National Integrated Service of Customs and Taxes)<br />

notified CANTV and Movilnet of additional tax assessments amounting to Bs. 271.2 billion and<br />

Bs. 27.0 billion, respectively, mainly related to the rejection of investment tax credits used for<br />

fiscal years en<strong>de</strong>d December 31, 1994, 1995, 1996 and 1997. SENIAT objected to these<br />

credits claiming that telecommunications activities do not qualify as industrial activities. These<br />

assessments were appealed before the Tribunal Superior Sexto <strong>de</strong> lo Contencioso Tributario<br />

(the “Sixth Court of Contentious Matters”) and, in the opinion of management and its legal<br />

counsel, there is a high probability of a ruling in favor of CANTV and Movilnet. In 1999 this<br />

Court ruled in favor of another telecommunications company. However, that <strong>de</strong>cision was<br />

appealed by SENIAT and a final ruling is pending. Based on the opinion of the Company’s<br />

management and its legal counsel, no provision has been recor<strong>de</strong>d.<br />

In June 2002 Caveguías was subject to an additional tax assessment by SENIAT of<br />

approximately Bs. 44.3 billion. This assessment was in respect of income tax returns for the<br />

years en<strong>de</strong>d December 31, 1996, 1997, 1998 and 1999, in which SENIAT objected to the<br />

<strong>de</strong>ferral of revenue in respect of the sale of advertising space. The Company appealed these<br />

assessments before the Tribunal Superior Octavo <strong>de</strong> lo Contencioso Tributario (the “Eighth<br />

Court of Contentious Matters”). In the opinion of management and its legal counsel, there is a<br />

high probability of a favorable <strong>de</strong>cision for Caveguías, and accordingly, no accrual or provision<br />

has been recor<strong>de</strong>d.<br />

Value-ad<strong>de</strong>d tax:<br />

During February 2004, CANTV Telecommunication Centers were subject to additional tax<br />

assessments by the tax authorities in two states of the central region of Venezuela. As a result<br />

of this assessment, 37 centers received sanctions including fines and were closed for 48 and 72<br />

hours as a result of their non-compliance with certain value-ad<strong>de</strong>d tax matters. Some of the<br />

sanctions were effective at that moment while others are currently being appealed. There is a<br />

risk for CANTV that Telecommunication Centers could request CANTV to assume some<br />

responsibility as business allies for the periods 2001 to 2003. Based on the opinion of legal<br />

counsel handling these proceedings, Company management believes that the provision is<br />

reasonable to cover this risk.<br />

In September 2006, SENIAT notified CANTV of additional tax assessments amounting to<br />

Bs. 21.6 billion related to revision of the value-ad<strong>de</strong>d tax paid by CANTV for the periods<br />

between January 2002 and December 2003. In October 2006, SENIAT notified CANTV.Net of<br />

additional tax assessments amounting to Bs. 3.8 billion related to revision of the value-ad<strong>de</strong>d<br />

tax paid by CANTV.Net for the periods between January 2003 and July 2005. The objections<br />

presented by SENIAT to the tax assessments were based on the lack of verification of tax<br />

credits. In November 2006 and December 2006, the Company presented administrative<br />

appeals of the tax assessments of CANTV and CANTV.Net, respectively. On September 12,<br />

2007, CANTV.Net received the final resolution in respect of the Administrative Summary, which<br />

confirmed the tax assessment for Bs. 0.9 billion and revoked Bs. 2.5 billion. On October 17,<br />

52


2007, CANTV.Net presented an administrative appeal against the tax assessment of Bs. 0.9<br />

billion. On October 31, 2007, CANTV received the final resolution in respect of the<br />

Administrative Summary, which partially revoked the tax assessment for Bs. 19.8 billion and<br />

partially confirmed it for Bs. 1.7 billion. On December 5, 2007, CANTV paid Bs. 0.5 billion, and<br />

on January 14, 2008, CANTV presented an administrative appeal of the tax assessment of Bs.<br />

1.2 billion. The administrative appeals are awaiting final <strong>de</strong>cision. Based on the opinion of<br />

external legal counsel, consi<strong>de</strong>ring the documentation submitted to SENIAT by CANTV and<br />

CANTV.Net in the administrative appeals, the Company believes that these tax assessments<br />

will be <strong>de</strong>ci<strong>de</strong>d favorably for the companies; accordingly, no provision has been.<br />

Telecommunications tax:<br />

In December 2004, CONATEL notified CANTV of inspection reports resulting from their<br />

review of tax payments called for by the Telecommunications Law, ma<strong>de</strong> by CANTV in 2000<br />

and Movilnet and CANTV.Net for 2000 to 2003. The main concepts objected to by CONATEL in<br />

<strong>de</strong>termining the tax base for computation of this tax are the <strong>de</strong>duction of uncollectible write-offs<br />

and discounts granted to customers. In addition, CONATEL objected to Movilnet’s exclusion of<br />

net interconnection revenue from the tax base for the Special Telecommunications Tax of<br />

Wireless Services, which was in effect until December 31, 2005. In January 2006, the<br />

Company received the final resolution from CONATEL in respect of the Administrative Summary<br />

indicating total additional taxes, penalties and interest of Bs. 8.1 billion for CANTV, Bs. 92.9<br />

billion for Movilnet and Bs. 0.7 billion for CANTV.Net. In February 2006, the Company<br />

presented an administrative appeal to the tax assessments and was awaiting a formal response<br />

from the tax authorities. In December 2006, CONATEL notified CANTV of inspection reports for<br />

net taxes of Bs. 6.9 billion resulting from their review of tax payments called for by the<br />

Telecommunications Law, ma<strong>de</strong> by CANTV for the periods from January 2001 to December<br />

2003. The main issues objected to by CONATEL in <strong>de</strong>termining the tax base for computation of<br />

this tax are the <strong>de</strong>duction of uncollectible write-offs and discounts granted to customers.<br />

Beginning in fiscal year 2007, CANTV, Movilnet and CANTV.Net, changed their view that<br />

uncollectible write-offs and discounts granted to customers should be <strong>de</strong>ducted from the tax<br />

base for computation of telecommunications taxes. In this respect, beginning January 1, 2007,<br />

CANTV, Movilnet and CANTV.Net calculate the tax base for telecommunication taxes including<br />

these concepts. In 2007, the Company recor<strong>de</strong>d a provision of Bs. 123.4 billion for this concept.<br />

In January and February 2008, the Company paid Bs. 48.1 billion with respect to the taxes<br />

objected to by CONATEL for the years 2000 to 2003.<br />

Labor lawsuits:<br />

A significant number of other labor-related lawsuits and claims have been ma<strong>de</strong> against<br />

CANTV for an aggregate of approximately Bs. 567.5 billion (including inflation adjustment of the<br />

lawsuits), most of which are related to special retirement initiatives, employee severance<br />

benefits and other benefits related to early retirement. These lawsuits are currently pending,<br />

and their final outcome cannot be <strong>de</strong>termined. CANTV has settled a number of these cases<br />

through mediation and negotiation with the parties involved, and is currently in the process of<br />

resolving claims and lawsuits filed by former employees to reduce the number of lawsuits<br />

against the Company.<br />

53


Other legal proceedings:<br />

In June 2003, a commercial party introduced an arbitration request against Movilnet<br />

before the Dirección Ejecutiva <strong>de</strong>l Centro <strong>de</strong> Arbitraje <strong>de</strong> la Cámara <strong>de</strong> Comercio <strong>de</strong> Caracas<br />

(the “Executive Direction of the Arbitration Center of the Caracas Commercial Chamber”),<br />

claiming damages of Bs. 20.4 billion alleging a <strong>de</strong>fault by Movilnet un<strong>de</strong>r an agreement dated<br />

September 19, 2000. On October 8, 2003, Movilnet answered these claims and on January 16,<br />

2004, an Arbitration Court was installed to hear the case. In September 2004, the Arbitration<br />

Court found in favor of the commercial party, and required a payment of Bs. 8.0 billion by<br />

Movilnet, which was paid in January 2005. In October 2005, this commercial party filed a new<br />

lawsuit before a Commercial Court for damages of Bs. 257.0 billion due to alleged <strong>de</strong>fault un<strong>de</strong>r<br />

the same commercial agreement. This case went before the Supreme Court which ruled<br />

against the commercial party, due to the existence of an agreement to arbitrate. On November<br />

24, 2006, this commercial party filed a new claim before the Executive Direction of the<br />

Arbitration Center of the Caracas Commercial Chamber Bs. 38.0 billion for alleged loss of future<br />

income due to alleged <strong>de</strong>fault un<strong>de</strong>r the same commercial agreement. On February 28, 2007,<br />

Movilnet answered this claim. In the opinion of external legal counsel, this second claim filed by<br />

the commercial party has a low probability of success; accordingly, no provision has been<br />

recor<strong>de</strong>d for this concept.<br />

Management believes that most of these cases and others will be resolved through<br />

negotiation and mediation processes, and that the total provision set asi<strong>de</strong> is reasonable as of<br />

December 31, 2007 to cover the contingencies consi<strong>de</strong>red probable and the cost of legal<br />

procedures. However, the timing for the utilization of this provision cannot been <strong>de</strong>termined.<br />

The Company consi<strong>de</strong>rs that it has recor<strong>de</strong>d the necessary provisions to cover each of<br />

the foregoing assessments and lawsuits based on the likelihood of their occurrence and the<br />

possibility of quantifying them.<br />

Pension litigation and Supreme Court Ruling<br />

In September 2004, the Sala <strong>de</strong> Casación Social <strong>de</strong>l Tribunal Supremo <strong>de</strong> Justicia (the<br />

“Social Chamber of the Supreme Court”) issued its ruling dismissing the pension payments<br />

litigation brought against CANTV by the Fe<strong>de</strong>ración Nacional <strong>de</strong> Jubilados y Pensionados <strong>de</strong><br />

Teléfonos <strong>de</strong> Venezuela (“FETRAJUPTEL”) (the National Fe<strong>de</strong>ration of CANTV Retirees and<br />

Pensioners). In January 2005, the Sala Constitucional <strong>de</strong>l Tribunal Supremo <strong>de</strong> Justicia (the<br />

“Constitutional Chamber of the Supreme Court) allowed an appeal filed by some members of<br />

the Asociación <strong>de</strong> Jubilados y Pensionados <strong>de</strong> Teléfonos <strong>de</strong> Venezuela (“AJUPTEL-Caracas”)<br />

(Caracas Association of CANTV Retirees and Pensioners) against the <strong>de</strong>cision of the Social<br />

Chamber of the Supreme Court issued in September 2004. The Constitutional Chamber of the<br />

Supreme Court <strong>de</strong>clared the prior <strong>de</strong>cision annulled and reman<strong>de</strong>d the case to the Social<br />

Chamber of the Supreme Court for a new ruling consistent with its <strong>de</strong>cision. The Constitutional<br />

Chamber of the Supreme Court’s <strong>de</strong>cision, issued in January 2005, also indicated that retiree<br />

pensions would be subject to adjustment up to the official minimum urban wage.<br />

54


In January 2005, CANTV’s management, based on the opinion of its external legal<br />

counsel, believed at the time that certain matters un<strong>de</strong>r court review would be <strong>de</strong>ci<strong>de</strong>d on<br />

appeal in favor of CANTV, and the Company estimated for year-end 2004 a provision to cover<br />

the potential additional liability with respect to the remaining matters. In accordance with the<br />

applicable accounting principles, the estimated effect in the pension projected benefit obligation<br />

was Bs. 71.9 billion, which was recor<strong>de</strong>d in the consolidated financial statements of 2004 as a<br />

provision for pension.<br />

On July 26, 2005, the Social Chamber of the Supreme Court issued its revised <strong>de</strong>cision in<br />

the lawsuit brought by FETRAJUPTEL regarding the adjustment of pensions of retirees of<br />

CANTV. The <strong>de</strong>cision required CANTV to adjust the pensions of retirees up to the official<br />

minimum urban wage, retroactive to December 30, 1999. In addition, the <strong>de</strong>cision indicated that<br />

pensions below the official minimum urban wage should be adjusted in proportion to the salary<br />

increases that resulted from the collective bargaining process from January 1, 1993 to<br />

December 1999. This <strong>de</strong>cision applied to current and future retirees and their eligible survivors.<br />

On October 14, 2005, the Social Chamber of the Supreme Court <strong>de</strong>nied a request for<br />

clarification of the July 26, 2005 <strong>de</strong>cision filed by the parties.<br />

On December 31, 2005, CANTV, based on the interpretation of the ruling that required<br />

that pensions paid after December 30, 1999 should not be lower than the official minimum<br />

urban wage, recor<strong>de</strong>d an additional expense and raised to Bs. 764.6 billion its accumulated<br />

provision related to additional pension obligations due to the Supreme Court ruling to reflect the<br />

estimated additional pension liability, which was estimated based on actuarial calculations<br />

including the retroactive payments and the projected benefit obligation, and incorporating the<br />

new assumption related to the minimum urban wage increase as a percentage of projected<br />

future inflation.<br />

The execution of the Social Chamber of the Supreme Court’s ruling was being<br />

administered by the Juzgado Quinto <strong>de</strong> Primera Instancia <strong>de</strong> Sustanciación, Mediación y<br />

Ejecución <strong>de</strong>l Área Metropolitana <strong>de</strong> Caracas, (“the Execution Court”) (the Fifth Court of First<br />

Instance of Substantiation, Mediation and Execution of the Metropolitan Area of Caracas), which<br />

appointed the Central Bank of Venezuela to perform the necessary calculations to <strong>de</strong>termine<br />

the actual amounts due to the beneficiaries. On June 6, 2006, the Central Bank of Venezuela<br />

conclu<strong>de</strong>d its analysis of damages but failed to specify the amount payable by CANTV to each<br />

retiree pursuant to the Social Chamber of the Supreme Court’s ruling, and <strong>de</strong>fined eight<br />

possible payment scenarios <strong>de</strong>pending on the inclusion of different items. Both parties objected<br />

the analysis, and therefore, the Execution Court appointed the Ministry of the Popular Power for<br />

Finance and SENIAT to perform a new expert calculation.<br />

Pursuant to the ruling of the Social Chamber of the Supreme Court, CANTV agreed to<br />

adjust current pension payments up to the official minimum urban wage beginning February 1,<br />

2006. However, in accordance with the criteria of the Execution Court, valid adjustments could<br />

only be ma<strong>de</strong> individually upon written request from the beneficiary whose pension fell below<br />

the minimum urban wage level.<br />

On August 2, 2006, the Execution Court issued its ruling which revoked the appointment<br />

of the Ministry of the Popular Power for Finance and appointed the Contraloría General <strong>de</strong> la<br />

República (the “General Controller’s Office”) in its place.<br />

55


In August 2006, the Execution Court <strong>de</strong>ci<strong>de</strong>d that beginning September 1, 2006, CANTV<br />

had to adjust all retirees’ pensions that were lower than the official minimum urban wage to the<br />

new effective minimum urban wage and it lifted the written request requirement. Beginning<br />

September 1, 2006, none of CANTV’s pension beneficiaries is collecting monthly pension<br />

payments lower than the minimum urban wage.<br />

On November 14, 2006, the General Controller’s Office and SENIAT issued the new<br />

expert report.<br />

On December 13, 2006, the Juzgado Trigésimo Séptimo <strong>de</strong> Primera Instancia <strong>de</strong><br />

Sustanciación, Mediación y Ejecución <strong>de</strong>l Trabajo <strong>de</strong>l Circuito Judicial <strong>de</strong>l Área Metropolitana<br />

<strong>de</strong> Caracas, (the “Thirty Seventh Court of First Instance of Substantiation, Mediation and Labor<br />

Execution of the Circuit Court of the Metropolitan Area of Caracas”) announced its ruling that<br />

the amounts due and the corresponding payments to retirees had been finally <strong>de</strong>termined, and<br />

the calculations of the two new in<strong>de</strong>pen<strong>de</strong>nt experts were <strong>de</strong>livered as or<strong>de</strong>red by the Execution<br />

Court. CANTV agreed to make the retroactive payments to more than 4,000 retirees to provi<strong>de</strong><br />

an adjusted pension equal to the minimum wage pursuant to the Execution Court’s <strong>de</strong>cision.<br />

For the cases CANTV had accepted, the final <strong>de</strong>termination of retroactive payments resulted in<br />

an additional Bs. 23.0 billion pension obligation expense and liability. However, CANTV<br />

appealed the <strong>de</strong>cision expressing disagreement with the expert’s methodology and benefits<br />

calculation, mainly in those cases in which pension adjustments would result in payments in<br />

excess of the minimum wage. In 2006, CANTV created a trust fun<strong>de</strong>d with Bs. 153.9 billion in<br />

or<strong>de</strong>r to cover the retroactive obligation as a result of the Supreme Court ruling.<br />

On April 16, 2007, the Tribunal Segundo Superior para el Régimen Procesal Transitorio<br />

<strong>de</strong>l Área Metropolitana <strong>de</strong> Caracas (the “Second Court for the Transitory Procedural Regime of<br />

the Circuit Court of the Metropolitan Area of Caracas”) announced its <strong>de</strong>cision on the<br />

<strong>de</strong>termination of retroactive payments performed by the appointed experts and approved by the<br />

Thirty Seventh Court of First Instance of Substantiation, Mediation and Labor Execution of the<br />

Metropolitan Area of Caracas on December 13, 2006. The <strong>de</strong>cision rejected the majority of the<br />

claims introduced by pension beneficiaries and also <strong>de</strong>clined to consi<strong>de</strong>r CANTV’s claim<br />

regarding the calculations of amounts exceeding the official minimum urban wage benefits. On<br />

April 24, 2007, CANTV filed an appeal with the Social Chamber of the Supreme Court of the<br />

<strong>de</strong>cision of the Second Court for the Transitory Procedural Regime of the Circuit Court of the<br />

Metropolitan Area of Caracas of the calculations performed by the experts with respect to<br />

amounts exceeding the official minimum urban wage benefits.<br />

On July 13, 2007, CANTV announced that it agreed to accept the <strong>de</strong>cision issued on<br />

December 13, 2006 by the Thirty Seventh Court of First Instance of Substantiation, Mediation<br />

and Labor Execution of the Circuit Court of the Metropolitan Area of Caracas, which was<br />

confirmed on April 16, 2007 by the Second Court for the Transitory Procedural Regime of the<br />

Circuit Court of the Metropolitan Area of Caracas. CANTV thereby agreed to accept the final<br />

<strong>de</strong>cision to be ren<strong>de</strong>red by the Social Chamber of the Supreme Court in the appeal of the<br />

<strong>de</strong>cision of the Second Court for the Transitory Procedural Regime of the Circuit Court of the<br />

Metropolitan Area of Caracas. In the event that the appeal was admitted, the Company would<br />

pay any additional amounts due to retirees as a result of the final ruling.<br />

In August 2007, CANTV proposed the execution of a Master Agreement by the retirees in<br />

or<strong>de</strong>r for them to receive the corresponding retroactive pension payments.<br />

56


In September 2007, the Procuraduría General <strong>de</strong> la República (the “Attorney General’s<br />

Office”) recommen<strong>de</strong>d that retirees should sign the Master Agreement at the Mediation Board at<br />

the Supreme Court, so that any differences or calculation errors as well as any other<br />

disagreements regarding any items to be recognized could be resolved in that setting. On<br />

October 10, 2007 CANTV and its retirees began meetings at the Supreme Court for the signing<br />

of the Master Agreement and installed the Mediation Board in Caracas and in other five regions<br />

of the country.<br />

The Master Agreement contemplates payments to retirees of the amounts established in<br />

the <strong>de</strong>cision issued by Thirty Seventh Court of First Instance of Substantiation, Mediation and<br />

Labor Execution of the Circuit Court of the Metropolitan Area of Caracas, which was confirmed<br />

on April 16, 2007 by the Second Court for the Transitory Procedural Regime of the Circuit Court<br />

of the Metropolitan Area of Caracas. Additionally, CANTV updated the amounts due to the<br />

payment date and increased the amounts to be paid to its retirees based on the salary increase<br />

established in the collective bargaining agreement for 2007-2009. The Master Agreement<br />

covers all retirees i<strong>de</strong>ntified in this court <strong>de</strong>cision and all those who <strong>de</strong>ci<strong>de</strong> to become parties.<br />

In addition, CANTV <strong>de</strong>ci<strong>de</strong>d to extend the Master Agreement to the retirees’ survivors, after<br />

their status has been legally certified in accordance with the applicable court rules.<br />

During 2007, 7,239 persons signed the Master Agreement, and the payments ma<strong>de</strong><br />

related to the December 13, 2006 court <strong>de</strong>cision were Bs.166.1 billion.<br />

During 2007, as a consequence of the Master Agreement, the Company recor<strong>de</strong>d an<br />

additional expense of Bs. 291.1 billion, which inclu<strong>de</strong>s Bs. 77.2 billion of retroactive benefits. In<br />

addition, the Company recor<strong>de</strong>d as an expense Bs. 71.1 billion for the Monthly Incentive, which,<br />

beginning in January 2008, is being paid to the retirees as <strong>de</strong>termined during the Mediation<br />

Board process managed by the Social Chamber of the Supreme Court.<br />

Trading Markets<br />

Section VI. Trading Information<br />

Following the initial public offering of CANTV’s Class D shares on November 22, 1996,<br />

the Class D shares began trading on the Caracas Stock Exchange un<strong>de</strong>r the symbol “TDV.d”.<br />

At the same time, the ADSs, each representing seven Class D shares, began trading on the<br />

NYSE un<strong>de</strong>r the symbol “VNT.” The Bank of New York is the Depositary for the ADSs.<br />

On June 18, 2007, the NYSE filed a notification with the SEC to <strong>de</strong>-list the ADSs from<br />

the NYSE. The <strong>de</strong>-listing became effective on June 28, 2007.<br />

On June 30, 2008, CANTV filed a Form 15F with the SEC to <strong>de</strong>register its Class D<br />

shares (including the Class D shares represented by its ADSs) from the SEC and terminate its<br />

reporting obligations un<strong>de</strong>r the Exchange Act pursuant to Rule 12h-6 un<strong>de</strong>r the Exchange Act.<br />

Subject to a number of conditions, Rule 12h-6 permits <strong>de</strong>registration of a class of registered<br />

securities if the ADTV of a class in United States for a recent 12-month period has been no<br />

greater than 5% of the ADTV of the class on a worldwi<strong>de</strong> basis for the same period. CANTV’s<br />

reporting obligations un<strong>de</strong>r the Exchange Act (including the obligation to file the annual report<br />

on Form 20-F that would have otherwise been due in June 30, 2008) were suspen<strong>de</strong>d<br />

immediately upon filing of the Form 15F. The <strong>de</strong>registration and termination of reporting will<br />

become effective 90 days after the filing (unless the Form 15F is earlier withdrawn by CANTV).<br />

57


The Venezuelan securities market is substantially smaller, less liquid and more volatile<br />

than the securities market in the U.S. and certain other countries. At May 30, 2008, the<br />

aggregate market capitalization of the 17 largest Venezuelan companies listed on the Caracas<br />

Stock Exchange was Bs. 11,816.4 billion (U.S.$5,496 million), of which the Company comprised<br />

Bs. 1,552.0 billion (U.S.$722 million), which represents 13.1% of total market capitalization.<br />

On February 12, 2007, the Republic announced that it had entered into the<br />

Memorandum of Un<strong>de</strong>rstanding with Verizon and Verizon’s subsidiary GTE Venholdings to<br />

acquire Verizon’s equity stake in the Company. On February 13, 2007, following this<br />

announcement, the CNV suspen<strong>de</strong>d the trading of CANTV’s shares in the Venezuelan market<br />

for 24 hours.<br />

On March 30, 2007, the CNV suspen<strong>de</strong>d trading of CANTV’s shares in the Venezuelan<br />

market after receiving a communication from the Ministry of the Popular Power for<br />

Telecommunications and Information Technology of the Republic’s intention to commence a<br />

ten<strong>de</strong>r offer for the shares of CANTV. The suspension was for four business days until the CNV<br />

completed its review of the ten<strong>de</strong>r offer and approved the terms of the ten<strong>de</strong>r offer on April 4,<br />

2007.<br />

On April 8 and 9, 2007, respectively, the Republic commenced concurrent public ten<strong>de</strong>r<br />

offers in Venezuela to purchase any and all shares of CANTV’s outstanding capital stock, other<br />

than those already owned by the Republic, and in the United States to purchase any and all of<br />

CANTV’s outstanding ADSs, each representing seven Class D shares. The purchase price paid<br />

in the U.S. Offer was U.S.$14.84791 per ADS. The purchase price paid in the Venezuelan<br />

Offer was the bolivar equivalent of U.S.$2.12113 per share based on the official exchange rate<br />

for the sale of dollars established by the Central Bank of Venezuela as of the settlement date for<br />

the Venezuelan Offer on the Caracas Stock Exchange. The Offers expired on May 8, 2007.<br />

On May 16, 2007, the Republic announced that it had purchased, through the Ministry of<br />

the Popular Power for Telecommunications and Information Technology, 61,257,605 ADSs<br />

(representing an aggregate of 428,803,235 Class D shares) ten<strong>de</strong>red in the U.S. Offer, and<br />

197,949,721 common shares ten<strong>de</strong>red in the Venezuelan Offer. Payment for the common<br />

shares and ADSs was ma<strong>de</strong> on or about May 21, 2007. The common shares and ADSs<br />

acquired by the Republic pursuant to the Offers (which inclu<strong>de</strong>d all of the shares and ADSs<br />

previously owned by Verizon), together with the 51,900,000 Class B shares already held by<br />

BANDES and the Ministry of the Popular Power for Infrastructure, represented an aggregate of<br />

approximately 86.2% of the outstanding shares of CANTV’s capital stock owned by the<br />

Republic.<br />

On March 31, 2008, the Republic entered into a purchase agreement with Renaissance<br />

to acquire 3,613,996 ADSs (representing 25,297,972 Class D shares) of CANTV owned by<br />

Renaissance. On April 1, 2008, following this announcement, the CNV suspen<strong>de</strong>d the trading<br />

of CANTV’s shares for 24 hours.<br />

The acquisition was consummated on April 4, 2008. The consi<strong>de</strong>ration paid to<br />

Renaissance consisted of a purchase price U.S.$11.27 per ADS, plus and an amount equal to<br />

the ordinary and extraordinary divi<strong>de</strong>nds, aggregating U.S.$2.88 per ADS, <strong>de</strong>clared by an<br />

Ordinary Sharehol<strong>de</strong>rs’ Assembly on March 31, 2008. As a result of the consummation of the<br />

Renaissance transaction, the Republic acquired 25,297,972 Class D shares which, together<br />

with 626,752,956 Class D shares owned by the Republic, through the Ministry of the Popular<br />

58


Power for Telecommunications and Information Technology, and the 51,900,000 Class B<br />

shares held by BANDES and the Ministry of the Popular Power for Infrastructure, represent an<br />

aggregate of 89.4% of the outstanding common shares of CANTV which are owned by the<br />

Republic. As of June 26, 2008, all Class D shares owned by the Republic were converted into<br />

Class B shares pursuant to a provision of CANTV’s by-laws.<br />

On March 31, 2008, the Republic announced that as a result of its acquisition of ADSs<br />

from Renaissance, Venezuelan law requires the Republic to offer to purchase any and all of the<br />

other outstanding ADSs and Class D shares of CANTV not already owned by the Republic on<br />

the date the offer commences (i) at a price, payable in U.S. dollars, of U.S.$11.27 per ADS for<br />

ADSs, and (ii) at a price, payable in bolivars, of the Bolivar equivalent of U.S.$1.61 per share,<br />

calculated at the official exchange rate in the Republic for the sale of U.S. dollars by the Central<br />

Bank of Venezuela, in effect on the date of the settlement of the offer in a special session on the<br />

Caracas Stock Exchange, for shares that are not represented by ADSs (being the U.S.$11.27<br />

per ADS price divi<strong>de</strong>d by seven to reflect that each ADS represents seven Class D shares). It is<br />

contemplated that hol<strong>de</strong>rs of CANTV’s Class C shares will be able to participate in the offer by<br />

converting their Class C shares into Class D shares in accordance with the procedure<br />

established in CANTV’s by-laws. As of the date of this report, it is CANTV’s un<strong>de</strong>rstanding that<br />

the Republic is continuing to consi<strong>de</strong>r an appropriate structure for the transaction, and that it will<br />

continue to make available updated information as it becomes available.<br />

59


Share Price Information<br />

The table below sets forth, for the periods indicated, the reported high and low sale<br />

prices and average trading volume for the Class D shares on the Caracas Stock Exchange:<br />

High<br />

Caracas Stock Exchange<br />

Low Average<br />

(Bs.) (Bs.) Trading Volume<br />

Annual highs and lows<br />

2003 6,700.00 2,250.00 116,880<br />

2004 9,500.00 6,325.00 209,953<br />

2005 8,450.00 4,500.00 68,229<br />

2006 9,850.00 5,100.00 74,859<br />

2007 9,780.00 2,250.00 14,327<br />

Quarterly highs and lows<br />

2006<br />

1st quarter 7,751.00 5,100.00 60,672<br />

2nd quarter 8,200.00 6,800.00 251,577<br />

3rd quarter 7,600.00 7,200.00 69,586<br />

4th quarter 9,850.00 7,600.00 65,319<br />

2007<br />

1st quarter 9,780.00 6,820.00 73,473<br />

2nd quarter 7,001.00 3,025.00 45,623<br />

3rd quarter 3,200.00 2,455.00 10,838<br />

4th quarter 2,800.00 2,250.00 8,741<br />

Monthly highs and lows<br />

2007<br />

July 3,200.00 3,000.00 11,757<br />

August 3,200.00 3,000.00 11,084<br />

September 3,000.00 2,455.00 9,313<br />

October 2,800.00 2,555.50 7,030<br />

November 2,800.00 2,350.00 5,556<br />

December 4,463.75 2,250.00 14,691<br />

2008<br />

January (1) 2,500.00 2,300.00 5,751<br />

February (1) 2,500.00 2,400.00 5,460<br />

March (1) 3,990.00 2,680.00 12,331<br />

April (1) 5,750.00 4,050.00 26,357<br />

May (1) 4,500.00 3,610.00 5,181<br />

June (1) 3,800.00 3,700.00 7,585<br />

(1) Pursuant to the Monetary Conversion Law, and only for comparison purposes with the share prices of 2007 and<br />

prior years, the share prices of year 2008 (originally expressed in Bs.F.), have been multiplied by 1,000 to<br />

convert them into Bs., the same monetary unit that was in effect until December 31, 2007.<br />

60


The table below sets forth, for the periods indicated, the reported annual high and low sale<br />

prices and the average trading volume for the ADSs on the NYSE:<br />

High<br />

NYSE<br />

Low Average<br />

(U.S.$) (U.S.$) Trading Volume<br />

Annual highs and lows<br />

2003 16.85 8.63 188,410<br />

2004 24.20 15.60 212,928<br />

2005 21.76 12.13 291,735<br />

2006<br />

2007<br />

22.75 13.89 299,462<br />

(1) 19.98 11.22 911,206<br />

Quarterly highs and lows<br />

2006<br />

1st quarter 21.50 13.89 413,656<br />

2nd quarter 22.75 17.97 348,073<br />

3rd quarter 19.95 19.00 196,694<br />

4th quarter 19.95 18.90 241,237<br />

2007<br />

1st quarter 19.98 11.22 1,187,279<br />

2nd quarter (1) 17.30 14.42 263,496<br />

(1) Through May 8, 2007. CANTV’s ADSs were tra<strong>de</strong>d in the NYSE until May 8, 2007.<br />

Inflation<br />

Section VII. Additional Information<br />

Venezuela has historically experienced high levels of inflation. The rate of inflation as<br />

measured by the Consumer Price In<strong>de</strong>x was 19.2%, 14.4%, 17.0% and 22.5% for the years<br />

2004 to 2007, and as the rate of inflation measured by the Wholesale Price In<strong>de</strong>x was 22.4%,<br />

14.2%, 15.9% and 17.2% for the years 2004 to 2007. The rate of inflation as measured by the<br />

Consumer Price In<strong>de</strong>x was 12.4% for the five months en<strong>de</strong>d May 31, 2008.<br />

The Venezuelan Government has established a series of measures to curb inflation,<br />

among which are reduction of the value-ad<strong>de</strong>d tax rate, establishment of price controls since<br />

February 2003, interest rate increases and dollar-<strong>de</strong>nominated bond issues placed in the local<br />

market and tradable in international markets.<br />

High inflation rates can adversely affect our business and results of operations by<br />

adversely affecting consumer purchasing power and consumer <strong>de</strong>mand for our services, and, to<br />

the extent inflation exceeds our price increases.<br />

61


Exchange Controls<br />

On January 21, 2003, the Venezuelan Government, by means of an agreement with the<br />

