Annual Report '95 - Telmexdownloads.telmex.com/pdf/annual95.pdf · 2014. 2. 1. · the Mexican...

Index

HIGHLIGHTS 1

LETTER TO SHAREHOLDERS 2

OPERATING RESULTS 4

FINANCIAL RESULTS 14

BOARD OF DIRECTORS 47

DIRECTORY 48

Highlights

Figures in million of pesos, unless otherwise indicated* 1995 1994 1993 1992 1991

ConsolidatedTotal Revenues 41,679 44,395 40,023 36,381 32,008Cost of Sales and Services 12,301 13,317 12,317 11,066 9,301Commercial, Administrative and General Expenses 7,129 6,805 6,120 5,537 4,575Depreciation and Amortization 7,211 5,390 4,859 3,988 4,157Total Expenses 26,641 25,512 23,296 20,591 18,033Operating Income 15,038 18,883 16,727 15,790 13,975Net Income 9,307 11,947 14,647 14,014 13,741Total Assets 101,634 114,343 86,063 76,513 73,587Total Liabilities 16,472 16,059 11,664 11,374 12,760Stockholders’ Equity 79,026 83,952 60,273 54,394 47,842Total Liabilities/Capitalization (%) 17.2 16.1 16.2 17.3 21.1Net Annual Investment 8,427 12,849 11,529 12,874 11,880Communities 20,554 20,447 18,281 15,783 12,914Access Lines in Service (1) 8,801 8,493 7,621 6,754 6,025Kms. of L.D. Circuits in Service (1) 87,428 83,778 83,672 83,106 69,720Domestic L.D. Minutes (2) 7,294 6,746 5,923 5,370 4,722International L.D. Minutes (2) 3,024 2,622 2,221 2,001 1,592

UnconsolidatedTotal Revenues 37,299 40,039 36,555 33,581 29,660Cost of Sales and Services 11,528 12,531 11,642 10,764 9,175Commercial, Administrative and General Expenses 5,565 5,605 5,095 4,700 3,934Depreciation and Amortization 6,377 4,825 4,463 3,647 3,872Total Expenses 23,470 22,961 21,200 19,111 16,981Operating Income 13,829 17,078 15,355 14,470 12,679Net Income (3) 8,939 11,001 13,669 13,212 11,406Total Assets (3) 91,320 103,332 78,764 70,003 68,135Total Liabilities 15,841 15,237 11,061 10,692 13,133Stockholders’ Equity (3) 69,745 74,834 54,549 49,482 43,686Total Liabilities/Capitalization (%) 18.5 16.9 16.9 17.8 23.1

Data per ShareEarnings per Share ($) 0.91 1.13 1.38 1.32 1.30Book Value ($) 8.16 7.98 5.68 5.13 4.51Market Value at Year-End ($) 12.360 10.240 10.450 8.775 7.150Historic Dividend per Share ($) 0.350 (4) 0.300 0.250 0.150 0.075Outstanding Shares (2) 9,681 10,526 10,603 10,603 10,603

*The financial information for 1991, 1992, 1993 and 1994 has been updated according to the third re-expression document of Bulletin B-10 and, accordingly, it isstated in pesos with a purchasing power as of December 31, 1995.(1) In Thousands(2) In Millions(3) It does not include equity method(4) Proposed

1

In recent years, Teléfonos de México has experienced one of the most accelerated and extensive transformations in its long history.Thanks to unprecedented strategic investments in the history of telecommunications in Mexico, Telmex now has areliable, state-of-the-art telecommunications infrastructure capable of transmitting voice, data and video signals throughout theworld and offering high quality and reliability telecommunications services.

During 1995 Teléfonos de México directed its efforts, described below, toward meeting company growth, and developing thetechnological platform, in order to improve service quality and explore new markets. The overall objectives continue to be meetingcustomer needs and firmly establishing Teléfonos de México as the Mexican telecommunications market leader.

Consolidation of the telecommunications infrastructure: We continued increasing the local network by adding 308,509 lines inservice, a 3.6 percent growth resulting in 8,801,030 lines in service. A 87.6 percent digitalization level of the telephone plant wasachieved. Telephone service was extended to 107 additional communities and was made more widely available with the installationof 45,055 microchip debit card activated public telephones. A total of 1,524 telephone districts were refurbished. The coverage of thecellular telephone network added 93,052 clients into the service while Teléfonos del Noroeste extended its overall marketleadership in northern Mexico.

Improvement in service quality and attention to our customers: The Project of Integration of Systems of Attention to Customerswas started; while telephone customer service was promoted by adding 6 new Commercial Information Centers to the 22 already inexistence, and several Commercial Offices were modernized. Customers were offered special long distance discounts, anddistribution of telephone directories extended to 14.4 million telephone directories in 3,087 communities.

Improvement in company operating efficiency: The Long Distance Network Supervision Center and two new Local NetworkAdministrative Centers in the cities of Guadalajara and Monterrey started operations. The signalling system Common Channel No.7 was started. The service reliability was improved by completion of an automated network monitoring system. Strict guidelineswere applied for the control and rationalization of expenses and investments.

New services and products offered to our customers: We launched new services and products such as the TELCARD telephonecredit card with 214,097 cards issued. A total of 84,138 customers subscribed to the new value-added digital telephone services:“Call Waiting”, “Three-Party Calling” and “Follow-Me”. In January 1996 we introduced UniNet, the Universal Network ofTeléfonos de México.

Acquisitions in 1995 of 49 percent of Empresas Cablevisión, S.A. de C.V. and 50 percent of Consorcio Red Uno, S.A. de C.V. willstrengthen customer access to multimedia and data transmission markets.

New work culture focussed on service and attention to our customers: Extensive reorganization of the company was carried outin order to focus attention on providing improved service to customers. Operations and commercialization were decentralized into10 new Regional Divisions and two new Corporate Directors were appointed to manage policies and strategies. Marketing, Sales,Communications, Legal and Human Resources Departments also were reorganized.

All activities developed under these strategies have been directed toward consolidating the operations and organizing the companyto successfully address the new competitive environment beginning in 1996. We are in the final stage to be prepared to meetformidable competition from other companies, especially in the long distance market.

Letter to Shareholders

2

Carlos Slim HelúChairman of the Board of Directors

Jaime Chico PardoChief Executive Officer

Four important factors affected the results of Teléfonos de México in 1995:

The regulatory lag in adjusting rates for the strong devaluation and inflation impacts, since the 12.25 percent rate increase in March1995 accounts for the 1994 impacts.

Adjustments to the exchange rate affected financial commitments in foreign currency and increase in depreciation expenses.

The strong economic recession in which the Gross Domestic Product dropped 6.9 percent despite exports increasing 30.7 percentand imports decreasing 8.7 percent. The GDP decreased telephone line growth and calling volumes, notwithstanding the fact thatservice rates remain below similar rates in other countries.

The 9.4 percent decrease in the accounting settlement rate with United States and Canada telephone companies.

To firmly establish market leadership, we must stay ahead of our competitors. We understand competition as an opportunity toimprove and grow as an organization. The company realizes it has room for improvement in the operations and services. We areconfident these efforts have placed us in an acceptable competitive position.

We have one of the most advanced telecommunication infrastructures in the world. The company’s personnel is its main strengthand the most qualified in telecommunications in the country. The management team offers experience in telecommunications andother highly competitive markets. The financial strength of the company provides tremendous capacity to generate cash, to supportthe operation and to meet new technological challenges.

We are the Mexican private company with the highest number of customers and investors. We have in service, 365 days a year,more than 9,200,000 land and wireless telephone lines. We communicate more than 20,500 communities in the country. Wecommunicate Mexico with the world. We handled 7,294 million domestic long distance billed minutes and 3,024 millioninternational long distance billed minutes, equivalent to 1,811 million and 504 million calls, respectively. The telecommunicationssector in Mexico and a large portion of the Mexican economy depend on the continuous success of Teléfonos de México.

The next several months will be difficult. We will act in a decisive, intelligent manner to take advantage of the opportunities openedby competition. With the constant effort, determination and devotion of Teléfonos de México’s talented personnel, we are confidentthat we will be able to face any competitive challenge.

3

Financial Results

Financial Statements

Comments on the Operating Results

and the Financial Position

Unconsolidated Financial Statements

as of December 31, 1995 and 1994

with the Auditors Report.

Consolidated Financial Statements

as of December 31, 1995 and 1994

with the Auditors Report.14

Teléfonos de México, S.A. de C.V., andits subsidiaries and associated compa-nies (TELMEX), provides telecommu-nications services at a national andinternational level to residential andcommercial customers operating awide range of activities. CurrentlyTELMEX is the largest supplier of localand long distance telephone services inthe Mexican Republic.

The following comments relate to theprimary financial results of theCompany for 1995, and they must beread together with the consolidatedfinancial statements and the notesthereof, included in this annual report.The financial statements have beenprepared in accordance with generallyaccepted accounting principles.

In accordance with Bulletin B-10 of theMexican Institute of Public Account-ants, adjustments for inflation were

Years ended December 311995 1994

Million % of operating Million % of operatingPesos revenue Pesos revenue

OPERATING REVENUESLong Distance Service:

International 11,186 26.8 9,016 20.3Domestic 11,450 27.5 13,568 30.6

Local Service 17,591 42.2 20,116 45.3Other 1,452 3.5 1,695 3.8Total Revenues 41,679 100.0 44,395 100.0

OPERATING COSTS AND EXPENSESCost of Sales and Services 12,301 29.5 13,317 30.0Commercial, Administrative and General Expenses 7,129 17.1 6,805 15.3Depreciation and Amortization 7,211 17.3 5,390 12.1Total Costs and Expenses 26,641 63.9 25,512 57.5

OPERATING INCOME 15,038 36.1 18,883 42.5

applied and the financial informationfor all the periods in the financialstatements of this report have beenrestated in pesos with purchasingpower as of December 31, 1995.

Operating ResultsDuring 1995, TELMEX added 308,509lines in service, reaching a total of8,801,030 lines in service at the end ofthe year. This represents an increase of3.6 percent over 1994.

In 1995 new, value-added productswere launched, including TELCARDcard, the prepaid calling card, variousdigital services, and others.

Total domestic long distance traffic,increased to 7,294 million, 8.1 percenthigher than 1994 volume. Internationallong distance traffic with 3,024 millionbilled minutes, increased 15.3 percentover 1994.

Progress in wireless telephony includ-ed the deployment of first 120 cellularpublic telephones, in Mexico Citymetropolitan area and its main high-ways.

The following chart shows the reve-nues, expenses and operating income,including a breakout of cellular tele-phone results. Beginning this year, theformat for expenses has been changed,with “Wages and Related Costs” and“Other Operating and MaintenanceExpenses” being replaced by “Cost ofSales and Services” and “Commercial,Administrative and General Ex-penses”.

The purpose of this change is to supplyenhanced information on TELMEX’soperations and to facilitate comparisonwith other telecommunications compa-nies.

Comments on the Operating Resultsand the Financial Position

15

Revenues for InternationalLong Distance ServicesRevenues derived from Internationallong distance, which represented 26.8percent of total revenues, increased24.1 percent over 1994 due to a highertraffic volume and effects of the pesodevaluation which increased revenuesfrom telephone settlements paid toTelmex.

International long distance service rev-enues primarily is determined by traf-fic volumes, rates charged to users ofthe services and settlement rates nego-tiated with the foreign telecommunica-tion operators. In 1995, the settlementrate with United States and Canadatelephone companies decreased 9.4percent. In 1994, International long dis-tance revenues grew 14.3 percent andrepresented 20.3 percent of total rev-enues.