Central Bank of Venezuela, suspen<strong>de</strong>d the trading of foreign currencies in the country for ten<br />

business days.<br />

Beginning February 5, 2003, several Exchange Agreements were published set out the<br />

rules for the foreign currency administration regime and the exchange rate applicable for<br />

transactions set forth in the Exchange Agreements.<br />

CADIVI was created, with the and has functions of coordinate, manage, control and<br />

establish the requirements, procedures and restrictions for the execution of the Exchange<br />

Agreements. CADIVI has issued several rulings related to the registration, gui<strong>de</strong>lines,<br />

requirements and conditions related to the foreign currency administration regime.<br />

On May 21, 2007, the Venezuelan Government assumed operating control of the<br />

Company, when it acquired ownership of 86.2% of CANTV’s shares. Beginning on that date,<br />

the Company is subject to Rulings No. 44 and No. 46, which establish the requirements,<br />

controls and procedures for the acquisition of foreign currency for public sector purposes,<br />

including importation of goods and services, payment of contracts for construction or services,<br />

and other payments by the public sector not inclu<strong>de</strong>s in the Exchange Agreements.<br />

In addition, the Exchange Agreements establish that public sector entities are allowed to<br />

maintain foreign exchange currency <strong>de</strong>posits in accounts abroad, as long as they are authorized<br />

by the Central Bank of Venezuela, for payments of obligations related to importation of goods<br />

and services required for their operations. These <strong>de</strong>posits of foreign currency in accounts<br />

abroad must only be used to pay obligations <strong>de</strong>nominated in foreign currency and payable<br />

abroad, and any excess over the amounts authorized by the Central Bank of Venezuela must<br />

be sold to the Central Bank of Venezuela, unless they are duly justified. The maximum amount<br />

authorized by the Central Bank of Venezuela for the Company is a monthly average of<br />

U.S.$63.36 million.<br />

The different official exchange rates set un<strong>de</strong>r the exchange control regime since it was<br />

established area as follows:<br />

a) On February 5, 2003, the exchange rate was set at Bs. 1,596.20 per U.S.$1 for<br />

purchase and Bs. 1,600,00 per U.S.$1 for sale.<br />

b) On February 9, 2004, the exchange rate was set at Bs. 1,915.20 per U.S.$1 for<br />

purchase and Bs. 1,920,00 per U.S.$1 for sale.<br />

c) On March 2, 2005, the exchange rate was set at Bs. 2,144.60 per U.S.$1 for<br />

purchase and Bs. 2,150,00 per U.S.$1 for sale, which have not been modified and<br />

remain as the current official exchange rates.<br />

Since the implementation of the exchange controls regime in February 2003, the<br />

Company’s requests to CADIVI, and approvals and foreign currency received from CADIVI, for<br />

2003, 2004, 2005, 2006 and 2007 are <strong>de</strong>tailed as follows:<br />

62


2003 2004 2005 2006 2007 Total<br />

(in millions of U.S.$)<br />

Requests<br />

Goods and services 96.5 271.6 601.7 1,178.5 193.4 2,341.7<br />

Debt payments 137.8 24.2 48.6 10.7 8.2 229.5<br />

Divi<strong>de</strong>nds 160.8 158.0 186.8 192.3 377.8 1,075.7<br />

Total requests 395.1 453.8 837.1 1,381.5 579.4 3,646.9<br />

Approvals<br />

Goods and services 84.3 201.6 577.6 1,116.7 183.5 2,163.7<br />

Debt payments 18.5 129.1 63.0 10.7 8.2 229.5<br />

Divi<strong>de</strong>nds 24.1 294.7 186.8 - 570.1 1,075.7<br />

Total approvals 126.9 625.4 827.4 1,127.4 761.8 3,468.9<br />

Received<br />

Goods and services 32.3 138.9 361.9 639.1 727.1 1,899.3<br />

Debt payments 18.5 129.1 63.0 10.7 8.2 229.5<br />

Divi<strong>de</strong>nds 24.1 294.7 186.8 - 570.1 1,075.7<br />

Total received 74.9 562.7 611.7 649.8 1,305.4 3,204.5<br />

The Company continues processing the necessary formalities required by CADIVI for the<br />

application of additional foreign currency.<br />

Taxes and Contributions<br />

During 2005, 2006 and 2007, the Company recor<strong>de</strong>d income tax, telecommunications tax<br />

and other operating taxes <strong>de</strong>tailed as follows (in millions of bolivars):<br />

63<br />

2005 2006 2007<br />

Income tax 147,881 186,576 298,626<br />

Telecommunications taxes 210,002 285,537 362,500<br />

Municipal taxes 13,798 10,265 13,304<br />

Value-ad<strong>de</strong>d tax 46,901 59,759 28,176<br />

Bank <strong>de</strong>bit tax 20,072 2,427 -<br />

Municipal tax on telecommunications services - 65,603 82,553<br />

Other taxes 4,389 5,601 3,298<br />

Total taxes 443,043 615,768 788,457<br />

In addition the Company is subject to the payment of labor contributions, including Seguro<br />

Social Obligatorio (“Social Security”), Seguro <strong>de</strong> Paro Forzoso (“Unemployment”), Ley <strong>de</strong><br />

Política Habitacional (“Housing Policy Law”) and Instituto Nacional <strong>de</strong> Cooperación Educativa<br />

(“Worker training”), among others. For the years en<strong>de</strong>d December 31, 2005, 2006 and 2007,<br />

the expense recor<strong>de</strong>d for these contributions in the Company’s consolidated results are as<br />

follows (in millions of bolivars):<br />

2005 2006 2007<br />

Social security 15,557 20,301 25,595<br />

Unemployment 3,842 5,437 6,841<br />

Housing policy law 4,955 5,619 6,677<br />

Worker training 5,174 6,760 7,454<br />

Other contributions 3,119 3,271 11,261<br />

Total contributions 32,647 41,388 57,828


Employees<br />

CANTV has unionized and non-unionized employees. The CANTV’s unionized<br />

employees are members of 28 separate labor unions which <strong>de</strong>al with CANTV either directly or<br />

through the Fe<strong>de</strong>ración <strong>de</strong> Trabajadores <strong>de</strong> Telecomunicaciones <strong>de</strong> Venezuela (“FETRATEL”)<br />

(Fe<strong>de</strong>ration of Telecommunications Workers of Venezuela). As of December 31, 2007,<br />

approximately 3,166 employees were members of a labor union, representing approximately<br />

51.7% of CANTV’s 6,124 employees and approximately 32.3% of the Company’s 9,808<br />

employees.<br />

On July 17, 2002, a new labor contract agreement was signed between CANTV and<br />

FETRATEL. This agreement was due to expire in June 2004 but remained in force pursuant to<br />

the Labor Law which allows up to three years for expiration until a new labor agreement is<br />

reached.<br />

In February 2004 FETRATEL presented a proposal to the Ministerio <strong>de</strong>l Po<strong>de</strong>r Popular<br />

para el Trabajo y Seguridad Social (the “Ministry of the Popular Power for Labor and Social<br />

Security”) to negotiate a new contract to replace the June 2002 agreement. CANTV presented<br />

a proposal to FETRATEL to extend the conditions and provisions inclu<strong>de</strong>d in the 2002-2004<br />

agreement until June 2005, pursuant to the Labor Law. This proposal was accepted by 20 of<br />

the unions registered with FETRATEL through the execution of an agreement which exten<strong>de</strong>d<br />

the 2002-2004 agreement in exchange for a special bonus for each employee. However, the<br />

remaining unions did not agree to this extension. The extension expired on August 30, 2005<br />

once the 2005-2007 labor agreement was finalized upon its filing with the Ministry of the Popular<br />

Power for Labor and Social Security, effective retroactively from June 18, 2005.<br />

On May 16 2007, a new labor contract agreement was signed between CANTV and<br />

FETRATEL. This labor agreement would be in effect from June 18, 2007 until June 17, 2009,<br />

and was presented on May 21, 2008 to the Ministry of the Popular Power for Labor and Social<br />

Security for its approval. On January 31, 2008, the Ministry of the Popular Power for Labor and<br />

Social Security, notified CANTV and FETRATEL that the approval would be partial, and that<br />

they should renegotiate 11 clauses and 2 appendices, of a total of 86 clauses and 11<br />

appendices, and that the remaining clauses and appendices of the labor contract agreement<br />

would be in effect. On July 25, 2008, CANTV and FETRATEL reached a final agreement<br />

regarding the 11 clauses and the 2 appendices of the labor agreement that were pending, and<br />

were presented on July 28, 2008 to the Ministry of the Popular Power for Labor and Social<br />

Security for its approval.<br />

CANTV has three pension plans: normal, <strong>de</strong>ferred and special. The normal pension<br />

plan is available to workers meeting certain age and/or service criteria. The <strong>de</strong>ferred pension<br />

plan is applicable to those workers that CANTV retains beyond the time of normal retirement.<br />

The special pension plan is available to certain workers who have completed at least 20 years<br />

of service (14 years for people employed as of June 23, 1995) and who CANTV dismissed<br />

without just cause.<br />

During 2007, the Company <strong>de</strong>ci<strong>de</strong>d to establish a <strong>de</strong>fined contribution pension plan for<br />

all employees of the subsidiaries Movilnet, CANTV.Net and Caveguías, and for those<br />

employees of CANTV who began their employment on May 21, 2007 or thereafter. The plan<br />

comprises a 3% contribution from the employee and 3% contribution from the Company. The<br />

64


Company has no further payment obligations once the contributions have been paid. The<br />

contributions are recognized as employee benefit expense when they are due.<br />

In 1993 the Company set up a bank trust fund known as the “Benefit Fund” with the<br />

purpose of acquiring Class C shares representing up to 1% of CANTV’s capital stock as of<br />

December 2, 1991, to be distributed to its workers in accordance with benefit plans promoted by<br />

the Company, one of which is the “Excellence Award.” On October 24, 2001, an Extraordinary<br />

Sharehol<strong>de</strong>rs’ Assembly approved the increase of this fund via the purchase of Class C shares<br />

representing up to 2% of the Company’s capital stock as of December 2, 1991. As December<br />

31, 2007, the trust maintained 2,883,099 shares. During the year en<strong>de</strong>d December 31, 2007,<br />

288,125 shares were granted to employees.<br />

In September 2007, the Company conducted a plan to award Class C shares to active<br />

employees and retirees, as part of a commitment ma<strong>de</strong> by the Ministry of the Popular Power for<br />

Telecommunications and Information Technology in connection with the ten<strong>de</strong>r offer. The plan<br />

consisted of granting one share for each two shares owned by each employee and retiree as of<br />

May 28, 2007. Pursuant to this plan, 9,577,859 shares were granted to 5,017 employees and<br />

retirees.<br />

Legal Framework Applicable to State-owned Companies in Venezuela<br />

On May 21, 2007, the Republic, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, assumed operating control of the Company<br />

when it acquired ownership of 86.2% of the capital stock of CANTV. Beginning on that date, the<br />

Company is subject to the legal dispositions applicable to <strong>de</strong>centralized entities of the public<br />

sector, including the following:<br />

Public Administration Organic Law<br />

The purpose of the Ley Orgánica <strong>de</strong> la Administración Pública (the “Public Administration<br />

Organic Law”) is to establish the principles and gui<strong>de</strong>lines governing the organization and<br />

operations of the Public Administration; the National Public Administration and <strong>de</strong>centralized<br />

administration; to regulate performance commitments; to create structures to promote the<br />

participation in and control over public policy and results; and to establish the basic rules for<br />

public archives and registries.<br />

Un<strong>de</strong>r this Law, the Ministry of the Popular Power for Finance is required to keep a<br />

registry of the equity ownerships structure of Venezuelan State-owned companies and to submit<br />

this information semi-annually to the corresponding Commission of the Venezuelan National<br />

Assembly within 30 days before the beginning of the next six-month period.<br />

In addition, the Ministerio <strong>de</strong>l Po<strong>de</strong>r Popular para la Planificación y el Desarrollo (the<br />

“Ministry of the Popular Power for Planning and Development”) is required to <strong>de</strong>termine<br />

performance indicators for the management of State-owned companies such, and will establish<br />

the subscription of performance commitments with the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, as governing body of the Company.<br />

In addition, the Company must inform the Ministry of the Popular Power for<br />

Telecommunications and Information Technology of any subscription of an equity interest in the<br />

Company and of its financial results and submit relevant performance and other reports to the<br />

65


Ministry of the Popular Power for Telecommunications and Information Technology, as its<br />

governing body.<br />

Partial Amendment of the Organic Law of Financial Administration of the Public Sector and its<br />

Regulations<br />

Un<strong>de</strong>r the Ley <strong>de</strong> Reforma Parcial <strong>de</strong> la Ley Orgánica <strong>de</strong> la Administración Financiera <strong>de</strong>l<br />

Sector Público y sus Reglamentos (the “Partial Amendment of the Organic Law of Financial<br />

Administration of the Public Sector and its Regulations”), CANTV’s and its subsidiaries’ senior<br />

management must approve their annual performance budgets, which must be submitted to the<br />

Oficina Nacional <strong>de</strong> Presupuesto (“ONAPRE”) (the National Budgeting Office), through the<br />

Ministry of the Popular Power for Telecommunications and Information Technology, before<br />

September 30 of each fiscal year. In addition, CANTV is required to submit any information<br />

required by ONAPRE and to comply with its rules and technical requirements, as well as submit<br />

the financial statements and accounting information required by the Oficina Nacional <strong>de</strong><br />

Contabilidad Pública (“ONCOP”) (the National Office of Public Accounting), thereby adjusting its<br />

accounting procedures to the Sistema <strong>de</strong> Contabilidad Pública (the “Public Accounting<br />

System”), the unified and integrated system for all public sector entities.<br />

The budget must be prepared in accordance with instructions issued by ONAPRE,<br />

consi<strong>de</strong>ring the national plans <strong>de</strong>veloped within the general framework of the Plan <strong>de</strong> Desarrollo<br />

Económico y Social <strong>de</strong> la Nación (the “Nation’s Plan for Economic and Social Development”),<br />

the annual policy agreement, the gui<strong>de</strong>lines for national <strong>de</strong>velopment and the Ley <strong>de</strong>l Marco<br />

Plurianual <strong>de</strong>l Presupuesto (the “Multiannual Budget Framework Law”), and it must contain the<br />

policies, strategic objectives, products and indicators in the Plan Operativo Anual (the “Annual<br />

Operating Plan”).<br />

The Company must also coordinate the timing of the physical and financial execution of its<br />

budget financial resources and expenses with the preparation of its budget proposal, pursuant<br />

to the sub-periods, rules and procedures established by ONAPRE.<br />

Organic Law for Planning<br />

The Ley Orgánica <strong>de</strong> Planificación (the “Organic Law for Planning”) establishes the basis<br />

and gui<strong>de</strong>lines for the preparation, practicability, improvement and organization of planning for<br />

all public sector entities.<br />

The Company must submit information regarding its programs, projects and actions to be<br />

<strong>de</strong>veloped during the fiscal year to the Ministry of the Popular Power for Telecommunications<br />

and Information Technology, which as its governing body will inform the Ministry of the Popular<br />

Power for the Planning and Development, to fulfill planning requirements and ensure<br />

compliance with the Law.<br />

Organic Law of the General Controller of the Republic and National System of Tax Control<br />

The Ley Orgánica <strong>de</strong> la Contraloría General <strong>de</strong> la República y <strong>de</strong>l Sistema Nacional <strong>de</strong><br />

Control Fiscal (the “Organic Law of the General Controller of the Republic and National System<br />

of Tax Control”) establishes that the Company is subject to the control, oversight and fiscal<br />

review of the General Controller’s Office, and must comply with the internal and external control<br />

rules established by this Law. Violations of this Law by actions, events or omissions that cause<br />

damage to the national wealth will result in administrative responsibility.<br />

66


The Company is required to assign an internal auditor in accordance with the open<br />

competition procedures established in the Reglamento sobre los Concursos Públicos para la<br />

Designación <strong>de</strong> los Contralores Distritales y Municipales, y los Titulares <strong>de</strong> las Unida<strong>de</strong>s <strong>de</strong><br />

Auditoria Interna <strong>de</strong> los Órganos <strong>de</strong>l Po<strong>de</strong>r Público Nacional, Estadal, Distrital y Municipal y sus<br />

Entes Descentralizados (the “Rules for Open Competition for the Designation of District and<br />

Municipal Controllers, and Internal Auditors of Organisms of the Public Sector of the Nation,<br />

States, Districts and Municipalities and Decentralized Entities”).<br />

When public administrators or those who manage or have custody of public assets or<br />

funds leave office, they must comply with the Normas para Regular la Entrega <strong>de</strong> los Órganos y<br />

Entida<strong>de</strong>s <strong>de</strong> la Administración Pública y <strong>de</strong> sus respectivas Oficinas o Depen<strong>de</strong>ncias (the<br />

“Standards Governing the Delivery of Organisms and Entities of the Public Administration and<br />

their respective Offices or Depen<strong>de</strong>ncies”).<br />

Anti-Corruption Law<br />

The provisions of the Ley Contra la Corrupción (the “Anti-Corruption Law”) are <strong>de</strong>signed to<br />

preserve public ethics and administrative morals, and prevent corruption by establishing legal<br />

rules in specific areas and circumstances. The objective is to prevent corruption and safeguard<br />

the national patrimony through moral principles (honesty, transparency, participation, efficiency,<br />

efficacy, legality, accountability and responsibility).<br />

Un<strong>de</strong>r the Anti-Corruption Law, members of the board of directors of State-owned<br />

companies are consi<strong>de</strong>red public officers and as such are subject to liability un<strong>de</strong>r this Law and<br />

the Organic Law of the General Controller of the Republic and National System of Tax Control.<br />

Also subject to this Law are those who perform management, supervisory, control and auditing<br />

functions; voting members of committees for purchasing, bidding, contracts and donations; and<br />

those who are authorized to transfer funds from the Company’s bank accounts.<br />

A violation of this Law will constitute a crime against the public interest and will be<br />

sanctioned in accordance with the Law.<br />

Public Contracting Law<br />

The Ley <strong>de</strong> Contrataciones Públicas (the “Public Contracting Law”) replaces the Ley <strong>de</strong><br />

Reforma Parcial <strong>de</strong> la Ley <strong>de</strong> Licitaciones y su Reglamento (the “Partial Amendment of the<br />

Bidding Law and its Regulations”). The Public Contracting Law rules the Venezuelan<br />

Government’s activities for acquisition of goods, ren<strong>de</strong>ring of services and execution of works.<br />

The Law establishes that are subject to direct award: contracting ob goods and services<br />

for commercialization with third parties; contracting of goods, services and works that could<br />

compromise the Company’s secrets or commercial strategies before its competitors; contracting<br />

related to the immediate reestablishment of services as a consequence of a interruption or<br />

failure.<br />

The Company must establish a Comisión <strong>de</strong> Contrataciones (“Contracting Commission”)<br />

and adjust its internal rules for the selection of contractors and suppliers, which must inclu<strong>de</strong><br />

rules to govern the authority of the internal organization to perform contracting processes.<br />

67


Organic Law that Regulates the Transfer of Assets of the Public Sector not Subject to Basic<br />

Industries and the related Rules<br />

According to the Ley Orgánica que Regula la Enajenación <strong>de</strong> Bienes <strong>de</strong>l Sector Público<br />

no Afectos a las Industrias Básicas y Normativa relacionada (the “Organic Law that Regulates<br />

the Transfer of Assets of the Public Sector not Subject to Basic Industries and the related<br />

Rules”), the Company must apply these rules to the disposition of all goods or assets that are<br />

not necessary to meet its objectives, as well as those that have been dismantled or are obsolete<br />

or damaged.<br />

A request for authorization to transfer goods or assets of the public sector must be ma<strong>de</strong><br />

before the Comisión para la Enajenación <strong>de</strong> Bienes <strong>de</strong>l Sector Público no Afectos a las<br />

Industrias Básicas (“CENBISP”) (the “Commission for the Transfer of Goods of the Public<br />

Sector not Subject to Basic Industries”), governed by the Ministry of the Popular Power for<br />

Finance, through the Secretaría Técnica (the “Technical Secretariat”).<br />

The base price for the transfer of the property of the Republic will be <strong>de</strong>termined by<br />

CENBISP, consi<strong>de</strong>ring the information submitted by the respective entities or organisms or by<br />

any other factors <strong>de</strong>termined by CENBISP. The senior officers of public entities must submit to<br />

the Technical Secretariat a periodic report of the status and condition of the managed assets,<br />

with the periodicity established in the Law.<br />

Organic Law of the Attorney General of the Republic<br />

The Ley Orgánica <strong>de</strong> la Procuraduría General <strong>de</strong> la República (the “Organic Law of the<br />

Attorney General of the Republic”) establishes that the Company must notify the Attorney<br />

General’s Office of lawsuits against CANTV and its subsidiaries, in the event that they could<br />

affect the direct or indirect interests of the Republic or provision of public services, or in the case<br />

of labor lawsuits.<br />

This Law also establishes that the Company’s contracts with its legal advisors must be<br />

approved by the Attorney General’s Office.<br />

The Company is adapting its processes and systems to comply with the requirements of<br />

the new applicable legal framework.<br />

Adoption of IFRS by the Venezuelan Fe<strong>de</strong>ration of Public Accountants<br />

In January 2004, the FCCPV <strong>de</strong>ci<strong>de</strong>d to adopt IFRS and its interpretations, issued by<br />

the IASB.<br />

be:<br />

In August 2006, the FCCPV resolved that the adoption date of these standards would<br />

- For all entities, except for those that offer securities to the public, and those that<br />

qualify as small and medium-sized entities, the initial adoption date will be the close<br />

of the fiscal year en<strong>de</strong>d December 31, 2008, or the close of the immediately<br />

following fiscal period.<br />

68


- For small and medium-sized entities, the initial adoption date will be the close of the<br />

fiscal year en<strong>de</strong>d December 31, 2010, or the close of the immediately following<br />

fiscal period.<br />

- For entities that offer securities to the public, the initial adoption date will be<br />

established by the CNV, the regulatory body of public companies.<br />

In December 2007, the FCCPV published the following three IFRS Adoption Bulletins<br />

(Adoption Bulletin VEN-FRS) which were approved in April 2008:<br />

- Adoption Bulletin VEN-FRS No. 0 (Framework for the adoption of International<br />

Financial Reporting Standards): revokes, beginning in 2008 for large enterprises<br />

and in 2010 for small and medium-sized entities, the former Venezuelan Statement<br />

of Accounting Principles and Technical Publications. It establishes that the<br />

Venezuelan generally accepted accounting principles will be <strong>de</strong>signated by the<br />

symbol VEN-FRS. It indicates that fist-time adoption of VEN-FRS should be in<br />

accordance to the procedures and factors established in IFRS 1 “First-time adoption<br />

of IFRS”. It also indicates the specific IFRS, IAS and interpretations of these<br />

standards that should be used as the standards approved by the FCCPV for VEN-<br />

FRS purposes. In the future, new Adoption Bulletin VEN-FRS will be issued to<br />

adapt IFRS to Venezuela’s situation.<br />

- Adoption Bulletin VEN-FRS No. 1 (Definition of small and medium-sized entities):<br />

this standard establishes the factors to be consi<strong>de</strong>red to <strong>de</strong>termine whether an entity<br />

is to be classified as a large or a medium-sized of small entity.<br />

- Adoption Bulletin VEN-FRS No. 2 (Criteria for the application of International<br />

Accounting Standard No. 29 “Financial reporting in hyperinflationary economies”<br />

(IAS 29) in Venezuela): this standard would require that un<strong>de</strong>r VEN-FRS, inflation<br />

should be recognized in the financial statements if the year inflation is more than<br />

one digit. Inflation recognition would be done in accordance with IAS 29.<br />

During 2005, the Company adopted IFRS which are different from VEN-FRS; therefore,<br />

the Company is currently analyzing the possible effects that the VEN-FRS could have on its<br />

consolidated financial statements. However, until the CNV issues a statement regarding this<br />

adoption plan, it is not possible to <strong>de</strong>termine the potential effects.<br />

Changes in Internal Controls<br />

There have been no changes in the Company’s internal controls during the year en<strong>de</strong>d<br />

December 31, 2007 that have materially affected, or are reasonably likely to materially affect,<br />

the Company’s internal controls, except for what is indicated in the next paragraph.<br />

In February 2007, the Company started operating a new billing and collection system for<br />

fixed telephony services as part of an ongoing project directed towards the integration and<br />

transformation of the Company’s information systems. During 2007, with the implementation of<br />

this new system there were technical failures in the automated billing and collections processes<br />

for fixed telephony services.<br />

69


Business Conduct Co<strong>de</strong><br />

CANTV has adopted a “Business Conduct Co<strong>de</strong>” covering all its officers and employees.<br />

The Business Conduct Co<strong>de</strong> addresses, among other things, the following items:<br />

• honest and ethical conduct, including the ethical handling of actual or apparent<br />

conflicts of interest between personal and professional relationships, including<br />

suppliers;<br />

• full, fair, accurate, timely and un<strong>de</strong>rstandable disclosure in reports and documents<br />

the Company makes public;<br />

• compliance with applicable governmental laws, rules and regulations;<br />

• the prompt internal reporting to an appropriate person or persons i<strong>de</strong>ntified in the<br />

Business Conduct Co<strong>de</strong> of violations of any of the provisions <strong>de</strong>scribed above; and<br />

• accountability for adherence to the Business Conduct Co<strong>de</strong>.<br />

CANTV un<strong>de</strong>rtakes to provi<strong>de</strong> a copy of its Business Conduct Co<strong>de</strong> at no charge to<br />

electronic mail requests at the following e-mail address: etica@cantv.com.ve.<br />

The Company has a Compliance Office to be in charge of overseeing compliance with<br />

the Business Conduct Co<strong>de</strong> by each manager and employee of the organization, as well as by<br />

third parties. The Business Conduct Co<strong>de</strong> facilitates the constant exercise of the best ethical<br />

practices in complying with work requirements and the relations that a company in general has<br />

with the society in which it operates.<br />

In addition, the Compliance Office is responsible for assisting both the units and the<br />

employees who may have doubts as to the interpretation of the Business Conduct Co<strong>de</strong>, to take<br />

notice of any violations of the established norms and to suggest appropriate action via the<br />

phone number +58 212 5001669 and e-mail address etica@cantv.com.ve, created for this<br />

purpose.<br />

Subsequent Events<br />

The subsequent events are all those material events occurred after December 31, 2007<br />

and until <strong>de</strong> publication of this document; the main events are presented below:<br />

On March 31, 2008, an Ordinary Sharehol<strong>de</strong>rs’ Assembly <strong>de</strong>clared an ordinary cash<br />

divi<strong>de</strong>nd of Bs. 757.14 per share and an extraordinary divi<strong>de</strong>nd of Bs. 127.04 per share,<br />

payable on April 15, 2008 to stockhol<strong>de</strong>rs of record at April 8, 2008.<br />

On March 31, 2008, the Republic entered into a purchase agreement with Renaissance<br />

to acquire 3,613,996 ADSs (representing 25,297,972 Class D shares) of CANTV owned by<br />

Renaissance. The acquisition was consummated on April 4, 2008. The consi<strong>de</strong>ration paid to<br />

70


Renaissance consisted of a purchase price U.S.$11.27 per ADS, plus and an amount equal to<br />

the ordinary and extraordinary divi<strong>de</strong>nds, aggregating U.S.$2.88 per ADS, <strong>de</strong>clared by an<br />

Ordinary Sharehol<strong>de</strong>rs’ Assembly on March 31, 2008. As a result of the consummation of the<br />

Renaissance transaction, the Republic acquired 25,297,972 Class D shares which, together<br />

with 626,752,956 Class D shares owned by the Republic, through the Ministry of the Popular<br />

Power for Telecommunications and Information Technology, and the 51,900,000 Class B<br />

shares held by BANDES and the Ministry of the Popular Power for Infrastructure, represent an<br />

aggregate of 89.4% of the outstanding common shares of CANTV which are owned by the<br />

Republic. As of June 26, 2008, all Class D shares owned by the Republic were converted into<br />

Class B shares pursuant to a provision of CANTV’s by-laws.<br />

On March 31, 2008, the Republic announced that as a result of its acquisition of ADSs<br />

from Renaissance, Venezuelan law requires the Republic to offer to purchase any and all of the<br />

other outstanding ADSs and Class D shares of CANTV not already owned by the Republic on<br />

the date the offer commences (i) at a price, payable in U.S. dollars, of U.S.$11.27 per ADS for<br />

ADSs, and (ii) at a price, payable in bolivars, of the Bolivar equivalent of U.S.$1.61 per share,<br />

calculated at the official exchange rate in the Republic for the sale of U.S. dollars by the Central<br />

Bank of Venezuela, in effect on the date of the settlement of the offer in a special session on the<br />

Caracas Stock Exchange, for shares that are not represented by ADSs (being the U.S.$11.27<br />

per ADS price divi<strong>de</strong>d by seven to reflect that each ADS represents seven Class D shares). It is<br />

contemplated that hol<strong>de</strong>rs of CANTV’s Class C shares will be able to participate in the offer by<br />

converting their Class C shares into Class D shares in accordance with the procedure<br />

established in CANTV’s by-laws. As of the date of this report, it is CANTV’s un<strong>de</strong>rstanding that<br />

the Republic is continuing to consi<strong>de</strong>r an appropriate structure for the transaction, and that it will<br />

continue to make available updated information as it becomes available.<br />

On May 21, 2008, an Extraordinary Sharehol<strong>de</strong>rs’ Assembly approved CANTV’s new bylaws<br />

which establish, among other things, CANTV’s new share class distribution, voting rights,<br />

the number of members of the Board of Directors, and the new divi<strong>de</strong>nd policy.<br />

On June 30, 2008, CANTV filed a Form 15F with the SEC to <strong>de</strong>register its Class D<br />

shares (including the Class D shares represented by its ADSs) from the SEC and terminate its<br />

reporting obligations un<strong>de</strong>r the Exchange Act pursuant to Rule 12h-6 un<strong>de</strong>r the Exchange Act.<br />

Subject to a number of conditions, Rule 12h-6 permits <strong>de</strong>registration of a class of registered<br />

securities if the ADTV of a class in United States for a recent 12-month period has been no<br />

greater than 5% of the ADTV of the class on a worldwi<strong>de</strong> basis for the same period. CANTV’s<br />

reporting obligations un<strong>de</strong>r the Exchange Act (including the obligation to file the annual report<br />

on Form 20-F that would have otherwise been due in June 30, 2008) were suspen<strong>de</strong>d<br />

immediately upon filing of the Form 15F. The <strong>de</strong>registration and termination of reporting will<br />

become effective 90 days after the filing (unless the Form 15F is earlier withdrawn by CANTV).<br />

71


Report of Statutory Auditors<br />

Report of In<strong>de</strong>pen<strong>de</strong>nt Public Accountants<br />

Consolidated Balance Sheet<br />

Consolidated Statement of Operations<br />

Section VIII. Exhibits<br />

Consolidated Statement of Changes in Stockhol<strong>de</strong>rs’ Equity<br />

Consolidated Statement of Cash Flows<br />

Notes to the Consolidated Financial Statements<br />

72


Compañía Anónima Nacional<br />

Teléfonos <strong>de</strong> Venezuela<br />

(CANTV) and Subsidiaries<br />

Report of Statutory Auditors and<br />

Consolidated Financial Statements as of<br />

December 31, 2007 and 2006 and for the years<br />

en<strong>de</strong>d December 31, 2007, 2006 and 2005


Compañía Anónima Nacional<br />

Teléfonos <strong>de</strong> Venezuela<br />

(CANTV) and Subsidiaries<br />

Report of In<strong>de</strong>pen<strong>de</strong>nt Public Accountants and<br />

Consolidated Financial Statements as of<br />

December 31, 2007 and 2006 and for the years<br />

en<strong>de</strong>d December 31, 2007, 2006 and 2005


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Consolidated Balance Sheet<br />

December 31, 2007 and 2006<br />

(In millions of bolivars) Note 2007 2006<br />

Assets<br />

Non-current assets<br />

Property, plant and equipment, net 5 4,094,344<br />

Cellular concessions, net 3 384,656<br />

Long-term accounts receivable from Venezuelan Government entities 10 93,025<br />

Deferred income tax 17 1,720,153<br />

Information systems (software), net 6 532,345<br />

Other assets 7 32,931<br />

Total non-current assets 6,857,454<br />

Current assets<br />

Other current assets 8 176,702<br />

Inventories, spare parts and supplies, net 9 465,596<br />

Accounts receivable from Venezuelan Government entities 10 304,281<br />

Accounts receivable, net 11 1,219,789<br />

Cash and temporary investments 12 776,311<br />

Total current assets 2,942,679<br />

Total assets 9,800,133<br />

Stockhol<strong>de</strong>rs' equity and liabilities<br />

Stockhol<strong>de</strong>rs' equity<br />

Capital stock 13 2,151,299<br />

Additional paid-in capital 13 -<br />

Legal reserve 13 215,130<br />

Workers' benefit shares 13 (18,726)<br />

Retained earnings 13 1,501,554<br />

Attributable to equity hol<strong>de</strong>rs of the Company 3,849,257<br />

Minority interest in subsidiary 4,548<br />

Total stockhol<strong>de</strong>rs' equity 3,853,805<br />

Liabilities<br />

Non-current liabilities<br />

Long-term <strong>de</strong>bt 14 10,278<br />

Cellular concession long-term payable 3 55,298<br />

Provision for litigation 19 (c) 311,785<br />

Pension and other post-retirement benefit obligations, net 15 1,979,048<br />

Total non-current liabilities 2,356,409<br />

Current liabilities<br />

Current portion of the long-term <strong>de</strong>bt 14 20,556<br />

Accounts payable 4 1,854,208<br />

Accrued employee benefits 112,042<br />

Current portion of pension and other post-retirement benefit obligations, net 15 324,141<br />

Income tax payable 17 166,330<br />

Divi<strong>de</strong>nds payable, including minimum divi<strong>de</strong>nd required by law 13 (b) 486,593<br />

Deferred revenue 2 (n) 370,746<br />

Other current liabilities 16 255,303<br />

Total current liabilities 3,589,919<br />

Total liabilities 5,946,328<br />

Total stockhol<strong>de</strong>rs’ equity and liabilities 9,800,133<br />

The notes on pages 5 to 71 are an integral part of the consolidated financial statements<br />

1<br />

3,714,737<br />

144,407<br />

55,856<br />

1,167,692<br />

461,940<br />

159,502<br />

5,704,134<br />

266,030<br />

681,139<br />

203,908<br />

915,009<br />

1,151,987<br />

3,218,073<br />

8,922,207<br />

2,151,299<br />

31,905<br />

215,130<br />

(83,044)<br />

969,493<br />

3,284,783<br />

4,871<br />

3,289,654<br />

29,303<br />

-<br />

170,254<br />

1,351,563<br />

1,551,120<br />

28,942<br />

2,061,758<br />

118,170<br />

242,275<br />

153,982<br />

923,583<br />

271,435<br />

281,288<br />

4,081,433<br />

5,632,553<br />

8,922,207


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Consolidated Statement of Operations<br />

Years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(In millions of bolivars, except information per share and per ADS) Note 2007 2006 2005<br />

Operating revenues<br />

Local services 966,129<br />

Domestic long distance 303,873<br />

International long distance 146,051<br />

Fixed-to-mobile outgoing calls 992,480<br />

Interconnection incoming 88,193<br />

Data transmission 908,073<br />

Other wireline-related services 376,249<br />

Total wireline services 3,781,048<br />

Access 228,273<br />

Airtime 1,782,798<br />

Interconnection 373,796<br />

Activation 66,066<br />

Special services 1,004,469<br />

Wireless equipment sales 586,228<br />

Other wireless-related services 103,362<br />

Total wireless services 4,144,992<br />

Other telecommunications-related services 393,576<br />

Total operating revenues 2 (n) 8,319,616<br />

Operating expenses<br />

Labor and benefits 2 (q) and 15 1,492,430<br />

Operations, maintenance, repairs and other 2,157,179<br />

Cost of sales of wireless equipment<br />

Additional pension obligation due to Venezuelan Supreme Court ruling,<br />

1,397,550<br />

"Acuerdo Marco" (Master Agreement) and "Bono Solidario" (monthly incentive) 15 362,162<br />

Provision for uncollectibles 11 117,521<br />

Interconnection costs 718,132<br />

Depreciation and amortization 3, 5 and 6 965,782<br />

Concession and other taxes 3 and 17 490,774<br />

Other (income) expense, net 4 and 7 (116,633)<br />

Total operating expenses 7,584,897<br />

Operating income (loss) 734,719<br />

Interest and exchange (loss) gain, net<br />

Interest income 50,014<br />

Interest expense (9,212)<br />

Exchange (loss) gain, net (2,037)<br />

Total interest and exchange (loss) gain, net 38,765<br />

Income before income tax 773,484<br />

Income tax (provision) benefit<br />

Current 17 (302,018)<br />

Deferred 17 552,461<br />

Total income tax benefit 250,443<br />

Net income 1,023,927<br />

Net income attributable to:<br />

Equity hol<strong>de</strong>rs of the Company 1,021,295<br />

Minority interest in subsidiary 2,632<br />

Net income 1,023,927<br />

Basic and diluted earnings per share 1,316<br />

Basic and diluted earnings per ADS (based on 7 shares per ADS) 9,213<br />

Weighted average shares outstanding (in millions) 778<br />

The notes on pages 5 to 71 are an integral part of the consolidated financial statements<br />

2<br />

920,574<br />

284,253<br />

121,894<br />

922,810<br />

91,307<br />

687,191<br />

213,735<br />

3,241,764<br />

172,850<br />

1,366,645<br />

339,050<br />

56,452<br />

677,030<br />

571,654<br />

58,957<br />

3,242,638<br />

313,265<br />

6,797,667<br />

1,147,256<br />

1,536,891<br />

1,172,817<br />

23,043<br />

65,438<br />

656,431<br />

858,476<br />

429,192<br />

8,738<br />

5,898,282<br />

899,385<br />

92,987<br />

(12,351)<br />

(530)<br />

80,106<br />

979,491<br />

(186,576)<br />

337,460<br />

150,884<br />

1,130,375<br />

1,127,420<br />

2,955<br />

1,130,375<br />

1,457<br />

10,197<br />

776<br />

912,042<br />

296,380<br />

115,435<br />

751,561<br />

97,963<br />

542,112<br />

200,662<br />

2,916,155<br />

119,758<br />

769,304<br />

215,244<br />

42,925<br />

376,487<br />

431,169<br />

26,771<br />

1,981,658<br />

190,579<br />

5,088,392<br />

898,016<br />

1,217,369<br />

743,556<br />

694,916<br />

35,068<br />

534,494<br />

827,692<br />

295,161<br />

(71,721)<br />

5,174,551<br />

(86,159)<br />

85,572<br />

(27,393)<br />

32,843<br />

91,022<br />

4,863<br />

(147,881)<br />

357,426<br />

209,545<br />

214,408<br />

213,929<br />

479<br />

214,408<br />

276<br />

1,934<br />

776


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV) and Subsidiaries<br />

Consolidated Statement of Changes in Stockhol<strong>de</strong>rs’ Equity<br />

Years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

Attributable to equity hol<strong>de</strong>rs of the Company<br />

Additional Translation Workers' Minority Total<br />

Capital paid-in Legal and other benefit Retained interest stockhol<strong>de</strong>rs'<br />

(In millions of bolivars) Note stock capital reserve adjustments shares earnings in subsidiary equity<br />

Balance as of December 31, 2004 2,151,299 33,724<br />

Net income -<br />

-<br />

Divi<strong>de</strong>nds <strong>de</strong>clared and approved 13 (b) -<br />

-<br />

Workers' benefit shares<br />

Valuation of available for<br />

-<br />

(675)<br />

sale investments, net of realization 2 (y) -<br />

-<br />

Balance as of December 31, 2005 2,151,299 33,049<br />

Net income -<br />

-<br />

Divi<strong>de</strong>nds <strong>de</strong>clared and approved 13 (b) -<br />

-<br />

Minimum divi<strong>de</strong>nds required to be <strong>de</strong>clared 13 (b) -<br />

-<br />

Workers' benefit shares<br />

Valuation of available for<br />

-<br />

(1,144)<br />

sale investments, net of realization 2 (y) -<br />

-<br />

Balance as of December 31, 2006 2,151,299 31,905<br />

Net income -<br />

-<br />

Divi<strong>de</strong>nds <strong>de</strong>clared and approved 13 (b) -<br />

-<br />

Reversal of minimum divi<strong>de</strong>nds 13 (b)<br />

required to be <strong>de</strong>clared for 2006 -<br />

-<br />

Minimum divi<strong>de</strong>nds required to be <strong>de</strong>clared 13 (b) -<br />

-<br />

Workers' benefit shares 13 (c) -<br />

(31,905)<br />

Balance as of December 31, 2007 2,151,299 -<br />

215,130<br />

The notes on pages 5 to 71 are an integral part of the consolidated financial statements<br />

3<br />

-<br />

-<br />

-<br />

-<br />

215,130<br />

-<br />

-<br />

-<br />

-<br />

-<br />

215,130<br />

-<br />

-<br />

-<br />

-<br />

-<br />

111,767<br />

-<br />

-<br />

-<br />

(111,510)<br />

257<br />

-<br />

-<br />

-<br />

-<br />

(257)<br />

-<br />

-<br />

-<br />

-<br />

-<br />

-<br />

215,130 -<br />

(80,403)<br />

-<br />

-<br />

(1,580)<br />

-<br />

(81,983)<br />

-<br />

-<br />

-<br />

(1,061)<br />

-<br />

(83,044)<br />

-<br />

-<br />

-<br />

-<br />

64,318<br />

(18,726)<br />

1,524,116<br />

213,929<br />

(390,407)<br />

-<br />

-<br />

1,347,638<br />

1,127,420<br />

(779,786)<br />

(725,779)<br />

-<br />

-<br />

969,493<br />

1,021,295<br />

(715,327)<br />

725,779<br />

(486,593)<br />

(13,093)<br />

4,837<br />

479<br />

(1,637)<br />

-<br />

-<br />

3,679<br />

2,955<br />

(1,763)<br />

-<br />

-<br />

-<br />

4,871<br />

2,632<br />

(2,955)<br />

-<br />

-<br />

-<br />

1,501,554 4,548<br />

3,960,470<br />

214,408<br />

(392,044)<br />

(2,255)<br />

(111,510)<br />

3,669,069<br />

1,130,375<br />

(781,549)<br />

(725,779)<br />

(2,205)<br />

(257)<br />

3,289,654<br />

1,023,927<br />

(718,282)<br />

725,779<br />

(486,593)<br />

19,320<br />

3,853,805


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Consolidated Statement of Cash Flows<br />

Years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(In millions of bolivars) Note 2007 2006 2005<br />

Cash flows provi<strong>de</strong>d by operating activities<br />

Net income<br />

Adjustments to reconcile net income to net cash provi<strong>de</strong>d by<br />

operating activities<br />

1,023,927<br />

Exchange (gain) loss, net 2,037<br />

Minority interest in subsidiary (2,632)<br />

Depreciation and amortization 3, 5 and 6 965,782<br />

Current income tax provision 17 302,018<br />

Deferred income tax (benefit) 17 (552,461)<br />

Provision for pension and other post-retirement benefits<br />

Additional pension obligation due to Venezuelan Supreme Court ruling,<br />

15 585,240<br />

"Acuerdo Marco" (Master Agreement) and "Bono Solidario" (monthly incentive) 15 362,162<br />

(Release of) provision for inventories obsolescence 9 (9,045)<br />

Provision for litigation 19 (c) 172,420<br />

Provision for uncollectibles 11 117,521<br />

Gain on sale of investments in equity 7 -<br />

Special plan of distribution of Class "C" shares 13 (c) 26,100<br />

Changes in current assets and liabilities<br />

Accounts receivable (405,336)<br />

Accounts receivable from Venezuelan Government entities (117,416)<br />

Inventories, spare parts and supplies 224,588<br />

Other current assets 89,328<br />

Accounts payable (272,514)<br />

Accrued employee benefits (6,128)<br />

Pension and other post-retirement benefits payments (238,051)<br />

Income tax payable (289,670)<br />

Deferred revenues 99,311<br />

Other current liabilities (23,353)<br />

Changes in non current assets and liabilities<br />

Long-term accounts receivable from Venezuelan Government entities (37,169)<br />

Other assets 126,572<br />

Provision for litigation (30,889)<br />

Net cash provi<strong>de</strong>d by operating activities 2,112,342<br />

Cash flows used in investing activities<br />

Acquisition of 1900 MHz band cellular concession 3 (129,000)<br />

Acquisition of information systems (software) 6 (194,938)<br />

Acquisition of property, plant and equipment 5 (1,250,683)<br />

Disposal of information systems (software) and other 6 3,277<br />

Disposal of property, plant and equipment and other 5 35,098<br />

Net cash used in investing activities (1,536,246)<br />

Cash flows used in financing activities<br />

Proceeds from borrowings -<br />

Payments of <strong>de</strong>bt (28,906)<br />

Divi<strong>de</strong>nds paid 13 (b) (916,086)<br />

Purchase of shares for workers' benefit fund, net (6,780)<br />

Net cash used in financing activities<br />

(Decrease) increase in cash and temporary investments before<br />

(951,772)<br />

effect of exchange rate changes on cash and temporary investments (375,676)<br />

Effect of exchange rate changes on cash and temporary investments -<br />

(Decrease) increase in cash and temporary investments (375,676)<br />

Cash and temporary investments<br />

Beginning of the period 1,151,987<br />

End of the period 12 776,311<br />

Supplementary information<br />

Unpaid divi<strong>de</strong>nds and provision for minimum divi<strong>de</strong>nds required by law 486,593<br />

Cash paid during the period for:<br />

Interest 1,778<br />

Income tax 396,853<br />

The notes on pages 5 to 71 are an integral part of the consolidated financial statements<br />

4<br />

1,130,375<br />

530<br />

(2,955)<br />

858,476<br />

186,576<br />

(337,460)<br />

348,998<br />

23,043<br />

110,073<br />

43,584<br />

65,438<br />

-<br />

-<br />

(310,717)<br />

1,230<br />

(478,957)<br />

(203,478)<br />

896,035<br />

25,562<br />

(356,901)<br />

(109,946)<br />

86,917<br />

(3,201)<br />

8,521<br />

(88,326)<br />

(7,843)<br />

1,885,574<br />

-<br />

(195,681)<br />

(1,042,573)<br />

5,074<br />

32,827<br />

(1,200,353)<br />

6,237<br />

(52,150)<br />

(583,745)<br />

(2,205)<br />

(631,863)<br />

53,358<br />

-<br />

53,358<br />

1,098,629<br />

1,151,987<br />

923,583<br />

5,472<br />

474,718<br />

214,408<br />

(32,843)<br />

(479)<br />

827,692<br />

147,881<br />

(357,426)<br />

279,839<br />

694,916<br />

912<br />

68,878<br />

35,068<br />

(71,260)<br />

-<br />

(250,266)<br />

(6,088)<br />

(59,111)<br />

769<br />

394,857<br />

14,195<br />

(147,993)<br />

(126,832)<br />

40,716<br />

(12,356)<br />

(46,111)<br />

52,867<br />

(12,082)<br />

1,650,151<br />

-<br />

(177,573)<br />

(867,339)<br />

35,840<br />

50,682<br />

(958,390)<br />

69,095<br />

(243,007)<br />

(415,133)<br />

(2,255)<br />

(591,300)<br />

100,461<br />

30,625<br />

131,086<br />

967,543<br />

1,098,629<br />

-<br />

14,447<br />

419,665


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

This is a free translation into English of a document issued in the Spanish language and is<br />

provi<strong>de</strong>d solely for the convenience of the English speaking rea<strong>de</strong>rs. This document should<br />

be read in conjunction with, and construed in accordance with, laws of the Bolivarian<br />

Republic of Venezuela.<br />

1. General Information<br />

Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (referred to hereinafter as CANTV) is<br />

the primary provi<strong>de</strong>r of telecommunications services in Venezuela, and the owner of a<br />

nationwi<strong>de</strong> basic telecommunications network, through which it provi<strong>de</strong>s local, domestic and<br />

international wireline telephone services, as well as private network, data networks, public<br />

telephony and rural telephony services. In addition, CANTV and its consolidated subsidiaries<br />

(referred hereinafter collectively as the Company) provi<strong>de</strong>s other telecommunications<br />

services, including national wireless communications, Internet access and publication of<br />

telephone directories through its principal subsidiaries: Telecomunicaciones Movilnet, C.A.<br />

(Movilnet), CANTV.Net, C.A. (CANTV.Net) and C.A. Venezolana <strong>de</strong> Guías (Caveguías) (Note<br />

2 (d) - Summary of significant accounting principles and policies - Consolidation).<br />

CANTV is a corporation (“<strong>compañía</strong> <strong>anónima</strong>”) incorporated in Venezuela on June 20, 1930.<br />

CANTV’s registered office is located at Avenida Libertador, Centro Nacional <strong>de</strong><br />

Telecomunicaciones, Nuevo Edificio Administrativo, Piso 1, Apartado Postal 1226, Caracas,<br />

Venezuela 1010.<br />

In 1991, VenWorld Telecom, C.A. (VenWorld), a company organized un<strong>de</strong>r the laws of<br />

Venezuela by a private consortium of companies, majority owned by a subsidiary of GTE<br />

Corporation (currently Verizon Communications Inc.), acquired operating control and initially<br />

40% of the capital stock of CANTV owned by the Bolivarian Republic of Venezuela.<br />

On January 8, 2007, the Presi<strong>de</strong>nt of the Bolivarian Republic of Venezuela announced the<br />

intention to nationalize several companies, including CANTV. On May 21, 2007, the<br />

Government of the Bolivarian Republic of Venezuela (the Venezuelan Government) assumed<br />

operating control of the Company, when it acquired ownership of 86.2% of CANTV’s capital<br />

stock following completion of a public in a ten<strong>de</strong>r offer (Note 13 (a) - Stockhol<strong>de</strong>rs' Equity -<br />

Capital stock).<br />

The Company’s shares are listed on the Caracas Stock Exchange. Therefore, the Company<br />

is subject to regulations of the Comisión Nacional <strong>de</strong> Valores (CNV) (the Venezuelan National<br />

Securities Commission), which is the regulatory body of companies that tra<strong>de</strong> on this stock<br />

exchange. On May 11, 2007, the New York Stock Exchange (NYSE) notified CANTV that it<br />

had suspen<strong>de</strong>d CANTV’s shares from trading on the exchange. On June 18, 2007, the<br />

NYSE filed with the Securities and Exchange Commission (SEC) a notification of its intention<br />

to remove the ADS from listing and registration on the exchange (Note 13 (a) - Stockhol<strong>de</strong>rs'<br />

Equity - Capital stock).<br />

5


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The Company’s consolidated financial statements were approved for issue by the Board of<br />

Directors on March 10, 2008.<br />

2. Summary of Significant Accounting Principles and Policies<br />

The Company’s most significant accounting principles and policies for the preparation of the<br />

consolidated financial statements are <strong>de</strong>scribed as follows. These practices and policies<br />

have been consistently applied for all periods presented, unless otherwise indicated.<br />

a) Basis of presentation<br />

The consolidated financial statements have been prepared in accordance with International<br />

Financial Reporting Standards (IFRS), issued by the International Accounting Standard Board<br />

(IASB), which comprise: (i) IFRS, (ii) International Accounting Standards (IAS) and (iii)<br />

International Financial Reporting Interpretations Committee (IFRIC) or the former Standing<br />

Interpretations Committee (SIC), and un<strong>de</strong>r the historical cost convention, except for<br />

adjustment for inflation (Note 2 (c) - Summary of significant accounting principles and policies<br />

- Adjustment for inflation).<br />

Pursuant to Resolution No. 157-2004 published in the Official Gazette of Venezuela No.<br />

38,085 dated December 13, 2004, the CNV required companies offering their public<br />

securities to the public un<strong>de</strong>r the Venezuelan Capital Markets Law to prepare and present<br />

their financial statements in accordance with IFRS beginning on January 1, 2006, based on<br />

IFRS in effect as January 1, 2005, with earlier adoption of IFRS permitted. On December 8,<br />

2005, the CNV issued Resolution No. 177-2005 which postponed the requirement to prepare<br />

financial statements un<strong>de</strong>r IFRS until the Venezuelan Fe<strong>de</strong>ration of Public Accountants<br />

adopts IFRS as accounting principles generally accepted in Venezuela (Note 25 - Adoption of<br />

International Financial Reporting Standards (IFRS) by the Venezuelan Fe<strong>de</strong>ration of Public<br />

Accountants). However, early adoption of IFRS is permitted once certain requirements are<br />

complied with.<br />

The Company’s consolidated financial statements as of and for the year en<strong>de</strong>d December 31,<br />

2005 are covered by IFRS 1, “First-time adoption of IFRS”, because they are part of the first<br />

financial statements prepared by the Company in accordance with IFRS. IFRS 1 is applied<br />

when the entity adopts IFRS for the first time and, in general, requires the entity to comply<br />

with IFRS in effect on the date of the preparation of the first financial statements prepared<br />

un<strong>de</strong>r IFRS. In addition, IFRS 1 inclu<strong>de</strong>s certain exemptions for some requirements un<strong>de</strong>r<br />

other IFRS.<br />

Standards, amendments and interpretations effective for annual consolidated financial<br />

statements as of December 31, 2007<br />

The following new standards, amendments and interpretations of existing standards have<br />

been published and are mandatory for the Company’s accounting periods beginning on<br />

January 1, 2007, or thereafter:<br />

6


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

- IFRS 7, “Financial instruments: disclosures, and a complementary amendment to IAS 1,<br />

presentation of financial statements - capital disclosures” (effective from January 1, 2007).<br />

IFRS 7 introduces new disclosures to improve the information about financial instruments.<br />

It requires the disclosure of qualitative and quantitative information about exposure to<br />

risks arising from financial instruments, including specified minimum disclosures about<br />

credit risks, liquidity risks and market risks, including sensitivity analysis to market risk.<br />

IFRS 7 replaces IAS 30. The amendment to IAS 1 introduces disclosures about the level<br />

of an entity’s capital and how it manages capital. Beginning January 1, 2007, the<br />

Company inclu<strong>de</strong>s all the disclosures of its financial instruments according to IFRS 7.<br />

Standards, amendments and interpretations effective for annual consolidated financial<br />

statements as of December 31, 2007 but not relevant to the Company’s operations<br />

The following standards, amendments and interpretations of existing standards have been<br />

published or amen<strong>de</strong>d and are mandatory for accounting periods beginning on January 1,<br />

2007, or thereafter, but are not relevant to the Company’s operations:<br />

- IFRS 4, “Insurance contracts”;<br />

- IFRIC 7, “Applying the restatement approach un<strong>de</strong>r IAS 29, Financial reporting in<br />

hyperinflationary economies”<br />

- IFRIC 8, “Scope of IFRS 2”;<br />

- IFRIC 9, ‘Re-assessment of embed<strong>de</strong>d <strong>de</strong>rivatives’; and<br />

- IFRIC 10, “Interim financial reporting and impairment”;<br />

Standards and interpretations of existing standards that are not yet effective and have not<br />

been early adopted by the Company<br />

The following standards and interpretations of existing standards have been published and<br />

are mandatory for the Company’s accounting periods beginning on January 1, 2008, or<br />

thereafter, but that the Company has <strong>de</strong>ci<strong>de</strong>d not to adopt them earlier:<br />

- IAS 1 (Amendment), “Presentation of financial statements” (effective from January 1,<br />

2009). IAS 1 (Amendment) establishes changes to require information in financial<br />

statements to be aggregated on the bases of shared characteristics. IAS 1 (Amendment)<br />

establishes the option of presenting items of income and expenses and components of<br />

other comprehensive income either in a single statement of comprehensive income with<br />

subtotals, or in two separate statements (a separate income statement followed by a<br />

statement of comprehensive income). The Company will apply IAS 1 (Amendment) form<br />

January 1, 2009.<br />

- IAS 23 (Amendment), “Borrowing costs” (effective from January 1, 2009). IAS 23<br />

(Amendment) eliminates the option of recognizing immediately as an expense all<br />

borrowing costs related to assets that require a substantial period of time before they can<br />

be brought to use or sold; as a result, these borrowing costs must be capitalized as part of<br />

the cost of the asset. Qualifying assets measured at fair value are exclu<strong>de</strong>d from the<br />

scope of IAS 23 (Amendment). The Company will apply IAS 23 from January 1, 2009.<br />

7


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

- IFRS 8, “Operating segments” (effective from January 1, 2009). IFRS 8 sets out<br />

requirements for disclosure of information about an entity’s operating segments as well as<br />

about the entity’s products and services, the geographical areas in which it operates, and<br />

its major customers. IFRS 8 replaces IAS 14 “Segment reporting”. The Company will<br />

apply IFRS 8 from January 1, 2009.<br />

- IFRIC 11, “IFRS 2 - Group and treasury share transactions” (effective from January 1,<br />

2009). IFRIC 11 provi<strong>de</strong>s establishes that share-based transactions involving treasury<br />

shares or shares of a group entity should be accounted for as equity settled. The<br />

Company’s management is currently assessing the impact of IFRIC 11 on the Company’s<br />

operations.<br />

- IFRIC 12, “Service concession arrangements” (effective from January 1, 2008). IFRIC 12<br />

gives guidance on the accounting by operators for public-to-private service concession<br />

arrangements and is applicable if: (a) the grantor of the concession controls or regulates<br />

what services the operator must provi<strong>de</strong> with the infrastructure, to whom it must provi<strong>de</strong><br />

them, and at what price; and (b) the grantor of the concession controls—through<br />

ownership, beneficial entitlement or otherwise—any significant residual interest in the<br />

infrastructure at the end of the term of the arrangement. The Company’s management is<br />

currently assessing the impact of IFRIC 12 on the Company’s operations.<br />

- IFRIC 13, “Customer loyalty program” (effective from July 1, 2008). IFRIC 13 establishes<br />

that where goods or services are sold together with a customer loyalty incentive, the<br />

arrangement is a multiple-element arrangement and the consi<strong>de</strong>ration receivable from the<br />

customer is allocated between the components of the arrangement using fair values. The<br />

Company’s management is currently assessing the impact of IFRIC 13 on the Company’s<br />

operations.<br />

- IFRIC 14, “IAS 19 - The limit on a <strong>de</strong>fined benefit asset, minimum funding requirements<br />

and their interaction” (effective from January 1, 2008). IFRIC 14 provi<strong>de</strong>s guidance on<br />

assessing the limit in IAS 19 on the amount of the surplus that can be recognized as an<br />

asset. It also explains how the pension asset or liability may be affected by a statutory or<br />

contractual minimum funding requirement. The Company’s management is currently<br />

assessing the impact of IFRIC 14 on the Company’s operations.<br />

b) Use of estimates in the preparation of financial statements<br />

The preparation of consolidated financial statements in accordance with IFRS requires<br />

management to make estimates and assumptions that affect the reported amounts of assets<br />

and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated<br />

financial statements and the amounts of income and expense recognized during the reporting<br />

period. The consolidated financial statements have been prepared based on estimates and<br />

assumptions <strong>de</strong>termined based on the Company’s strategic business plan for the period<br />

2008-2013 approved by the Board of Directors on February 12, 2008. Future changes in the<br />

Company’s business plan and/or in management assumptions may significantly affect<br />

8


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

estimates as of December 31, 2007. The consolidated financial statements as of December<br />

31, 2007 have been prepared based on events and facts known as of March 10, 2008, the<br />

date on which the Board of Directors approved issuance of the financial statements.<br />

The most significant judgments and principal assumptions ma<strong>de</strong> in the application of<br />

accounting principles are indicated in sections “c”, “f”, “h”, “k”, “m”, “n”, “p”, “r” and “t” of this<br />

note.<br />

c) Adjustment for inflation<br />

Items inclu<strong>de</strong>d in the financial statements of each one of the Company’s entities are<br />

measured using the currency of the primary economic environment in which the entity<br />

operates (the functional currency). IAS 29, “Financial reporting in hyperinflationary<br />

economies”, is applied to the financial statements of the entities whose functional currency is<br />

the currency of a hyperinflationary economy. The functional and presentation currency of the<br />

Company is the Venezuelan bolivar (Bs).<br />

According to this standard, an economy is consi<strong>de</strong>red as hyperinflationary if the following<br />

conditions exist:<br />

a. The general population prefers to keep its wealth in non-monetary assets or in a<br />

relatively stable foreign currency.<br />

b. The general population regards monetary amounts not in terms of the local currency but<br />

in terms of a relatively stable foreign currency.<br />

c. Sales and purchases on credit take place at prices that compensate for the expected<br />

loss of purchasing power during the credit period.<br />

d. Interest rates, wages and prices are linked to a price in<strong>de</strong>x.<br />

e. The cumulative inflation rate over three years is approaching, or exceeds, 100%.<br />

For IAS 29 purposes, Venezuela was consi<strong>de</strong>red as a hyperinflationary economy until<br />

December 31, 2003 and, accordingly, non-monetary assets and liabilities (fixed assets,<br />

inventories, intangibles and <strong>de</strong>ferred revenue) and equity accounts inclu<strong>de</strong> the effects of<br />

inflation through that date. Beginning January 1, 2004, Venezuela is not consi<strong>de</strong>red as a<br />

hyperinflationary economy and all new transactions are recor<strong>de</strong>d and maintained at their<br />

original nominal values; non-monetary assets and liabilities originated before January 1, 2004<br />

are maintained at their acquisition or original value in constant bolivars as of December 31,<br />

2003.<br />

Three-year cumulative inflation for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005 was<br />

63.8%, 59.4% and 73.2%, respectively. For the years en<strong>de</strong>d December 31, 2007, 2006 and<br />

2005, inflation was 22.5%, 17.0% and 14.4%, respectively.<br />

9


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

d) Consolidation<br />

An entity is consi<strong>de</strong>red a subsidiary when the Company has the power to <strong>de</strong>termine its<br />

financial and operating policies, generally by owning equity representing more than 50% of<br />

the voting rights.<br />

The consolidated financial statements inclu<strong>de</strong> CANTV and all its majority owned subsidiaries.<br />

CANTV’s principal subsidiaries are: Movilnet, CANTV.Net and Caveguías. The Company<br />

also consolidates the workers’ benefit fund (Note 13 (c) - Stockhol<strong>de</strong>rs’ equity - Workers’<br />

benefit fund). All subsidiaries are wholly owned, except for Caveguías which is 80% owned.<br />

All significant intercompany balances and transactions among companies are eliminated in<br />

consolidation. The accounting practices and policies used by the Company’s subsidiaries<br />

have been adapted to be consistent with those used by CANTV.<br />

e) Segment reporting<br />

A business segment is a separate group of assets and operations engaged in providing<br />

products or services that are subject to risks and returns that are different from those of other<br />

business segments (Note 20 - Segment reporting). Substantially all of the Company’s<br />

businesses are conducted in Venezuela and substantially all its assets are located in<br />

Venezuela.<br />

f) Property, plant and equipment and <strong>de</strong>preciation<br />

Property, plant and equipment is recor<strong>de</strong>d at acquisition or construction cost, only when it is<br />

probable that it will generate future benefits and the asset’s cost can be <strong>de</strong>termined.<br />

Property, plant and equipment inclu<strong>de</strong>s the costs of materials used, as well as direct labor<br />

costs and other allocable costs incurred in connection with construction work in progress.<br />

The Company capitalizes the estimated cost of asset retirement which is <strong>de</strong>preciated over the<br />

remaining useful lives of the assets. Maintenance and repair costs are expensed when<br />

incurred, while major improvements (including technological upgra<strong>de</strong>s) and significant<br />

renewals that extend the assets’ useful lives or asset capability are capitalized.<br />

Upon disposal of fixed assets, the cost and accumulated <strong>de</strong>preciation are removed from fixed<br />

asset accounts, and any gain or loss <strong>de</strong>termined by comparing the proceeds with the carrying<br />

amount and are recognized as other expense (income), net in the consolidated statement of<br />

operations.<br />

Depreciation is calculated using the straight-line method over the estimated useful lives of<br />

fixed assets. Land is not <strong>de</strong>preciated.<br />

Due to rapid changes in technology and new competitors, selecting the estimated economic<br />

life of telecommunications plant and equipment requires a significant level of judgment. The<br />

Company annually reviews data on expected utilization of new equipment, asset retirement<br />

activity and net salvage values to <strong>de</strong>termine adjustments to <strong>de</strong>preciation rates.<br />

10


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

During the first quarter of 2006 and 2007, the Company performed an analysis of useful lives.<br />

The most significant changes were ma<strong>de</strong> for new additions, mainly in the plant category,<br />

resulting in a shorter useful life for commutation, transmission and data equipment. The<br />

remaining useful lives of assets already installed remained unchanged. The Company’s<br />

management consi<strong>de</strong>rs that as of December 31, 2007 and 2006, in accordance with<br />

applicable accounting principles, there is no impairment in the carrying value of this group of<br />

assets. Future changes in the Company’s business plan and/or in management assumptions<br />

may significantly affect estimates of the value of the use of property, plant and equipment as<br />

of December 31, 2007 (Note 2 (h) - Summary of significant accounting principles and policies<br />