Domestic Long Distance ServiceRevenuesFactors such as delay in updating ofrates and the economic situation inMexico caused 1995 revenues from

domestic long distance services todecrease 15.6 percent in real termscompared with 1994. These revenuesrepresented 27.5 percent of total rev-enues. In 1994 the domestic long dis-tance revenues grew 0.6 percent, andrepresented 30.6 of total revenues.

Local Service RevenuesRevenues from local service includecharges for the installation of newlines, measured service and the basicrent.

In 1995, local service revenuesdecreased 12.6 percent compared with1994. This change resulted fromMexico’s economic recession and itsimpact on the local traffic volume aswell as from delay in rates increases.Local service revenues represented42.2 percent of 1995 total revenues. In1994, revenues from local service grew17.4 percent and represented 45.3percent of total revenues.

Other RevenuesRevenues from other related servicesdecreased 14.3 percent in real terms in

1995, mainly reflecting decreasedrevenues from the sale of material andwaste products.

Cost of Sales and ServicesIn 1995, several factors including anemphasis on expenses control,favorable salary negotiations andhigher use of the installedinfrastructure, resulted in lower cost ofsales and services. These costsdecreased 7.6 percent in real termscompared to 1994. Starting on thefourth quarter of 1995, expensestotaling 224 million pesos, which werepreviously capitalized, were moved tooperating results for the first time.

In comparison, cost of sales andservices increased 8.1 percent in 1994.That increase was due to wageincreases, increases in Social Securitycontributions, refurbishing outsideplant, line replacement program andcharges for obsolete material.

In 1995, TELMEX continued with thefiscal system established in 1990,which includes a 29 percent tax on the

Years ended December 311995 1994

Million % of operating Million % of operatingPesos revenue Pesos revenue

CELLULAR TELEPHONE SERVICESREVENUES* 2,115 100.0 2,052 100.0

Cost of Services* 588 27.8 826 40.3Selling, General and Administrative Expenses 1,407 66.5 905 44.1

TOTAL COSTS AND OPERATING EXPENSES 1,995 94.3 1,731 84.4

OPERATING INCOME 120 5.7 321 15.6

*Excluding long distance income and/or associated costs

16

revenues derived from telephoneservice. 1995 was the last fiscal year inwhich the company was subject to thistax. In 1995, accrued telephone taxamounted to 10,522 million pesos, ofwhich 3,683 million pesos werecharged to results, and totalinvestments were credited against 65percent of accrued taxes.

Commercial, Administrative andGeneral ExpensesIn 1995, these expenses grew 4.8 per-cent due to several factors includinghigher expenses associated systemsimplementation and an increase in theprovision for bad debts.

During 1994 expenses for these itemsincreased 11.2 percent, reflecting awage increase that year, increases inSocial Security contributions and baddebts provision, and larger trainingexpenses.

DepreciationCharges for depreciation and amorti-zation increased 33.8 percent com-pared to 1994. This increase reflectedtelephone network growth and therestatement of the replacement valueof telephone assets.

Operating IncomeBecause of the above, operatingincome decreased 20.4 percent com-pared with 1994. Operating marginswere 36.1 and 42.5 percent for 1995 and1994, respectively. Before depreciationand amortization charges, the cashoperating margins were 53.4 and 54.7percent for 1995 and 1994, respectively.

Integral Financing CostThe integral financing cost for 1995shows a debit of 3,705 million pesos,

comprised of the following items:accrued exchange loss of 7,158 millionpesos, resulted from the devaluation ofthe peso against other currencies,which affected the value of the debt inforeign currency. This debt wasequivalent to 2,108 million dollars atthe end of 1995. Net interest accruedtotaled 2,922 million pesos, reflectingthe company’s liquidity, whichcontinues to be invested in short-terminstruments in Mexican currency.Finally, the monetary position resultedat the end of the fiscal year with a cred-it of 530 million pesos.

Income TaxInflation and the recognition of adeferred tax derived from the acquisi-tion of associated companies were thefactors increasing this tax.

Effect of Associated CompaniesIn conjunction with its investments inEmpresas Cablevisión, S.A. de C.V.and Consorcio Red Uno, S.A. de C.V.,TELMEX incorporated into its 1995results a net charge in the amount of266 million pesos.

Net ProfitConsolidated net profit was 9,307 mil-lion pesos; a decrease of 22.1 percentcompared with restated results for1994.

InvestmentsThe consolidated investment ofTELMEX in 1995 amounted to 8,427million pesos, which includes 1,687million pesos of investments inassociated companies.

Financial StructureThe financial structure of the companycontinues to be sound, as shown by its

ratio of total debt to capitalization of17.2 percent in 1995.

Stock RepurchaseIn connection with the stock repur-chase program, 820 million shares werecancelled during December, represent-ing 7.7 percent of the capital stock ofthe company. Likewise, the repurchaseof 1 billion additional shares wasapproved. At the end of the year, 102million shares corresponding to thisauthorization had been repurchased.

17

Opinion of the Statutory Auditor

To the Stockholders ofTeléfonos de México, S.A. de C.V.

In my capacity as statutory auditor, I am pleased to submit the following report on the year ended December 31,1995.

I myself, or, in my absence, the alternate statutory auditor, attended all the meetings of the Board of Directors ofTeléfonos de México, S.A. de C.V., and I obtained the information on the Company’s operations that I considerednecessary.

I reviewed, to the extent I considered necessary in the circumstances, the unqualified audit report of the independentauditors dated February 23, 1996, derived from their examination made in accordance with auditing standardsgenerally accepted in Mexico, of the consolidated and the unconsolidated financial statements at December 31,1995, prepared by the Company’s management. In my opinion, based on the work performed:

a) The accounting and reporting policies followed by the Company are adequate and sufficient in the circumstancesand were applied on a basis consistent with that of the prior year.

b) The above-mentioned audited financial statements reasonably reflect the financial position of Teléfonos deMéxico, S.A. de C.V. at December 31, 1995, and the results of its operations, the changes in its stockholders’ equity,and the changes in its financial position for the year then ended, in accordance with accounting principles generallyaccepted in Mexico. Consequently, I submit them for consideration by the stockholders.

C.P. Victor AguilarStatutory Auditor

Mexico City,February 26, 1996

18

Report of Independent Auditors


We have audited the accompanying unconsolidated balance sheets of Teléfonos de México, S.A. de C.V. as ofDecember 31, 1995 and 1994, and the related unconsolidated statements of income, changes in stockholders’ equityand changes in financial position for the years then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements based on ouraudits.

We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance that the financial statements are free ofmaterial misstatement and are prepared in conformity with accounting principles generally accepted in Mexico. Anaudit includes examining, on a test basis, evidence supporting the amounts and the disclosures in the financialstatements. An audit also includes assessing the accounting principles used and the significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits providea reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the unconsolidatedfinancial position of Teléfonos de México, S.A. de C.V. (as a legally independent entity) at December 31, 1995 and1994, and the unconsolidated results of its operations, changes in its stockholders’ equity, and changes in its financialposition for the years then ended in conformity with accounting principles generally accepted in Mexico.

Mancera, S.C.Member of

Ernst & Young International

C.P. Alberto Tiburcio


19

Unconsolidated Statements of Income(Thousands of Mexican pesos with purchasing power at December 31, 1995)

Year ended December 311995 1994

Operating revenues:Long-distance service:

International Ps. 10,804,798 Ps. 8,666,386Domestic 11,173,432 13,285,489

Local service 15,075,912 17,741,333Other 245,294 346,080

37,299,436 40,039,288Operating costs and expenses:

Cost of sales and services (Note 13) 11,528,460 12,531,562Commercial, administrative and general 5,565,016 5,604,918Depreciation and amortization (Note 5) 6,376,778 4,824,989

23,470,254 22,961,469

Operating income 13,829,182 17,077,819

Comprehensive financing cost:Interest income ( 3,390,943 ) ( 1,981,725 )Interest expense 2,676,699 1,423,571Exchange loss, net (Note 9) 6,600,308 5,589,475Monetary effect ( 2,217,535 ) 52,457

3,668,529 5,083,778Income before income tax and

employee profit sharing 10,160,653 11,994,041

Provisions for (Notes 12 and 13):Income tax 370,783Employee profit sharing 851,259 993,197

1,222,042 993,197Income before equity in

results of subsidiaries 8,938,611 11,000,844

Equity in results of subsidiaries(Notes 1 and 4) 367,901 945,665

Net income Ps. 9,306,512 Ps. 11,946,509

See accompanying notes.

20

Unconsolidated Statements of Changesin Financial Position(Thousands of Mexican pesos with purchasing power at December 31, 1995)


Operating activities:Net income Ps. 9,306,512 Ps. 11,946,509Add (deduct): Items not requiring the use

of resources:Depreciation 6,250,099 4,698,289Amortization 126,679 126,700Equity in results of subsidiaries ( 367,901 ) ( 945,665 )

Changes in operating assets and liabilities:(Increase) decrease in:

Accounts due from subscribers 1,544,184 ( 1,220,495 )Other accounts receivable 2,020,420 ( 2,224,949 )Prepaid expenses 48,287 ( 46,937 )Trust fund contribution 473,125 3,650

Increase (decrease) in :Employee pensions and seniority premiums:

Reserve 1,744,443 1,978,555Contributions to trust fund ( 1,196,078 ) ( 1,367,285 )Payments to employees ( 693,143 ) ( 780,956 )Monetary effect of reserve ( 330,248 ) ( 76,776 )

Accounts payable and accrued liabilities ( 226,713 ) 1,247,458Taxes payable ( 2,813 ) ( 45,533 )Deferred credits ( 315,293 ) ( 107,839 )

Resources provided by operating activities 18,381,560 13,184,726

Financing activities:New loans 3,048,949 1,646,096Repayment of loans ( 2,546,184 ) ( 2,853,407 )Effect of exchange difference and of inflation on debt 101,546 5,383,798Application of advances on sale of receivables ( 1,227,890 ) ( 1,279,303 )Decrease in capital stock and retained earnings due to

purchase of Company’s own shares ( 9,505,763 ) ( 1,097,438 )Cash dividens paid ( 3,269,509 ) ( 4,118,837 )

Resources used in financing activities ( 13,398,851 ) ( 2,319,091 )

Investing activities:Investment in telephone plant ( 6,714,082 ) ( 11,592,917 )Reduction in telephone plant inventories 34,328 159,796Investment in subsidiaries ( 2,065,200 ) ( 1,519,700 )

Resources used in investing activities ( 8,744,954 ) ( 12,952,821 )

Net decrease in cash and short-term investments ( 3,762,245 ) ( 2,087,186 )Cash and short-term investments at beginning of year 4,514,254 6,601,440

Cash and short-term investments at end of year Ps. 752,009 Ps. 4,514,254


21

Unconsolidated Balance Sheets(Thousands of Mexican pesos with purchasing power at December 31, 1995)

December 311995 1994

AssetsCurrent assets:

Cash and short-term investments Ps. 752,009 Ps. 4,514,254Accounts receivable:

Subscribers 6,123,224 7,667,408Interconnecting carriers 779,863 985,035Advances to suppliers 10,851 355,266Other 1,369,565 2,840,398

8,283,503 11,848,107

Prepaid expenses 324,661 372,948Trust contribution (Note 2) 473,125

Total current assets 9,360,173 17,208,434

Property, plant and equipment, net (Note 5) 70,651,842 71,163,639

Inventories, primarily for use inconstruction of telephone plant 1,217,160 1,527,382

Equity investment in subsidiaries (Notes 1 and 4) 18,738,512 16,511,434

Other assets (Notes 5 and 7) 633,320 6,039,832

Total assets Ps. 100,601,007 Ps. 112,450,721

22


Liabilities and stockholders’ equityCurrent liabilities:

Current portion of long-termdebt (Note 6) Ps. 4,602,385 Ps. 2,377,370

Accounts payable and accrued liabilities 3,660,985 3,887,698Taxes payable 874,195 877,008

Total current liabilities 9,137,565 7,142,076

Long-term debt (Note 6) 11,238,934 12,859,638Reserve for employee pensions and

seniority premiums (Note 7) 549,042 6,303,901Deferred credits (Note 8) 649,533 2,192,716

Total liabilities 21,575,074 28,498,331

Stockholders’ equity (Note 11):Capital stock:

Historical 965,387 1,049,874Restatement increment 25,957,327 25,968,529

26,922,714 27,018,403

Premium on sale of shares 4,636,225 4,636,225Retained earnings:

Unappropriated earnings of prior years 49,040,392 49,786,535Net income of the year 9,306,512 11,946,509

58,346,904 61,733,044Deficit from restatement of stockholders’ equity ( 10,879,910 ) ( 9,435,282 )

Total stockholders’ equity 79,025,933 83,952,390

Total liabilities and stockholders’ equity Ps. 100,601,007 Ps. 112,450,721


23

PremiumCapital on sale LegalStock of shares reserve

Balance at December 31, 1993 Ps. 27,028,406 Ps. 4,634,246 Ps. 3,116,598

Appropriation of earnings approvedat stockholders’ meeting heldon April 15, 1994:Cash dividends paid, at

Ps. 0.25 per shareIncrease in legal reserve 683,442Reserve for purchase of

Company’s own sharesCash purchase of Company’s own shares ( 10,003 ) 1,979Income tax attributable

to sale of stockSurplus from holding nonmonetary assetsNet income



Ps. 0.30 per shareIncrease in legal reserve 550,042

Increase in reserve for purchase ofCompany’s own shares

Cash purchase of Company’s own shares ( 95,689 )Deficit from holding nonmonetary assetsNet income

Balance at December 31, 1995 (Note 11) Ps. 26,922,714 Ps. 4,636,225 Ps. 4,350,082


Unconsolidated Statements of Changesin Stockholders’ Equity(Thousands of Mexican pesos with purchasing power at December 31, 1995, ex-cept for dividends per share)

24

R e t a i n e d e a r n i n g s

Reserve for Deficit frompurchase of restatement of TotalCompany’s stockholders’ stockholders’own shares Unappropriated Total equity equity

Ps. 51,859,154 Ps. 54,975,752 Ps. ( 26,365,470 ) Ps. 60,272,934

( 4,118,837 ) ( 4,118,837 ) ( 4,118,837 )( 683,442 )

Ps. 1,449,920 ( 1,449,920 )( 1,085,555 ) 151,352 ( 934,203 ) ( 942,227 )

( 136,177 ) ( 136,177 ) ( 136,177 )16,930,188 16,930,188

11,946,509 11,946,509 11,946,509

Ps. 364,365 Ps. 57,568,639 Ps. 61,733,044 Ps. ( 9,435,282 ) Ps. 83,952,390

( 3,269,509 ) ( 3,269,509 ) ( 3,269,509 )( 550,042 )

21,704,310 ( 21,704,310 )( 9,410,074 ) ( 13,069 ) ( 9,423,143 ) ( 9,518,832 )

( 1,444,628 ) ( 1,444,628 )9,306,512 9,306,512 9,306,512

Ps. 12,658,601 Ps. 41,338,221 Ps. 58,346,904 Ps.( 10,879,910 ) Ps. 79,025,933

25

Notes to Unconsolidated FinancialStatementsDecember 31, 1995 and 1994(Thousands of Mexican pesos with purchasing power at December 31,1995)

1. Line of Business and Accounting Policies

I. Line of businessTeléfonos de México, S.A. de C.V. (“the Company” or TELMEX)provides telecommunication services to users of domestic andinternational telephone services in Mexico. Currently, theCompany is the only provider of basic domestic and internationallong-distance public telephone service in Mexico. EffectiveAugust 11, 1996, competition will be permitted in long-distancetelephone service by companies that have their own infra-structure and that, accordingly, do not require any interconnec-tion with the TELMEX system. Starting January 1, 1997, the com-petition will be allowed to interconnect with the Companysystem.

The amended concession under which the Company operateswas signed with the Mexican Government on August 10, 1990.The concession runs through the year 2026, but it may berenewed for an additional period of fifteen years. The conces-sion defines, among other things, the quality standards for tele-phone service and establishes the basis for regulating rates. TheMinistry of Communications and Transportation, acting for theMexican Government, is responsible for verifying compliancewith all the terms of the concession.

II. Accounting policiesThe significant accounting policies and practices observed in thepreparation of these financial statements are described below.

a) Monetary UnitAs previously announced by the Central Bank (Banco deMéxico), effective January 1, 1996, the word “new” and its abbre-viation “N” was dropped before the name of the Mexican mone-tary unit, which reacquired the name “peso”(abbreviated “Ps.”).This change had no effect on the value of the peso.

b) Basis of preparation of the financial statements and valuation of the investment in shares of subsidiaries

The Company prepares consolidated financial statements. Therelated consolidated financial statements of Teléfonos de México,S.A. de C.V. for the years ended December 31, 1995 and 1994,were issued on this same date and are included in this annualreport.

The accompanying unconsolidated financial statements atDecember 31, 1995 and 1994, were prepared for specific pur-poses, which require the presentation of unconsolidated finan-cial statements. The investment in shares of subsidiaries wasvalued using the equity method, which consists of recognizingthe parent company’s share in the net income and in the stock-holders’ equity of the issuers. With this procedure, the stock-holders’ equity and the results of operations in the consolidatedand the unconsolidated financial statements are the same.

The equity in results of subsidiaries represented income ofPs. 367,901 in 1995 and Ps. 945,665 in 1994.

c) Recognition of revenuesAll service revenues are recognized as they accrue. Local servicerevenues are derived from new-line installation charges, month-ly service fees, measured usage charges based on the number ofcalls made, and other service charges to subscribers. Revenuesfrom domestic and international long-distance telephone callsare determined on the basis of the duration of the calls, thedistance, and the type of service used. All these services arebilled monthly, based on the rates authorized by the Ministry ofCommunications and Transportation.

International long-distance service revenues include the rev-enues earned under agreements with foreign telephone servicecarriers or operators for the use of facilities in interconnectinginternational calls. These agreements define the rates for the useof the international interconnecting facilities. These servicerevenues represent the net settlement between the parties.

d) Recognition of the effects of inflation on financial information

The Company recognizes the effects of inflation on financialinformation as required by Mexican Accounting PrinciplesBulletin B-10 (“Accounting Recognition of the Effects of Inflationon Financial Information”), as amended. Consequently, theamounts shown in the financial statements and in the notesthereto are expressed in thousands of Mexican pesos with pur-chasing power at December 31, 1995. The December 31, 1995restatement factor applied to the financial statements at Decem-ber 31, 1994 was 51.97% (corresponding to inflation for 1995).

Property, plant and equipment, and construction in progress arerestated using the specific-cost method. Depreciation is calcu-lated on the restated investment using the retirement andreplacement method, based on the estimated useful lives of theassets.

Inventories are valued at average cost and are restated on thebasis of specific costs. The stated value of inventories is not inexcess of market.

Capital accounts, the premium on the sale of shares, and retainedearnings are restated using adjustment factors obtained from theMexican National Consumer Price Index (NCPI).

The deficit from restatement of stockholders’ equity consists ofthe accumulated monetary position loss at the time the provi-sions of Bulletin B-10 were first applied (Ps. 5,084,827 atDecember 31, 1995) and of the result of holding nonmonetaryassets, which represents the net difference between restatementby the specific-cost method and restatement based on the NCPI.

26

The monetary effect represents the impact of inflation on mone-tary assets and liabilities. The net monetary effect of each year isincluded in the statement of income as a part of the comprehen-sive financing cost.

e) Short-term investmentsShort-term investments, represented basically by time depositsin financial institutions, are stated at market value.

f) Exchange differencesTransactions in foreign currency are recorded at the prevailingexchange rate at the time of the related transactions. Foreigncurrency denominated assets and liabilities are translated at theprevailing exchange rate at the balance sheet date. Exchange dif-ferences are applied directly to income of the year.

g) Labor obligationsPension and seniority premium costs are recognized periodicallyduring the years of service of employees, based on actuarialcalculations (see Note 7). Termination payments are charged toincome in the year in which the decision to dismiss an employeeis made.

h) Income taxes and employee profit sharingIt is the Company’s policy to provide for income taxes andemployee profit sharing based on the amount paid, taking intoconsideration the effect of important nonrecurring temporarydifferences in income for financial and tax reporting purposes(deferred taxes).

i) ReclassificationsCertain amounts in the 1994 statement of income have beenreclassified for uniformity of presentation with 1995.

2. Trust Contribution for Sale of Shares to EmployeesIn 1991, the Company contributed Ps. 1,166,382 to a trust fund inwhich Teléfonos de México, S.A. de C.V. and the Company’s offi-cers and nonunionized employees act as the founders, BancoInternacional, S.A. as the trustee, and the Company’s officers

and nonunionized employees as the trust beneficiaries. The trustwas established for the primary purpose of acquiring on behalfand for the benefit of the participants, 150 million series “L”shares of Teléfonos de México, S.A. de C.V.

The account receivable shown in the balance sheet at December31, 1994 represents the Company’s unrecovered contribution tothe trust fund, which was paid back by the trust in 1995. Theaccount receivable at December 31, 1994 was denominated inU.S. dollars and earned a floating market interest rate. In 1995,the trust placed 45.9 million shares (9.9 million shares in 1994)and paid back to TELMEX Ps. 473,125 (Ps. 3,650 in 1994).

3. Related PartiesIn the years ended December 31, 1995 and 1994, the Companyhad the following important transactions with related parties,excluding subsidiaries:

4. Equity Investment in SubsidiariesThis represents the investment in twenty-two subsidiaries thatare wholly owned, with the exception of one, in which theCompany has an 80% equity interest. All of the subsidiaries areengaged in telecommunications activities or they provide theirservices to companies that carry out such activities.

1995 1994

Purchase of materials, inventories and fixed assets Ps. 931,466 Ps. 904,888

Payment of insurancepremiums and fees foradministrative andoperating services 734,103 514,050

Sale of materials,inventories and fixed assets 93,756 46,337

27

b) Items comprising the telephone plant are restated based onthe acquisition date and cost, applying the factors derived fromthe specific indexes determined by the Company and validatedby an independent expert appraiser registered with the NationalBanking and Securities Commission.

c) Depreciation of the telephone plant is calculated at annualrates ranging from 3.3% to 16.7%. The other assets are depreci-ated at rates ranging from 3.3% to 20%. Depreciation charged toincome was Ps. 6,250,099 in 1995 and Ps. 4,698,289 in 1994.

d) In December 1990, the Company purchased the FederalMicrowave Network from Telecomunicaciones de México, adecentralized agency of the Mexican Government. TheCompany paid U.S.$ 300 million or, based on the prevailingexchange rate at the purchase date, Ps. 883,716 (Ps. 2,064,865constant pesos at December 31, 1995). The Ps. 1,266,703 differ-ence between the purchase price of the Federal MicrowaveNetwork and the appraised value of the assets acquired wasincluded in other assets and is being amortized over a ten-yearperiod.

6. Long-term debtThe long-term debt consist of the following:

1995average Maturitiesinterest from 1996 Balance at December 31

rate* through 1995 1994Debt denominated in foreign currency:

Banks 8.0% 2006 Ps. 4,333,941 Ps. 3,102,563Mexican government 7.2% 2006 234,295 239,058Suppliers’ credits 7.3% 2021 10,931,020 11,306,857Financial leases 10.1% 2000 108,997 163,812

Total 15,608,253 14,812,290

Debt denominated in Mexican pesos:Debentures 28.9% 2005 233,066 422,647Financial leases 2,071

Total 233,066 424,718

Total debt 15,841,319 15,237,008Less current portion of long-term debt 4,602,385 2,377,370

Long-term debt Ps. 11,238,934 Ps. 12,859,638

* Net of taxes, subject to variances in international and local rates.