- Impairment of long-lived assets).<br />

The estimated useful lives as of December 31, 2007 are as follows:<br />

11<br />

Useful<br />

lives<br />

(Years)<br />

Plant<br />

Wireline telecommunications<br />

Transmission equipment 5 to 15<br />

Access network 10 to 32<br />

Commutation equipment 4 to 13<br />

Other 3 to 20<br />

Wireless telecommunications<br />

Data transmission 5 to 6<br />

Commutation equipment 3 to 6<br />

Radio bases 3 to 7<br />

Other 3 to 7<br />

Other telecommunications services 2 to 13<br />

Buildings and facilities 3 to 30<br />

Furniture and equipment 5 to 10<br />

Vehicles 4 to 5<br />

g) Information systems ( software) and amortization<br />

This account inclu<strong>de</strong>s computer systems (software) acquired, <strong>de</strong>veloped or modified solely to<br />

meet the internal needs of the Company and is not for sale. The cost of certain projects and<br />

computer systems (software) for internal use and upgra<strong>de</strong>s that extend the assets’ useful<br />

lives or improve their capabilities is capitalized as assets and classified as information<br />

systems. Software maintenance and modification expenses that do not increase its<br />

functionality are expensed when incurred.<br />

Software acquired is capitalized on the basis of the costs incurred to acquire and bring to use<br />

the specific software. Costs related to the evaluation phase of an internally <strong>de</strong>veloped<br />

software project are recognized as an expense, and the i<strong>de</strong>ntifiable costs of <strong>de</strong>veloping<br />

software applications are capitalized if the Company is able to control the future benefits.<br />

Post-implementation and operation expenses are recognized as an expense of the year.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Amortization is calculated using the straight-line method over the estimated useful lives which<br />

are between three and seven years.<br />

The Company upgra<strong>de</strong>s its systems to adapt the network to the technological requirements of<br />

new products and services. I<strong>de</strong>ntifiable system upgra<strong>de</strong> costs are capitalized to the<br />

corresponding hardware within property, plant and equipment or information systems when<br />

this upgra<strong>de</strong> meets the criteria of a major improvement and renewal that extends the asset’s<br />

useful life or improve asset capacity and the Company is able to control the future benefits, or<br />

otherwise expensed. For accounting purposes these activities are not consi<strong>de</strong>red to be<br />

research and <strong>de</strong>velopment expenses. The Company conducts no other activities that could<br />

be consi<strong>de</strong>red research and <strong>de</strong>velopment.<br />

The Company does not hold intangible assets with in<strong>de</strong>finite useful lives.<br />

h) Impairment of long-lived assets<br />

The Company assesses impairment of long-lived assets, including intangible assets, whenever<br />

events or changes in circumstances indicate that the carrying amounts of such assets may not<br />

be recoverable. The recoverable amount is the higher of an assets’ fair value less cost to sell<br />

and its value in use. The value in use is the present value of the projection of discounted cash<br />

flows estimated to be generated by these assets or upon disposal. In the event that such cash<br />

flows are not expected to be sufficient to recover the recor<strong>de</strong>d value of the assets, these assets<br />

are written down to their estimated recoverable values. For the purposes of assessing<br />

impairment, assets are grouped at the lowest levels for which there are separately i<strong>de</strong>ntifiable<br />

cash flows (cash generating units).<br />

The Company’s management, based on its business plan for the period 2008-2013 approved<br />

by the Board of Directors on February 12, 2008, consi<strong>de</strong>rs that there are no events or<br />

circumstances that indicate that the carrying amount of long-lived assets may not be<br />

recoverable and, in accordance with applicable accounting principles, there is no impairment in<br />

the carrying value of these assets. In addition, management consi<strong>de</strong>rs that the estimates of<br />

future cash flows are reasonable; however, changes in estimates resulting in lower future cash<br />

flows and fair value due to unforeseen changes in business assumptions could negatively affect<br />

the valuations of those long-lived assets. These unforeseen changes inclu<strong>de</strong> significant<br />

technological changes, timely tariff approvals and macroeconomic changes, among others.<br />

i) Investments<br />

Investments in equity and obligations are classified as financial assets for “trading” and<br />

“available for sale” <strong>de</strong>pending on the purpose for which they were acquired, and are recor<strong>de</strong>d<br />

at their realizable or fair value.<br />

An investment is classified as for “trading” if acquired principally for the purpose of selling in<br />

the short term. Gains or losses arising from changes in fair value are presented in the<br />

consolidated statement of operations, un<strong>de</strong>r other expense (income), net.<br />

12


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

“Available for sale” investments are measured at their estimated realizable or fair value. The<br />

change in their fair values is presented in the statements of changes in stockhol<strong>de</strong>rs’ equity,<br />

un<strong>de</strong>r translation and other adjustments, until their sale.<br />

If the market for a financial asset is not active, the Company establishes fair value by using<br />

valuation techniques. These inclu<strong>de</strong> the use of recent arm’s length transactions, reference to<br />

other instruments that are substantially the same, discounted cash flow analysis and option<br />

pricing mo<strong>de</strong>ls, making maximum use of market inputs and relying as little as possible on<br />

entity-specific inputs.<br />

j) Inventories, spare parts and supplies, net<br />

Inventories, spare parts and supplies are recor<strong>de</strong>d at acquisition cost, net of reserves, which<br />

does not exceed their net realizable value. Certain inventories, spare parts and supplies are<br />

expensed when purchased due to their low value. Cost is <strong>de</strong>termined using the average<br />

method.<br />

Net realizable value is the estimated selling price in the ordinary course of business,<br />

consi<strong>de</strong>ring promotions, less the applicable variable selling expenses.<br />

The provision for inventory obsolescence is <strong>de</strong>termined based on an analysis performed on<br />

the specific turnover of materials and supplies, and the provision for net realizable value is<br />

recor<strong>de</strong>d monthly based on the lower of the specific net market price of wireline and wireless<br />

terminal equipment for sale and the book value. These provisions are presented as operating<br />

expenses.<br />

Current conditions in the local and global economies have a certain level of uncertainty. As a<br />

result, it is difficult to estimate the level of growth or contraction for the economy as a whole,<br />

and it is even more difficult to estimate growth or contraction in various parts of the economy.<br />

Because all components of Company’s budgeting and forecasting are <strong>de</strong>pen<strong>de</strong>nt upon<br />

estimates of growth or contraction in the markets it serves and <strong>de</strong>mand for its products or<br />

services, the prevailing economic uncertainties ren<strong>de</strong>r estimates of future <strong>de</strong>mand for product<br />

or services more difficult. Such economic changes may affect the sales of the Company’s<br />

products and its corresponding inventory levels, which would potentially impact the valuation<br />

of its inventory.<br />

k) Accounts receivable and provision for uncollectible accounts<br />

Accounts receivable are recognized initially at fair value less provision for impairment. A<br />

provision for impairment of accounts receivable is established when there is objective<br />

evi<strong>de</strong>nce that the Company will not be able to collect all amounts due according to the<br />

original terms of the receivables. Accounts receivables from Venezuelan Government entities<br />

that are expected to be collected after one year are adjusted at their present value at<br />

origination date. When an account receivable is uncollectible, it is written off against the<br />

provision for uncollectible accounts. Subsequent recoveries of amounts previously written off<br />

are credited as other income (expense), net in the consolidated statement of operations.<br />

13


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The Company maintains a provision for uncollectible accounts at a level <strong>de</strong>emed a<strong>de</strong>quate to<br />

provi<strong>de</strong> for potentially uncollectible receivables. The balance of this allowance for<br />

uncollectible accounts is continuously assessed and adjusted by management based on<br />

historic experience and other current factors that affect the collectibility of accounts<br />

receivable. Based on the analyses, as of December 31, 2007, the Company recor<strong>de</strong>d a<br />

provision equivalent to 1.8% of wireline services accounts receivable, 1.7% for wireless<br />

services accounts receivable, and 1.9% for Internet and other voice services. Additionally, a<br />

review of the age and status of receivables is performed, <strong>de</strong>signed to i<strong>de</strong>ntify risks on<br />

individual accounts and groups of accounts, in or<strong>de</strong>r to provi<strong>de</strong> these accounts with a specific<br />

allowance on a continuous basis.<br />

During 2006, based on historic experience and current trends, the Company changed its<br />

estimate for wireless telephony and Internet provision for uncollectibles, which was accounted<br />

for prospectively. The provision was previously estimated based on a percentage of gross<br />

revenues and aging analysis of accounts receivable but now the estimation is based on a<br />

percentage and aging analysis of accounts receivables, which is consi<strong>de</strong>red to be more<br />

appropriate un<strong>de</strong>r current circumstances. This change in estimate resulted in a reversal of<br />

Bs. 12,000 in the provision of 2006.<br />

During 2005, based on historic experience and current trends, the Company changed its<br />

estimate for fixed telephony provision for uncollectibles, which was accounted for<br />

prospectively. The provision was previously estimated based on a percentage of gross<br />

revenues and aging analysis of accounts receivable but now the estimation is based on a<br />

percentage and aging analysis of accounts receivables, which is consi<strong>de</strong>red to be more<br />

appropriate un<strong>de</strong>r current circumstances. This change in estimate resulted in a reversal of<br />

Bs. 20,000 in the provision of 2005.<br />

A full allowance is provi<strong>de</strong>d for receivables of wireline and wireless subscribers from<br />

permanently disconnected subscribers. Permanent disconnections are ma<strong>de</strong> after<br />

performing several collection efforts following non-payment by subscribers. Such permanent<br />

disconnections generally occur within approximately 90 days.<br />

Changes in external factors, such as economic environment, may impact the estimations.<br />

The Company believes that its provision for uncollectibles as of December 31, 2007 and 2006<br />

is a<strong>de</strong>quate and proper. However, if the financial condition of customers were to <strong>de</strong>teriorate,<br />

actual write-offs might be higher than expected.<br />

l) Cash and temporary investments<br />

Cash and temporary investments inclu<strong>de</strong> short-term and highly liquid investments, having<br />

maturities of three months or less, and are consi<strong>de</strong>red cash equivalents. These investments<br />

are recor<strong>de</strong>d at their fair value. Foreign exchange gain (loss) on cash and temporary<br />

investments are reflected as a separate caption in the consolidated statement of cash flows.<br />

14


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

m) Provision for litigation<br />

The Company’s management records a provision for those contingencies and/or litigation,<br />

which are consi<strong>de</strong>red probable and can be measured with reasonable sufficient reliability,<br />

based on the opinion of legal counsel (Note 19 (c) - Commitments and contingencies -<br />

Litigation and provision for litigation). The Company’s management believes that the<br />

provision for litigation recor<strong>de</strong>d as of December 31, 2007 and 2006 is a<strong>de</strong>quate and<br />

reasonable to cover the i<strong>de</strong>ntified risks. However, the provision is based on <strong>de</strong>velopments to<br />

date and the final outcome of litigation may be different than expected.<br />

n) Revenue recognition<br />

Revenue for wireline services, wireless services, Internet access and data transmission, are<br />

recognized in the period in which services are ren<strong>de</strong>red, based on minutes of use and basic<br />

monthly recurring charges, all net of promotional discounts. Revenue from settlement of<br />

traffic with international telecommunications carriers is recognized on a net basis and based<br />

on estimates of traffic volume and rates as earned or caused.<br />

Revenue related to phone handset sales is recognized when the equipment is <strong>de</strong>livered and<br />

accepted by the customer or distributor. The distributor only has the right of return of<br />

equipment using the warranty only in case of damaged equipment. The Company does not<br />

have obligations of returns for excess inventories with the distributors. Equipment sales are<br />

recognized as income and the corresponding cost of sales as part of the operating expenses.<br />

Submarine cable usage is recognized as revenue on a monthly basis, once the service is<br />

ren<strong>de</strong>red.<br />

Unlimited plans for Internet access are recognized as revenue on a monthly basis, once the<br />

service is ren<strong>de</strong>red.<br />

Amounts related to prepaid cards are recognized as revenue based on monthly usage.<br />

Prepaid cards expire in one year after being activated by the customer. Unused balances of<br />

prepaid cards are recognized as revenues at expiration date.<br />

Monthly charges for telecommunications services are recognized as revenues on a monthly<br />

basis, once the service is ren<strong>de</strong>red.<br />

Advertising in telephone directories is recognized as revenues when the obligations to the<br />

customers are fulfilled, which is at the time of the publication and distribution of directories.<br />

The Company records revenues from other telecommunications services which inclu<strong>de</strong><br />

interconnection facilities, data transmission services, late payment charges, reconnection fees<br />

and miscellaneous charges.<br />

Interconnection facilities are recognized as revenue on a monthly basis, once the service is<br />

ren<strong>de</strong>red.<br />

15


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Data transmission services inclu<strong>de</strong> a monthly recurring fee, which is initially recor<strong>de</strong>d as<br />

<strong>de</strong>ferred revenue for services billed in advance, and revenue is recognized based on traffic<br />

when the service is ren<strong>de</strong>red.<br />

Late payment charges are recognized as revenues when generated, which is after 30 days of<br />

non-payment by the subscriber.<br />

Reconnection fees are recognized as revenue when generated, which is the moment the<br />

subscriber’s line is reconnected after paying overdue amounts.<br />

Miscellaneous charges inclu<strong>de</strong> subscriber line relocation, private number, other equipment<br />

sales and vertical services, and are recognized as revenue once the service is ren<strong>de</strong>red or<br />

the equipment is sold and <strong>de</strong>livered.<br />

Revenue from wireless line activation fees charged to new customers is <strong>de</strong>ferred and<br />

recognized monthly over the estimated average time that the customer will maintain and use<br />

wireless lines. The amortization of the <strong>de</strong>ferred amount is calculated using the straight line<br />

method.<br />

The Company records as <strong>de</strong>ferred revenue billed services not ren<strong>de</strong>red, such as submarine<br />

cable usage, unlimited plans for Internet access, amounts related to unused prepaid cards,<br />

monthly advanced charges for telecommunications services and telephone directories.<br />

Earned revenues pending for billing are inclu<strong>de</strong>d in accounts receivable.<br />

Deposits received from subscribers for wireline service activation are recor<strong>de</strong>d as a liability<br />

when reimbursable (Note 16 - Other current liabilities).<br />

The Company has agreements with customers, in which certain equipments are sold<br />

including mo<strong>de</strong>ms, personal computers, among others, financed without charging interest.<br />

These revenues and the corresponding accounts receivable are recognized at present value<br />

using the effective interest method. Interest income is recognized on a time-proportion basis<br />

using the effective interest method.<br />

Customer arrangements that inclu<strong>de</strong> both equipment and services sold in bundled packages<br />

are evaluated to <strong>de</strong>termine whether the elements are separable. If the elements are <strong>de</strong>emed<br />

separable and fair value can be reliably <strong>de</strong>termined, total revenue is allocated based on the<br />

relative fair values of the separate elements and the revenue associated with each element is<br />

recognized as earned. Equipment sales are recognized upon <strong>de</strong>livery and each service is<br />

recognized according to the applicable revenue recognition policy. If the elements are not<br />

<strong>de</strong>emed separable, total revenue is <strong>de</strong>ferred and recognized ratably over the longer of the<br />

contractual period or the expected customer relationship period.<br />

16


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The Company has agreements with third parties to act as exclusive authorized agents to<br />

capture and provi<strong>de</strong> wireless services and equipment sales to new customers. The Company<br />

gives discounts based on volume of equipment sold. Discounts earned by the authorized<br />

agents are accrued based on equipment sold, and recor<strong>de</strong>d as a reduction of the Company’s<br />

revenues in the corresponding caption.<br />

The Company also has agreements with third parties to provi<strong>de</strong> them with Telecommunication<br />

Center franchises that ren<strong>de</strong>r fixed line services directly to the public. The Company is<br />

required to pay commissions as sales incentives established by type and volume of services<br />

ren<strong>de</strong>red by the Telecommunication Center in its installations. Commissions earned by the<br />

Telecommunication Centers are consi<strong>de</strong>red as cash incentives and are recor<strong>de</strong>d as a<br />

reduction of the Company’s revenues in the corresponding caption, <strong>de</strong>pending on the related<br />

services. The Company also gives discounts based on volume of equipment sold. Discounts<br />

earned by the Telecommunication Centers are accrued based on equipment sold, and<br />

recor<strong>de</strong>d as a reduction of the Company’s revenues in the corresponding caption.<br />

o) Cost and expense recognition<br />

Costs and expenses are recognized on an accrual basis.<br />

Accounts payable are initially recognized at their fair value and later recor<strong>de</strong>d at the<br />

amortized amount.<br />

Costs and expenses related to the publication of directories, including production and printing<br />

costs and selling and distribution costs are recognized upon publication and distribution of the<br />

directories.<br />

The Company, through its business units, performs multiple market studies to i<strong>de</strong>ntify new<br />

products and services to remain competitive, which are recognized as operating expenses as<br />

incurred. These activities are not consi<strong>de</strong>red to be research and <strong>de</strong>velopment costs.<br />

Advertising costs are recognized as operating expenses as incurred. Advertising expense for<br />

the years en<strong>de</strong>d December 31, 2007, 2006 and 2005 was Bs. 195,097, Bs. 108,801 and Bs.<br />

82,835, respectively.<br />

p) Income tax<br />

Income tax is calculated based upon taxable income, which is different from income before<br />

tax for accounting purposes. Venezuelan tax legislation does not permit consolidation of<br />

results of subsidiaries for tax purposes. Tax credits for new investment in property, plant and<br />

equipment reduce income tax for the year in which such assets are placed in service and are<br />

permitted to be carried forward for three years (Note 17 - Taxes). Tax losses generated<br />

during the year, except those from tax inflation adjustment, are permitted to be carried<br />

forward for three years.<br />

17


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The Company records income taxes in accordance to IAS 12, “Accounting for income taxes”,<br />

which requires the recognition of assets and liabilities for the accounting of <strong>de</strong>ferred income<br />

taxes. Un<strong>de</strong>r this method, <strong>de</strong>ferred income taxes reflect the net effect of the tax<br />

consequences expected in the future as a result of: (a) Temporary differences due to the<br />

application of statutory tax rates applicable in future years over the differences between the<br />

amounts according to the balance sheet and the tax base of existing assets and liabilities;<br />

and (b) Tax credits and losses carryforwards. In addition, un<strong>de</strong>r IAS 12, the effects on<br />

<strong>de</strong>ferred taxes of changes in tax rates are recognized in the income of the year. A <strong>de</strong>ferred<br />

tax asset is recognized if it is probable that future tax income will be generated to be used.<br />

Deferred income tax provi<strong>de</strong>s for temporary differences arising on investments in<br />

subsidiaries, except where the timing of the reversal of the temporary difference is controlled<br />

by the Company and it is probable that the temporary difference will not be reversed in the<br />

foreseeable future. The main items generating <strong>de</strong>ferred taxes are the differences between tax<br />

and book bases of property, plant and equipment, pension and other post-retirement benefit<br />

obligation liabilities, net and some provisions which will be <strong>de</strong>ductible in future years.<br />

Differences between tax and book bases of property, plant and equipment generate a<br />

<strong>de</strong>ferred tax asset since property, plant and equipment are adjusted for inflation for tax<br />

purposes creating a higher tax base which will be realized in the future through a higher<br />

<strong>de</strong>preciation expense <strong>de</strong>ductible for tax purposes. Pension plan and other post-retirement<br />

benefit obligation liabilities also generate a <strong>de</strong>ferred tax asset which will be reversed in the<br />

future when payments and contributions will be ma<strong>de</strong>.<br />

The Company, based on its business plan for the period 2008-2013 approved by the Board of<br />

Directors on February 12, 2008, and consi<strong>de</strong>ring that the Company generated taxable income<br />

in the past, consi<strong>de</strong>rs that the estimates of future taxable income to be reasonable and<br />

sufficient to realize the recognized <strong>de</strong>ferred tax assets.<br />

q) Employee severance benefits and other benefits<br />

The costs of <strong>de</strong>fined contributions to employee severance benefits are calculated and<br />

recor<strong>de</strong>d on an accrual basis in accordance with the Venezuelan Labor Law and CANTV’s<br />

current collective bargaining agreement. Un<strong>de</strong>r the current Venezuelan Labor Law,<br />

employees earn a severance in<strong>de</strong>mnity equal to five days’ salary per month, up to a total of<br />

60 days per year of service, with no retroactive adjustment. Labor-related in<strong>de</strong>mnities are<br />

earned once an employee has completed three months of continuous service and are<br />

recor<strong>de</strong>d on an accrual basis. Beginning with the second year of service, the employee<br />

earns an additional two days’ salary for each year of service (or fraction of a year greater than<br />

six months), cumulative up to a maximum of 30 days’ salary. Severance benefits must be<br />

calculated and settled monthly and either <strong>de</strong>posited in a severance trust fund or accrued in<br />

the employer’s accounting records and bear interest, as specified in writing by each<br />

employee. No additional payments and/or <strong>de</strong>posits related to past services are required.<br />

18


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

In the event of unjustified termination, employees have the right to an additional in<strong>de</strong>mnity<br />

payment of one month’s salary per year of service up to a maximum of 150 days of current<br />

salary. Furthermore, in the event of unjustified termination, the Venezuelan Labor Law<br />

requires payment of an additional severance benefit up to a maximum of 90 days of current<br />

salary based on length of employment. This additional in<strong>de</strong>mnity does not apply when the<br />

employee voluntary terminates the labor relation. The Company recognizes the costs of this<br />

additional termination benefits when it is <strong>de</strong>monstrably committed to either: (i) terminating the<br />

employment of current employees according to a <strong>de</strong>tailed formal plan without possibility of<br />

withdrawal, or (ii) providing termination benefits as a result of an offer ma<strong>de</strong> to encourage<br />

employees to voluntary terminate.<br />

Additionally, the Venezuelan Labor Law requires a mandatory annual profit-sharing<br />

distribution to all employees in amounts of up to 120 days of salary. The Company ma<strong>de</strong><br />

distributions equal to 120 days of salary for the years en<strong>de</strong>d December 31, 2007, 2006 and<br />

2005, totaling Bs. 132,201, Bs. 109,916 and Bs. 88,549, respectively.<br />

Employee entitlements to annual compensated leave are accrued as earned by the<br />

employees.<br />

The Company has a workers’ benefit program <strong>de</strong>signed, among other things, to annually<br />

reward employee excellence via the voluntary free granting of Company shares (Note 13 (c) -<br />

Stockhol<strong>de</strong>rs’ equity - Worker’s benefit fund). This benefit is recognized as an expense when<br />

the shares are awar<strong>de</strong>d to the worker and the amount is <strong>de</strong>termined based on the market<br />

value at the date when the shares are granted.<br />

The Company does not grant stock purchase options, except for the option mentioned in<br />

Note 13 (d) - Stockhol<strong>de</strong>rs’ equity - Stock option.<br />

As of March 10, 2008, certain provisions of CANTV’s 2007-2009 collective bargaining<br />

agreement are still un<strong>de</strong>r negotiation with CANTV’s workers, and the possible effects on the<br />

2007 consolidated financial statements of the final agreements reached with respect to such<br />

provisions are not known,<br />

r) Pension plan and other post-retirement benefits<br />

The costs of <strong>de</strong>fined benefit pension plan and other post-retirement benefits relating to health<br />

care expenses are accrued based on actuarial calculations performed by in<strong>de</strong>pen<strong>de</strong>nt<br />

actuaries, using the projected credit method and nominal discount rates, asset returns, salary<br />

progressions and projected medical costs, to calculate projected benefit liabilities (Note 15 -<br />

Retirement benefits).<br />

Actuarial gains and losses may result from differences between assumptions used for their<br />

estimates (including inflation rates) and actual results (Note 15 - Retirement benefits). In<br />

2007 and 2006, cumulative actuarial gains and losses in excess of 10% of the greater of<br />

projected benefit obligations and market-related value of plan assets are amortized<br />

19


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

conservatively and consistently over a period of four years, which was shorter than the<br />

expected average remaining future service of currently active employees and resulted in a<br />

faster recognition of cumulative actuarial gains and losses. Beginning in 2008, the Company<br />

has changed the amortization period for cumulative actuarial gains and losses to the<br />

expected average future service of current active employees.<br />

The measurement of pension obligations, costs and liabilities is <strong>de</strong>pen<strong>de</strong>nt on a variety of<br />

long-term assumptions, including estimates of the present value of projected future pension<br />

payments to plan participants, consi<strong>de</strong>ring the likelihood of potential future events, such as<br />

minimum urban wages increases and <strong>de</strong>mographic experience. These assumptions may<br />

have an effect on the amount and timing of future contributions, if any variation occurs.<br />

Additionally, the plan trustee conducts an in<strong>de</strong>pen<strong>de</strong>nt valuation of the fair value of pension<br />

plan assets.<br />

The discount rate enables us to state expected future cash flows at a present value on the<br />

measurement date. The Company is required to select a long-term rate that represents the<br />

market rate for high-quality fixed income investments or for Venezuelan Government bonds,<br />

and consi<strong>de</strong>rs the timing and amounts of expected future benefit payments, for which the<br />

Company has selected the Venezuelan Government bonds. A lower discount rate increases<br />

the present value of benefit obligations and usually increases expense. The Company’s<br />

inflation assumption is based on projections by the Ministry of the Popular Power for Finance<br />

and the Central Bank of Venezuela. The salary growth assumptions consi<strong>de</strong>r the Company’s<br />

long-term actual experience, the future outlook and projected inflation. The expected return<br />

on plan assets reflects asset allocations, investment strategy and the views of investment<br />

managers. The actuarial values are calculated based on the Company’s specific experience<br />

combined with published statistics and market indicators. The plan assets are presented at<br />

their fair value and those <strong>de</strong>nominated in foreign currency are converted into bolivars using<br />

the official exchange rate at the date of the financial statements.<br />

The Company provi<strong>de</strong>s certain medical benefits to substantially all retired employees and<br />

accrues actuarially <strong>de</strong>termined post-retirement benefit costs as active employees earn these<br />

benefits.<br />

During 2007, the Company <strong>de</strong>ci<strong>de</strong>d to establish a <strong>de</strong>fined contribution pension plan for all<br />

employees of the subsidiaries Movilnet, CANTV.Net and Caveguías, and for those employees<br />

of CANTV who began their employment on May 21, 2007 or thereafter. The plan comprises a<br />

3% contribution from the employee and 3% contribution from the Company. The Company<br />

has no further payment obligations once the contributions have been paid. The contributions<br />

are recognized as employee benefit expense when they are due.<br />

20


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

s) Foreign currency transactions<br />

Foreign currency transactions are recor<strong>de</strong>d at the exchange rate as of the transaction date.<br />

Outstanding balances of foreign currency assets and liabilities are translated into bolivars<br />

using the official, controlled and fixed exchange rate at the balance sheet date, which was Bs.<br />

2,150 per US$1 as of December 31, 2007 and 2006 (Note 4 - Balances in foreign currency<br />

and Note 21 - Exchange controls). Any exchange gain or loss from the translation of these<br />

balances or transactions is presented as exchange gain (loss), net shown in the<br />

accompanying consolidated statement of operations. The Company does not engage in<br />

hedging activities in connection with its foreign currency balances and transactions.<br />

During the years en<strong>de</strong>d December 31, 2007 and 2006 there was no official <strong>de</strong>valuation of the<br />

Bolivar against the U.S. dollar. The <strong>de</strong>valuation of the bolivar against the U.S. dollar was<br />

12% for the year en<strong>de</strong>d December 31, 2005.<br />

t) Fair value of financial instruments<br />

Financial instruments are recor<strong>de</strong>d in the balance sheet as part of the assets or liabilities at<br />

their corresponding fair market value. The carrying value of cash and cash equivalents, tra<strong>de</strong><br />

accounts receivable and tra<strong>de</strong> accounts payable approximates their fair values since these<br />

instruments have short-term maturities. Management believes that carrying amounts of<br />

CANTV and subsidiaries’ loans and other financing obligations subject to market-variable<br />

interest approximate fair value. The Company has not i<strong>de</strong>ntified any financial instruments<br />

that qualify as embed<strong>de</strong>d <strong>de</strong>rivatives. The Company records transactions with financial<br />

instruments at their transaction date.<br />

Financial instruments that qualify as <strong>de</strong>rivatives are initially recognized at fair value on the<br />

date a <strong>de</strong>rivative contract is entered into and are subsequently remeasured at their fair value<br />

through profit and loss, based on current market value.<br />

The Company does not have financial instruments that qualify for <strong>de</strong>signation as hedging<br />

instruments.<br />

u) Concentration of credit risk<br />

Although cash and temporary investments, accounts receivable and other financial<br />

instruments of CANTV and subsidiaries are exposed to a potential credit loss risk, the<br />

Company’s management consi<strong>de</strong>rs that this risk is a<strong>de</strong>quately covered by recor<strong>de</strong>d<br />

provisions. Cash and temporary investments inclu<strong>de</strong> short-term financial investments,<br />

primarily certificates of <strong>de</strong>posit and commercial paper, which have maturities of three months<br />

or less, in institutions with high creditworthiness. Other financial instruments inclu<strong>de</strong><br />

investments in bonds <strong>de</strong>nominated in bolivars and U.S. dollars. Most of the Company’s<br />

accounts receivables are from a diversified group of customers and individually do not<br />

represent a significant credit risk. There is a concentration of Venezuelan Government<br />

accounts receivables (Note 10 - Accounts receivable from Venezuelan Government entities).<br />

There is also a concentration of credit risk due to the fact that subscribers accounts<br />

receivable are all from <strong>de</strong>btors of the same country.<br />

21


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

v) Earnings per share<br />

Earnings per share is calculated by 778,287,442, 775,950,426 and 776,167,423 average<br />

common shares outstanding on December 31, 2007, 2006 and 2005, respectively. This<br />

number of shares exclu<strong>de</strong>s workers’ benefit shares, which are consi<strong>de</strong>red as treasury stock<br />

for accounting purposes. Basic and diluted earnings per share are the same for all the<br />

periods presented, since the Company did not have instruments consi<strong>de</strong>red potentially<br />

dilutive.<br />

w) Divi<strong>de</strong>nd distribution<br />

Divi<strong>de</strong>nd distribution to the Company’s stockhol<strong>de</strong>rs is recognized as a liability in the<br />

Company’s financial statements in the period in which the divi<strong>de</strong>nds are approved by the<br />

Company’s stockhol<strong>de</strong>rs.<br />

Additionally, the Company recognizes a liability for the minimum divi<strong>de</strong>nds required to be<br />

<strong>de</strong>clared pursuant to the Capital Market Law (Note 13 (b) - Stockhol<strong>de</strong>rs’ equity - Divi<strong>de</strong>nds).<br />

x) Market and liquidity risk<br />

The carrying amounts of cash and temporary investments, receivables and payables, and<br />

short and long-term <strong>de</strong>bt approximate their estimated fair values.<br />

The Company is exposed to market risk, including changes in interest rates and foreign<br />

currency exchange rates.<br />

The Company limits investment risk by only investing in securities of the most solid<br />

companies and institutions. The Company is averse to investment loss and ensures the<br />

safety and preservation of its invested funds by limiting <strong>de</strong>fault risk, market risk and<br />

investment risk; therefore, it mainly invests in those investments secured or guaranteed by its<br />

parent company. The Company sometimes has acquired <strong>de</strong>rivative financial. The Company<br />

does not expect any material loss in its investment portfolio.<br />

The Company does not hedge against foreign currency exposures. Currently, U.S. dollars<br />

are not readily available due to the exchange controls regime in effect since February 5, 2003<br />

(Note 21 - Exchange controls).<br />

Pru<strong>de</strong>nt liquidity risk management implies maintaining sufficient cash and temporary<br />

investments, the availability of funding through an a<strong>de</strong>quate amount of committed credit<br />

facilities and the ability to close out market positions. Due to the dynamic nature of<br />

un<strong>de</strong>rlying businesses, the Company’s treasury aims to maintain flexibility in funding by<br />

keeping committed credit lines available.<br />

The Company’s objective when managing capital risk is to safeguard the Company’s ability to<br />

continue as a going concern in or<strong>de</strong>r to provi<strong>de</strong> returns for sharehol<strong>de</strong>rs and to maintain an<br />

optimal capital structure to reduce the cost of capital.<br />

22


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

y) Total recognized gains and losses (inclu<strong>de</strong>s those recognized directly in equity)<br />

Total recognized gains and losses represents changes in stockhol<strong>de</strong>rs’ equity for the period<br />

from transactions and other events, and circumstances from non-owner sources. It inclu<strong>de</strong>s<br />

all changes in equity for the period, except those resulting from investments by owners and<br />

distributions to owners. During the years en<strong>de</strong>d December 31, 2006 and 2005, the only<br />

component recor<strong>de</strong>d directly in equity and not recognized in the statement of operations was<br />

the unrealized gain (loss) from investments consi<strong>de</strong>red as available-for-sale. During the year<br />

en<strong>de</strong>d December 31, 2007, there is no amount recor<strong>de</strong>d for this concept.<br />

23<br />

2007 2006 2005<br />

Net income 1,023.927 1,130,375 214,408<br />

Unrealized loss on investments available-for-sale - - (837)<br />

Realization of gain on investments available-for-sale - (257) (71,260)<br />

Realization of cumulative translation adjustment - - (39,413)<br />

Recognized directly in equity - (257) (111,510)<br />

Total recognized gain and loss 1,023.927 1,130,118 102,898<br />

3. Concessions and Telecommunications Regulation<br />

CANTV’s services and tariffs are regulated by the rules established in the Concession<br />

Agreement (referred to as the Concession), the Telecommunications Law enacted in 2000<br />

(referred to as the Telecommunications Law) and its Regulations.<br />

The Telecommunications Law and its Regulations, which provi<strong>de</strong> the general legal framework<br />

for the regulation of telecommunications services in Venezuela, establish that suppliers of<br />

public telecommunications services must operate un<strong>de</strong>r administrative licenses and<br />

concessions granted by the Venezuelan Government, through the Ministry of the Popular<br />

Power for Telecommunications and Information Technology (the Company’s principal<br />

stockhol<strong>de</strong>r).<br />

The Comisión Nacional <strong>de</strong> Telecomunicaciones (CONATEL) (the Venezuelan National<br />

Telecommunications Commission) is an in<strong>de</strong>pen<strong>de</strong>nt regulatory body un<strong>de</strong>r the direction of<br />

the Ministry of the Popular Power for Telecommunications and Information Technology<br />

(principal stockhol<strong>de</strong>r of the Company), created by Presi<strong>de</strong>ntial Decree in September 1991,<br />

which has, among others, the authority to manage, regulate and control the use of limited<br />

resources for telecommunications services, grant administrative licenses and concessions,<br />

recommend the approval of tariffs and collection of taxes, as well as the promotion and<br />

protection of free competition together with the Superinten<strong>de</strong>ncia para la Promoción <strong>de</strong> la<br />

Libre Competencia (Pro-Competencia) (Superinten<strong>de</strong>ncy for the Promotion of Free<br />

Competition).