5. Property, plant and equipmenta) Property, plant and equipment consist of the following:

1995 1994Accummulated Accummulated

Investment depreciation Investment depreciation

Plant for local service Ps. 77,278,946 Ps. 23,770,972 Ps. 73,070,398 Ps. 21,960,121Plant for long-distance service 13,761,054 2,607,823 13,696,573 2,560,655Subtotal 91,040,000 26,378,795 86,766,971 24,520,776Construction in progress and

advances to equipment suppliers 5,990,637 8,917,444

Total Ps. 97,030,637 Ps. 26,378,795 Ps. 95,684,415 Ps. 24,520,776

Net Ps. 70,651,842 Ps. 71,163,639

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7. Employee Pensions and Seniority PremiumsAll the Company’s employees are covered under defined retire-ment and seniority premium plans.

Pension benefits are determined on the basis of compensationsof employees in their final year of employment, their seniority,and their age at the time of retirement.

In 1990, the Company set up an irrevocable trust fund to coverthe payment of these obligations. It adopted the policy ofmaking annual contributions to the fund, which totaledPs. 1,196,078 in 1995 and Ps. 1,367,285 in 1994. These contribu-tions are deductible for Mexican corporate income tax purposes.

The Company recognizes these labor obligations on the basis ofindependent actuarial calculations, using the projected unit-credit method, in accordance with Mexican AccountingPrinciples Bulletin D-3, “Labor Obligations,” which defines theaccounting treatment of pensions and seniority premiums.

The related charge to income of the year ended December 31,1995 was Ps. 1,744,443 (Ps. 1,978,555 in 1994). An analysis ofbasic actuarial assumptions considered in the pension plancalculations for the years ended December 31, 1995 and 1994, isas follows:

At December 31, 1995, the Company has unused letters of creditfrom certain banks of approximately Ps. 3,300,000, at a floatinginterest rate of approximately LIBOR plus 0.75 points.

Annual long-term debt maturities after 1996 are as follows:

Year Amount

1997 Ps. 2,201,2571998 1,764,8631999 1,363,9882000 1,253,6562001 and beyond 4,655,170

Ps. 11,238,934

An analysis of the foreign currency denominated debt at December 31, 1995 is as follows:

Exchange rateForeign at December 31, Mexicancurrency 1995 peso

(in thousands) (in units) equivalent

U.S. dollar 1,473,459 Ps. 7.6842 Ps. 11,322,338Japanese yen 45,432,823 0.0745 3,384,745French franc 378,246 1.5714 594,376German mark 35,399 5.3682 190,029Dutch guilder 4,930 4.7942 23,635Swiss franc 13,937 6.6822 93,130

Total Ps. 15,608,253

Analysis of the net period cost:

1995 1994

Labor cost Ps. 581,675 Ps. 588,464Financial cost

of projectedbenefit obligations 1,500,672 1,497,532

Return on planassets ( 901,602 ) ( 659,718 )

Amortization ofpast service costs 408,587 547,463

Amortization ofvariances inassumptions 155,111 4,814

Net period cost Ps. 1,744,443 Ps. 1,978,555

Reserve for pensions and seniority premiums:

1995 1994

Projected benefitobligations Ps. 12,845,241 Ps. 18,105,526

Established fund ( 9,187,143 ) ( 7,549,289 )Transition liability ( 3,140,240 ) ( 5,302,469 )Actuarial gain (loss) 31,184 ( 4,229,700 )

Net projected liability 549,042 1,024,068Additional liability 5,279,833

Reserve for pensionsand senioritypremiums Ps. 549,042 Ps. 6,303,901

Accumulated benefitobligations Ps. 8,004,760 Ps. 13,853,190

Intangible asset Ps. Ps. 5,279,833

The transition liability, past service cost and variances in as-sumptions will be amortized over a twelve-year period.

29

Thousands of U.S. dollars1995 1994

Net settlementrevenues U.S.$ 867,410 U.S.$ 832,574

Interest expenses 153,314 144,841Operating expenses 75,000 75,000

1995 1994

Revenues from saleof future accountsreceivable Ps. 1,227,890

Advances fromsubscribers Ps. 541,662 848,938

Other 107,871 115,888

Ps. 649,533 Ps. 2,192,716

The rates used in the actuarial study were:

1995 1994

Discount of labor obligations:First year 31.8% 11.0%Long-term average 13.9% 11.0%

Increase in salaries:First year 16.8% 5.5%Long-term average 9.6% 5.5%

Annual return from the fund:First year 31.8% 14.0%Long-term average 13.9% 14.0%

As shown in the table above, the rates used in the 1995 and 1994actuarial studies to calculate labor obligations at the end of eachyear are different, basically because in 1995 it was decided toconsider in the projected unit-credit method (which is themethod required by Mexican Accounting Principles Bulletin D-3)select nominal rates instead of level nominal rates since the for-mer are considered to provide better recognition of labor obli-gations in the current economic circumstances. Select nominalrates are based on rates that vary annually through a certain yearand that remain constant thereafter. The level nominal ratesremain constant over the long-term.

Although the new rates were used to calculate projected benefitobligations and accumulated benefit obligations at December 31,1995, as disclosed in this note, such rates did not have anyimpact on the net period cost charged to income of the year. Thenew rates will be used to calculate the 1996 net period cost,which it is estimated will be approximately Ps. 1,820,000.

The elimination in 1995 of the additional liability and the relatedintangible asset was due primarily to the important decrease inaccumulated benefit obligations and projected benefit obli-gations and to the increase in trust funds set up to meet theseobligations.

8. Deferred CreditsDeferred credits consist of the following at December 31, 1995and 1994:

Deferred revenue, which was restated on the basis of the NCPI,was amortized against income on a straight-line basis and therelated costs were recognized based on the amount of theaccounts receivable sold.

In the year ended December 31, 1995, the Company completedthe amortization of this deferred revenue, amortizingPs. 1,227,890 (Ps. 1,279,303 in 1994). The recorded cost wasPs. 1,875,650 in 1995 (Ps. 1,185,168 in 1994).

9. Foreign Currency Position and Transactionsa) At December 31, 1995, the Company has a net foreign curren-cy liability position of U.S.$ 1,929,725 thousand (net liabilitymonetary position of U.S.$ 1,819,735 thousand at December 31,1994).

The net exchange loss for the year ended December 31, 1995 wasPs. 6,600,308 (Ps. 5,589,475 in 1994). In both years, the exchangeloss was charged to income.

The prevailing exchange rate at December 31, 1995 was Ps. 7.68per U.S. dollar (Ps. 5.00 per U.S. dollar at December 31, 1994). AtFebruary 23, 1996, the date of the issuance of these financialstatements, the exchange rate of the Mexican peso relative to theU.S. dollar was Ps. 7.54 per U.S. dollar.

b) In the years ended December 31, 1995 and 1994, the Companyhad the following transactions denominated in foreign curren-cies. Currencies other than the U.S. dollar, were translated todollars using the average exchange rate for the year.

10. Commitments and Contingenciesa) At December 31, 1995, the Company has noncancelable com-mitments, primarily for the purchase of equipment, in theapproximate amount of Ps. 650,000 (Ps. 2,340,000 in 1994).

b) At December 31, 1995, there are outstanding letters of creditin the approximate amount of Ps. 160,000 (Ps. 45,000 in 1994),which were issued to foreign suppliers for the purchase of mate-rials and supplies.

c) In December 1995 a competitor that provides cellular tele-phone services reported Teléfonos de México, S.A. de C.V. and asubsidiarie to the Federal Fair Practices Commission for allegedmonopolistic practices.

The TELMEX’s independent lawyers believe that the probabili-ties are great that the complaint will be declared unfounded.Although the accusation makes reference to different amounts ofdamages, there is no mention of the total amount of the claims.Also, the Commission is only empowered to impose fines, thetotal amount of which cannot be determined at the present time.Accordingly, the financial statements do not include any provi-sion for this contingency.

In prior years, the Company entered into various agreementsdenominated in U.S. dollars for the sale of accounts receivablethat would be realized in the future and that would derive fromlong-distance traffic between Mexico and the United States.

30

1995 1994

2,163 millionseries “AA” shares Ps. 13,026,943 Ps. 13,026,943

342 million(402 million in 1994) series “A” shares 2,137,632 2,497,095

7,149 million(7,934 million in 1994)series “L” shares 11,758,139 11,494,365

Ps. 26,922,714 Ps. 27,018,403

d) Teléfonos de México, S.A. de C.V. has been sued by a formeremployee, for the alleged illegal use of a system the latter callsthe “High Traffic System”, which the former employee claims tohave created. The suit does not specify the exact amount of theindemnization sought. The Company’s independent lawyersfeel that the Company will prevail in this matter.

11. Stockholders’ Equitya) Capital stock is represented by 9,654 million common sharesissued and outstanding with no par value (10,499 million sharesin 1994). An analysis is as follows:

b) At the stockholders’ meeting held in April 1994, it wasresolved to establish a reserve of Ps. 891,250 (nominal)(Ps. 1,449,920 restated to December 31, 1995) for the purchase ofthe Company’s own shares. In 1994, the Company purchased itsown shares for Ps. 709,191 (nominal) (Ps. 1,097,438 restated toDecember 31, 1995). The shares purchased were 75,983,000series “L” shares and 880,000 series “A” shares. The decrease inthe reserve for these purchases was Ps. 1,085,555.

At stockholders’ meetings held in 1995 resolutions were adoptedto increase by Ps. 21,704,310 the reserve for the purchase of up to1,750 million of the Company’s own shares. In the year endedDecember 31, 1995, the nominal value of shares purchased wasPs. 8,459,344 (Ps. 9,505,763 restated to December 31, 1995). Theshares purchased were 844,867,456 series “L” shares. Thedecrease in the reserve for these purchases was Ps. 9,410,074.

c) In conformity with the Securities Trading Act, the Company’sfixed capital was modified at a stockholders’ meeting held onDecember 5, 1995. This modification involved the cancellation of880,000 of the Company’s own series “A” and 818,961,939 series“L” treasury shares that the Company finished acquiring onDecember 4, 1995.

d) Series “AA” shares, which may be subscribed only byMexican individuals and corporate entities, must represent at alltimes no less than 20% of capital stock and no less that 51% of thecommon shares. Common series “A” shares, which may befreely subscribed, must account for no more than 19.6% of capi-tal stock and no more than 49% of the common shares. series“AA” and “A” shares combined may not represent more than51% of capital stock. The combined number of series “L” shares,

which have limited voting rights and may be freely subscribed,and series “A” shares may not exceed 80% of capital stock.

e) In conformity with the Mexican Corporations Act, at least 5%of net income of the year must be appropriated to increase thelegal reserve. This practice must be continued each year until thelegal reserve reaches 20% of capital stock issued and outstand-ing.

f) Cash dividends paid from the so-called “net tax profit” (i.e.,from earnings on which corporate income taxes have alreadybeen paid) will be exempt from taxation. Dividends paid fromsources other than the net tax profit will be subject to Mexicanincome tax, which is payable by the Company, so that thestockholder will receive the net equivalent of 66% of thedividend paid.

12. Income Tax and Asset Taxa) In December 1994, the Ministry of Finance and Public Creditauthorized TELMEX to consolidate for tax purposes startingJanuary 1, 1995 (excluding the subsidiary Instituto Tecnológicode Teléfonos de México, S.C.). Consequently, in the year endedDecember 31, 1995, the Company determined its tax result andcalculated the asset tax on a consolidated basis.