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Concession Agreement<br />

CANTV entered into a Concession Agreement with the Venezuelan Government in 1991 to<br />

provi<strong>de</strong>, manage and operate national telecommunications services, including wireline<br />

telephone services, private networks and value-ad<strong>de</strong>d services, guaranteeing high quality<br />

service, mo<strong>de</strong>rnizing and expanding the network, introducing progressive rate rebalancing<br />

and establishing a framework for the introduction of competition into the market. CANTV did<br />

not make an initial payment for this Venezuelan Government concession and for accounting<br />

purposes it was recognized at a symbolic minimum nominal amount. November 2000<br />

marked the opening of the telecommunications market to competition and the entrance of<br />

new competitors (Note 3 (c) - Concessions and telecommunications regulation - Regulation -<br />

Competition). Since June 12, 2000, the Company has been regulated by the Concession, the<br />

Telecommunications Law and its Regulations (Note 19 (d) - Commitments and contingencies<br />

- Concessions mandates).<br />

Significant terms of the Concession are as follows:<br />

a) The Concession established a special privilege regime of limited concurrence, through<br />

which the Venezuelan Government <strong>de</strong>signated CANTV, except in certain circumstances,<br />

as the exclusive provi<strong>de</strong>r of basic telephone service, including local, national and<br />

international access until November 27, 2000. Beginning on that date, any party that<br />

obtains the corresponding administrative concession is permitted to provi<strong>de</strong> basic<br />

telecommunications services nationwi<strong>de</strong>.<br />

b) The Concession is for 35 years (ending in 2026), and is renewable, with no cost, for an<br />

additional period of 20 years, subject to the approval of the Venezuelan Government and<br />

satisfactory performance by CANTV of its obligations un<strong>de</strong>r the Concession.<br />

c) Until December 31, 2000, CANTV paid the Venezuelan Government an annual 5.5% of<br />

billed services by means of a concession tax. Beginning January 2001, the Company is<br />

required to pay up to 4.8% of gross revenues (Note 3 (a) - Concessions and<br />

telecommunications regulation - Regulation - Tax regime). These expenses are<br />

presented in the accompanying consolidated statement of operations as concession and<br />

other taxes totaling Bs. 157,582, Bs. 127,798 and Bs. 107,363 for the years en<strong>de</strong>d<br />

December 31, 2007, 2006 and 2005, respectively.<br />

d) The Concession specifies various penalties that may be imposed on CANTV for<br />

negligent or intentional violation of its provisions. Depending on the nature of the<br />

violation, penalties may inclu<strong>de</strong> a public reprimand, a fine up to 1% of services billed,<br />

and/or the termination of the Concession. As of December 31, 2007, CANTV has not<br />

been penalized for any violation. Furthermore, the penalties that have been assessed<br />

against CANTV for other matters through December 31, 2007 have not been material.<br />

e) Upon any termination of the Concession, all of CANTV’s real estate, equipment,<br />

structures and facilities assets utilized in the performance of services un<strong>de</strong>r the<br />

24


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Concession would be forfeited to the Venezuelan Government in exchange for a<br />

payment equal to an amount <strong>de</strong>termined by an expert and in<strong>de</strong>pen<strong>de</strong>nt entity agreed by<br />

the Venezuelan Government and CANTV.<br />

On May 21, 2007, the Venezuelan Government, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, assumed operating control of the<br />

Company, when it acquired ownership of a majority of CANTV’s shares (Note 13 (a) -<br />

Stockhol<strong>de</strong>rs' Equity - Capital stock), without changing the terms of the Concession, which<br />

remain in effect until its expiration date. The regulatory body (CONATEL) is un<strong>de</strong>r the<br />

direction of this Ministry.<br />

Cellular Concession<br />

On May 19, 1992, CANTV purchased a cellular service concession (the Cellular Concession)<br />

from the Venezuelan Government for Bs. 230,766 (Bs. 5,388 in nominal amounts) and<br />

established the subsidiary Movilnet to operate wireless communications. The Cellular<br />

Concession was granted for 20 years and is renewable with no cost for an additional 20-year<br />

period, subject to the satisfactory performance of the obligations established in the Cellular<br />

Concession. The amount paid for the acquisition of the Cellular Concession is being<br />

amortized over 40 years using the straight-line method. As of December 31, 2007 and 2006,<br />

accumulated amortization is Bs. 92,039 and Bs. 86,358, respectively. Amortization expense<br />

was Bs. 5,681 for each one of the years en<strong>de</strong>d December 31, 2007, 2006 and 2005.<br />

The Cellular Concession specifies various penalties that may be imposed on Movilnet for<br />

negligent or intentional violation of its provisions. Depending on the nature of the violation,<br />

penalties may inclu<strong>de</strong> a public reprimand, the imposition of fines proportionate to the damage<br />

caused and/or temporary suspension or termination of the concession. Through December<br />

31, 2007, no penalties have been imposed on Movilnet for any such violation.<br />

Upon any termination of the Cellular Concession, all of Movilnet’s real estate, equipment,<br />

structures and facilities utilized in the performance of services un<strong>de</strong>r the Cellular Concession<br />

would be forfeited to the Venezuelan Government in exchange for a payment equal to the net<br />

value of such assets recor<strong>de</strong>d for income tax purposes. The net tax value of Movilnet’s<br />

assets as of December 31, 2007, on such basis was Bs. 3,227,475.<br />

Beginning in 2001, the tax regime applicable to cellular telephony service operators is up to<br />

9.3% of gross revenues and with periodic <strong>de</strong>creases of 1% per annum through 2005 (Note 3<br />

(a) - Concessions and telecommunications regulation - Regulation - Tax regime). These<br />

expenses are presented in the accompanying consolidated statement of operations as<br />

concession and other taxes totaling Bs. 189,410. Bs. 146,046 and Bs. 94,852 for the years<br />

en<strong>de</strong>d December 31, 2007, 2006 and 2005, respectively.<br />

On August 14, 2006, CONATEL granted Movilnet the administrative license with the attributes<br />

of ground mobile radio communications and establishment and use of telecommunication<br />

networks. Later, on November 28, 2007, CONATEL transformed Cellular Concession into an<br />

25


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

administrative license and inclu<strong>de</strong>d the attributes of mobile telephony and transport.<br />

On May 21, 2007, the Venezuelan Government, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, assumed operating control of the<br />

Company, when it acquired ownership of a majority of CANTV’s shares (Note 13 (a) -<br />

Stockhol<strong>de</strong>rs' Equity - Capital stock), without changing the terms of the Concession, which<br />

remain in effect until its expiration date. The regulatory body (CONATEL) is un<strong>de</strong>r the<br />

direction of this Ministry.<br />

Cellular Concession for 1900 MHz Band<br />

On November 28, 2007, Movilnet obtained a cellular concession for the use the radioelectric<br />

service in the 1900 MHz band (the Cellular Concession for 1900 MHz band) for Bs. 258,000<br />

(equivalent to Bs. 248.798, which represents the present value of the discounted cash flow to<br />

be disbursed for the payment of the concession), payable in three installments without<br />

interest as follows:<br />

a) Payment of Bs. 129.000 (equivalent to US$60 million at the official exchange rate in<br />

effect on the date of the subscription of the concession), at the time the concession was<br />

granted.<br />

b) Payment of Bs. 64.500 (equivalent to US$30 million at the official exchange rate in effect<br />

on the date of the subscription of the concession), one year after the date that the<br />

concession was granted.<br />

c) Payment of Bs. 64.500 (equivalent to US$30 million at the official exchange rate in effect<br />

on the date of the subscription of the concession), two years after the date that the<br />

concession was granted.<br />

The Cellular Concession for 1900 MHz band was granted for 15 years in accordance to the<br />

Telecommunications Law Regulations on Administrative Licenses and Concessions for the<br />

Use of the Radioelectric Spectrum. The Cellular Concession for 1900 MHz band will be used<br />

for the new GSM cellular network (Note 5 - Property, plant and equipment, net). The amount<br />

paid for the Cellular Concession for 1900 MHz band will be amortized over 15 years using the<br />

straight-line method.<br />

Value-Ad<strong>de</strong>d Services Concession<br />

The majority of the Company’s value-ad<strong>de</strong>d services are provi<strong>de</strong>d directly by CANTV’s wholly<br />

owned subsidiary, CANTV.Net. On October 5, 1995, CONATEL granted to CANTV.Net the<br />

Value-Ad<strong>de</strong>d Services Concession, which has an initial term of 10 years and is renewable for<br />

an additional 10-year period, subject to certain conditions.<br />

Un<strong>de</strong>r the Value-Ad<strong>de</strong>d Services Concession, CANTV.Net is granted the right to offer voicemail<br />

services nationwi<strong>de</strong>. Subsequently, the Value-Ad<strong>de</strong>d Services Concession has been<br />

expan<strong>de</strong>d to allow CANTV.Net to offer additional services such as Internet access. Pursuant<br />

26


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

to the Telecommunications Law, CANTV.Net applied for the conversion of this concession<br />

into an administrative license. The conversion of concessions into administrative licenses<br />

had to be completed within two years following the enactment of the Telecommunications<br />

Law. CONATEL has not issued the administrative license to CANTV.Net. The Company is<br />

currently performing the necessary formalities to obtain the right to continue offering these<br />

services. On March 30, 2006, CANTV.Net received a communication from CONATEL<br />

indicating that all rights and obligations established in the concession granted remain in effect<br />

until CONATEL completes the transformation of the administrative licenses.<br />

The Value Ad<strong>de</strong>d Services Concession requires the payment to CONATEL of an annual<br />

concession fee equal to 4.3% of the revenues of CANTV.Net (Note 3 (a) - Concessions and<br />

telecommunications regulation - Regulation - Tax regime). These expenses are presented in<br />

the accompanying consolidated statements of operations as concession and other taxes<br />

totaling Bs. 15,507, Bs. 11.693 and Bs. 7,787 for the years en<strong>de</strong>d December 31, 2007, 2006<br />

and 2005, respectively.<br />

On May 21, 2007, the Venezuelan Government, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, assumed operating control of the<br />

Company, when it acquired ownership of a majority of CANTV’s shares (Note 13 (a) -<br />

Stockhol<strong>de</strong>rs' Equity - Capital stock), without changing the terms of the Concession, which<br />

remain in effect until its expiration date. The regulatory body (CONATEL) is un<strong>de</strong>r the<br />

direction of this Ministry.<br />

Regulation<br />

a) Tax regime<br />

Beginning in 2001, the Telecommunications Law adopted the tax regime applicable to all<br />

telecommunications service operators based on gross revenue. The composite tax rate<br />

established in the Telecommunications Law totals 4.8% and is comprised of the following:<br />

2.3% activity tax, 0.5% CONATEL funding tax, up to 0.5% spectrum allocation tax, 1%<br />

Universal Service Fund tax and 0.5% Telecommunications Research and Development Fund<br />

tax. In addition, cellular service operators became subject to a supplementary tax of up to<br />

4.5% of their gross revenue (excluding interconnection revenue), which <strong>de</strong>creased by 1% per<br />

annum through 2005 when it was eliminated.<br />

b) Tariffs<br />

Telecommunications regulations establish regarding tariff matters that operators are free to<br />

set prices and that only tariffs from operators ren<strong>de</strong>ring services in a dominant position will be<br />

regulated. Asymmetric regulation of ren<strong>de</strong>red services in a dominant position is foun<strong>de</strong>d in<br />

setting “price-caps” and its in<strong>de</strong>xation through the application of the compound in<strong>de</strong>x of<br />

adjustment as established in the Regulations for Basic Telephony Services.<br />

Since the enactment of the Telecommunications Law and its Regulations in 2000, CONATEL<br />

has established maximum tariffs as a result of agreements reached with CANTV. These<br />

agreements cover, in addition to the <strong>de</strong>finition of price-caps for each telecommunication<br />

27


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

service, other tariff-related matters including: <strong>de</strong>finition of the compound in<strong>de</strong>x of adjustment<br />

tied to the Wholesale Price In<strong>de</strong>x (WPI) and the <strong>de</strong>valuation rate of the bolivar against the<br />

U.S. dollar; establishment of schemes for extraordinary adjustments allowing additional<br />

adjustments to established tariffs in case of <strong>de</strong>viations in the projected macroeconomic<br />

variables inclu<strong>de</strong>d in the compound in<strong>de</strong>x of tariff adjustment; changes in resi<strong>de</strong>ntial plans<br />

and migration of clients between resi<strong>de</strong>ntial plans; and the possibility of incorporation of new<br />

proposals for additional plans.<br />

On February 13, 2003, as published in the Official Gazette of Venezuela No. 37,631, the<br />

Venezuelan Government, as a supplementary measure to the new exchange controls regime,<br />

instituted price controls for all products consi<strong>de</strong>red as essential needs, including resi<strong>de</strong>ntial<br />

fixed telephone services. The adoption of the price controls has suspen<strong>de</strong>d the approval of<br />

tariff increases applicable to CANTV since 2003 for resi<strong>de</strong>ntial services. In addition, this<br />

situation has affected approval of tariff increases in non-resi<strong>de</strong>ntial and public telephony<br />

where tariffs have been frozen since 2004.<br />

Beginning July1, 2007, CANTV reduced its fixed-to-mobile tariffs by an average of 21%, as<br />

part of its new corporate strategy and to support the new regulatory framework for<br />

interconnection matters that CONATEL will announce in the coming months.<br />

On November 22, 2007, Administrative Ruling No. 1.110 was published in the Official Gazette<br />

of Venezuela No. 38,816, pursuant to which CONATEL established the price-caps that apply<br />

to CANTV’s international long distance services for non-resi<strong>de</strong>ntial subscribers and public<br />

telephony. This Administrative Ruling reiterated the existing price-caps, except for the pricecap<br />

applicable to Cuba which was increased in 65%.<br />

On January 3, 2008, the Resolution No. DM 323 and DM 023 was published in the Official<br />

Gazette of Venezuela No. 38,842, pursuant to which CONATEL established the price-caps<br />

that apply to CANTV’s international long distance services for resi<strong>de</strong>ntial subscribers. This<br />

Resolution reiterated the existing price-caps, except for increases of the price-caps applicable<br />

to Cuba by 107%, Greece by 46%, Hong King by 46%, Honduras by 39% Japan by 107%<br />

and Hawaii by 206%.<br />

Currently, CANTV and CONATEL are reviewing various tariff issues relating to basic<br />

services, including, <strong>de</strong>velopment of a new tariff proposal for the inclusion of plans for socioeconomic<br />

sectors with the lowest resources, and the study, <strong>de</strong>sign and implementation of a<br />

new regulatory tariff regime for basic services.<br />

c) Competition<br />

Pursuant to the Concession, prior to November 27, 2000, the Company was the sole provi<strong>de</strong>r<br />

of basic telephone services. During that period, the Venezuelan Government could grant<br />

concessions to operate in population centers with 5,000 or fewer inhabitants if CANTV was<br />

not providing basic telephone services in such areas and did not contemplate doing so within<br />

two years, according to the network expansion and mo<strong>de</strong>rnization plans established in the<br />

28


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Concession. CONATEL granted multi-service concessions to Infonet Re<strong>de</strong>s <strong>de</strong> Información<br />

C.A. (Infonet), Corporación Digitel, C.A. (Digitel) and Digicel, C.A. (Digicel) to provi<strong>de</strong> basic<br />

telecommunications services, except domestic and international long distance services, in<br />

population centers with 5,000 or fewer inhabitants. On May 18, 2006, CONATEL approved<br />

the merger of Digitel, Infonet and Digicel. Digitel continues as the surviving entity after the<br />

merger.<br />

On November 24, 2000, CONATEL issued regulations based on the Telecommunications<br />

Law, which established the basic regulatory framework to create an appropriate environment<br />

for new participants and allowing effective competition. These regulations govern, among<br />

other things, the sector’s opening, interconnection, administrative licenses and spectrum<br />

concessions.<br />

Additionally, CONATEL has granted administrative licenses to offer long distance services to<br />

the following companies: Convergence Communications <strong>de</strong> Venezuela (Convergence),<br />

Veninfotel Comunicaciones, C.A. (Veninfotel), Multiphone <strong>de</strong> Venezuela, C.A. (Multiphone),<br />

Telecomunicaciones NGTV, S.A. (New Global Telecom), Totalcom Venezuela, C.A.<br />

(Totalcom), Etelix.com, C.A. (Etelix), Telcel, C.A. (Movistar), Entel Venezuela, C.A. (Entel),<br />

LD Telecom Comunicaciones, C.A. (LD Telecom), Convergia <strong>de</strong> Venezuela, S.A.<br />

(Convergia), Corporación Intercall, C.A. (Intercall) and Corporación Telemic, C.A.<br />

(Intercable), most of which offer the service by means of prepaid cards (calling cards).<br />

Current operators maintaining interconnection agreements with the Company are: Movistar,<br />

Digitel, Convergence, Veninfotel, Entel, Multiphone, Totalcom, Etelix, New Global Telecom,<br />

LD Telecom, Convergia, Intercall and Intercable. These agreements permit interoperations<br />

between CANTV’s basic telecommunications network and local and long distance domestic<br />

and international services of these companies.<br />

Effective April 5, 2002, CONATEL initiated a pre-subscription long distance service where<br />

wireline service customers can access continually and automatically a previously selected<br />

operator’s domestic and international long distance network without the use of the long<br />

distance operator’s i<strong>de</strong>ntification co<strong>de</strong>.<br />

In 2004, the Venezuelan Government incorporated CVG Telecomunicaciones (currently<br />

Telecom Venezuela), a telephone company to provi<strong>de</strong> data transmission and other services<br />

through fiber-optics and Internet protocol platforms in north-central Venezuela and the<br />

Guayana region, located in the southeast of Venezuela. As of August 14, 2007, Telecom<br />

Venezuela became a company un<strong>de</strong>r the direction of the Ministry of the Popular Power for<br />

Telecommunications and Information Technology (the Company’s principal stockhol<strong>de</strong>r).<br />

29


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

d) Universal Service Fund<br />

The Telecommunications Law provi<strong>de</strong>s for the creation of the Universal Service Fund and the<br />

Telecommunications Research and Development Fund. These funds are created by<br />

CONATEL from the contributions ma<strong>de</strong> by telecommunications companies as part of the<br />

telecommunications taxes.<br />

The purpose of the Universal Service Fund is to ensure that every citizen has the opportunity<br />

to access telecommunications services, including the Internet. This fund is used to subsidize<br />

the <strong>de</strong>velopment of infrastructure for the provision of telecommunications services by<br />

operators in unprofitable areas.<br />

The Telecommunications Research and Development Fund was created to provi<strong>de</strong> financial<br />

resources to universities, technology institutes and research institutions to study and research<br />

telecommunications technology.<br />

In May 2006, CANTV and CONATEL signed an agreement to provi<strong>de</strong> the installation,<br />

operation, administration and maintenance of telecommunications infrastructure for the<br />

connectivity of the civil records’ and notaries’ offices with the General Office of Civil Records<br />

and Notary Offices of the Ministry of the Popular Power for Interior Affairs and Justice. In<br />

addition, CANTV and CONATEL signed an agreement to provi<strong>de</strong> the installation, operation,<br />

administration and maintenance of telecommunications infrastructure for the creation of a<br />

virtual private network that would connect 47 offices and 100 mobile i<strong>de</strong>ntification units with<br />

the main office of the Oficina Nacional <strong>de</strong> I<strong>de</strong>ntificación y Extranjería (ONIDEX) (National<br />

Office of I<strong>de</strong>ntification and Immigration). The funding for this infrastructure of both projects<br />

will be provi<strong>de</strong>d by the Universal Service Fund, and the property rights to the infrastructure<br />

will be transferred to CANTV once the obligation is met and subject to certain conditions.<br />

4. Balances in Foreign Currency<br />

The Company has monetary assets and liabilities in U.S. dollars and liabilities in Japanese<br />

yen (Note 2 (x) - Summary of significant accounting principles and policies - Market and<br />

liquidity risk) as of December 31, 2007 and 2006 as shown below:<br />

(Expressed in millions of U.S. dollars) 2007 2006<br />

Cash and temporary investments 25 161<br />

Accounts receivable, net 23 27<br />

Other assets 11 71<br />

Tra<strong>de</strong> accounts payable (517) (601)<br />

Debt obligations (14) (27)<br />

30<br />

(472) (369)<br />

Pension plan assets (Note 15 (a) - Retirement benefits - Pension plan) 349 343


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Effective February 5, 2003, the Venezuelan Government and the Central Bank of Venezuela<br />

signed exchange controls agreements that immediately established limits to foreign currency<br />

transactions (Note 21 - Exchange controls).<br />

The Company conducted purchase-sale and exchange transactions with securities in bolivars<br />

and foreign currency, originating a net income of Bs. 71,873 during the year en<strong>de</strong>d December<br />

31, 2007, and a net loss of Bs. 60,604 during the year en<strong>de</strong>d December 31, 2006, shown in<br />

other expense (income), net in the consolidated statement of operations (Note 21 - Exchange<br />

controls)<br />

5. Property, Plant and Equipment, Net<br />

A reconciliation of the carrying amount at the beginning and end of years en<strong>de</strong>d December<br />

31, 2007 and 2006 is as follows:<br />

Cost<br />

December 31,<br />

2006<br />

31<br />

Additions<br />

Disposals and<br />

other<br />

Transfers<br />

December 31,<br />

2007<br />

Plant<br />

Wireline telecommunications 12,132,881 37,339 (276,863) 347,023 12,240,380<br />

Wireless telecommunications 1,807,816 48,533 (1,503) 316,487 2,171,333<br />

Other telecommunications services 44,428 30 - - 44,458<br />

Buildings and facilities 3,114,475 25,292 (7,915) 82,568 3,214,420<br />

Furniture and equipment 630,747 12,928 (6,157) 94,260 731,778<br />

Vehicles 71,993 15,349 (4,337) - 83,005<br />

Land 74,677 755 (119) - 75,313<br />

Construction work in progress 201,486 1,110,457 (17,979) (840,338) 453,626<br />

18,078,503 1,250,683 (314,873) - 19,014,313<br />

Accumulated <strong>de</strong>preciation<br />

December 31,<br />

2006<br />

Expense<br />

Disposals<br />

and other<br />

December 31,<br />

2007<br />

Plant<br />

Wireline telecommunications (10,501,314) (403,109) 262,898 (10,641,525)<br />

Wireless telecommunications (902,511) (244,271) 187 (1,146,595)<br />

Other telecommunications services (40,142) (3,108) - (43,250)<br />

Buildings and facilities (2,410,123) (86,883) 1,969 (2,495,037)<br />

Furniture and equipment (450,342) (90,311) 10,589 (530,064)<br />

Vehicles (59,334) (8,296) 4,132 (63,498)<br />

(14,363,766) (835,978) 279,775 (14,919,969)<br />

Net book value 3,714,737 4,094,344


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Cost<br />

December 31,<br />

2005<br />

32<br />

Additions<br />

Disposals and<br />

other<br />

Transfers<br />

December 31,<br />

2006<br />

Plant<br />

Wireline telecommunications 12,200,315 19,919 (326,021) 238,668 12,132,881<br />

Wireless telecommunications 1,294,575 40,171 (2,007) 475,077 1,807,816<br />

Other telecommunications services 44,428 - - - 44,428<br />

Buildings and facilities 3,020,535 18,813 (19,446) 94,573 3,114,475<br />

Furniture and equipment 526,172 9,850 (477) 95,202 630,747<br />

Vehicles 86,003 5,233 (19,243) - 71,993<br />

Land 72,020 3,065 (408) - 74,677<br />

Construction work in progress 181,799 949,229 (26,022) (903,520) 201,486<br />

17,425,847 1,046,280 (393,624) - 18,078,503<br />

Accumulated <strong>de</strong>preciation<br />

December 31,<br />

2005<br />

Expense<br />

Disposals<br />

and other<br />

December 31,<br />

2006<br />

Plant<br />

Wireline telecommunications (10,361,753) (460,837) 321,276 (10,501,314)<br />

Wireless telecommunications (736,328) (166,547) 364 (902,511)<br />

Other telecommunications services (36,602) (3,540) - (40,142)<br />

Buildings and facilities (2,348,346) (80,859) 19,082 (2,410,123)<br />

Furniture and equipment (388,523) (63,169) 1,350 (450,342)<br />

Vehicles (71,232) (6,827) 18,725 (59,334)<br />

(13,942,784) (781,779) 360,797 (14,363,766)<br />

Net book value 3,483,063 3,714,737<br />

As of December 31, 2007 and 2006, the balance of fully <strong>de</strong>preciated assets was Bs.<br />

11,442,104 and Bs. 10,632,041, respectively. As of December 31, 2007 and 2006, 92% and<br />

93%, respectively, of the fully <strong>de</strong>preciated assets relate to wireline telecommunications.<br />

Labor and other allocable costs inclu<strong>de</strong>d un<strong>de</strong>r construction work in progress amounted to<br />

Bs. 37,357 and Bs. 33,637 for the years en<strong>de</strong>d December 31, 2007 and 2006, respectively.<br />

As of December 31, 2007 and 2006, construction work in progress mainly inclu<strong>de</strong>s ongoing<br />

projects for the expansion of the cellular network un<strong>de</strong>r CDMA-1X technology and the new<br />

cellular network un<strong>de</strong>r GSM technology, expansion of the Internet broadband access<br />

network, and integration and transformation of the Company’s information systems.<br />

During 2007, the Company began the <strong>de</strong>ployment of a new cellular network with GSM<br />

technology. As of December 31, 2007, the Company has ma<strong>de</strong> capital expenditures of Bs.<br />

157.253, which are inclu<strong>de</strong>d in the balance of construction work in process, and expects that<br />

this new technology will be in operation in mid-2008.<br />

As of December 31, 2007 and 2006, the amount of non-operating assets not classified as<br />

held for sale were Bs. 776 and Bs. 1,499, respectively. Non-operating assets are mainly land<br />

and buildings. The Company’s management believes that there is no impairment of these<br />

assets.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

6. Information Systems (Software), Net<br />

Information systems (software) inclu<strong>de</strong> the cost of computer systems for internal use, net of<br />

accumulated amortization.<br />

A reconciliation of the carrying amount at the beginning and end of the years en<strong>de</strong>d<br />

December 31, 2007 and 2006 is as follows:<br />

33<br />

2007 2006<br />

Cost<br />

Beginning of the year 1,625,769 1,437,000<br />

Additions 194,938 195,681<br />

Disposals and other (70,569) (6,912)<br />

End of the year 1,750,138 1,625,769<br />

Accumulated amortization<br />

Beginning of the year (1,163,829) (1,094,651)<br />

Expense (121,256) (71,016)<br />

Disposals and other 67,292 1,838<br />

End of the year (1,217,793) (1,163,829)<br />

Net book value 532,345 461,940<br />

During 2007, the company ma<strong>de</strong> significant disposals of information systems (software). The<br />

main disposal was the former billing system for wireline services (Note 11 - Accounts<br />

receivable, net)<br />

As of December 31, 2007 and 2006, the balance of fully amortized information systems<br />

(software) was Bs. 1,025,080 and Bs. 987,219, respectively.<br />

7. Other Assets<br />

Other assets as of December 31, 2007 and 2006 were comprised of the following:<br />

2007 2006<br />

Warranty <strong>de</strong>posits to suppliers 24,715 152,599<br />

Assets held for sale 4,827 6,066<br />

Other 3,389 837<br />

32,931 159,502<br />

Warranty <strong>de</strong>posits to suppliers are granted to foreign suppliers while the Company obtains<br />

the foreign currency required to make payments for importation of assets and services<br />

pursuant to the current exchange control regime (Note 21 - Exchange control).