By determining its taxable income on a consolidated basis,TELMEX was able to reduce income tax payable byapproximately Ps. 117,000 (nominal) as compared to the taxthat the Company would have been required to pay on anunconsolidated basis. This was due basically to the carryfor-ward of the tax losses reported by some subsidiaries.

The asset tax for the years ended December 31, 1995 and 1994,was Ps. 689,989 and Ps. 751,511 respectively. In both years theseamounts were credited against income tax, and against the tele-phone service tax.

b) The most important differences between book and tax resultsrelate primarily to the difference in depreciation expense forbook and tax purposes, the deduction of the telephone servicetax (see Note 13), tax losses of subsidiaries and other non-deductible expenses.

13. Telephone Service TaxThe Company is subject to a 29% telephone service tax on allrevenues obtained from telephone related services. Sixty-fivepercent (65%) of this tax may be credited against investments infixed assets during the year. In the year ended December 31,1995, the telephone service tax was Ps. 10,190,006 (Ps. 10,640,254in 1994) and the creditable portion of the tax was Ps. 6,623,504(Ps. 6,916,165 in 1994) so that the net amount charged to incomewas Ps. 3,566,502 in 1995 and Ps. 3,724,089 in 1994. Theseamounts are included in cost of sales and services.

For income tax purposes, the telephone service tax was consid-ered deductible in its entirety through the year ended December31, 1995. The telephone service tax was eliminated effectiveJanuary 1, 1996.

31

Unconsolidated Balance SheetsDecember 31(Thousands of Mexican pesos with purchasing power at December 31, 1995)

1991 1992 1993 1994 1995

Operating revenues Ps. 29,659,804 Ps. 33,581,174 Ps. 36,554,653 Ps. 40,039,288 Ps. 37,299,436Cost of sales and services 9,174,921 10,764,313 11,641,420 12,531,562 11,528,460Commercial, administrative

and general 3,934,800 4,699,621 5,094,647 5,604,918 5,565,016Depreciation and amortization 3,871,614 3,646,921 4,463,348 4,824,989 6,376,778Total operating costs and

expenses 16,981,335 19,110,855 21,199,415 22,961,469 23,470,254Integral (income) cost of financing ( 910,516 ) ( 1,159,200) ( 762,878) 5,083,778 3,668,529Income tax 1,326,248 1,499,836 1,486,937 370,783Employee profit sharing 856,343 917,717 962,323 993,197 851,259Total costs, expenses and taxes 18,253,410 20,369,208 22,885,797 29,038,444 28,360,825Income before equity in

results of subsidiaries 11,406,394 13,211,966 13,668,856 11,000,844 8,938,611Equity in results of subsidiaries 801,551 977,725 945,665 367,901Net income Ps. 11,406,394 Ps. 14,013,517 Ps. 14,646,581 Ps. 11,946,509 Ps. 9,306,512

Unconsolidated Statements of IncomeFor the years ended December 31(Thousands of Mexican pesos with purchasing power at December 31, 1995)

1991 1992 1993 1994 1995

AssetsCurrent assets Ps. 13,102,408 Ps. 12,890,232 Ps. 15,806,889 Ps. 17,208,434 Ps. 9,360,173Telephone plant 71,414,042 74,368,925 71,088,195 95,684,415 97,030,637Accumulated depreciation 26,422,721 26,744,448 21,102,595 24,520,776 26,378,795Telephone plant, net 44,991,321 47,624,477 49,985,600 71,163,639 70,651,842Inventories 4,381,351 3,955,699 1,470,917 1,527,382 1,217,160Investment in subsidiaries 4,519,439 9,430,618 11,596,521 16,511,434 18,738,512Other assets 1,140,039 1,013,379 5,627,741 6,039,832 633,320Total Ps. 68,134,558 Ps. 74,914,405 Ps. 84,487,668 Ps. 112,450,721 Ps. 100,601,007

Liabilities and Stockholders’ Equity

Current liabilities Ps. 4,886,009 Ps. 4,822,991 Ps. 5,499,389 Ps. 7,142,076 Ps. 9,137,565Long-term debt 10,865,104 9,245,097 9,123,916 12,859,638 11,238,934Reserve for employee pensions

and seniority premiums 1,965,872 1,556,135 6,011,571 6,303,901 549,042Deferred credits 6,731,947 4,896,574 3,579,858 2,192,716 649,533Total liabilities 24,448,932 20,520,797 24,214,734 28,498,331 21,575,074Stockholders’ equity 43,685,626 54,393,608 60,272,934 83,952,390 79,025,933Total Ps. 68,134,558 Ps. 74,914,405 Ps. 84,487,668 Ps. 112,450,721 Ps. 100,601,007

32

Report of Independent Auditors


We have audited the accompanying consolidated balance sheets of Teléfonos de México, S.A. de C.V. andsubsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes instockholders’ equity and changes in financial position for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standardsrequire that we plan and perform the audit to obtain reasonable assurance that the financial statements are free ofmaterial misstatement and are prepared in conformity with accounting principles generally accepted in Mexico. Anaudit includes examining, on a test basis, evidence supporting the amounts and the disclosures in the financialstatements. An audit also includes assessing the accounting principles used and the significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits providea reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of Teléfonos de México, S.A. de C.V. and subsidiaries at December 31, 1995 and 1994, and theconsolidated results of their operations, changes in their stockholders’ equity, and changes in their financial positionfor the years then ended in conformity with accounting principles generally accepted in Mexico.

Mancera, S. C.a Member of

Ernst & Young International

C.P. Alberto Tiburcio


33


Operating revenues:Long-distance service:

International Ps. 11,186,266 Ps. 9,016,293Domestic 11,449,836 13,568,199

Local service 17,590,712 20,115,596Other 1,452,392 1,695,078

41,679,206 44,395,166Operating costs and expenses:

Cost of sales and services (Note 13) 12,301,312 13,316,721Commercial, administrative and general 7,128,938 6,805,313Depreciation and amortization (Note 5) 7,210,975 5,390,079

26,641,225 25,512,113

Operating income 15,037,981 18,883,053

Comprehensive financing cost:Interest income ( 5,730,738 ) ( 2,502,643 )Interest expense 2,808,306 1,534,631Exchange loss, net (Note 9) 7,158,003 6,056,390Monetary effect ( 530,477 ) 223,756

3,705,094 5,312,134Income before income tax and

employee profit sharing 11,332,887 13,570,919

Provisions for (Notes 12 and 13):Income tax 843,977 543,100Employee profit sharing 915,955 1,081,310

1,759,932 1,624,410Income before equity in

results of affiliates 9,572,955 11,946,509

Net equity in resultsof affiliates (Note 4) 266,443

Net income Ps. 9,306,512 Ps. 11,946,509


Consolidated Statements of Income(Thousands of Mexican pesos with purchasing power at December 31, 1995)

34


Operating activities:Net income Ps. 9,306,512 Ps. 11,946,509Add (deduct): Items not requiring the use

of resources:Depreciation 7,084,296 5,263,379Amortization 445,203 126,700Equity in results of affiliates ( 52,081 )

Changes in operating assets and liabilities:(Increase) decrease in:

Accounts due from subscribers 1,720,501 ( 1,180,167 )Other accounts receivable 1,957,413 ( 1,568,022 )Prepaid expenses 150,204 ( 148,889 )Trust fund contribution 473,125 3,650

Increase (decrease) in:Employee pensions and seniority premiums:

Reserve 1,849,037 2,081,275Contributions to trust fund ( 1,301,864 ) ( 1,470,050 )Payments to employees ( 718,951 ) ( 804,593 )Monetary effect of reserve ( 364,489 ) ( 85,516 )

Accounts payable and accrued liabilities ( 657,784 ) 1,288,520Taxes payable 46,920 ( 78,277 )Deferred credits ( 315,293 ) ( 109,295 )

Resources provided by operating activities 19,622,749 15,265,224

Financing activities:New loans 3,048,949 1,741,015Repayment of loans ( 2,720,311 ) ( 2,998,651 )Effect of exchange difference and of inflation on debt 83,739 5,652,902Application of advances on sale of receivables ( 1,227,890 ) ( 1,279,303 )Decrease in capital stock, premium on sale of shares and retained

earnings due to purchase of Company’s own shares ( 9,527,821 ) ( 1,091,379 )Cash dividends paid ( 3,260,520 ) ( 4,105,862 )

Resources used in financing activities ( 13,603,854 ) ( 2,081,278 )

Investing activities:Investment in telephone plant ( 7,107,257 ) ( 12,844,301 )Reduction (investment) in telephone plant inventories 367,242 ( 4,463 )Investment in affiliated companies ( 1,687,477 )

Resources used in investing activities ( 8,427,492 ) ( 12,848,764 )

Net (decrease) increase in cash and short-term investments ( 2,408,597 ) 335,182Cash and short-term investments at beginning of year 9,408,194 9,073,012

Cash and short-term investments at end of year Ps. 6,999,597 Ps. 9,408,194


Consolidated Statements of Changes inFinancial Position(Thousands of Mexican pesos with purchasing power at December 31, 1995)

35


AssetsCurrent assets:

Cash and short-term investments Ps. 6,999,597 Ps. 9,408,194Accounts receivable:

Subscribers 6,600,160 8,320,661Net settlement receivables 745,846 1,001,887Advances to suppliers 17,099 408,872Other 769,379 2,078,979

8,132,484 11,810,399

Prepaid expenses 989,431 1,139,635Trust contribution (Note 2) 473,125

Total current assets 16,121,512 22,831,353

Property, plant and equipment, net (Note 5) 82,053,663 83,193,150

Inventories, primarily for use inconstruction of the telephone plant 1,367,554 2,053,801

Equity investment in affiliates (Note 4) 417,078

Goodwill, net (Note 4) 1,040,781

Other assets (Notes 5 and 7) 633,449 6,264,641

Total assets Ps. 101,634,037 Ps. 114,342,945

Consolidated Balance Sheets(Thousands of Mexican pesos with purchasing power at December 31, 1995)

36


Liabilities and stockholders’ equityCurrent liabilities:

Current portion of long-termdebt (Note 6) Ps. 4,767,526 Ps. 2,554,538

Accounts payable and accrued liabilities 3,538,545 4,196,330Taxes payable 1,348,754 1,301,834

Total current liabilities 9,654,825 8,052,702

Long-term debt (Note 6) 11,704,156 13,504,767Reserve for employee pensions and

seniority premiums (Note 7) 599,590 6,640,370Deferred credits (Note 8) 649,533 2,192,716

Total liabilities 22,608,104 30,390,555

Stockholders’ equity (Note 11):Capital stock:

Historical 965,387 1,049,874Restatement increment 25,957,327 25,968,529

26,922,714 27,018,403

Premium on sale of shares 4,636,225 4,636,225Retained earnings:

Unappropriated earnings of prior years 49,040,392 49,786,535Net income of the year 9,306,512 11,946,509

58,346,904 61,733,044Deficit from restatement of stockholders’ equity ( 10,879,910 ) ( 9,435,282 )

Total stockholders’ equity 79,025,933 83,952,390

Total liabilities and stockholders’ equity Ps. 101,634,037 Ps. 114,342,945


37

PremiumCapital on sale Legalstock of shares reserve



Ps. 0.25 per shareIncrease in legal reserve 788,705Reserve for purchase of

Company’s own sharesCash purchase of Company’s own shares ( 10,003 ) 1,979Income tax attributable

to sale of stockSurplus from holding nonmonetary assetsNet income



Ps. 0.30 per shareIncrease in legal reserve 612,212

Increase in reserve for purchase ofCompany’s own shares

Cash purchase of Company’s own shares ( 95,689 )Deficit from holding nonmonetary assetsNet income