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The balance of assets held for sale inclu<strong>de</strong>s non-operating building and land currently in the<br />

process of sale, which do not exceed their estimated market value. Beginning in October<br />

2004, the Company’s management began a sale process through the auction of nonoperating<br />

property, plant and equipment. During 2007 and 2006, assets with a carrying value<br />

of Bs. 499 and Bs. 6,066, respectively, were sold through this mechanism, with a gain of Bs.<br />

3,251 and Bs. 4,468, respectively.<br />

In September 2004, CANTV’s Board of Directors approved the sale of the investment in the<br />

International Telecommunications Satellite Organization (INTELSAT) to Zeus Holdings Ltd.<br />

On January 28, 2005, INTELSAT announced the closing of negotiations with Zeus Holding<br />

Ltd. The effective sale was approved for an amount of US$34,978,950, equivalent to Bs.<br />

75,205, which generated in 2005 a realization of Bs. 110,673 corresponding to exchange<br />

gains, previously inclu<strong>de</strong>d in translation and other adjustments in the statement of changes in<br />

stockhol<strong>de</strong>rs’ equity (Note 2 (y) - Summary of significant accounting principles and policies -<br />

Total recognized gains and losses).<br />

8. Other Current Assets<br />

Other current assets as of December 31, 2007 and 2006 were comprised of the following:<br />

34<br />

2007 2006<br />

Value-ad<strong>de</strong>d tax credits, net (Note 17 - Taxes) 61,719 175,010<br />

Short-term investments 57,576 70,070<br />

Prepaid expenses<br />

Deferred telephone directories costs (Note 2 (o) - Summary of significant<br />

33,995 11,795<br />

accounting principles and policies - Cost and expense recognition)<br />

16,175<br />

8,441<br />

Other 7,237 714<br />

9. Inventories, Spare Parts and Supplies, Net<br />

Inventories, spare parts and supplies, net as of December 31, 2007 and 2006 were<br />

comprised of the following:<br />

176,702 266,030<br />

2007 2006<br />

Network equipment inventories 296,732 205,654<br />

Equipment for sale 289,179 624,035<br />

Prepaid cards for sale 7,334 7,194<br />

593,245 836,883<br />

Less: Allowance for obsolescence and net realizable value of equipment for sale (127,649) (155,744)<br />

465,596 681,139


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Reconciliation of changes generated during the year en<strong>de</strong>d December 31, 2007 and 2006 of<br />

the allowance for obsolescence and net realizable value of inventories is as follows:<br />

35<br />

2007 2006<br />

Balance at beginning of year 155,744 56,486<br />

(Release) / expense of the period (9,045) 110,073<br />

Write-off (19,050) (10,815)<br />

Balance at the end of year 127,649 155,744<br />

10. Accounts Receivable from Venezuelan Government Entities<br />

The Company’s largest customer is the Venezuelan public sector, including the central<br />

Venezuelan Government and its centralized and <strong>de</strong>centralized entities, State-owned<br />

companies, and agencies at both the state and municipal level (collectively, Venezuelan<br />

Government entities).<br />

On May 21, 2007, the Venezuelan Government, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, assumed operating control of the<br />

Company, when it acquired ownership of a majority of CANTV’s shares (Note 13 (a) -<br />

Stockhol<strong>de</strong>rs' Equity - Capital stock).<br />

Government entities generated approximately 7%, 9% and 8%, respectively, of the<br />

Company’s consolidated revenues for years en<strong>de</strong>d December 31, 2007, 2006 and 2005.<br />

The following table shows the aging of accounts receivable from Venezuelan Government<br />

entities as of December 31, 2007 and 2006:<br />

2007 2006<br />

Years in which were originated<br />

2007 196,139 -<br />

2006 133,728 164,337<br />

2005 and prior years 93,282 121,768<br />

Total accounts receivable from Venezuelan Government entities 423,149 286,105<br />

Less: Present value adjustment (25,843) (26,341)<br />

Less: Long-term portion (93,025) (55,856)<br />

304,281 203,908


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

During the year en<strong>de</strong>d December 31, 2007 and 2006, changes in accounts receivable from<br />

Venezuelan Government entities are shown below:<br />

36<br />

2007 2006<br />

Balance at the beginning of year 286,105 291,047<br />

Billings 623,156 631,246<br />

Collections and adjustments (486,112) (636,188)<br />

Balance at the end of year 423,149 286,105<br />

The amounts that central Venezuelan Government entities may pay for telecommunications<br />

services are established in annual budgets, which do not necessarily coinci<strong>de</strong> with actual<br />

annual usage. As a result of these budgeting processes and for other macroeconomic<br />

reasons, a number of Venezuelan Government entities have not timely paid the Company for<br />

telecommunications services received. In addition, as a result of inflation and <strong>de</strong>valuation,<br />

the present value of these balances has been significantly reduced, since these accounts<br />

cannot bear interest.<br />

Management has taken actions to try to reduce additional usage and recover prior years’<br />

balances, thereby reducing accrued <strong>de</strong>bt in this connection. In addition, collections are being<br />

reinforced and payment agreements are being negotiated with Venezuelan Government<br />

entities to reduce payment <strong>de</strong>lays. However, there is no guarantee that the Company will not<br />

continue to experience significant <strong>de</strong>lays in the collection of these receivables or that inflation<br />

and <strong>de</strong>valuation will not continue to reduce the real value of these accounts receivable.<br />

These amounts <strong>de</strong>pend on Venezuelan Government annual budgets for current usage and<br />

on payments of extraordinary usage.<br />

During the years en<strong>de</strong>d December 31, 2007 and 2006, the Company has recor<strong>de</strong>d<br />

adjustments against revenues of Bs. 5,300 and Bs. 11,570, respectively, in regard to the<br />

initial present value of an estimated portion of these accounts receivable, due to the projected<br />

<strong>de</strong>lay in payments from Venezuelan Government entities, inclu<strong>de</strong>d as a reduction of accounts<br />

receivable from Venezuelan Government entities and as a reduction of revenues, consi<strong>de</strong>ring<br />

an average discount rate of short-term Venezuelan National Public Debt Bonds. Any<br />

subsequent adjustment to the initial fair value estimate is recor<strong>de</strong>d in results of the year.<br />

During 2007 and 2006, payments received from Venezuelan Government entities have been<br />

in cash, and therefore, the Company’s management believes all amounts from Venezuelan<br />

Government entities will be collected in cash.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

11. Accounts Receivable, Net<br />

The Company’s accounts receivable, net as of December 31, 2007 and 2006 are shown<br />

bellow:<br />

37<br />

2007 2006<br />

Subscribers<br />

Wireline telecommunications 860,194 587,232<br />

Wireless telecommunications 126,332 116,652<br />

Other telecommunications services 157,940 117,897<br />

International carriers, net 39,886 59,236<br />

Phone card and prepaid card sold to distributors 69,037 63,797<br />

Other 43,748 32,812<br />

1,297,137 977,626<br />

Less: Provision for doubtful accounts (77,348) (62,617)<br />

1,219,789 915,009<br />

Other accounts receivable as of December 31, 2007 and 2006 inclu<strong>de</strong> Bs. 22.705 of valuead<strong>de</strong>d<br />

taxes paid in excess by the subsidiary CANTV.Net during 2004 and 2005 (Note 17 -<br />

Taxes - Value ad<strong>de</strong>d tax)<br />

Unbilled revenues of Bs. 116,382 and Bs. 111,339 are inclu<strong>de</strong>d in accounts receivable as of<br />

December 31, 2007 and 2006, respectively (Note 2 (n) - Summary of significant accounting<br />

principles and policies - Revenue recognition).<br />

Reconciliation of changes generated during the years en<strong>de</strong>d December 31, 2007 and 2006 of<br />

the provision for doubtful accounts is as follows:<br />

2007 2006<br />

Balance at beginning of the period 62,617 70,577<br />

Provision for uncollectible 117,521 65,438<br />

Write-off (102,790) (73,398)<br />

Balance at the end of the period 77,348 62,617<br />

In February 2007, the Company started operating a new billing and collection system for fixed<br />

telephony services as part of an ongoing project directed towards the integration and<br />

transformation of the Company’s information systems. During 2007, with this new system<br />

there have been technical failures in the automated processes of billing and collections for<br />

fixed telephony services.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

12. Cash and Temporary Investments<br />

The composition of cash and temporary investments balances as of December 31, 2007 and<br />

2006 is as follows:<br />

38<br />

2007 2006<br />

Cash and banks 301,198 213,573<br />

Temporary investments in bolivars 420,680 593,151<br />

Temporary investments in foreign currency 54,433 345,263<br />

776,311 1,151,987<br />

As of December 31, 2007, temporary investments in bolivars bear interest rates between<br />

8.00% and 13.50%, and temporary investments in foreign currency bear interest rates<br />

between 4.94% and 6.28%.<br />

13. Stockhol<strong>de</strong>rs' Equity<br />

a) Capital stock<br />

Company capital stock, all issued and fully paid, is represented by 787,140,849 shares with a<br />

nominal value of Bs. 36.9 each at December 31, 2007, 2006 and 2005, as shown below:<br />

Number of shares<br />

Stockhol<strong>de</strong>rs Class 2007 2006 2005<br />

Ministerio <strong>de</strong>l Po<strong>de</strong>r Popular para las<br />

Telecomunicaciones y la Informática (Ministry of the<br />

Popular Power for Telecommunications and<br />

Information Technology)<br />

Banco <strong>de</strong> Desarrollo Económico y Social <strong>de</strong> Venezuela<br />

(BANDES) (Economic and Social Development<br />

Bank Fund of Venezuela)<br />

Ministerio <strong>de</strong>l Po<strong>de</strong>r Popular para la Infraestructura<br />

(Ministry of the Popular Power for Infraestructure)<br />

D<br />

B<br />

B<br />

626.752.956<br />

51.899.999<br />

1<br />

-<br />

51.899.999<br />

1<br />

-<br />

51.899.999<br />

GTE Venholdings B.V. A - 196.401.427 196.401.427<br />

GTE Venholdings B.V. D - 28.009.177 28.009.177<br />

Telefónica Venezuela Holding B.V. A - 54.410.144 54.410.144<br />

Banco Mercantil, C.A. A - 367.139 367.139<br />

Employees and retirees C 41.451.451 37.514.060 41.645.445<br />

Public stockhol<strong>de</strong>rs D 64.153.343 407.140.119 403.263.187<br />

784.257.750 775.742.066 775.996.519<br />

Workers’ benefit fund C 2.883.099 11.398.783 11.144.330<br />

787.140.849 787.140.849 787.140.849<br />

The Company’s capital stock of Bs. 2,151,299 is composed by Bs 29,047 of nominal or<br />

historical capital stock and Bs 2,122,252 of accumulated adjustment for inflation until<br />

1


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

December 31, 2003 (Note 2 (c) - Summary of significant accounting practices and policies -<br />

Adjustment for inflation).<br />

All shares have the same rights for liquidation and/or divi<strong>de</strong>nd distribution.<br />

Class “A” shares could only be held by former members of VenWorld, the consortium that<br />

acquired 40% of CANTV’s shares in 1991. On February 1, 2002, at a Special Stockhol<strong>de</strong>rs’<br />

Meeting of VenWorld, the liquidation of the Consortium was approved and shares were<br />

converted into CANTV Class “A” shares. Any Class “A” shares transferred to any entity, not a<br />

wholly-owned subsidiary of former members of VenWorld, would be automatically converted<br />

into an equal number of Class “D” shares. As of December 31, 2007, there are no hol<strong>de</strong>rs of<br />

Class “A” shares, as all Class “A” shares were acquired by the Venezuelan Government<br />

pursuant to a public ten<strong>de</strong>r offer for CANTV’s shares which commenced on April 9, 2007.<br />

Class “B” shares may only be held by the Venezuelan Government and/or other entities<br />

related to the Venezuelan Government. The transfer of Class “B” shares to any non-public<br />

individual or entity will cause these shares to be automatically converted to Class “D” shares,<br />

except if they are transferred to CANTV employees or retirees, in which case the shares will<br />

be converted to Class “C” shares. Until January 1, 2001, Class “B” stockhol<strong>de</strong>rs had the right<br />

to elect two principal members of the Company’s Board of Directors and their alternates.<br />

Thereafter, they may elect only one principal member and the alternate. A majority of Class<br />

“B” stockhol<strong>de</strong>rs is required to approve a number of corporate actions, including by-law<br />

amendments in certain matters.<br />

Class “C” shares may be held only by employees, retirees, former employees, heirs and<br />

spouses of employees or retirees of CANTV and its subsidiaries, as well as workers’<br />

companies and benefit plans. Any Class “C” shares transferred to any other individual or<br />

entity different from the aforementioned will be automatically converted to Class “D” shares.<br />

Hol<strong>de</strong>rs of Class “C” shares have the right, voting as a separate class, to elect two principal<br />

members of the Board of Directors (from a total of nine directors) and their alternates, who<br />

must be retirees or active employees (with at least five years of continuing service) only if<br />

such Class “C” shares represent at least 8% of CANTV’s capital stock. In the event that<br />

these shares represent a percentage lower than 8% but equal or higher than 3% of the<br />

Company’s capital stock, they will be able to elect only one principal member of the Board of<br />

Directors and the corresponding alternate. In the event that these shares represent a<br />

percentage lower than 3% of the Company’s capital stock, they will not have the right to elect<br />

any member of the Board of Directors.<br />

Class “D” shares are comprised of those resulting from the conversion of Class “A”, “B” and<br />

“C” shares as <strong>de</strong>scribed above, and those issued pursuant to capital increases. There are no<br />

restrictions on the ownership or transfer of Class “D” shares. In accordance with CANTV’s<br />

by-laws, hol<strong>de</strong>rs of Class “D” shares have the right to elect, voting together with the hol<strong>de</strong>rs of<br />

other class of chares, members of the Board of Directors (principal and alternate), except for<br />

39


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

the members of the Board of Directors elected by Class “B” and “C” stockhol<strong>de</strong>rs, as<br />

<strong>de</strong>scribed above.<br />

On January 8, 2007, the Presi<strong>de</strong>nt of the Bolivarian Republic of Venezuela announced the<br />

intention to nationalize CANTV, because it is consi<strong>de</strong>red a strategic company for Venezuela.<br />

On February 12, 2007, the Venezuelan Government, through the Ministry of the Popular<br />

Power for Telecommunications and Information Technology, entered into a memorandum of<br />

un<strong>de</strong>rstanding with Verizon Communications Inc. and its subsidiary GTE Venholdings B.V.<br />

(GTE Venholdings) to acquire Verizon’s equity interest in CANTV, held through its<br />

subsidiaries.<br />

On April 9, 2007, the Venezuelan Government commenced concurrent public ten<strong>de</strong>r offers in<br />

Venezuela and the United States of America for CANTV’s common shares and American<br />

Depositary Shares (ADS) at a price of U.S.$2.12 per share (equivalent to Bs. 4,560.43 per<br />

share calculated at the official exchange rate in effect at the closing date) and U.S.$14.85 per<br />

ADS, expiring on May 8, 2007.<br />

On May 16, 2007, the Venezuelan Government announced that it had acquired, through the<br />

Ministry of the Popular Power for Telecommunications and Information Technology, during<br />

the ten<strong>de</strong>r offer in the United States of America, 61,257,605 ADSs (representing an<br />

aggregate of 428,803,235 common shares) pursuant to the ten<strong>de</strong>r offer in the United States<br />

of America, and 197,949,721 common shares pursuant to the ten<strong>de</strong>r offer in Venezuela. The<br />

ten<strong>de</strong>red common shares and ADSs inclu<strong>de</strong>d all common shares and ADSs previously held<br />

by Verizon, through its subsidiaries, and by the other Class “A” sharehol<strong>de</strong>rs.<br />

Class “D” shares are tra<strong>de</strong>d on the Caracas Stock Exchange, and were tra<strong>de</strong>d on the NYSE<br />

in the form of ADSs, each representing seven Class “D” shares.<br />

On May 11, 2007, the NYSE notified CANTV that it had suspen<strong>de</strong>d CANTV’s ADS from<br />

trading on the exchange because it had <strong>de</strong>termined that CANTV was no longer suitable for<br />

listing in light of the circumstances following the ten<strong>de</strong>r offer whereby by the Venezuelan<br />

Government assumed control of CANTV, and the NYSE commenced the formal <strong>de</strong>listing<br />

process. CANTV has not arranged for listing of the ADSs on another United Sates securities<br />

exchange or for quotation of CANTV's securities on any other quotation system in the United<br />

States of America. Investors that wish to make a tra<strong>de</strong> with ADSs should contact their<br />

brokers for information on the ability to make tra<strong>de</strong>s with ADS in the over-the-counter market<br />

or exchange their ADSs for un<strong>de</strong>rlying Class “D” shares and make a tra<strong>de</strong> with such shares<br />

on the Caracas Stock Exchange where such shares are listed.<br />

On June 18, 2006, the NYSE filed in the SEC the notification of the suspension of trading of<br />

CANTV’s ADSs and the withdrawal of CANTV from that stock exchange, effective June 28,<br />

2007.<br />

40


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The ADSs and the un<strong>de</strong>rlying Class “D” shares remain registered un<strong>de</strong>r the Securities<br />

Exchange Act of 1934, as amen<strong>de</strong>d (the Exchange Act of 1934), and the suspension and<br />

termination of listing of the ADSs by the NYSE does not automatically suspend or terminate<br />

CANTV's reporting obligations un<strong>de</strong>r the Exchange Act of 1934. As a result, CANTV is still<br />

required to continue to comply with its obligations to submit reports to the SEC until such time<br />

as it terminates the registration of the ADS in accordance with the SEC’s rules. If CANTV is<br />

no longer required to comply with its reporting obligations un<strong>de</strong>r the Exchange Act of 1934,<br />

the information CANTV would be required to furnish to hol<strong>de</strong>rs of ADSs will be substantially<br />

reduced. As of March 10, 2008, this <strong>de</strong>registration process has not been completed.<br />

b) Divi<strong>de</strong>nds<br />

The Venezuelan Co<strong>de</strong> of Commerce, the Venezuelan Capital Markets Law and the standards<br />

issued by the CNV regulate the Company’s ability to pay divi<strong>de</strong>nds. The Venezuelan Co<strong>de</strong> of<br />

Commerce establishes that divi<strong>de</strong>nds shall be paid solely out of “liquid and collected<br />

earnings.” The Venezuelan Capital Markets Law stipulates that the Company must distribute<br />

annually no less than 50% of its net annual income to its stockhol<strong>de</strong>rs, after income tax and<br />

legal reserve <strong>de</strong>ductions. Likewise, the Capital Markets Law establishes that at least 25% of<br />

such 50% shall be distributed in cash. However, if the Company has accumulated losses, net<br />

income shall be used to offset such <strong>de</strong>ficit.<br />

According to CNV standards, unconsolidated net income, excluding the equity participation in<br />

subsidiaries, is the basis for divi<strong>de</strong>nd distribution.<br />

Net income for the year en<strong>de</strong>d December 31, 2007, including divi<strong>de</strong>nds received from<br />

subsidiaries, available for divi<strong>de</strong>nd distribution at CANTV’s level as an individual legal entity,<br />

is as follows:<br />

Unconsolidated net income for 2007 1,023,927<br />

Less: equity participation in subsidiaries (510,409)<br />

Income available as basis for <strong>de</strong>claring divi<strong>de</strong>nds 513,518<br />

Plus: Divi<strong>de</strong>nds paid by subsidiaries during 2007 463,251<br />

Net income available as base for distribution after consi<strong>de</strong>ring divi<strong>de</strong>nds from subsidiaries 976,769<br />

The minimum required divi<strong>de</strong>nd to be distributed for the year en<strong>de</strong>d December 31, 2007 is<br />

Bs. 488,382, which was recognized as a liability in the consolidated balance sheet, less the<br />

portion that corresponds to the workers’ benefit fund of Bs. 1,789, which is eliminated for<br />

consolidation purposes.<br />

The Venezuelan Capital Markets Law establishes that divi<strong>de</strong>nds must be <strong>de</strong>clared in a<br />

Stockhol<strong>de</strong>rs’ Meeting at which the stockhol<strong>de</strong>rs <strong>de</strong>termine the amount, form and frequency<br />

of divi<strong>de</strong>nd payments. Furthermore, un<strong>de</strong>r CNV regulations, companies’ by-laws must state<br />

their divi<strong>de</strong>nd policies.<br />

41


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Beginning in 2002, the Company established gui<strong>de</strong>lines for the annual divi<strong>de</strong>nd distribution.<br />

These gui<strong>de</strong>lines call for the distribution to stockhol<strong>de</strong>rs of 50% of the annual free cash flow,<br />

which is <strong>de</strong>fined as cash flows provi<strong>de</strong>d by operating activities, less cash flows used in<br />

investment activities, based on the audited financial statements, net of <strong>de</strong>bt and interest<br />

payments scheduled for the following year. Annual payment of divi<strong>de</strong>nds will be ma<strong>de</strong> in<br />

bolivars following recommendations by the Board of Directors and approval by the Regular<br />

Stockhol<strong>de</strong>rs’ Meeting and could be paid in quarterly installments.<br />

On March 30, 2007, a Regular Stockhol<strong>de</strong>rs’ Meeting <strong>de</strong>clared a cash divi<strong>de</strong>nd of Bs. 922.07<br />

per share to be paid on April 18, 2007 to stockhol<strong>de</strong>rs of record at April 12, 2007.<br />

On November 27, 2006, an Extraordinary Stockhol<strong>de</strong>rs’ Meeting <strong>de</strong>clared a cash divi<strong>de</strong>nd of<br />

Bs. 307.14 per share to be paid on December 13, 2006 to stockhol<strong>de</strong>rs of record at<br />

December 6, 2006.<br />

On March 31, 2006, a Regular Stockhol<strong>de</strong>rs’ Meeting <strong>de</strong>clared a cash divi<strong>de</strong>nd of Bs. 700 per<br />

share to be paid on April 27, 2006 to stockhol<strong>de</strong>rs of record at April 18, 2006.<br />

On March 31, 2005, a Regular Stockhol<strong>de</strong>rs’ Meeting <strong>de</strong>clared a cash divi<strong>de</strong>nd of Bs. 505 per<br />

share to be paid on April 27, 2005 to stockhol<strong>de</strong>rs of record at April 20, 2005.<br />

c) Workers’ benefit fund<br />

In 1993 the Company set up a bank trust fund known as the “Benefit Fund” with the purpose<br />

of acquiring Class “C” shares representing up to 1% of CANTV’s capital stock as of<br />

December 2, 1991, to be distributed to its workers in accordance with benefit plans promoted<br />

by the Company, one of which is the “Excellence Award.” This contribution is recognized as<br />

an expense to the extent that the workers receive stock awards, which are granted to<br />

employees at no cost. On October 24, 2001, a Special Stockhol<strong>de</strong>rs’ Meeting approved the<br />

increase of this fund via the purchase of Class “C” shares of up to 2% of the Company’s<br />

capital stock as of December 2, 1991. As December 31, 2007 and 2006, the trust maintains<br />

2,883,099 and 11,398,783 shares, respectively, presented in a separate account as a<br />

reduction in the consolidated statement of changes in stockhol<strong>de</strong>rs’ equity.<br />

Trust fund assets are consolidated as part of the Company’s consolidated balance sheet and<br />

these Class “C” shares are presented as a reduction of stockhol<strong>de</strong>rs’ equity.<br />

The shares in the trust are recor<strong>de</strong>d at acquisition cost. Fair value of the shares granted<br />

during the period was <strong>de</strong>termined based on the market value of the shares at the granting<br />

date. The Company recognizes an expense as shares are granted to workers, based on their<br />

market value. Shares may be granted at the Company’s discretion. During the years en<strong>de</strong>d<br />

December 31, 2007 and 2006, the numbers of shares granted to employees were 288,125<br />

and 310,080, respectively, and the related expense recognized was Bs. 2,182 and Bs. 2,089,<br />

respectively.<br />

42


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

In September 2007, the Company conducted a plan to award Class “D” shares to active<br />

employees and retirees, as part of a commitment ma<strong>de</strong> by the Ministry of the Popular Power<br />

for Telecommunications and Information Technology in connection with the ten<strong>de</strong>r offer. The<br />

plan consisted of granting one share for each two shares owned by each employee and<br />

retiree as of May 28, 2007. Pursuant to this plan, 9,577,859 shares were granted to 5,017<br />

employees and retirees, and the related expense recognized was Bs. 26,100.<br />

d) Stock option<br />

In January 2003 the Board of Directors approved a stock option agreement, pursuant to which<br />

CANTV had the obligation to sell 875,000 CANTV common Class “D” shares at a fixed price<br />

of Bs. 2,697.26 per share, exercisable in whole or in part by the counterparty and expiring in<br />

January 2013. CANTV was able to choose to honor this commitment through a cash<br />

payment equal to the total difference between the market value of shares at the exercise date<br />

and the price referred into the option. In February 2007, this agreement was terminated by<br />

the counterparty and the option was not exercised. Therefore, as of December 31, 2007,<br />

there is no provision recor<strong>de</strong>d for this stock option agreement. As of December 31, 2006,<br />

there was provision of Bs. 5.996 to cover the total difference calculated at that date (intrinsic<br />

value), which was reversed in the 2007 results of operations.<br />

e) Legal reserve<br />

The Company and each one of its subsidiaries are required, un<strong>de</strong>r the Venezuelan Co<strong>de</strong> of<br />

Commerce and their corporate by-laws, to transfer at least 5% of each year’s net income to a<br />

legal reserve in stockhol<strong>de</strong>rs’ equity until such reserve equals at least 10% of capital stock.<br />

This reserve is not available for divi<strong>de</strong>nd distribution to stockhol<strong>de</strong>rs.<br />

14. Debt Obligations<br />

Debt obligations as of December 30, 2007 and 2006 were comprised of the following:<br />

43<br />

2007 2006<br />

Bank loans in Japanese yen at a fixed annual rate of 5.8%, maturing in 2009<br />

IFC loans in U.S. dollars at six-month LIBOR interest rates plus a financial margin of<br />

30,834 48,839<br />

2%, maturing in 2007<br />

- 9,406<br />

Total <strong>de</strong>bt obligations 30,834 58,245<br />

Less: Current portion (20,556) (28,942)<br />

Total long-term <strong>de</strong>bt 10,278 29,303<br />

In February 1990, the Company entered into a loan with the Japan Bank for International<br />

Cooperation (formerly The Export - Import Bank of Japan) for ¥16,228 million, which was<br />

used for technological changes in the transmission and urban connection network. This loan<br />

is being repaid semi-annually and as of December 31, 2007, the outstanding balance is<br />

¥1,622.8 million.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

In 1997 Movilnet signed an agreement with the International Finance Corporation (IFC) for<br />

two loans totaling US$95 million, which were drawn down during 1998. These loans were<br />

used for expansion and mo<strong>de</strong>rnization of the cellular network. The final installment of this<br />

loan was paid in July 2007.<br />

As of December 31, 2007, estimated <strong>de</strong>bt payments are: Bs. 20,556 in 2008 and Bs. 10,278<br />

in 2009, as translated into bolivars at the exchange rate at this date. The Company’s<br />

management consi<strong>de</strong>rs that estimated fair value of <strong>de</strong>bt approximates its book value as of<br />

December 31, 2007.<br />

15. Retirement Benefits<br />

a) Pension plan<br />

The Company sponsors a <strong>de</strong>fined benefit pension plan for its employees. The benefits to be<br />

paid un<strong>de</strong>r the plan are based on the employees’ years of service and final salary. As of<br />

December 31, 2007 and 2006, the Company has trusts funds related to this plan that have<br />

assets with a fair value of Bs. 862,298 (inclu<strong>de</strong>s US$349.3 million) and Bs. 968,681 (inclu<strong>de</strong>s<br />

US$343.4 million), respectively, to cover plan benefits for eligible employees. Plan assets<br />

<strong>de</strong>nominated in foreign currency are converted to bolivars using the official exchange rate.<br />

During 2007, as part of the “Acuerdo Marco” (Master Agreement) and the “Mesa <strong>de</strong><br />

Conciliación” (Mediation Board) (Note 15 (b) - Retirement benefits - Pension litigation and<br />

Court Ruling), the Company agreed to comply with the Venezuelan Supreme Court ruling<br />

issued issued on December 13, 2006 and to voluntarily accept the amounts calculated in<br />

accordance with this <strong>de</strong>cision and procee<strong>de</strong>d to increase the amounts paid to retirees<br />

according to the salary increase established in the Company’s 2007-2009 collective<br />

bargaining agreement. Additionally, the Company agreed to inclu<strong>de</strong> as part of the pension<br />

plan a monthly incentive called “Bono Solidario” (monthly incentive), which began in January<br />

2008, and covered 7,243 retirees but did not cover retirees’ survivors. Management does not<br />

contemplate increasing the amount of this additional incentive in the future.<br />

The components of pension expense, inclu<strong>de</strong>d as labor and benefits for the years en<strong>de</strong>d<br />

December 31, 2007, 2006 and 2005 are as follows:<br />

44<br />

2007 2006 2005<br />

Cost incurred during the year 30,265 18,808 17,305<br />

Interest cost on projected benefit obligation 409,511 286,320 145,874<br />

Expected return on assets<br />

Additional pension obligation due to Supreme Court ruling, “Acuerdo<br />

Marco” (Master Agreement) and “Bono Solidario” (monthly<br />

incentive), including the effects on the other components of the<br />

pension expense during the year (Note 15 (b) - Retirement benefits<br />

(209,169) (153,445) (158,772)<br />

- Pension litigation and Court Ruling)<br />

362,162<br />

23,043<br />

694,916<br />

Curtailment and settlement loss - - 56,909<br />

Amortization of actuarial losses 26,680 1,341 -<br />

619,449 176,067 756,232


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The accrued pension plan obligations as of December 31, 2007 and 2006 are as follows:<br />

45<br />

2007 2006<br />

Active employees 792,259 659,622<br />

Retirees 1,377,242 1,166,335<br />

Projected benefit obligations 2,169,501 1,825,957<br />

Fun<strong>de</strong>d amount in trusts at fair value (862,298) (968,681)<br />

Past service cost (5,935) -<br />

Unrecognized net actuarial loss<br />

Net pension obligations (including current portion of Bs. 214,111 and Bs. 154,087,<br />

(256,671) (282,224)<br />

respectively)<br />

1,044,597 575,052<br />

Unrecognized net actuarial losses are generated mainly from changes in future estimated<br />

inflation rates which have a significant impact on pensions since they are not increased by<br />

inflation. The greater the projected inflation rates, the lower the present value of the projected<br />

benefit obligation. Due to the volatility of the Venezuelan economy, projected inflation rates<br />

are revised every year.<br />

During 2005, the Company negotiated with some targeted employees a voluntary special<br />

termination program, which consisted of the following:<br />

a) Immediate retirement at earlier age than otherwise contemplated by the formal plan rules;<br />

b) Pension benefits calculated as per formal plan rules was supplemented by an amount<br />

<strong>de</strong>pending on negotiated agreement with the individual targeted; and<br />

c) A lump sum payment of Bs. 20,923 was also ma<strong>de</strong> to targeted individuals.<br />

The total impact of this specific negotiation was an additional obligation of Bs. 56,909,<br />

including the lump-sum payments. This amount was recognized as a curtailment and<br />

settlement loss in 2005. The formal pension plan rules were not modified.<br />

Reconciliation of the changes generated during the years en<strong>de</strong>d December 31, 2007 and<br />

2006, in the amount of assets in trusts at fair value is as follows:<br />

2007 2006<br />

Amount in trusts at fair value at beginning of year 968,681 710,392<br />

Additions - 171,782<br />

Payments (166,116) (39,778)<br />

Actual return on investments 59,733 126,285<br />

Amount in trusts at fair value at end of year 862,298 968,681


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Percentages by type of investment of the fair value of the pension plan assets are as follows:<br />

46<br />

2007 2006<br />

% %<br />

Equity securities 56.8 50.2<br />

Debt securities 41.4 48.8<br />

Cash and temporary investments 1.8 1.0<br />

100.0 100.0<br />

Reconciliation of changes generated during the years en<strong>de</strong>d December 31, 2007 and 2006 in<br />

the net pension liability recognized is as follows:<br />

2007 2006<br />

Net pension liability at the beginning of the year 575,052 684,844<br />

Expense of the year 619,449 176,067<br />

Payments and contributions during the year (149,904) (285,859)<br />

Net pension plan liability at the end of the year 1,044,597 575,052<br />

Assumptions used to calculate the projected benefit obligations are shown below:<br />

2007 2006<br />

% %<br />

Discount rate 9.30 6.51<br />

Expected return on plan assets 6.25 7.00<br />

Compensation increase rate 2.00 1.96<br />

Urban minimum wage increase (as % of projected inflation) 100.00 100.00<br />

The long-term assumptions represent estimates of average real interest and compensation<br />

increase rates, to which the estimated inflation rate is ad<strong>de</strong>d to convert them into nominal<br />

rates. Projected inflation rates used for the calculation of liabilities as of December 31, 2007<br />

and 2006 were as follows:<br />

2007<br />

Rate Rate Rate<br />

Year % Year % Year %<br />

2008 15.1 2012 9.8 2016 11.5<br />

2009 12.1 2013 9.1 2017 11.0<br />

2010 12.1 2014 14.9<br />

2011 11.0 2015 12.9<br />

After 2018, projected inflation fluctuates between 9.9% and 14.8% until 2023 and remains on<br />

12.1% flat thereafter.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

2006<br />

Rate Rate Rate<br />

Year % Year % Year %<br />

2007 18.0 2011 16.1 2015 18.4<br />

2008 21.5 2012 14.3 2016 17.3<br />

2009 19.9 2013 21.4<br />

2010 18.1 2014 19.9<br />

After 2017, projected inflation fluctuated between 15.5% and 20.1% until 2022 and remained<br />

on 16.8% flat thereafter.<br />

The mortality assumption for the years en<strong>de</strong>d December 31, 2007 and 2006 was based on<br />

UP94 Mortality Table (projected to 2000); specimen rates being as follows (number of <strong>de</strong>aths<br />

per 1,000,000):<br />

Age Male Female<br />

25 669 288<br />

35 888 481<br />

45 1,569 950<br />

55 4,241 2,350<br />

b) Pension litigation and Court Ruling<br />

In September 2004, the Sala <strong>de</strong> Casación Social <strong>de</strong>l Tribunal Supremo <strong>de</strong> Justicia (the Social<br />

Chamber of the Supreme Court) issued its ruling dismissing the pension payments litigation<br />

brought against CANTV by the Fe<strong>de</strong>ración Nacional <strong>de</strong> Jubilados y Pensionados <strong>de</strong><br />

Teléfonos <strong>de</strong> Venezuela (FETRAJUPTEL) (National Fe<strong>de</strong>ration of CANTV Retirees and<br />

Pensioners). In January 2005, the Constitutional Chamber of the Supreme Court allowed an<br />

appeal filed by some members of the Asociación <strong>de</strong> Jubilados y Pensionados <strong>de</strong> Teléfonos<br />

<strong>de</strong> Venezuela (AJUPTEL-Caracas) (Caracas Association of CANTV Retirees and Pensioners)<br />

against the <strong>de</strong>cision of the Social Chamber of the Supreme Court issued in September 2004.<br />

The Constitutional Chamber of the Supreme Court <strong>de</strong>clared the prior <strong>de</strong>cision annulled and<br />

reman<strong>de</strong>d the case to the Social Chamber of the Supreme Court for a new ruling consistent<br />

with its <strong>de</strong>cision. The Constitutional Chamber of the Supreme Court’s <strong>de</strong>cision, issued in<br />