Balance at December 31, 1995 (Note 11) Ps. 26,922,714 Ps. 4,636,225 Ps. 5,055,774


Consolidated Statements of Changesin Stockholders’ Equity(Thousands of Mexican pesos with purchasing power at December 31, 1995, ex-cept for dividends per share)

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R e t a i n e d e a r n i n g s

Reserve for Deficit frompurchase of restatement of TotalCompany’s stockholders’ stockholders’ own shares Unappropriated Total equity equity

Ps. 51,320,895 Ps. 54,975,752 Ps. ( 26,365,470 ) Ps. 60,272,934

( 4,105,862 ) ( 4,105,862 ) ( 4,105,862 )( 788,705 )

Ps. 1,449,920 ( 1,449,920 )( 1,085,555 ) 138,377 ( 947,178 ) ( 955,202 )

( 136,177 ) ( 136,177 ) ( 136,177 )16,930,188 16,930,188

11,946,509 11,946,509 11,946,509

Ps. 364,365 Ps. 56,925,117 Ps. 61,733,044 Ps. ( 9,435,282 ) Ps. 83,952,390

( 3,260,520 ) ( 3,260,520 ) ( 3,260,520 )( 612,212 )

21,704,310 ( 21,704,310 )( 9,410,074 ) ( 22,058 ) ( 9,432,132 ) ( 9,527,821 )

( 1,444,628 ) ( 1,444,628 )9,306,512 9,306,512 9,306,512

Ps. 12,658,601 Ps. 40,632,529 Ps. 58,346,904 Ps.( 10,879,910 ) Ps. 79,025,933

39

Notes to Consolidated FinancialStatementsDecember 31, 1995 and 1994(Thousands of Mexican pesos with purchasing power at December 31, 1995)

1. Line of Business and Accounting Policies

I. Line of businessTeléfonos de México, S.A. de C.V. and its subsidiaries (collec-tively “the Company” or TELMEX) provides telecommunicationservices to users of domestic and international telephone serv-ices in Mexico. Currently, the Company is the only provider ofbasic domestic and international long-distance public telephoneservice in Mexico. Effective August 11, 1996, competition will bepermitted in long-distance telephone service by companies thathave their own infrastructure and that, accordingly, do notrequire any interconnection with the TELMEX system. StartingJanuary 1, 1997, the competition will be allowed to interconnectwith the Company system.

The amended concession under which the Company operateswas signed with the Mexican Government on August 10, 1990.The concession runs through the year 2026, but it may berenewed for an additional period of fifteen years. The conces-sion defines, among other things, the quality standards for tele-phone service and establishes the basis for regulating rates. TheMinistry of Communications and Transportation, acting for theMexican Government, is responsible for verifying compliancewith all the terms of the concession.

II. Accounting policiesThe significant accounting policies and practices observed in thepreparation of these financial statements are described below.

a) Monetary UnitAs previously announced by the Central Bank (Banco deMéxico) effective January 1, 1996, the word “new” and its abbre-viation “N” was dropped before the name of the Mexican mone-tary unit, which reacquired the name “peso” (abbreviated “Ps.”).This change had no effect on the value of the peso.

b) ConsolidationThe consolidated financial statements include the accounts ofTeléfonos de México, S.A. de C.V. and its twenty-two sub-sidiaries, all of which are wholly owned, except forAerocomunicaciones, S.A. de C.V., in which the Company holdsan 80% equity interest. All of the companies operate in thetelecommunications sector. Important intercompany accountsand transactions have been eliminated in the consolidation.

c) Recognition of revenuesAll service revenues are recognized as they accrue. Local servicerevenues are derived from new-line installation charges, month-ly service fees, measured usage charges based on the number ofcalls made, and other service charges to subscribers. Revenuesfrom domestic and international long-distance telephone callsare determined on the basis of the duration of the calls, thedistance, and the type of service used. All these services arebilled monthly, based on the rates authorized by the Ministry ofCommunications and Transportation.

International long-distance service revenues include the rev-enues earned under agreements with foreign telephone serviceproviders or operators for the use of facilities in interconnectinginternational calls. These agreements define the rates for the useof the international interconnecting facilities. These service rev-enues represent the net settlement between the parties.

d) Recognition of the effects of inflation on financialinformation

The Company recognizes the effects of inflation on financialinformation as required by Mexican Accounting PrinciplesBulletin B-10 (“Accounting Recognition of the Effects ofInflation on Financial Information”), as amended. Consequent-ly, the amounts shown in the financial statements and in thenotes thereto are expressed in thousands of Mexican pesos withpurchasing power at December 31, 1995. The December 31, 1995restatement factor applied to the financial statements atDecember 31, 1994 was 51.97% (corresponding to inflation for1995).

Property, plant and equipment, and construction in progress arerestated using the specific-cost method. Depreciation is calcu-lated on the restated investment using the retirement and re-placement method, based on the estimated useful lives of theassets.

Inventories are valued at average cost and are restated on thebasis of specific costs. The stated value of inventories is not inexcess of market.

Capital accounts, the premium on the sale of shares, andretained earnings are restated using adjustment factors obtainedfrom the Mexican National Consumer Price Index (NCPI).

The deficit from restatement of stockholders’ equity consists ofthe accumulated monetary position loss at the time the provi-sions of Bulletin B-10 were first applied (Ps. 5,084,827 atDecember 31, 1995) and of the result of holding nonmonetaryassets, which represents the net difference between restatementby the specific-cost method and restatement based on the NCPI.

The monetary effect represents the impact of inflation on mone-tary assets and liabilities. The net monetary effect of each year isincluded in the statements of income as a part of the compre-hensive financing cost .

e) Short-term investmentsShort-term investments, represented basically by time depositsin financial institutions, are stated at market value.

f) Equity investment in affiliatesThe investment in shares of affiliates is valued using the equitymethod. This accounting method consists basically of recogni-zing the investor’s equity interest in the results of operations andin the result of holding nonmonetary assets of investees at thetime such results are determined (see Note 4).

40

g) Exchange differencesTransactions in foreign currency are recorded at the prevailingexchange rate at the time of the related transactions. Foreigncurrency denominated assets and liabilities are translated at theprevailing exchange rate at the balance sheet date. Exchange diff-erences are applied directly to income of the year.

h) Labor obligationsPension and seniority premium costs are recognized periodi-cally during the years of service of employees, based on actuarialcalculations (see Note 7). Termination payments are charged toincome in the year in which the decision to dismiss an employeeis made.

i) Income taxes and employee profit sharingIt is the Company’s policy to provide for income taxes andemployee profit sharing based on the amount paid, taking intoconsideration the effect of important nonrecurring temporarydifferences in income for financial and tax reporting purposes(deferred taxes).

j) ReclassificationsCertain amounts in the 1994 statement of income have beenreclassified for uniformity of presentation with 1995.

2. Trust Contribution for Sale of Shares to EmployeesIn 1991, Teléfonos de México, S.A. de C.V. contributedPs. 1,166,382 to a trust fund in which Teléfonos de México, S.A.de C.V. and the Company’s officers and nonunionizedemployees act as the founders, Banco Internacional, S.A. as thetrustee, and the Company’s officers and nonunionizedemployees as the trust beneficiaries. The trust was establishedfor the primary purpose of acquiring on behalf and for thebenefit of the participants, 150 million series “L” shares ofTeléfonos de México, S.A. de C.V.

The account receivable shown in the balance sheet at December31, 1994, represents the Teléfonos de México, S.A. de C.V.’s unre-covered contribution to the trust fund, which was paid back bythe trust in 1995. The account receivable at December 31, 1994was denominated in U.S. dollars and earned a floating marketinterest rate. In 1995, the trust placed 45.9 million shares (9.9million shares in 1994) and paid back to Teléfonos de México,S.A. de C.V. Ps. 473,125 (Ps. 3,650 in 1994).

3. Related PartiesIn the years ended December 31, 1995 and 1994, the Companyhad the following important transactions with related parties:

1995 1994

Purchase of materials, inventories and fixed assets Ps. 931,466 Ps. 904,888

Payment of insurancepremiums and fees foradministrative andoperating services 752,546 528,416

Sale of materials,inventories and fixed assets 100,054 46,337

4. Equity Investment in Affiliatesa) Sercotel, S.A. de C.V. (Sercotel), a subsidiary of Teléfonos deMéxico, S.A. de C.V., acquired for Ps. 170,937 (nominal) onSeptember 8, 1995, 1,121,429 series “B” shares equal to 50% of thecapital stock of Consorcio Red Uno, S.A. de C.V., a companyengaged in integrating telecommunication and information serv-ice systems. This purchase gave rise to goodwill of Ps. 94,675that will be amortized over a ten-year period.

b) In December 1994, Sercotel entered into an agreement toacquire a 49% interest in Empresas Cablevisión, S.A. de C.V., theparent company of subsidiaries engaged in cable TV trans-mission. The specified price was approximately U.S.$ 211 mil-lion. This acquisition was subject to the necessary governmentapproval, which was obtained on July 5, 1995, at which time thetransaction was considered consummated for financial purposes.

Goodwill of Ps. 1,264,630 was recognized for the differencebetween the purchase price and the book value of the shares ofthis affiliate at the purchase date. This goodwill will be amor-tized over a ten-year period. Also, at the time the shares of theaffiliate were acquired, a deferred tax of Ps. 227,648 was recog-nized that will reverse in the same period.

c) TELMEX credited to income and to stockholders’ equity Ps. 52,081 and Ps. 36,826, corresponding to its equity interest inthe net income and in the result of holding nonmonetary assetsof affiliates, respectively.

41

5. Property, plant and equipmenta) Property, plant and equipment consist of the following:

1995 1994Accumulated Accumulated

Investment depreciation Investment depreciation

Plant for local service Ps. 89,433,789 Ps. 27,561,205 Ps. 85,628,832 Ps. 25,576,134Plant for long-distance service 14,072,112 2,746,250 14,009,251 2,687,580Other 3,101,291 923,935 2,688,333 868,942Subtotal 106,607,192 31,231,390 102,326,416 29,132,656Construction in progress and

advances to equipment suppliers 6,677,861 9,999,390

Total Ps. 113,285,053 Ps. 31,231,390 Ps. 112,325,806 Ps. 29,132,656

Net Ps. 82,053,663 Ps. 83,193,150

6. Long-term debtThe long-term debt consists of the following:

1995average Maturitiesinterest from 1996 Balance at December 31

rate* through 1995 1994Debt denominated in foreign currency:

Banks 8.0% 2006 Ps. 4,333,941 Ps. 3,102,563Mexican government 7.2% 2006 236,390 241,819Suppliers’ credits 7.3% 2021 11,307,645 11,783,455Financial leases 10.1% 2000 322,448 432,621

Total 16,200,424 15,560,458

Debt denominated in Mexican pesos:Banks 53.2% 1999 33,694 59,838Debentures 28.9% 2005 233,066 422,647Financial leases 50.5% 1996 4,498 16,362

Total 271,258 498,847

Total debt 16,471,682 16,059,305Less current portion of long-term debt 4,767,526 2,554,538

Long-term debt Ps. 11,704,156 Ps. 13,504,767

* Net of taxes, subject to variances in international and local rates.

b) Items comprising the telephone plant are restated based onthe acquisition date and cost, applying the factors derived fromthe specific indexes determined by the Company and validatedby an independent expert appraiser registered with the NationalBanking and Securities Commission.

c) Depreciation of the telephone plant is calculated at annualrates ranging from 3.3% to 16.7%. The other assets are depreci-ated at rates ranging from 3.3% to 20%. Depreciation charged toincome was Ps. 7,084,296 in 1995 and Ps. 5,263,379 in 1994.

d) In December 1990, the Company purchased the FederalMicrowave Network from Telecomunicaciones de México, adecentralized agency of the Mexican Government. The Com-pany paid U.S.$ 300 million or, based on the prevailing exchangerate at the purchase date, Ps. 883,716 (Ps. 2,064,865 constantpesos at December 31, 1995). The Ps. 1,266,703 differencebetween the purchase price of the Federal Microwave Networkand the appraised value of the assets acquired was included inother assets and is being amortized over a ten-year period.

42

An analysis of the foreign currency denominated debt at December 31, 1995 is as follows:

Exchange rateForeign at December 31, Mexicancurrency 1995 peso

(in thousands) (in units) equivalent

U.S. dollar 1,550,521 Ps. 7.6842 Ps. 11,914,509Japanese yen 45,432,823 0.0745 3,384,745French franc 378,246 1.5714 594,376German mark 35,399 5.3682 190,029Dutch guilder 4,930 4.7942 23,635Swiss franc 13,937 6.6822 93,130

Total Ps. 16,200,424

Analysis of the net period cost:

1995 1994

Labor cost Ps. 624,794 Ps. 627,498Financial cost

of projectedbenefit obligations 1,585,896 1,576,868

Return on planassets ( 952,915 ) ( 696,872 )

Amortization ofpast service costs 428,414 567,967

Amortization ofvariances inassumptions 162,848 5,814

Net period cost Ps. 1,849,037 Ps. 2,081,275

Reserve for pensions and seniority premiums:

1995 1994Projected benefit

obligations Ps. 13,680,245 Ps. 19,149,503Established fund ( 9,742,356 ) ( 7,987,890 )Transition liability ( 3,278,932 ) ( 5,534,795 )Past service costs ( 44,427 ) ( 73,544 )Actuarial loss ( 15,069 ) ( 4,417,546 )

Net projected liability 599,461 1,135,728Additional liability 129 5,504,642

Reserve for pensionsand senioritypremiums Ps. 599,590 Ps. 6,640,370

Accumulated benefitobligations Ps. 8,470,477 Ps. 14,628,260

Intangible asset Ps. 129 Ps. 5,504,642

The transition liability, the past service cost and the variances inassumptions will be amortized over a twelve-year period.

At December 31, 1995, the Company has unused lines of creditfrom certain banks of approximately Ps. 3,300,000 at a floatinginterest rate of approximately LIBOR plus 0.75 points.

Annual long-term debt maturities after 1996 are as follows:

7. Employee Pensions and Seniority PremiumsSubstantially all the Company’s employees are covered underdefined retirement and seniority premium plans.

Pension benefits are determined on the basis of compensations ofemployees in their final year of employment, their seniority, andtheir age at the time of retirement.

In 1990, the Company set up an irrevocable trust fund to coverthe payment of these obligations. It adopted the policy ofmaking annual contr ibut ions to the fund, whichtota led Ps. 1,301,864 in 1995 and Ps. 1,470,050 in 1994. Thesecontributions are deductible for Mexican corporate income taxpurposes.

The Company recognizes these labor obligations on the basis ofindependent actuarial calculations, using the projected unit-credit method, in accordance with Mexican AccountingPrinciples Bulletin D-3, “Labor Obligations,” which defines theaccounting treatment of pensions and seniority premiums.

The related charge to income of the year ended December 31,1995 was Ps. 1,849,037 (Ps. 2,081,275 in 1994). An analysis ofbasic actuarial assumptions considered in the pension plan cal-culations for the years ended December 31, 1995 and 1994, is asfollows:

Year Amount

1997 Ps. 2,358,5411998 1,874,6771999 1,462,7732000 1,347,0112001 and beyond 4,661,154

Ps. 11,704,156

43

As shown in the table above, the rates used in the 1995 and 1994actuarial studies to calculate labor obligations at the end of eachyear are different, basically because in 1995 it was decided toconsider in the projected unit-credit method (which is themethod required by Mexican Accounting Principles BulletinD-3) select nominal rates instead of level nominal rates since theformer are considered to provide better recognition of laborobligations in the current economic circumstances. Select nomi-nal rates are based on rates that vary annually through a certainyear and that remain constant thereafter. The level nominal ratesremain constant over the long term.

Although the new rates were used to calculate projected benefitobligations and accumulated benefit obligations at December 31,1995, as disclosed in this note, such rates did not have anyimpact on the net period cost charged to income of the year. Thenew rates will be used to calculate the 1996 net period cost,which it is estimated will be approximately Ps. 1,930,000.

The significant reduction in 1995 of the additional liability andthe related intangible asset was due primarily to the importantdecrease in accumulated benefit obligations and projected bene-fit obligations and to the increase in trust funds set up to meetthese obligations.

In prior years, the Company entered into various agreementsdenominated in U.S. dollars for the sale of accounts receivablethat would be realized in the future and that would derive fromlong-distance traffic between Mexico and the United States.

Deferred revenue, which was restated on the basis of the NCPI,was amortized against income on a straight-line basis and therelated costs were recognized based on the amount of theaccounts receivable sold.

In the year ended December 31, 1995, the Company completedthe amortization of this deferred revenue, amortizingPs. 1,227,890 (Ps. 1,279,303 in 1994). The recorded cost wasPs. 1,875,650 in 1995 (Ps. 1,185,168 in 1994).

9. Foreign Currency Position and Transactionsa) At December 31, 1995, the Company has a net foreign curren-cy liability position of U.S.$ 2,014,499 thousand (net liabilitymonetary position of U.S. $ 1,915,980 thousand at December 31,1994).

The net exchange loss for the year ended December 31, 1995 wasPs. 7,158,003 (Ps. 6,056,390 in 1994). In both years the exchangeloss was charged to income.

The prevailing exchange rate at December 31, 1995 was Ps. 7.68per U.S. dollar (Ps. 5.00 per U.S. dollar at December 31, 1994). AtFebruary 23, 1996, which is the date of issuance of these financialstatements, the exchange rate of the Mexican peso relative to theU.S. dollar was Ps. 7.54 per U.S. dollar.

b) In the years ended December 31, 1995 and 1994, the Companyhad the following transactions denominated in foreign curren-cies. Currencies other than the U.S. dollar, were translated todollars using the average exchange rate for the year.

10. Commitments and Contingenciesa) At December 31, 1995, the Company has noncancelable com-mitments, primarily for the purchase of equipment, in theapproximate amount of Ps. 650,000 (Ps. 2,340,000 in 1994).

b) At December 31, 1995, there are outstanding letters of credit inthe approximate amount of Ps. 160,000 (Ps. 45,000 in 1994),which were issued to foreign suppliers for the purchase of mate-rials and supplies.

c) In December 1995 a competitor that provides cellular tele-phone services reported the Company to the Federal FairPractices Commission for alleged monopolistic practices.

The Company’s independent lawyers believe that the probabili-ties are great that the complaint will be declared unfounded.Although the accusation makes reference to different amounts ofdamages, there is no mention of the total amount of the claims.Also, the Commission is only empowered to impose fines, thetotal amount of which cannot be determined at the present time.Accordingly, the financial statements do not include any provi-sion for this contingency.

The rates used in the actuarial study were:

1995 1994Discount of labor obligations:

First year 31.8% 11.0%Long-term average 13.9% 11.0%

Increase in salaries:First year 16.8% 5.5%Long-term average 9.6% 5.5%

Annual returns from the fund:First year 31.8% 14.0%Long-term average 13.9% 14.0%

Thousands of U.S. dollars1995 1994

Net settlementrevenues U.S.$ 877,874 U.S.$ 851,421

Interest expenses 166,116 156,662Operating expenses 122,476 114,773

8. Deferred CreditsDeferred credits consist of the following at December 31, 1995and 1994:

1995 1994

Revenues from saleof future accountsreceivable Ps. 1,227,890

Advances fromsubscribers Ps. 541,662 848,938

Other 107,871 115,888

Ps. 649,533 Ps. 2,192,716

44

1995 1994

2,163 millionseries “AA” shares Ps. 13,026,943 Ps. 13,026,943

342 million(402 million in 1994)series “A” shares 2,137,632 2,497,095

7,149 million(7,934 million in 1994)series “L” shares 11,758,139 11,494,365

Ps. 26,922,714 Ps. 27,018,403

d) Teléfonos de México, S.A. de C.V. has been sued by a formeremployee, for the alleged illegal use of a system the latter callsthe “High Traffic System”, which the former employee claims tohave created. The suit does not specify the exact amount of theindemnization sought. The Company’s independent lawyers feelthat the Company will prevail in this matter.

11. Stockholders’ Equitya) Capital stock is represented by 9,654 million common sharesissued and outstanding with no par value (10,499 million sharesin 1994). An analysis is as follows:

b) At the stockholders’ meeting held in April 1994, it wasresolved to establish a reserve of Ps. 891,250 (nominal)(Ps. 1,449,920 restated to December 31, 1995) for the purchase ofthe Company’s own shares. In 1994, the Company purchased itsown shares for Ps. 709,191 (nominal) (Ps. 1,097,438 restated toDecember 31, 1995). The shares purchased were 75,983,000series “L” shares and 880,000 series “A” shares. The decrease inthe reserve for these purchases was Ps. 1,085,555.

At stockholders’ meetings held in 1995 resolutions were adoptedto increase by Ps. 21,704,310 the reserve for the purchase of up to1,750 million of the Company’s own shares. In the year endedDecember 31, 1995, the nominal value of the shares purchasedwas Ps. 8,459,344 (Ps. 9,505,763 restated to December 31, 1995).The shares purchased were 844,867,456 series “L” shares. Thedecrease in the reserve for these purchases was Ps. 9,410,074.

c) In conformity with the Securities Trading Act, the Company’sfixed capital was modified at a stockholders’ meeting held onDecember 5, 1995. This modification involved the cancellation of880,000 of the Company’s own series “A” and 818,961,939 series“L” treasury shares that the Company finished acquiring onDecember 4, 1995.

d) Series “AA” shares, which may be subscribed only byMexican individuals and corporate entities, must represent at alltimes no less than 20% of capital stock and no less that 51% of thecommon shares. Common series “A” shares, which may befreely subscribed, must account for no more than 19.6% of cap-ital stock and no more than 49% of the common shares. Series“AA” and “A” shares combined may not represent more than51% of capital stock. The combined number of series “L” shares,which have limited voting rights and may be freely subscribed,and series “A” shares may not exceed 80% of capital stock.

e) In conformity with the Mexican Corporations Act, at least 5%of net income of the year must be appropriated to increase thelegal reserve. This practice must be continued each year until thelegal reserve reaches 20% of capital stock issued and outstand-ing.

f) Cash dividends paid from the so-called “net tax profit” (i.e.,from earnings on which corporate income taxes have alreadybeen paid) will be exempt from taxation. Dividends paid fromsources other than the net tax profit will be subject to Mexicanincome tax, which is payable by the Company, so that thestockholder will receive the net equivalent of 66% of thedividend paid.

12. Income Tax and Asset Taxa) In December 1994, the Ministry of Finance and Public Creditauthorized TELMEX (excluding the subsidiary InstitutoTecnológico de Teléfonos de México, S.C.) to consolidate for taxpurposes starting January 1, 1995. Consequently, in the yearended December 31, 1995, TELMEX determined its tax result andcalculated the asset tax on a consolidated basis.

By determining its taxable income on a consolidated basis, theCompany was able to reduce income tax payable by approxi-mately Ps. 117,000 (nominal) as compared to the tax that theCompany would have been required to pay on an unconsoli-dated basis. This was due basically to the carryforward of the taxlosses reported by some of the subsidiaries.

b) The asset tax for the years ended December 31, 1995 and 1994,was Ps. 892,801 and Ps. 958,812 respectively. In both years theseamounts were credited against income tax, and against thetelephone service tax.

c) The most important differences between book and tax resultsrelate primarily to the difference in depreciation expense forbook and tax purposes, the deduction of the telephone servicetax (see Note 13), tax losses of subsidiaries and other non-deductible expenses.