January 2005, also indicated that retiree pensions would be subject to adjustment up to the<br />

official minimum urban wage.<br />

In January 2005, CANTV’s management, based on the opinion of its external legal counsels,<br />

believed at the time that certain matters un<strong>de</strong>r court review would be <strong>de</strong>ci<strong>de</strong>d on appeal in<br />

favor of CANTV, and the Company estimated for year-end 2004 a provision to cover the<br />

potential additional liability with respect to the remaining matters. In accordance with the<br />

applicable accounting principles, the estimated effect in the pension projected benefit<br />

obligation was Bs. 71,918, which was recor<strong>de</strong>d in the consolidated financial statements of<br />

2004 as a provision for pension.<br />

47


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

On July 26, 2005, the Social Chamber of the Supreme Court issued its revised <strong>de</strong>cision in the<br />

lawsuit brought by FETRAJUPTEL regarding the adjustment of pensions of retirees of<br />

CANTV. The <strong>de</strong>cision required CANTV to adjust the pensions of retirees up to the official<br />

minimum urban wage, retroactive to December 30, 1999. In addition, the <strong>de</strong>cision indicated<br />

that pensions below the official minimum urban wage should be adjusted in proportion to the<br />

salary increases that resulted from the collective bargaining process from January 1, 1993 to<br />

December 1999. This <strong>de</strong>cision applies to current and future retirees and their eligible<br />

survivors. On October 14, 2005, the Social Chamber of the Supreme Court <strong>de</strong>nied a request<br />

for clarification of the July 26, 2005 <strong>de</strong>cision filed by the parties.<br />

On December 31, 2005, CANTV, based on the interpretation of the ruling that required that<br />

pensions paid after December 30, 1999 should not be lower than the official minimum urban<br />

wage, recor<strong>de</strong>d an additional expense and raised to Bs. 764,553 its accumulated provision<br />

related to additional pension obligations due to the Supreme Court ruling to reflect the<br />

estimated additional pension liability, which was estimated based on actuarial calculations<br />

including the retroactive payments and the projected benefit obligation, and incorporating the<br />

new assumption related to the minimum urban wage increase as a percentage of projected<br />

future inflation.<br />

The execution of the Social Chamber of the Supreme Court’s ruling was being administered<br />

by the Juzgado Quinto <strong>de</strong> Primera Instancia <strong>de</strong> Sustanciación, Mediación y Ejecución <strong>de</strong>l<br />

Área Metropolitana <strong>de</strong> Caracas, (the Execution Court) (the Fifth Court of First Instance of<br />

Substantiation, Mediation and Execution of the Metropolitan Area of Caracas), which<br />

appointed the Central Bank of Venezuela to perform the necessary calculations to <strong>de</strong>termine<br />

the actual amounts due to the beneficiaries. On June 6, 2006, the Central Bank of Venezuela<br />

conclu<strong>de</strong>d its analysis of damages but failed to specify the amount payable by CANTV to<br />

each retiree pursuant to the Social Chamber of the Supreme Court’s ruling, and <strong>de</strong>fined eight<br />

possible payment scenarios <strong>de</strong>pending on the inclusion of different items. Both parties<br />

objected the analysis, and therefore, the Execution Court appointed the Ministry of the<br />

Popular Power for Finance and the Servicio Nacional Integrado <strong>de</strong> Administración Aduanera y<br />

Tributaria (SENIAT) (the National Integrated Service of Customs and Taxes) to perform a new<br />

expert calculation.<br />

Pursuant to the ruling of the Social Chamber of the Supreme Court’s, CANTV agreed to<br />

adjust current pension payments up to the official minimum urban wage beginning February<br />

1, 2006. However, in accordance with the criteria of the Execution Court, valid adjustments<br />

could only be ma<strong>de</strong> individually upon written request from the beneficiary whose pension fell<br />

below the minimum urban wage level.<br />

On August 2, 2006, the Execution Court issued its ruling in which revoked the appointment of<br />

the Ministry of the Popular Power for Finance and appointed the General Controller of the<br />

Republic in its place.<br />

48


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

In August 2006, the Execution Court in charge of administering the <strong>de</strong>cision of the Social<br />

Chamber of the Supreme Court <strong>de</strong>ci<strong>de</strong>d that beginning September 1, 2006, CANTV must<br />

adjust all retirees’ pensions that were lower than the official minimum urban wage to the new<br />

effective minimum urban wage established by the Venezuelan Government, and it lifted the<br />

written request requirement. Beginning September 1, 2006, none of CANTV’s pension<br />

beneficiaries is collecting monthly pension payments lower than the minimum urban wage.<br />

On November 14, 2006, the General Controller of the Republic and SENIAT issued the new<br />

expert report.<br />

On December 13, 2006, the Juzgado Trigésimo Séptimo <strong>de</strong> Primera Instancia <strong>de</strong><br />

Sustanciación, Mediación y Ejecución <strong>de</strong>l Trabajo <strong>de</strong>l Circuito Judicial <strong>de</strong>l Área Metropolitana<br />

<strong>de</strong> Caracas, (the Thirty Seventh Court of First Instance of Substantiation, Mediation and<br />

Labor Execution of the Circuit Court of the Metropolitan Area of Caracas) announced its ruling<br />

that the amounts due and the corresponding payments to retirees had been finally<br />

<strong>de</strong>termined, and the calculations of the two new in<strong>de</strong>pen<strong>de</strong>nt experts were <strong>de</strong>livered as<br />

or<strong>de</strong>red by the Execution Court. CANTV agreed to make the retroactive payments to more<br />

than 4,000 retirees to provi<strong>de</strong> an adjusted pension equal to the minimum wage pursuant to<br />

the Execution Court’s <strong>de</strong>cision. For the cases CANTV had accepted, the final <strong>de</strong>termination<br />

of retroactive payments resulted in an additional Bs. 23,043 pension obligation expense and<br />

liability. However, CANTV appealed the <strong>de</strong>cision expressing disagreement with the expert’s<br />

methodology and benefits calculation, mainly in those cases in which pension adjustments<br />

would result in payments in excess of the minimum wage. In 2006, CANTV created a trust<br />

fun<strong>de</strong>d with Bs. 153,859 in or<strong>de</strong>r to cover the retroactive obligation as a result of the Supreme<br />

Court ruling.<br />

On April 16, 2007, the Tribunal Segundo Superior para el Régimen Procesal Transitorio <strong>de</strong>l<br />

Área Metropolitana <strong>de</strong> Caracas (the Second Court for the Transitory Procedural Regime of<br />

the Circuit Court of the Metropolitan Area of Caracas) announced its <strong>de</strong>cision on the<br />

<strong>de</strong>termination of retroactive payments performed by the appointed experts and approved by<br />

the Thirty Seventh Court of First Instance of Substantiation, Mediation and Labor Execution of<br />

the Metropolitan Area of Caracas on December 13, 2006. The <strong>de</strong>cision rejected the majority<br />

of the claims introduced by pension beneficiaries and also <strong>de</strong>clined to consi<strong>de</strong>r CANTV’s<br />

claim regarding the calculations of amounts exceeding the official minimum urban wage<br />

benefits. On April 24, 2007, CANTV filed an appeal with the Social Chamber of the Supreme<br />

Court of the <strong>de</strong>cision of the Second Court for the Transitory Procedural Regime of the Circuit<br />

Court of the Metropolitan Area of Caracas of the calculations performed by the experts with<br />

respect to amounts exceeding the official minimum urban wage benefits.<br />

On July 13, 2007, CANTV announced that it agreed to accept the <strong>de</strong>cision issued on<br />

December 13, 2006 by the Thirty Seventh Court of First Instance of Substantiation, Mediation<br />

and Labor Execution of the Circuit Court of the Metropolitan Area of Caracas, which was<br />

confirmed on April 16, 2007 by the Second Court for the Transitory Procedural Regime of the<br />

Circuit Court of the Metropolitan Area of Caracas. CANTV thereby agreed to accept the final<br />

49


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

<strong>de</strong>cision to be ren<strong>de</strong>red by the Social Chamber of the Supreme Court in the appeal of the<br />

<strong>de</strong>cision of the Second Court for the Transitory Procedural Regime of the Circuit Court of the<br />

Metropolitan Area of Caracas. In the event that the appeal was admitted, the Company<br />

would pay any additional amounts due to retirees as a result of the final ruling.<br />

In August 2007, CANTV proposed the execution of an “Acuerdo Marco” (Master Agreement)<br />

by the retirees in or<strong>de</strong>r for them to receive the corresponding retroactive pension payments.<br />

In September 2007, the Venezuelan Attorney General’s Office recommen<strong>de</strong>d that retirees<br />

sign the “Acuerdo Marco” (Master Agreement) at the “Mesa <strong>de</strong> Conciliación” (Mediation<br />

Board) at the Supreme Court, so that any differences or calculation errors as well as any<br />

other disagreements regarding any items to be recognized could be resolved in that setting.<br />

On October 10, 2007 CANTV and its retirees began meetings at the Supreme Court for the<br />

signing of the “Acuerdo Marco” (Master Agreement) and installed the “Mesa <strong>de</strong> Conciliación”<br />

(Mediation Board) in Caracas and in other five regions of the country.<br />

The “Acuerdo Marco” (Master Agreement) contemplates payments to retirees of the amounts<br />

established in the <strong>de</strong>cision issued by Thirty Seventh Court of First Instance of Substantiation,<br />

Mediation and Labor Execution of the Circuit Court of the Metropolitan Area of Caracas,<br />

which was confirmed on April 16, 2007 by the Second Court for the Transitory Procedural<br />

Regime of the Circuit Court of the Metropolitan Area of Caracas. Additionally, CANTV<br />

updated the amounts due to the payment date and increased the amounts to be paid to its<br />

retirees based on the salary increase established in the collective bargaining agreement for<br />

2007-2009. The “Acuerdo Marco” (Master Agreement) covers all retirees i<strong>de</strong>ntified in this<br />

court <strong>de</strong>cision and all those who <strong>de</strong>ci<strong>de</strong> to become parties. In addition, CANTV <strong>de</strong>ci<strong>de</strong>d to<br />

extend the “Acuerdo Marco” (Master Agreement) to the retirees’ survivors, subject to legal<br />

certification of their status and in accordance with applicable law after being legally certified of<br />

their condition and according to the legal regulations.<br />

As of December 31, 2007, 7,239 retirees representing 89% of all total CANTV retirees, have<br />

signed the “Acuerdo Marco” (Master Agreement). During 2007, the payments ma<strong>de</strong> related<br />

to the December 13, 2006 court <strong>de</strong>cision were Bs. 166,116.<br />

During 2007, as a consequence of the “Acuerdo Marco” (Master Agreement), the Company<br />

recor<strong>de</strong>d an additional expense of Bs. 291,068 which inclu<strong>de</strong>s Bs. 77,178 of retroactive<br />

benefits. In addition, the Company recor<strong>de</strong>d as an expense Bs. 71,094 for the “Bono<br />

Solidario” (monthly incentive), which, beginning in January 2008, is being paid to the retirees<br />

as <strong>de</strong>termined during the “Mesa <strong>de</strong> Conciliación” (Mediation Board) process managed by the<br />

Social Chamber of the Supreme Court.<br />

During the period that this labor claim was un<strong>de</strong>r litigation, the Company followed IAS 37,<br />

“Provisions and contingent liabilities,” for measurement and disclosure. Un<strong>de</strong>r this approach,<br />

the total estimated additional obligation was immediately recognized as expense. In August<br />

2005, after a final court ruling was issued, the total contingent liability that was recognized<br />

50


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

un<strong>de</strong>r IAS 37 was transferred to the pension obligations. Thereafter, the Company has<br />

followed IAS 19, “Employee benefits,” for measurement and disclosure of this additional<br />

pension obligation.<br />

c) Post-retirement benefits other than pensions<br />

The Company records medical expenses related to accrued post-retirement benefits other<br />

than pensions, based on actuarial calculations.<br />

The components of other post-retirement benefits expense, inclu<strong>de</strong>d as labor and benefits for<br />

the years en<strong>de</strong>d December 31, 2007, 2006 and 2005 are as follows:<br />

51<br />

2007 2006 2005<br />

Benefits earned during the year 18,716 13,795 12,110<br />

Interest cost on projected benefit obligation 288,108 182,179 181,983<br />

Curtailment loss - - 24,430<br />

Past service cost 6,601 - -<br />

Amortization of actuarial losses 14,528 - -<br />

327,953 195,974 218,523<br />

The accrued other post-retirement benefit obligations as of December 31, 2007 and 2006 are<br />

as follows:<br />

2007 2006<br />

Active employees 411,369 343,426<br />

Retirees 1,186,108 853,102<br />

Accumulated post-retirement benefit obligation 1,597,477 1,196,528<br />

Unrecognized net actuarial loss<br />

Accrued post-retirement benefit obligations (including current portion of Bs. 110,030 and<br />

(338,885) (177,742)<br />

Bs. 88,188, respectively)<br />

1,258,592 1,018,786<br />

Reconciliation of changes generated during the years en<strong>de</strong>d December 31, 2007 and 2006 in<br />

the net liability recognized is as follows:<br />

2007 2006<br />

Accrued post-retirement benefit obligations at the beginning of the year 1,018,786 893,854<br />

Expense of the year 327,953 195,974<br />

Payments ma<strong>de</strong> during the year (88,147) (71,042)<br />

Accrued post-retirement benefit obligations at the end of the year 1,258,592 1,018,78


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Assumptions used to calculate post-retirement benefit obligations are shown below:<br />

52<br />

2007 2006<br />

% %<br />

Discount rate 9.30 6.49<br />

Projected medical cost increase 2.80 2.00<br />

The long-term assumptions used for other post-retirement benefits represent estimates of<br />

average real interest and compensation increase rates, to which the estimated inflation rate is<br />

ad<strong>de</strong>d to convert them into nominal rates.<br />

Actuarial assumptions are annually reviewed and changed due to the volatility of the<br />

Venezuelan economy. During 2005 the long-term actuarial assumptions were reviewed, and<br />

based on this the only change ma<strong>de</strong> was on the projected inflation. As a result of the<br />

Supreme Court ruling <strong>de</strong>scribed in section (b) of this note, in 2005 the Company <strong>de</strong>veloped<br />

an assumption to project the minimum urban wage increases.<br />

At the end of 2006, the actuarial assumptions were revised. Based on additional analysis<br />

performed by management, the mortality table changed from 1951 Annuity Mortality Table to<br />

UP94 Mortality Table (projected to 2000), which is a better match to CANTV’s mortality<br />

experience in recent years. Additionally the projected inflation rates were updated according<br />

to the current economics expectation in the country. The effects of these changes in<br />

estimates were accounted as accumulated actuarial losses.<br />

During 2007, as part of the agreements reached with retirees, CANTV provi<strong>de</strong>d certain<br />

special benefits consisting of wireline and wireless services to its retirees. The Company’s<br />

management believes that these telephony benefits do no represent an additional cost and<br />

that they will generate sufficient revenues to cover the related costs.<br />

d) Defined contribution pension plan<br />

During 2007, the Company <strong>de</strong>ci<strong>de</strong>d to establish a <strong>de</strong>fined contribution pension plan for all<br />

employees of the subsidiaries Movilnet, CANTV.Net and Caveguías, and for those employees<br />

of CANTV who began their employment on May 21, 2007 or thereafter. The plan comprises a<br />

3% contribution from the employee and 3% contribution from the Company. During the year<br />

en<strong>de</strong>d December 31, 2007, the Company recor<strong>de</strong>d Bs. 2,580 for this expense in the<br />

consolidated statement of operations.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

16. Other Current Liabilities<br />

Other current liabilities as of December 30, 2007 and 2006 were comprised of the following:<br />

53<br />

2007 2006<br />

Concession tax (Note 3 - Concessions and telecommunications regulation - Concession<br />

agreement) 121,769 99,622<br />

Subscriber reimbursable <strong>de</strong>posits 5,600 35,213<br />

Advances received from the Universal Service Fund 14,785 18,017<br />

Accrued liabilities 85,033 91,512<br />

Municipal and other taxes 6,539 23,879<br />

Interest payable 2,392 3,245<br />

Other 19,185 9,800<br />

255,303 281,288<br />

Subscriber reimbursable <strong>de</strong>posits represent warranty payments from wireline subscribers<br />

when services are activated, which must be refun<strong>de</strong>d when the subscription is cancelled.<br />

During 2007 and 2006, based on management analysis and in accordance with the<br />

Venezuelan Telecommunications Law, Bs. 35.025 and Bs. 43,083, respectively, were<br />

recognized as income related to subscriber <strong>de</strong>posits of customers who lost the refund rights<br />

due to a <strong>de</strong>fault in compliance of their contract terms.<br />

Advances received from the Universal Service Fund relate to funds received from CONATEL<br />

for the installation, operation, administration and maintenance of telecommunications<br />

infrastructure for the two projects assigned to CANTV according to the agreements<br />

subscribed with CONATEL (Note 3 (d) - Concessions and telecommunications regulation -<br />

Regulation - Universal Service Fund).<br />

Accrued liabilities mainly inclu<strong>de</strong> employee’s withholding and employer’s contributions<br />

payable according to labor regulations.<br />

17. Taxes<br />

Income tax<br />

According with current legislation, CANTV and its subsidiaries must individually pay income<br />

tax computed un<strong>de</strong>r the historic cost convention, plus or minus the inflation adjustment of<br />

non-monetary assets and liabilities and of initial stockhol<strong>de</strong>rs’ equity for tax purposes.<br />

The main reconciling items between the financial and tax result relate to the effect of the<br />

regular inflation adjustment for tax purposes, the provision for uncollectible accounts, pension<br />

plan and provisions for litigation.<br />

The Venezuelan Income Tax Law authorizes a tax credit for new investments in property,<br />

plant and equipment. Any portion of the credit not used in the year it arises may be carried<br />

forward for three years.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Pursuant to the Partial Amendment to the Income Tax Law effective October 22, 1999, tax<br />

credits for new investments in property, plant and equipment were available for up to 10% of<br />

the investments for the five years following the enactment of this law, effective until December<br />

31, 2004.<br />

On December 28, 2001, the Venezuelan Government published a Partial Amendment of the<br />

Venezuelan Income Tax Law. Certain interpretations of the Venezuelan Income Tax Law<br />

conclu<strong>de</strong>d that investment tax credits were effective for the five years following the enactment<br />

of the 2001 Amendment, making them available until December 28, 2006. This interpretation<br />

was not accepted by SENIAT. Accordingly, the Company stopped recording investment tax<br />

credits since January 1, 2005.<br />

On July 10, 2006, the Company received the opinion from SENIAT agreeing to apply<br />

investment tax credits until December 28, 2006. Accordingly, the Company’s management<br />

prepared substitute tax returns for fiscal year 2005, which resulted in Bs. 91,205 in tax<br />

credits, which reduced the 2006 income tax expense. As of December 31, 2007 and 2006,<br />

the Company did not have any carry-forward tax credits available to be compensated in future<br />

periods.<br />

On September 25, 2006, the Venezuelan Government published, in the Official Gazette of<br />

Venezuela No. 38,529, the Partial Amendment of the Venezuelan Income Tax Law. This<br />

Amendment inclu<strong>de</strong>s the extension of 10% investment tax credits on telecommunications<br />

companies for five additional years.<br />

The Venezuelan Income Tax Law also allows tax losses to be carried forward and recovered<br />

over three years from the year they were incurred and over one year for tax losses from tax<br />

inflation adjustments. As of December 31, 2007 and 2006, the Company did not have tax<br />

losses to be carried forward in future years.<br />

The (benefit) provision for income taxes for the years en<strong>de</strong>d December 31, 2007, 2006 and<br />

2005 is as follows:<br />

54<br />

2007 2006 2005<br />

Current 302,018 186,576 147,881<br />

Deferred (benefit) (552,461) (337,460) (357,426)<br />

(250,443) (150,884) (209,545)


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Reconciliation between total income taxes presented in the consolidated statement of<br />

operations and the amount that would be computed by applying the statutory income tax rate<br />

to income before income taxes, is as follows:<br />

2007 % 2006 % 2005 %<br />

Accounting income before income tax 773.484 979,491 4,863<br />

Statutory income tax rate 34% 34% 34%<br />

Theoretical tax provision at statutory income tax rate 262,985 34.0 333,027 34.0 1,653 34.0<br />

Tax inflation adjustment of the year, net (415,769) (53.8) (262,566) (26.8) (208,319) (4,283.8)<br />

Investment tax credits (141,721) (18.3) (199,761) (20.4) - -<br />

Other non-taxable and non-<strong>de</strong>ductible items, net 44,062 5.7 (21,584) (2.2) (2,880) (59.2)<br />

Income tax (benefit) (250,443) (32.4) (150,884) (15.4) (209,545) (4,309.0)<br />

The components of <strong>de</strong>ferred income tax asset as of December 31, 2007 and 2006 are as<br />

follows:<br />

55<br />

2007 2006<br />

Provision for uncollectible 26,302 21,453<br />

Provision for inventories’ obsolescence and net realizable value 43,386 51,483<br />

Concession and municipal taxes 48,420 42,642<br />

Pension and other post-retirement benefit obligations 783,145 539,884<br />

Accruals not <strong>de</strong>ductible until paid<br />

Differences in tax vs. book value of non monetary assets originated mainly due to<br />

39,944 47,446<br />

inflation adjustment for tax purposes<br />

702,552 414,016<br />

Provision for litigation 76,404 50,768<br />

Total <strong>de</strong>ferred tax asset 1,720,153 1,167,692<br />

The amount of the non-current portion of <strong>de</strong>ferred tax that is expected to be recovered or<br />

settled over 12 months is Bs. 1,478,271 and Bs. 933,271 for 2007 and 2006, respectively.<br />

Tax divi<strong>de</strong>nd<br />

Divi<strong>de</strong>nds <strong>de</strong>clared by Venezuelan companies, generated by net income in excess of the<br />

taxable net income <strong>de</strong>termined in conformity to the Income Tax Law, will be subject to a tax<br />

divi<strong>de</strong>nd at the moment of payment. These divi<strong>de</strong>nds will be subject to a proportional tax rate<br />

of 34%. This tax is subject to a total withholding at the moment of payment. Stock divi<strong>de</strong>nds<br />

will be subject to an advance income tax of 1% over the total amount of the divi<strong>de</strong>nd<br />

<strong>de</strong>clared, which will be credited to the proportional income tax to be paid in the final tax<br />

return.<br />

Value ad<strong>de</strong>d tax<br />

The value ad<strong>de</strong>d tax is based on a tax credit system and applies to the different stages of<br />

production and sales. It is payable based on the value ad<strong>de</strong>d at each of these stages. The<br />

value ad<strong>de</strong>d tax rate is set annually through the Venezuelan Budget Law and as of December<br />

31, 2007 the applicable rate is 9% (14% from October 2005 until February 2007, and 11% from


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

February 2007 until July 2007). The Value Ad<strong>de</strong>d Tax Law also introduced effective<br />

September 2002, an additional 10% tax on <strong>de</strong>fined luxury goods and services.<br />

During 2006 and 2007, the subsidiary CANTV.Net <strong>de</strong>tected value-ad<strong>de</strong>d taxes paid in excess<br />

during 2004 and 2005. The subsidiary’s management introduce a reimbursement request to<br />

SENIAT, and at this date ignores the amount that would be recognized by SENIAT and when<br />

the reimbursement would be ma<strong>de</strong>.<br />

Bank <strong>de</strong>bit tax<br />

The bank <strong>de</strong>bit tax is levied upon <strong>de</strong>bits or withdrawals ma<strong>de</strong> from current and savings<br />

accounts, custody <strong>de</strong>posits, or any other type of <strong>de</strong>mand <strong>de</strong>posit, liquid asset funds, trust<br />

funds and other financial market funds or financial instruments transacted by individuals or<br />

corporations with Venezuelan banks and financial institutions for transactions in excess of 40<br />

tax units. The applicable tax rate was 0.5% for the years en<strong>de</strong>d December 31, 2006 and<br />

2005. During the years en<strong>de</strong>d December 31, 2006 and 2005, the Company incurred bank<br />

<strong>de</strong>bit tax expense of Bs. 2,427 and Bs. 20,072, respectively. On February 8, 2006, the Law<br />

repealing this tax was published in Official Gazette of Venezuela No. 38,375, effective<br />

beginning February 10, 2006.<br />

Financial transactions tax<br />

On October 5, 2007, the extraordinary Official Gazette of Venezuela No. 5,852, was<br />

published the Financial Transactions of Corporations and Unincorporated Economic Entities,<br />

which will start on November 1, 2007 and will remain in force until December 2008, which<br />

establishes that <strong>de</strong>bits in bank accounts, custody <strong>de</strong>posits or any other type of <strong>de</strong>mand<br />

<strong>de</strong>posit, liquid asset funds, trust funds and other financial market funds or financial<br />

instruments transacted, performed in banks or other financial institutions, a 1.5% tax will<br />

apply. This tax is not <strong>de</strong>ducible from the income tax. This Law establishes that all<br />

Government entities with or without enterprise purposes are exempt of this that, by this<br />

reason, CANTV and its subsidiaries are exempt of this tax.<br />

Municipal tax on telecommunications services<br />

In accordance with the Municipal Power Organic Law, which became effective on January 1,<br />

2006, a tax is established based on gross revenues effectively earned in the tax period for<br />

telecommunications activities in the municipality. This tax is different to the taxes established<br />

on the Telecommunications Law.<br />

The applicable rate for telecommunications activities could not exceed 1% until the<br />

Telecommunications Law establishes another rate. The telecommunications companies<br />

should adapt the information systems to provi<strong>de</strong> billing information for each municipality.<br />

For the years en<strong>de</strong>d December 31, 2007 and 2006, the Company has incurred Bs. 82,553<br />

and Bs. 65,603, respectively, in municipal tax on telecommunications services inclu<strong>de</strong>d in the<br />

accompanying consolidated statement of operations is presented as concession and other<br />

taxes.<br />

56


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

18. Transactions with Related Parties<br />

On May 21, 2007, the Venezuelan Government, through the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, assumed operating control of the<br />

Company, when it acquired a majority of CANTV’s outstanding shares following the<br />

completion of a ten<strong>de</strong>r offer (Note 13 (a) - Stockhol<strong>de</strong>rs' Equity - Capital stock).<br />

The Company’s largest customer is the Venezuelan public sector, including the central<br />

Venezuelan Government and its centralized and <strong>de</strong>centralized entities, State-owned<br />

companies, and agencies at both the state and municipal level (Note 10 - Accounts<br />

receivable from Venezuelan Government entities). Additionally, during 2007, the Company<br />

recor<strong>de</strong>d as expenses Bs. 38,611 for basic services of electricity, water supply and mail<br />

services with Venezuelan Government entities.<br />

Until May 21, 2007, and during the years 2006 and 2005, in the normal course of business,<br />

the Company entered into transactions with certain of its previous stockhol<strong>de</strong>rs and their<br />

respective affiliates, which inclu<strong>de</strong>d purchases of inventories, supplies, plant and equipment,<br />

technical and administrative assistance and net revenue (expense) related to settlement of<br />

international telephone traffic with these affiliates. Transactions for technical and<br />

administrative assistance relate to consulting services, support to implement new<br />

technologies, strategic planning and analysis, training and personnel services, among others.<br />

Also inclu<strong>de</strong>d are salaries, pension, retirement benefits and other benefits for certain<br />

executives. The balances of these transactions for the years en<strong>de</strong>d December 31, 2006 and<br />

2005 are shown below:<br />

57<br />

2006 2005<br />

Purchase of inventories, supplies, plant and equipment of stockhol<strong>de</strong>rs’ affiliates 4,557 75,307<br />

Technical and administrative assistance expenses 26,378 27,131<br />

Net (expense) income related to the settlement of international telephone traffic with affiliates (6,685) 1,754<br />

For the years en<strong>de</strong>d December 31, 2007, 2006 and 2005, the aggregate amount of<br />

compensation paid by the Company to all principal directors, alternate directors and executive<br />

officers was Bs. 9,480, Bs. 11,419, and Bs. 9,928, respectively, and the aggregate amount<br />

accrued by the Company at December 31, 2007 and 2006 to provi<strong>de</strong> pension, retirement or<br />

similar benefits for executive officers, pursuant to existing plans, was Bs. 2,618 and Bs.<br />

6,576.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

19. Commitments and Contingencies<br />

The Company has the following commitments and contingencies:<br />

a) Capital expenditures<br />

The Company’s payment commitments as of December 31, 2007 and 2006 in respect of<br />

capital expenditures amount to approximately US$182 million y US$86 million, respectively.<br />

b) Operating leases<br />

The Company leases equipment and real property un<strong>de</strong>r operating leases for periods of one<br />

year or less. Lease agreements generally inclu<strong>de</strong> automatic extension clauses for equal<br />

terms, unless written termination notification is provi<strong>de</strong>d.<br />

The Company’s operating leases expense was Bs. 52,680, Bs. 51,284 and Bs. 42,345 for the<br />

years en<strong>de</strong>d December 31, 2007, 2006 and 2005, respectively.<br />

c) Litigation and provision for litigation<br />

The Company is involved in a number of legal and administrative proceedings; the main<br />

cases are presented below:<br />

Income tax:<br />

In May 2000 and December 1999, SENIAT notified CANTV and Movilnet of additional tax<br />

assessments amounting to Bs. 271,179 and Bs. 26,954, respectively, mainly related to the<br />

rejection of investment tax credits used for fiscal years en<strong>de</strong>d December 31, 1994, 1995,<br />

1996 and 1997. SENIAT objected to these credits claiming that telecommunications activities<br />

do not qualify as industrial activities. These assessments were appealed before the Tribunal<br />

Superior Sexto <strong>de</strong> lo Contencioso Tributario (Sixth Court of Contentious Matters) and, in the<br />

opinion of management and its legal counsel, there is a high probability of a ruling in favor of<br />

CANTV and Movilnet. It is important to point out that in 1999 this Court ruled in favor of<br />

another telecommunications company. However, that <strong>de</strong>cision was appealed by SENIAT and<br />

a final ruling is pending. Based on the opinion of the Company’s management and its legal<br />

counsel, no provision has been recor<strong>de</strong>d.<br />

In June 2002 Caveguías was subject to an additional tax assessment by SENIAT of<br />

approximately Bs. 44,312. This assessment was in respect of income tax returns for the<br />

years en<strong>de</strong>d December 31, 1996, 1997, 1998 and 1999, in which SENIAT objected to the<br />

<strong>de</strong>ferral of revenue in respect of the sale of advertising space. The Company appealed these<br />

assessments before the Tribunal Superior Octavo <strong>de</strong> lo Contencioso Tributario (Eighth Court<br />

of Contentious Matters). In the opinion of management and its legal counsel, there is a high<br />

probability of a favorable <strong>de</strong>cision for Caveguías, accordingly, no accrual or provision has<br />

been recor<strong>de</strong>d.<br />

58


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Value-ad<strong>de</strong>d tax:<br />

During February 2004, CANTV Telecommunication Centers were subject to additional tax<br />

assessments by the tax authorities in two states of the central region of Venezuela. As a<br />

result of this assessment, 37 centers received sanctions including fines and were closed for<br />

48 and 72 hours as a result of their non-compliance with certain value ad<strong>de</strong>d tax matters.<br />

Some of the sanctions were effective at that moment while others are currently being<br />

appealed. There is a risk for CANTV that Telecommunication Centers could request CANTV<br />

to assume some responsibility as business allies for the periods 2001 to 2003. CANTV has<br />

set asi<strong>de</strong> a provision for this contingent liability. Based on the opinion of legal counsel<br />

handling these proceedings, Company management believes that the provision is reasonable<br />

to cover this risk.<br />

In September 2006, SENIAT notified CANTV of additional tax assessments amounting to Bs.<br />

21,551 related to revision of the value ad<strong>de</strong>d tax paid by CANTV for the periods between<br />

January 2002 and December 2003. In October 2006, SENIAT notified CANTV.Net of<br />

additional tax assessments amounting to Bs. 3,804 related to revision of the value ad<strong>de</strong>d tax<br />

paid by CANTV.Net for the periods between January 2003 and July 2005. The objections<br />

presented by SENIAT to the tax assessments were based on the lack of verification of tax<br />

credits. In November 2006 and December 2006, the Company presented administrative<br />

appeals of the tax assessments of CANTV and CANTV.Net, respectively. On September 12,<br />

2007, CANTV.Net received the final resolution in respect of the Administrative Summary,<br />

which confirmed the tax assessment for Bs. 940 and revoked Bs. 2,497. On October 17,<br />

2007, CANTV.Net presented an administrative appeal against the tax assessment of Bs. 940.<br />

On October 31, 2007, CANTV received the final resolution in respect of the Administrative<br />