13. Telephone Service TaxThe Company is subject to a 29% telephone service tax on all rev-enues obtained from telephone related services. Sixty-five per-cent (65%) of this tax may be credited against investments infixed assets during the year. In the year ended December 31,1995, the telephone service tax was Ps. 10,521,800 (Ps. 10,997,289in 1994) and the creditable portion of the tax was Ps. 6,839,170(Ps. 7,148,238 in 1994) so that the net amount charged to incomewas Ps. 3,682,630 in 1995 and Ps. 3,849,051 in 1994. Theseamounts are included in cost of sales and services.

For income tax purposes, the telephone service tax was consid-ered deductible in its entirety through the year ended December31, 1995. The telephone service tax was eliminated effectiveJanuary 1, 1996.

14. Generally Accepted Accounting Principles in the UnitedStates Reconciliation

The Company’s consolidated financial statements are preparedin accordance with Mexican GAAP, which differ in certain sig-nificant respects from Accounting Principles Generally Acceptedin the United States (“U.S. GAAP”.)

45

The principal differences between Mexican GAAP and U.S.GAAP, as they relate to the Company, consist of the accountingfor pension plan costs and deferred income taxes and deferredemployee profit sharing (deferred taxes). Other differences arethe accounting for interest on assets under construction, accruedvacation costs, the financing costs on deferred income, the acqui-sition of a microwave network, and the employee stock purchasetrust.

The reconciliation to U.S. GAAP does not include the reversal ofthe adjustments to the financial statements for the effects ofinflation required under Mexican GAAP (Bulletin B-10), becausethe application of Bulletin B-10 represents a comprehensive mea-sure of the effects of price level changes in the Mexican economyand, as such, is considered a more meaningful presentation thanhistorical cost-based financial reporting for both Mexican andU.S. accounting purposes.

1995 1994

Net income as reportedunder Mexican GAAP Ps. 9,306,512 Ps. 11,946,509

Total approximate U.S. GAAPadjustments, net ( 1,571,253 ) 669,057

Approximate net income underU.S. GAAP Ps. 7,735,259 Ps. 12,615,566

Weighted average common sharesoutstanding (in millions) 10,150 10,549

Approximate net income per shareunder U.S .GAAP Ps. 0.762 Ps. 1.196

Total stockholders’ equity underMexican GAAP Ps. 79,025,933 Ps. 83,952,390

Total approximate U.S. GAAPadjustments, net ( 14,846,329 ) ( 13,627,858 )

Approximate total stockholders’equity under U.S. GAAP Ps. 64,179,604 Ps. 70,324,532

A summary of the net income and total stockholders’ equity between Mexican and U.S. GAAP, is as follows:

46

Proposal to the Meeting

With respect to the dividends payment for the 1995 fiscal year, and based on Clause forty-five of the by-laws of Teléfonos deMéxico, S.A. de C.V., the following amounts are available to the Shareholders:

(Thousands of Pesos)

Prior year´s unappropriated earnings 24,968,840Net income for the year 8,938,611

Total 33,907,451

It is proposed that the balance of 33,907,451 thousand pesos made available to the shareholders to be allocated as follows:

(Thousands of Pesos)

To increase the legal reserve 5%of the net income for the year 446,931

To pay the cash dividend of $0.35per share, coming from the Net FiscalProfit (1) 3,259,832

To the retained earnings account 30,200,688

Total 33,907,451

The cash dividend proposed to the Shareholders’ Meeting shall be $0.35 per share, payable in two equal payments of $0.175 each;the first, as of June 20, 1996, and the second as of November 21, 1996, for all outstanding shares which make up the capital stockof the Company, against coupons 99 and 00, respectively. While such balance is not allocated to the shareholders, it shall continuein the Company’s retained earnings account.

(1) Figure estimated considering a total of 9,313,806,744 outstanding shares.

47

Board of Directors(During fiscal year 1995)

CARLOS SLIM HELÚ

CHAIRMAN OF THE BOARD

DIRECTORS

JAMES R. ADAMS

GROUP PRESIDENT

(INTERNATIONAL SUBSIDIARIES AND

CABLE TELEVISION)SBC COMMUNICATIONS, INC.

JOHN H. ATTERBURY IIIPRESIDENT AND CHIEF EXECUTIVE OFFICER

SBC INTERNATIONAL, INC.

JAIME CHICO PARDO

CHIEF EXECUTIVE OFFICER

TELÉFONOS DE MÉXICO, S.A. DE C.V.

ANTONIO COSÍO ARIÑO

PRESIDENT

CÍA. INDUSTRIAL TEPEJI DEL RIO, S.A. DE C.V.

JAMES D. ELLIS

SENIOR EXECUTIVE VICE-PRESIDENT AND

GENERAL COUNSEL

SBC COMMUNICATIONS, INC.

AMPARO ESPINOSA RUGARCÍA

DIRECTOR

CENTRO DE DOCUMENTACIÓN Y

ESTUDIOS DE MUJERES, A.C.

ELMER FRANCO MACÍAS

PRESIDENT AND DIRECTOR

GRUPO INFRA, S.A. DE C.V.

CLAUDIO X. GONZÁLEZ L.CHAIRMAN OF THE BOARD AND

PRESIDENT

KIMBERLY CLARK DE MÉXICO, S.A. DE C.V.

JEAN YVES GOUIFFÉS

DIRECTOR OF INTERNATIONAL NETWORKS AND SER-VICES

FRANCE TÈLÈCOM

MICHEL HIRSCH

DIRECTOR OF INTERNATIONAL AFFAIRS

FRANCE TÈLÈCOM

DAVID IBARRA MUÑOZ

CONSULTANT

DONALD E. KIERNAN

SENIOR VICE-PRESIDENT,TREASURER AND

CHIEF FINANCIAL OFFICER

SBC COMMUNICATIONS, INC.

ANGEL LOSADA MORENO

ASSISTANT PRESIDENT

GIGANTE, S.A.DE C.V.

ROMULO O’FARRIL JR.CHAIRMAN AND PRESIDENT

NOVEDADES EDITORES, S.A. DE C.V.

JUAN ANTONIO PÉREZ SIMÓN

VICE CHAIRMAN OF THE BOARD


BERNARDO QUINTANA ISAAC

PRESIDENT INDUSTRIES DIVISION

GRUPO ICA, S.A. DE C.V.

FRANCOIS SCHOELLER

PRESIDENT

FRANCE CABLES ET RADIO

DE MÉXICO, S.A. DE C.V.

CARLOS SLIM DOMIT

PRESIDENT

SANBORNS HNOS., S.A.

STATUTORY AUDITOR

VICTOR M. AGUILAR VILLALOBOS

PRESIDENT

MANCERA, S.C.

SECRETARY

SERGIO F. MEDINA NORIEGA

LEGAL CORPORATE DIRECTOR


ALTERNATE DIRECTORS

JAIME ALVERDE GOYA

EXECUTIVE VICE-PRESIDENT

GIGANTE, S.A. DE C.V.

CARLOS BERNAL VEREA

PARTNER

NORIEGA Y ESCOBEDO, A.C.

PAUL CARDARELLA

DIRECTOR OF OPERATIONS


MOISÉS COSÍO ARIÑO

PRESIDENT

ASEGURADORA UNIVERSAL, S.A. DE C.V.Y ASEGURADORA COSÍO, S.A. DE C.V.

MICHEL DAUDE

HEAD OF FINANCIAL BUDGET

SERVICES

FRANCE TÈLÈCOM

ANTONIO DEL VALLE RUÍZ

PRESIDENT

BANCO INTERNACIONAL, S.A.

ANGELES ESPINOSA RUGARCÍA

DIRECTOR

MUSEO AMPARO

JORGE ESTEVE Y CAMPDERA


TECNOLOGÍA INDUSTRIAL

AGROPECUARIA, S.A. DE C.V.

AGUSTÍN FRANCO MACÍAS


CRYOINFRA, S.A. DE C.V.

JOSÉ GARZA MONTEMAYOR

PRESIDENT

PRODUCTOS LAMINADOS DE

MONTERREY, S.A. DE C.V.

RAFAEL KALACH MIZRAHI

PRESIDENT

GRUPO KALTEX, S.A. DE C.V.

JOSÉ KURI HARFUSH

PRESIDENT

JANEL, S.A. DE C.V.

FEDERICO LAFFAN FANO

MAIN PARTNER

LAFFAN, MUES Y KAYE

JORGE MARTÍNEZ GÜITRÓN

PRESIDENT

GRUPO SIDEK, S.A. DE C.V

JOSÉ MIGUEL NADER

PRESIDENT

INFOMIN, S.A. AND PYN, S.A. DE C.V.

DENIS PETONNET

GENERAL MANAGER

FRANCE CABLES ET RADIO

DE MÉXICO, S.A. DE C.V.

JACQUES PONTVIANNE

VICE-PRESIDENT

IFI DE MÉXICO

MARCO ANTONIO SLIM DOMIT

PRESIDENT

SEGUROS INBURSA, S.A.

RANDALL STEPHENSON

DIRECTOR OF FINANCE


ALTERNATE STATUTORY AUDITOR

ALBERTO TIBURCIO CELORIO

PARTNER

MANCERA, S.C.

48

Directory

JAIME CHICO PARDO

CHIEF EXECUTIVE OFFICER

FACUNDO ALONSO GARCÍA RAFAEL MENDOZA ORTÍZ

EAST METROPOLITAN DIVISION CUSTOMER SERVICE AND SUPPORT

EUGENIO AMAYA TORRES ALEJANDRO MONTAÑO MARTÍNEZ

NORTH DIVISION CORPORATE COMMUNICATION

ISIDORO AMBE ATTAR LEOPOLDO MURO PICO

SALES-TELECORP WEST DIVISION

JORGE CASAHONDA LICEA LUIS NÁJERA VALDÉZ

CENTER DIVISION NORTHWEST DIVISION

ADOLFO CEREZO PÉREZ JOSÉ M. PACHECO GAMBOA

FINANCE AND ADMINISTRATION SOUTHEAST DIVISIÓN

PEDRO CERISOLA Y WEBER JAIME PÉREZ BONILLA

WEST METROPOLITAN DIVISION NORTHEAST DIVISION

JAVIER COCA MUÑÍZ JAVIER RAMÍREZ OTERO

GULF-PACIFIC DIVISION OPERATIONS STANDARS AND SUPPORT

JAVIER ELGUEA SOLÍS HÉCTOR SLIM SEADE

HUMAN RESOURCES PROCUREMENT

EDUARDO GÓMEZ CHIBLI BERNABÉ SOBERANIS SOSA

LONG DISTANCE SYSTEMS IMPLEMENTATION AND SUPPORT

CARLOS KAUACHI KAUACHI JESÚS M. SOTOMAYOR

INTERNATIONAL DEVELOPMENT CORPORATE COMMERCIAL AND ENGINEERING

GERARDO LEAL GARZA JORGE L. SUÁSTEGUI ESQUIVEL

SOUTH METROPOLITAN DIVISION OPERATIONS ENGINEERING AND SUPPORT

JUAN LUDLOW SALDÍVAR ANDRÉS VÁZQUEZ DEL MERCADO

SYSTEMS PLANNING AND INTEGRATION MARKETING

SERGIO F. MEDINA NORIEGA OSCAR VON HAUSKE SOLÍS

CORPORATE LEGAL CORPORATE ADMINISTRATION, FINANCE AND SYSTEMS

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