Summary, which partially revoked the tax assessment for Bs. 19,845 and partially confirmed it<br />

for Bs. 1,705. On December 5, 2007, CANTV paid Bs. 544, and on January 14, 2008,<br />

CANTV presented an administrative appeal of the tax assessment of Bs. 1,161. The<br />

administrative appeals are awaiting final <strong>de</strong>cision. Based on the opinion of external legal<br />

counsel, consi<strong>de</strong>ring the documentation submitted to SENIAT by CANTV and CANTV.Net in<br />

the administrative appeals, the Company believes that these tax assessments will be <strong>de</strong>ci<strong>de</strong>d<br />

favorably for the companies; accordingly, no provision has been recor<strong>de</strong>d in respect of these<br />

inspection reports.<br />

Telecommunications tax:<br />

In December 2004, CONATEL notified CANTV of inspection reports resulting from their<br />

review of tax payments called for by the Telecommunications Law, ma<strong>de</strong> by CANTV in 2000<br />

and Movilnet and CANTV.Net for 2000 to 2003. The main concepts objected to by CONATEL<br />

in <strong>de</strong>termining the tax base for computation of this tax are the <strong>de</strong>duction of uncollectible writeoffs<br />

and discounts granted to customers. In addition, CONATEL objected to Movilnet’s<br />

exclusion of net interconnection revenue from the tax base for the Special<br />

Telecommunications Tax of Wireless Services. In January 2006, the Company received the<br />

final resolution from CONATEL in respect of the Administrative Summary indicating total<br />

additional taxes, penalties and interest of Bs. 8,125 for CANTV, Bs. 92,866 for Movilnet and<br />

Bs. 667 for CANTV.Net. In February 2006, the Company presented an administrative appeal<br />

59


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

to the tax assessments and was awaiting a formal response from the tax authorities. In<br />

December 2006, CONATEL notified CANTV of inspection reports for net taxes of Bs. 6,920<br />

resulting from their review of tax payments called for by the Telecommunications Law, ma<strong>de</strong><br />

by CANTV for the periods from January 2001 to December 2003. The main issues objected<br />

to by CONATEL in <strong>de</strong>termining the tax base for computation of this tax are the <strong>de</strong>duction of<br />

uncollectible write-offs and discounts granted to customers. Beginning in fiscal year 2007,<br />

CANTV, Movilnet and CANTV.Net, changed their view that uncollectible write-offs and<br />

discounts granted to customers should be <strong>de</strong>ducted from the tax base for computation of<br />

telecommunications taxes. In this respect, beginning January 1, 2007, CANTV, Movilnet and<br />

CANTV.Net calculate the tax base for telecommunication taxes including these concepts.<br />

As of December 31, 2007, the Company’s management recor<strong>de</strong>d a provision of Bs. 123,443<br />

for this concept. In January and February 2008, the Company paid Bs. 48,074 regarding the<br />

taxes objected by CONATEL for the years 2000 to 2003.<br />

Labor lawsuits:<br />

In addition, an important number of other labor-related lawsuits and claims have been ma<strong>de</strong><br />

against CANTV for approximately Bs. 567,521 (including inflation adjustment of the lawsuits),<br />

most of which are related to special retirement initiatives, employee severance benefits and<br />

other benefits related to early retirement. These lawsuits are currently pending and, as of the<br />

date of these financial statements, their final outcome is not predictable. CANTV has settled<br />

a number of these cases through mediation and negotiation with the parties involved, and is<br />

currently in the process of resolving claims and lawsuits filed by former employees to reduce<br />

the number of lawsuits against the Company.<br />

Other legal proceedings:<br />

In June 2003, a commercial party introduced an arbitration request before the Centro <strong>de</strong><br />

Arbitraje <strong>de</strong> la Cámara <strong>de</strong> Comercio <strong>de</strong> Caracas (Caracas Arbitration Center of the<br />

Commercial Chamber), claiming damages of Bs. 20,399 due to <strong>de</strong>fault by Movilnet in<br />

compliance with an agreement. On October 8, 2003, Movilnet respon<strong>de</strong>d to these claims and<br />

on January 16, 2004, the Arbitration Court convened to hear the case. In September 2004<br />

this Arbitration Center found in favor of the commercial party, and required a payment of Bs.<br />

8,000 by Movilnet, which was paid in January 2005. In October 2005, this commercial party<br />

filed a new lawsuit before a Commercial Court for the alleged loss of future income due to<br />

<strong>de</strong>fault in compliance with the same commercial agreement for Bs. 257,000. This case was<br />

sent to the Supreme Court which ruled against the <strong>de</strong>manding party, due to the existence of<br />

an arbitration agreement. On October 24, 2006, this commercial party issued a new lawsuit<br />

before the Caracas Arbitration Center of the Commercial Chamber for the alleged loss of<br />

future income due to <strong>de</strong>fault in compliance with the same commercial agreement for Bs.<br />

38,000. On February 28, 2007 Movilnet respon<strong>de</strong>d to the lawsuit. In the opinion of the<br />

Company’s management and its legal counsel, this second lawsuit filed by the commercial<br />

party has little probability of success; accordingly, no provision has been recor<strong>de</strong>d with<br />

respect thereto.<br />

60


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Management believes that most of these cases and others will be resolved through<br />

negotiation and mediation processes, and that the total provision set asi<strong>de</strong> is reasonable as<br />

of December 31, 2007 to cover the contingencies consi<strong>de</strong>red probable. However, the timing<br />

for the utilization of this provision has not been <strong>de</strong>termined.<br />

The Company has recor<strong>de</strong>d the necessary provisions to cover each one of these<br />

assessments and lawsuits based on the likelihood of occurrence of them and the possibility of<br />

their calculation.<br />

Reconciliation of changes generated during the years en<strong>de</strong>d December 31, 2007 and 2006 of<br />

the provision for litigation is as follows:<br />

61<br />

2007 2006<br />

Balance at beginning of the period 170,254 134,513<br />

Expense of the period 172,420 43,584<br />

Write-offs and/or payments (30,889) (7,843)<br />

Balance at end of the period 311,785 170,254<br />

At the Regular Stockhol<strong>de</strong>rs’ Meeting held on March 30, 2007, BANDES, indicated that it<br />

consi<strong>de</strong>red insufficient of the provisions recor<strong>de</strong>d for assessments issued by SENIAT<br />

regarding income tax and CONATEL regarding telecommunication taxes.<br />

d) Concessions mandates<br />

Plant mo<strong>de</strong>rnization is not currently required un<strong>de</strong>r the concessions.<br />

The Regulations for Basic Telephony Services require basic telephony service operators to<br />

install and maintain public telephone equipment equivalent to 3% of their subscriber base. As<br />

of December 31, 2007, the Company has complied with the obligations established in these<br />

Regulations.<br />

The gui<strong>de</strong>lines for the market opening in Venezuela (Note 3 - Concessions and<br />

telecommunications regulation) inclu<strong>de</strong>d certain quality service standards that incorporate<br />

minimum and maximum targets. These targets were CONATEL’s basis for issuing the<br />

Administrative Ruling on Quality Service applicable to all basic telecommunication services<br />

operators. This Administrative Ruling was published in the Official Gazette of Venezuela No.<br />

37,968 on June 28, 2004. As of December 31, 2007, the Company has reasonably complied<br />

with the targets established in this Administrative Ruling and has action plans to reach the<br />

remaining targets.<br />

e) Other regulations<br />

Since 2004, there have been a number of new laws and related rules issued in Venezuela<br />

(Law of Prevention, Conditions and Work Environment; Housing Law; Employment Law;<br />

Science, Technology and Innovation Law; Law Against Illicit Traffic of Drugs; Reform of the<br />

Labor Law Rules; among others), creating a potential impact on the Company’s financial


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

statements. The Company’s management and its internal and external legal counsels are<br />

evaluating and analyzing such laws in or<strong>de</strong>r to ensure their appropriate application and to<br />

record the necessary provisions.<br />

In addition, beginning May 21, 2007, the Company is subject to other legal dispositions<br />

applicable to the public sector (Note 24 - Legal framework applicable to State-owned<br />

companies).<br />

20. Segment Reporting<br />

The i<strong>de</strong>ntifiable segments are strategic business units offering different products and services<br />

in the telecommunications industry and related services. These segments are managed<br />

separately since each business requires different technology and marketing strategies. The<br />

Company manages its operations mainly in two business segments: wireline and wireless<br />

services. The wireline services segment provi<strong>de</strong>s local, domestic and international long<br />

distance services, data transmission and other wireline-related services, which are provi<strong>de</strong>d<br />

by the same group of assets to substantially the same group of customers. The wireless<br />

services segment provi<strong>de</strong>s nationwi<strong>de</strong> cellular mobile services. Substantially all of the<br />

Company’s businesses are conducted in Venezuela and substantially all its assets are<br />

located in Venezuela; the Company’s management consi<strong>de</strong>rs that Venezuela is its only<br />

geographic segment.<br />

In January 2005, CANTV and its subsidiary Movilnet signed a five year agreement in which<br />

CANTV granted Movilnet a license to use its commercial tra<strong>de</strong>mark in exchange for 3% of<br />

Movilnet’s gross revenues. In July 2007, this agreement was terminated by mutual<br />

agreement between the parties.<br />

Segment results for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005, and assets and<br />

liabilities as of December 30, 2007, 2006 and 2005, are shown below:<br />

62<br />

2007 2006 2005<br />

Wireline services<br />

Operating revenues<br />

Local services 967,620 922,923 915,147<br />

Domestic long distance 305,856 285,872 296,009<br />

International long distance 146,115 121,961 115,536<br />

Fixed to mobile outgoing calls 993,143 924,457 753,888<br />

Interconnection incoming 142,965 127,978 124,633<br />

Data transmission 2,218,174 1,618,356 1,140,131<br />

Other wireline-related services 546,426 409,827 328,021<br />

Total operating revenue 5,320,299 4,411,374 3,673,365<br />

Intersegment operating revenue (1,193,289) (912,141) (585,566)<br />

Segment operating income (loss) (•) 423,130 589,186 (235,663)<br />

Depreciation and amortization 559,813 571,284 536,199


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

63<br />

2007 2006 2005<br />

Income tax benefit (provision) 219,102 95,835 222,982<br />

Acquisition of information systems and property, plant and equipment 696,565 444,926 397,896<br />

Assets at the end of the period 7,968,816 7,309,660 5,910,440<br />

Pension and other post-retirement benefit obligations at the end of the year 2,303,189 1,593,838 1,578,698<br />

Liabilities at the end of the period 4,975,386 4,965,998 2,847,976<br />

Wireless services<br />

Operating revenues<br />

Access 229,355 173,853 119,758<br />

Airtime 1,795,708 1,378,241 781,822<br />

Interconnection 781,011 750,936 535,015<br />

Activation 66,066 56,452 42,925<br />

Special services 1,011,902 683,425 383,480<br />

Equipment sales 597,237 573,711 431,169<br />

Other 139,494 91,790 36,826<br />

Total operating income 4,620,773 3,708,408 2,330,995<br />

Intersegment operating revenue (475,781) (465,770) (349,338)<br />

Segment operating income 297,021 290,261 148,970<br />

Depreciation and amortization 405,601 286,788 291,133<br />

Income tax benefit (provision) 34,722 61,352 (12,760)<br />

Acquisition of information systems and property, plant and equipment 742,697 796,786 646,616<br />

Assets at the end of the period 4,267,211 4,400,116 2,456,369<br />

Liabilities at the end of the period 3,484,694 3,595,862 1,972,366<br />

The reconciliation of segment operating revenues, operating income (loss), assets and<br />

liabilities to the consolidated financial statements as of December 31, 2007, 2006 and 2005<br />

are shown below:<br />

Reconciliation of operating revenues:<br />

2007 2006 2005<br />

Reported segments 9,941,072 8,119,782 6,004,360<br />

Other telecommunications-related services 49,204 57,354 20,437<br />

Elimination of intersegment operating revenues (1,670,660) (1,379,469) (936,405)<br />

Total operating revenues 8,319,616 6,797,667 5,088,392


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Reconciliation of operating income (loss):<br />

64<br />

2007 2006 2005<br />

Reported segments (•) 720,151 879,447 (86,693)<br />

Other telecommunications-related services 14,568 19,938 534<br />

Total operating income (loss) 734,719 899,385 (86,159)<br />

Reconciliation of assets:<br />

2007 2006 2005<br />

Reported segments 12,236,027 11,709,776 8,366,809<br />

Elimination of assets (2,609,669) (2,993,970) (1,249,456)<br />

Other telecommunications-related services 173,775 206,401 172,758<br />

Total assets at the end of the period 9,800,133 8,922,207 7,290,111<br />

Reconciliation of liabilities:<br />

2007 2006 2005<br />

Reported segments 8,460,080 8,561,860 4,820,342<br />

Elimination of liabilities (2,609,669) (2,993,970) (1,248,060)<br />

Other telecommunications-related services 95,917 64,663 48,760<br />

Total liabilities at the end of the period 5,946,328 5,632,553 3,621,042<br />

(•) Segments reported inclu<strong>de</strong> Bs. 362,162, Bs. 23,043 and Bs. 694,916 for the years en<strong>de</strong>d<br />

December 31, 2007, 2006 and 2005, respectively, related to the expense from the additional<br />

pension obligation due to the Supreme Court ruling (Note 15 (b) - Retirement benefits -<br />

Pension litigation and Court Ruling).<br />

21. Exchange Controls<br />

On January 21, 2003, the Venezuelan Government, by means of an agreement with the<br />

Central Bank of Venezuela, suspen<strong>de</strong>d the trading of foreign currencies in the country for ten<br />

business days.<br />

Beginning February 5, 2003, several Exchange Agreements were published set out the rules<br />

for the foreign currency administration regime and the exchange rate applicable for<br />

transactions set forth in the Exchange Agreements.<br />

The Comisión <strong>de</strong> Administración <strong>de</strong> Divisas (CADIVI) (the Commission for the Administration<br />

of Foreign Currency) is created, and it will coordinate, manage, control and establish the<br />

requirements, procedures and restrictions for the execution of the Exchange Agreements.<br />

CADIVI has issued several rulings related to the registration, gui<strong>de</strong>lines, requirements and<br />

conditions related to the foreign currency administration regime.


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

On May 21, 2007, the Venezuelan Government assumed operating control of the Company,<br />

when it acquired ownership of 86.2% of CANTV’s shares (Note 13 (a) - Stockhol<strong>de</strong>rs' Equity -<br />

Capital stock). Beginning on that date, the Company is subject to Rulings No. 44 and No. 46,<br />

which establish the requirements, controls and procedures for the acquisition of foreign<br />

currency for public sector purposes, including importation of goods and services, payment of<br />

contracts for construction or services, and other payments by the public sector not inclu<strong>de</strong>s in<br />

the Exchange Agreements.<br />

In addition, the Exchange Agreements establish that public sector entities are allowed to<br />

maintain foreign exchange currency <strong>de</strong>posits in accounts abroad, as long as they are<br />

authorized by the Central Bank of Venezuela, for payments of obligations related to<br />

importation of goods and services required for their operations. These <strong>de</strong>posits of foreign<br />

currency in accounts abroad must only be used to pay obligations <strong>de</strong>nominated in foreign<br />

currency and payable abroad, and any excess over the amounts authorized by the Central<br />

Bank of Venezuela must be sold to the Central Bank of Venezuela, unless they are duly<br />

justified. The maximum amount authorized by the Central Bank of Venezuela for the<br />

Company is a monthly average of US$63.36 million.<br />

The different official exchange rates set un<strong>de</strong>r the exchange control regime since it was<br />

established area as follows:<br />

a) On February 5, 2003, the exchange rate was set at Bs. 1,596.20/US$1 for purchase and<br />

Bs. 1,600/US$1 for sale.<br />

b) On February 9, 2004, the exchange rate was set at Bs. 1,915.20/US$1 for purchase and<br />

Bs. 1,920/US$1 for sale.<br />

c) On March 2, 2005, the exchange rate was set at Bs. 2,144.60/US$1 for purchase and Bs.<br />

2,150/US$1 for sale.<br />

As of December 31, 2007, the Company had applied to CADIVI for a total of US$3,646.9<br />

million since the implementation of the current exchange controls regime in February 2003.<br />

As of December 31, 2007, CADIVI has approved US$3,468.9 million, of which US$3,204.5<br />

million have been received.<br />

The Company continues to implement the necessary procedures to comply with the<br />

requirements of CADIVI for requests for additional foreign currency.<br />

The Amendment of the Illicit Foreign Exchange Conversion Law became effective on January<br />

28, 2008. Like the Illicit Foreign Exchange Conversion Law issued in 2004, the amen<strong>de</strong>d law<br />

establishes that any <strong>de</strong>mand, offer, purchase or sale of U.S. dollars in violation of the<br />

requirements of CADIVI is consi<strong>de</strong>red illegal. Goods and services exporters are obligated to<br />

sell to the Central Bank of Venezuela any foreign currency representing gains from<br />

65


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

commercial transactions, and imports and exports in excess of US$10,000 must be <strong>de</strong>clared<br />

to CADIVI. Transactions in ADSs and Venezuelan Government dollar-<strong>de</strong>nominated bonds<br />

subscribed to in local currency are exempt. The Law prohibits the offering, announcement or<br />

disclosure of financial or trading information relating to non-official exchange rates, in written,<br />

audiovisual, radioelectric, electronic or other form. In addition, all commercial establishments<br />

must visibly display in their stores a notice indicating the goods and services acquired through<br />

the authorized foreign currency regime at the official exchange rate. Violators will be subject<br />

to fines equal to two or three times the total amount of the transaction, seizure of the subject<br />

foreign currency and incarceration ranging from two to seven years and fines ranging from<br />

500 tax units to 1,000 tax units for failure to comply with the law.<br />

22. Enabling Law<br />

On February 1, 2007, a law was published in Official Gazette N° 38.617 authorizing the<br />

Presi<strong>de</strong>nt of the Republic, in a Cabinet Meeting, to issue Decrees with the Rank, Validity and<br />

Status of Law (“Decretos con Rango, Valor y Fuerza <strong>de</strong> Ley”) (Decrees with Status of Law)<br />

(the Enabling Law), on matters <strong>de</strong>legated pursuant to the Enabling Law in accordance with<br />

the Constitution of the Bolivarian Republic of Venezuela. The Presi<strong>de</strong>nt of the Republic has<br />

the power to legislate through Decrees with Status of Law un<strong>de</strong>r the Enabling Law for a term<br />

of 18 months from the date of publication of the law, in 11 <strong>de</strong>legated areas, including<br />

economic welfare, finance and tax, among others. As of March 10, 2008, the potential effects<br />

of the Decrees with Status of Law that may be issued un<strong>de</strong>r the Enabling Law on future fiscal<br />

periods are unknown.<br />

23. Monetary Conversion Law<br />

On March 6, 2007, as published in the Official Gazette of Venezuela No. 38.638, the<br />

Presi<strong>de</strong>nt of the Republic approved a Decree with Status of Law regarding monetary<br />

conversion (the Monetary Conversion Law). Beginning January 1, 2008, the Monetary<br />

Conversion Law establishes a system whereby the current monetary unit, the “Bolivar” (Bs.),<br />

will be replaced by a new unit, the “Bolívar Fuerte” (Strong Bolivar) (Bs.F.) which is the<br />

equivalent of Bs. 1,000.00. The Decree with Status of Law establishes that beginning on<br />

such date, all prices of goods and services, salaries, pensions, <strong>de</strong>bt, payment obligations,<br />

taxes, stock quotes in exchange markets, exchange rates, rates and tariffs, amounts<br />

contained in financial statements or any other accounting documents and, in general, any or<br />

reference expressed in local currency will be expressed in the new currency.<br />

On June 6, 2007, the Central Bank of Venezuela issued Resolution No. 01-06-02 relating to<br />

the Rules for Monetary Conversion and Rounding, published in the Official Gazette of<br />

Venezuela No. 38.711. This resolution establishes, among other matters, that financial<br />

statements that are for periods en<strong>de</strong>d before January 1, 2008 but that will be approved after<br />

such date, must be prepared and presented in current Bs. as of December 31, 2007. In<br />

addition, for comparison with future periods, the amounts stated in such financial statements<br />

must be converted into Bs.F. using the equivalency established un<strong>de</strong>r the new law.<br />

66


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

24. Legal Framework Applicable to State-Owned Companies<br />

On May 21, 2007, the Venezuelan Government assumed operating control of the Company<br />

when it acquired ownership of 86.2% of the capital stock of the Company (Note 13 (a) -<br />

Stockhol<strong>de</strong>rs' Equity - Capital stock). Beginning on that date, the Company is subject to the<br />

legal dispositions applicable to <strong>de</strong>centralized entities in the public sector, such as:<br />

Public Administration Organic Law<br />

The purpose of this law is to establish the principles and gui<strong>de</strong>lines governing the<br />

organization and operations of the Public Administration; the National Public Administration<br />

and <strong>de</strong>centralized administration; to regulate performance commitments; to create structures<br />

to promote the participation in and control over public policy and results; and to establish the<br />

basic rules for public archives and registries.<br />

Un<strong>de</strong>r this law, the Ministry of the Popular Power for Finance is required to keep a registry of<br />

the equity ownerships structure of Venezuelan Government-owned companies and to submit<br />

this information semi-annually to the corresponding Commission of the Venezuelan National<br />

Assembly within 30 days before the beginning of the next six-month period.<br />

In addition, the Ministry of the Popular Power for Planning and Development is required to<br />

<strong>de</strong>termine performance indicators for the management of government-owned companies<br />

such, and will establish the subscription of performance commitments with the Ministry of the<br />

Popular Power for Telecommunications and Information Technology, as governing body of<br />

the Company.<br />

In addition, the Company must inform the Ministry of the Popular Power for<br />

Telecommunications and Information Technology of any subscription of an equity interest in<br />

the Company and of its financial results and submit relevant performance and other reports to<br />

the Ministry of the Popular Power for Telecommunications and Information Technology, as its<br />

governing body.<br />

Partial Amendment of the Organic Law of Financial Administration of the Public Sector<br />

and its Regulations<br />

Un<strong>de</strong>r this law, the governmental entities at the highest level must approve the annual<br />

performance budgets of CANTV and its subsidiaries, which must be submitted to the Oficina<br />

Nacional <strong>de</strong> Presupuesto (ONAPRE) (the National Budgeting Office), through the Ministry of<br />

the Popular Power for Telecommunications and Information Technology, before September<br />

30 of each fiscal year. In addition, CANTV is required to submit any information required by<br />

ONAPRE and to comply with its rules and technical requirements. CANTV must also submit<br />

the financial statements and accounting information required by the Oficina Nacional <strong>de</strong><br />

Contabilidad Pública (ONCOP) (the National Office of Public Accounting), thereby adjusting<br />

its accounting procedures to the Sistema <strong>de</strong> Contabilidad Pública (Public Accounting<br />

System), the unified and integrated system for all Venezuelan Government entities.<br />

67


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

The budget must be prepared in accordance with instructions issued by ONAPRE, taking into<br />

account the national plans <strong>de</strong>veloped within the general framework of the Plan <strong>de</strong> Desarrollo<br />

Económico y Social <strong>de</strong> la Nación (the Nation’s Plan for Economic and Social Development),<br />

the annual policy agreement, the gui<strong>de</strong>lines for national <strong>de</strong>velopment and the Multiannual<br />

Budget Framework Law, and it must contain the policies, strategic objectives, products and<br />

indicators in the Plan Operativo Anual (Annual Operating Plan).<br />

The Company must also coordinate the timing of the physical and financial execution of its<br />

budget financial resources and expenses with the preparation of its budget proposal,<br />

pursuant to the sub-periods, rules and procedures established by ONAPRE.<br />

Organic Law for Planning<br />

This law establishes the basis and gui<strong>de</strong>lines for the preparation, practicability, improvement<br />

and organization of planning at different levels of the government.<br />

The Company must submit information regarding its programs, projects and actions to be<br />

<strong>de</strong>veloped during the relevant fiscal year to the Ministry of the Popular Power for<br />

Telecommunications and Information Technology, which as its governing body will inform the<br />

Ministry of the Popular Power for the Planning and Development, to fulfill planning<br />

requirements and ensure compliance with the law.<br />

Organic Law of the General Controller of the Republic and National System of Tax<br />

Control<br />

The Company is subject to the control, oversight and fiscal review of the General Controller of<br />

the Republic, and must comply with the internal and external control rules established by this<br />

law. Violations of this law by actions, events or omissions that cause damage to the national<br />

wealth will result in liability on the part of management.<br />

The Company is required to assign an internal auditor in accordance in accordance with the<br />

open competition procedures established in the Rules for Open Competition for the<br />

Designation of District and Municipal Controllers, and Internal Auditors of Organisms of the<br />

Public Sector of the Nation, States, Districts and Municipalities and Decentralized Entities.<br />

When public administrators or those who manage or have custody of public assets or funds<br />

leave office, they must comply with the Standards Governing the Delivery of Organisms and<br />

Entities of the Public Administration and their respective Offices or Depen<strong>de</strong>ncies.<br />

Anti-Corruption Law<br />

The provisions of this law are <strong>de</strong>signed to preserve public ethics and administrative morals<br />

and prevent corruption by establishing legal rules in specific areas and circumstances. The<br />

objective is to prevent corruption and safeguard the national patrimony through moral<br />

principles (honesty, transparency, participation, efficiency, efficacy, legality, accountability<br />

and responsibility.<br />

68


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Un<strong>de</strong>r the Anti-Corruption Law, members of the Board of Directors of companies owned by<br />

the Venezuelan Government are consi<strong>de</strong>red public officials and as such are subject to liability<br />

un<strong>de</strong>r this law and the Organic Law of the General Controller of the Republic and National<br />

System of Tax Control. The same is true for persons who perform management, supervisory,<br />

control and auditing functions; voting members of committees for purchasing, bidding,<br />

contracts and donations; and those who are authorized to transfer funds from the Company’s<br />

bank accounts.<br />

A violation of this law will constitute a crime against the public and will be sanctioned in<br />

accordance with the Law.<br />

Partial Amendment of the Bidding Law and its Regulations<br />

This law establishes the rules that must be applied in the selection of contractors or suppliers<br />

for construction projects, purchase of property, and supply of services to the Company (other<br />

than professional and labor-related services).<br />

The Company must establish a Bidding Commission and modify its internal rules for the<br />

selection of contractors and suppliers which must inclu<strong>de</strong> rules to govern the authority of the<br />

internal organization to perform bidding processes.<br />

The Company must take the necessary steps to maximize use of goods and services ma<strong>de</strong><br />

by small and medium-sized domestic producers, as well as to establish conditions to promote<br />

national <strong>de</strong>velopment through licenses for technology uses.<br />

Organic Law that Regulates the Transfer of Assets of the Public Sector not Subject to<br />

Basic Industries and the related rules<br />

The Company must apply these rules to dispose of all goods or assets that are not necessary<br />

to meet its objectives, as well as those that have been dismantled or are obsolete or<br />

damaged.<br />

A request for authorization to transfer goods or assets of the public sector must be ma<strong>de</strong><br />

before the Comisión para la Enajenación <strong>de</strong> Bienes <strong>de</strong>l Sector Público no Afectos a las<br />

Industrias Básicas (CENBISP) (Commission for the Transfer of Goods of the Public Sector<br />

not Subject to Basic Industries), governed by the Ministry of the Popular Power for Finance,<br />

through the Technical Secretariat.<br />

The base price for the transfer of the property of the Republic will be <strong>de</strong>termined by<br />

CENBISP, taking into account the information submitted by the respective entities or<br />

organisms or by any other factors <strong>de</strong>termined by CENBISP. The officials at the highest level<br />

of the public entity must submit a periodic report of the status and condition of the assets it<br />

owns.<br />

69


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

Organic Law of the Attorney General of the Republic<br />

This law establishes that the Company must notify the Attorney General of the Republic of<br />

lawsuits against CANTV and its subsidiaries, in the event that they could affect the direct or<br />

indirect interests of the Republic or the ren<strong>de</strong>ring of public services, or in the case of labor<br />

lawsuits.<br />

This law also establishes that the Company’s contracts with its legal advisors must be<br />

approved by the Attorney General of the Republic, in accordance with applicable rules.<br />

As of March 10, 2008, the Company is adapting its processes and systems to comply with the<br />

requirements of the new applicable legal framework.<br />

25. Adoption of International Financial Reporting Standards (IFRS) by the Venezuelan<br />

Fe<strong>de</strong>ration of Public Accountants (FCCPV)<br />

In January 2004, the FCCPV <strong>de</strong>ci<strong>de</strong>d to adopt IFRS and its interpretations, issued by the<br />

International Accounting Standard Board (IASB).<br />

In August 2006, the FCCPV resolved that the adoption date of these standards would be:<br />

- For all entities, except for those that offer securities to the public, and those that qualify as<br />

small and medium-sized entities, the initial adoption date will be the close of the fiscal<br />

year en<strong>de</strong>d December 31, 2008, or the close of the immediately following fiscal period.<br />

- For small and medium-sized entities, the initial adoption date will be the close of the fiscal<br />

year en<strong>de</strong>d December 31, 2010, or the close of the immediately following fiscal period.<br />

- For entities that offer securities to the public, the initial adoption date will be established<br />

by the CNV, the regulatory body of public companies.<br />

In December 2007, the FCCPV published the following three IFRS Adoption Bulletins<br />

(Adoption Bulletin VEN-IFRS):<br />

- Adoption Bulletin VEN-IFRS No. 0 (Framework for the adoption of International Financial<br />

Reporting Standards): revokes, beginning in 2008 for large enterprises and in 2010 for<br />

small and medium-sized entities, the former Venezuelan Statement of Accounting<br />

Principles and Technical Publications. It establishes that the Venezuelan generally<br />

accepted accounting principles will be <strong>de</strong>signated by the symbol VEN-IFRS. It prohibits<br />

the application of IFRS 1 “First-time adoption of IFRS” and indicates that the Adoption<br />

Bulletin VEN-IFRS shall come into effect by applying the changes in accounting policies<br />

established in International Accounting Standard No. 8 (IAS 8). This would require the<br />

retroactive recognition of the new accounting policies. It also indicates the specific IFRS,<br />

IAS and interpretations of these standards that should be used as the standards approved<br />

by the FCCPV for VEN-IFRS purposes. In the future, new Adoption Bulletin VEN-IFRS<br />

70


Compañía Anónima Nacional Teléfonos <strong>de</strong> Venezuela (CANTV)<br />

and Subsidiaries<br />

Notes to the Consolidated Financial Statements<br />

December 31, 2007 and 2006<br />

And for the years en<strong>de</strong>d December 31, 2007, 2006 and 2005<br />

(Amounts are expressed in millions of Venezuelan bolivars, unless otherwise<br />

indicated)<br />

will be issued to adapt IFRS to Venezuela’s situation. This bulletin is an exposure draft<br />

for public comment and therefore has not been approved.<br />

- Adoption Bulletin VEN-IFRS No. 1 (Definition of small and medium-sized entities): this<br />

standard establishes the factors to be consi<strong>de</strong>red to <strong>de</strong>termine whether an entity is to be<br />

classified as a large or a medium-sized of small entity.<br />

- Adoption Bulletin VEN-IFRS No. 2 (Criteria for the application of International Accounting<br />

Standard No. 29 “Financial reporting in hyperinflationary economies” (IAS 29) in<br />

Venezuela): this standard would require that un<strong>de</strong>r VEN-IFRS, inflation should be<br />

recognized in the financial statements if the year inflation is more than one digit. Inflation<br />

recognition would be done in accordance with IAS 29. This bulletin is an exposure draft<br />

for public comment and therefore has not been approved.<br />

During 2005, the Company adopted IFRS (Note 2 (a) - Summary of significant accounting<br />

principles and policies - Basis of presentation) which are different from VEN-IFRS; therefore,<br />

the Company is currently analyzing the possible effects that the <strong>de</strong>cisions of the FCCPV<br />

could have on the consolidated financial statements. However, until the FCCPV approves the<br />

final plan for IFRS adoption, and the CNV issues a statement regarding this plan, it is not<br />

possible to <strong>de</strong>termine the potential effects.<br />

26. Subsequent Events<br />

Divi<strong>de</strong>nd proposal<br />

On March 10, 2008, CANTV’s Board of Directors approved an ordinary divi<strong>de</strong>nd of Bs. 757.14<br />

(equivalent to Bs.F. 0.75714) per share that will be presented for the approval of the<br />

Stockhol<strong>de</strong>rs’ Meeting to be held on March 31, 2008.<br />

Additionally, on March 10, 2008, CANTV’s Board of Directors approved an extraordinary<br />

divi<strong>de</strong>nd of Bs. 127.04 (equivalent to Bs.F. 0.12704) per share that will be presented for the<br />

approval of the Stockhol<strong>de</strong>rs’ Meeting to be held on March 31, 2008.<br />

71